outline for paper

ok this one will be based on Denmark: the student is expected to submit a 1- 2 page outline for every section of the paper (each of these sections will be 3 to 4 pages in length for the completed research paper). Each of these must be in APA format along with a reference page with at least 3 references. A general introduction to the country, including an overview of its political and economic realities. Focus on the major themes from the first few chapters of the book such as risk, technology, human rights, the legal system, and politics. Each student will choose a country from the region selected by the team. Each team member must select a different country within that region. Each student will then pick a major industry to focus on for that country from the viewpoint of a company that is going to enter that market. For instance, if a student chooses India, they may look at the IT industry, if they choose Japan; they might select the Electronics sector. Choose a product or service in that industry that is to be introduced into that sector and the country. how much for this and I will attach the pdf of the book

International
Management

Managing Across Borders and Cultures
Text and Cases

TENTH EDITION

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

Stewart R. Miller
University of Texas at San Antonio

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

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

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

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

ScoutAutomatedPrintCode

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

https://lccn.loc.gov/2020024827

https://lccn.loc.gov/2020024826

http://www.pearsoned.com/permissions/

https://support.pearson.com/getsupport/s/

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

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

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

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

Stewart

Brief Contents

Preface xi

PART 1 The Global Manager’s Environment 1

Chapter 1 Assessing the Environment 2
Chapter 2 Managing Interdependence 43

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

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

Glory? PC1-13

PART 2 The Cultural Context of Global Management 75

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

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

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

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

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

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

Business PC3-25

PART 4 Global Human Resources Management 285

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

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

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

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

Preface xi

PART 1 The Global Manager’s
Environment 1

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

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

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

Comparative Management in
Focus China Loses Its Allure 16

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

The Political and Economic
Environment 23

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

The Legal Environment 28
Contract Law 29
Other Regulatory Issues 29

The Technological Environment 29
The Globalization of Information
Technology 31

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

Global E-Business 32

Developing Skills to Enhance Your
Career 34

Communication 34
Critical Thinking 35

Collaboration 35

Knowledge Application/Analysis 35

Business Ethics/Social Responsibility 35

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

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

Endnotes 39

Chapter 2 Managing Interdependence 43

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

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

From CSR to Shared Value? 48

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

MNC Responsibility toward Human Rights 51

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

Ethics in Global Management 55
Bribery 58

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

Ethics in Uses of Technology 60

Making the Right Decision 61

Under the Lens Volkswagen under the
Spotlight 62

Managing Interdependence 63
Foreign Subsidiaries in the United States 63

Managing Subsidiary–Host Country
Interdependence 64

Contents

vI CONTENTS

Managing Environmental Interdependence and
Sustainability 66
Implementing Sustainability Strategies 68

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

CASE STUDY: Facebook Faces Fresh Probe
After Photo Leak 71

Endnotes 72

Comprehensive Cases
Case 1 Eliminating Modern Slavery from

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

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

PART 2 The Cultural Context of Global
Management 75

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

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

Under the Lens Religion and the
Workplace 83

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

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

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

Saudi Arabia 107
Chinese Family Small Businesses 109

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

CASE STUDY: An Australian Manager
in an American
Company 111

Endnotes 114

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

Cultural Noise in the Communication
Process 119

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

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

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

Nonverbal Communication 131
Under the Lens Communicating Italian
Style 132

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

Comparative Management in
Focus Communicating with Arabs 137

Communication Channels 140

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

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

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

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

Endnotes 149

CONTENTS vII

Chapter 5 Cross-Cultural Negotiation
and Decision Making 152

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

Negotiation 153
The Negotiation Process 154

Stage One: Preparation 154

Negotiating Teams 154

Variables in the Negotiation Process 155

Stage Two: Relationship Building 156

Nontask Sounding 156

Stage Three: Exchanging Task-Related
Information 157

Stage Four: Persuasion 157

Stage Five: Concessions and
Agreement 158

Understanding Negotiation Styles 158
Successful Negotiators around the World 161

Comparing Profiles 162

Managing Negotiation 162
Dealing with Translators 164

Using the Internet to Support
Negotiations 164

Managing Conflict Resolution 165

Comparative Management in
Focus Negotiating with the
Chinese 165

Context in Negotiations 169

Decision Making 169
The Influence of Culture on Decision
Making 170

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

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

Approaches to Decision Making 173

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

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

Endnotes 179

Comprehensive Cases
Case 3 Cross-Cultural Challenges for

a Singaporean Expatriate in
Zurich PC2-1

Case 4 Anuj Pathak Returns to India PC2-5

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

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

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

Proactive Reasons 190

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

Challenges When Going International 194

Strategic Formulation Process 195
Steps in Developing Strategies 196

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

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

Step 6. Decide on Strategy 218

Timing Entry and Scheduling Expansions 220

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

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

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

Endnotes 224

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

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

vIII CONTENTS

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

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

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

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

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

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

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

Managing the Firm’s Performance in
International Joint Ventures 246

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

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

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

Endnotes 254

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

Integrated Global Structures 260

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

Organizing for Globalization 264
Dual Headquarters 265

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

Organizing to Be Global, Act Local 267

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

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

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

Business Groups 270

Organizational Structure in the Digital
Economy 270

Platform-Based teaming 271

Centralization and Decentralization 271

Changing Role of the Headquarters 271

Digital Organizational Readiness 271

The Global E-Corporation Network
Structure 272

The Transnational Corporation (TNC)
Network Structure 272

Choice of Organizational
Form 273

Organizational Change and Design
Variables 274

Control Systems for Global
Operations 276

Direct Coordinating Mechanisms 277

Indirect Coordinating Mechanisms 277

Managing Effective Monitoring
Systems 278

The Appropriateness of Monitoring and Reporting
Systems 278

The Role of Information Systems 278

Evaluation Variables across
Countries 279

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

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

Endnotes 282

Comprehensive Cases
Case 5 Amazon.com in China: Can

Elaine Chang Crack the Chinese
Market? PC3-1

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

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

CONTENTS Ix

PART 4 Global Human Resources
Management 285

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

Managing Expatriates 296
Expatriate Selection 297

Expatriate Performance Management 298

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

Global Team Performance Management 301

Expatriate Training and
Development 302

Cross-Cultural Training 304

Training Techniques 304

Compensating Expatriates 307

Training and Compensating Host-
Country Nationals 309

Training HCNs 309

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

Training Priorities for E-Business
Development 312

Compensating HCNs 312

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

CASE STUDY: Kelly’s Assignment in
Japan 314

Endnotes 316

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

Preparation, Adaptation, and Repatriation 323

The Role of the Expatriate Spouse 324

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

Expatriate Retention 325

The Role of Repatriation in Developing
a Global Management Cadre 326

Knowledge Transfer 326

Global Management Teams 328
Virtual Global Teams 328

Management in Action The Emergence of a
Virtual Multinational Enterprise 330

Managing Transnational Teams 331

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

The Impact of Unions on Businesses 336

Under the Lens German Manufacturer to
Close Two UK Plants 336

Organized Labor around the World 337

Convergence versus Divergence in Labor
Systems 339

Adapting to Local Industrial Relations
Systems 340

USMCA and Labor Relations in
Mexico 341

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

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

Endnotes 346

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

The Meaning of Work 352

The Needs Hierarchy in the International
Context 354

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

Culture and Job Motivation 359

Reward Systems 359

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

Women in Global Leadership Roles 364

x CONTENTS

Comprehensive Cases
Case 8 Daimler China: Facing a Media

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

Human Resource Management
Practices PC4-5

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

Case 10 IKEA’s Challenges in Russia PC5-1

Glossary 378
Index 382

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

Global Team Leadership 365
The Role of Technology in Leadership 366

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

Contingency Leadership: The Culture
Variable 368

The GLOBE Project 368
Earlier Leadership Research 370

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

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

Endnotes 375

Preface

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

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

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

• Comprehensive cases: All the comprehensive cases are new.

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

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

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

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

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

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

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

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

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

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

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

■ Chapter 2. Facebook Faces Fresh Probe after Photo Leak

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

xII PREFACE

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

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

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

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

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

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

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

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

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

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

CHAPTER-BY-CHAPTER UPDATES

Part 1: The Global Manager’s Environment

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

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

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

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

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

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

• Added and updated material on regional economic
groups

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

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

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

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

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

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

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

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

Photo Leak
• New section on ethics in uses of technology

—censorship and privacy

PREFACE xIII

Part 2: The Cultural Context of Global Management

CHAPTER 3
UNDERSTANDING THE
ROLE OF CULTURE

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

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

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

management
• Inclusion of the Culture Classification Model (task

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

Internet and culture

CHAPTER 4
COMMUNICATING ACROSS
CULTURES

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

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

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

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

language use

CHAPTER 5
CROSS-CULTURAL NEGO-
TIATION AND DECISION
MAKING

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

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

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

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

• New section on negotiating styles and
dealing with translators

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

CHAPTER 6
FORMULATING STRATEGY

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

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

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

• Updated and Revised MIA: Strategic Planning for
Emerging Markets

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

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

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

formulating strategies
• New sections of liability of foreignness and foreign

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

• Expanded, revised feature on strategic planning for
emerging markets

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

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

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

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

• Updated CMF: Joint Ventures in the Russian
Federation

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

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

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

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

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

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

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

CHAPTER 8
ORGANIZATION STRUC-
TURE AND CONTROL
SYSTEMS

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

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

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

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

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

digital economy and digital organizational readiness

Part 4: Global Human Resources Management

CHAPTER 9
STAFFING, TRAINING, AND
COMPENSATION FOR
GLOBAL OPERATIONS

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

United States
• New UTL: Expatriate Employees Struggle to

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

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

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

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

xIv PREFACE

CHAPTER 10
DEVELOPING A GLOBAL
MANAGEMENT CADRE

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

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

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

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

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

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

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

• New feature on best practices for virtual
multinational companies

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

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

CHAPTER 11
MOTIVATING AND LEADING

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

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

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

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

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

Together
• Updated and expanded sections on reward systems,

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

• Updated section on leadership in a digital world

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

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

PREFACE xv

Cases and the term project:

About Amazon

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

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

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

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

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

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

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

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

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

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

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

–
3

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

P A R T 5 : Integrative Case

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

xvI PREFACE

Comparative Management in Focus
Negotiating with the Chinese

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

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

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

mailto:casehelpdesk@ibsindia.org

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

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

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

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

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

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

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

PREFACE xvII

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

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

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

xvIII PREFACE

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

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

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

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

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

—Helen Deresky &
Stewart R. Miller

Employability Skills Matrix

Critical
thinking

Communi-
cation

Collabora-
tion

Knowledge
Application
and Analysis

Social
Responsibility

Opening
Profiles

Manage-
ment in
Action

Under the
Lens

Compara-
tive Man-
agement in
Focus

Application
exercises

Experiential
exercises

Case studies

✔ ✔ ✔

✔ ✔ ✔ ✔

✔✔✔✔

✔ ✔ ✔

✔ ✔ ✔ ✔

✔✔✔✔

✔✔✔✔✔

http://www.pearson.com

P A R T O U T L I N E

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

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

The Global Manager’s
Environment1

P A R T

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

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

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

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

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

Assessing the Environment
Political, Economic, Legal, Technological

O B J E C T I V E S

1
C H A P T E R

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

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

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

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

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

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

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

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

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

CHAPTER 1 • ASSESSING THE ENVIRONMENT 3

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

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

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

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

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

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

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

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

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

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

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

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

Source: © The Financial Times Limited 2019.

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

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

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

4 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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

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

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

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

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

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

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

CHAPTER 1 • ASSESSING THE ENVIRONMENT 5

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

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

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

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

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

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

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

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

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

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

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

6 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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

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

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

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

+ –Maintained ranking Moved up Moved down

1
3
2
4
7
6
5
10
8

2018

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

24
17

1
2
3
4
5
6
7
8
9

2019

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

2017
1
2
5
4
7
6
3
13
9
10
11
14
12
–

15
8
18
20
21
19
22
–
–
–

2016

Ranking Values calculated on a 0 to 3 scale

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

21
22
–
–

23
17

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

1.78
1.79

1.85
1.87
1.90

2.10

Mexico
Norway
Finland
Taiwan
Austria
Ireland

New Zealand
Belgium

South Korea
India

Sweden
Denmark

Switzerland
Netherlands

Spain
Singapore
Australia

Italy
China
Japan

France
United Kingdom

Canada
Germany

United States
+

–
+
+
+

+
+
–
+

+
+
+

–

–
+

–

+
–
–

–

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

CHAPTER 1 • ASSESSING THE ENVIRONMENT 7

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8 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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

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

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

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

Effects of Institutions on Global Trade17

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

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

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

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

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

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

CHAPTER 1 • ASSESSING THE ENVIRONMENT 9

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

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

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

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

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

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

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

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

10 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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

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

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

2019 Global TalenT CompeTiTiveness index RepoRT

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

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

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

CHAPTER 1 • ASSESSING THE ENVIRONMENT 11

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

te
xe

la
rt

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23

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F

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B

L
td

TABLE 1–1 Global Talent Competitiveness Index by Pillar33

Pillar Top Countries

Enabling Talent Singapore, Switzerland, Denmark

Attracting Talent Singapore, Luxembourg, UAE

Growing Talent United States, Switzerland, Netherlands

Retaining Talent Switzerland, Norway, Austria

Vocational-Technical Skills Switzerland, United States, Germany

Global Knowledge Skills Singapore, Iceland, United States

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

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

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

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

12 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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

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

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

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

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

Low Economic Integration

Free Trade Area Customs Union Common Market Economic Union Political Union

High Economic Integration

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

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

CHAPTER 1 • ASSESSING THE ENVIRONMENT 13

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

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

Cities over 1 million
Capitals over 1 million

Countries members in EU
Countries not members in EU

MONTENEGRO

CROATIA
SERBIABOSNIA-

HERZEGOVINA

MACEDONIA
ALBANIA

KOSOVO

Seville

Madrid

Valencia

Barcelona

Valletta

Rome

Turin
Milan

Frankfurt

Warsaw
Amsterdam

Dublin

Bonn
Cologne

Hamburg

Copenhagen

Oslo

Reykjavik

Helsinki

Stockholm

Murmansk

Bern
Zurich

Athens

Naples

Palermo

Lisbon

Bordeaux

Paris

Marseille

Geneva

ViennaMunich

Berlin

Brussels

The
Hague

S P A I N

F R A N C E

NORWAY

SWEDEN

F I N L A N D

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

ESTONIA

LATVIA

LITHUANIA

HUNGARY

ANDORRA
MONACO

LIECH.

LUX.
BELGIUM

N.
IRELAND

ICELAND

IRELAND
NETH.

DENMARK

SWITZ.

AUSTRIA

MALTA

GREECE

CYPRUS

ITALY

PORTUGAL

SICILY

ORKNEY
ISLANDS

SHETLAND ISLANDS
(U.K.)

FAEROE ISLANDS
(Denmark)

SARDINIA

CORSICA

CRETE

Strait of Gibraltar

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

Ionian
Sea

Bay of
Biscay

N o r t h
S e a

Baltic
Sea

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

A r c t i c O c e a n

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

A
egean Sea

Adriat ic Sea

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

Prague
CZECH

REPUBLIC SLOVAKIA

ROMANIA

BULGARIA

SLOVENIA

Budapest Bucharest

Sofia

Skopje
Tirana

Zagreb

Sarajevo

Belgrade

Podgorica

Pristina

EdinburghGlasgow
SCOTLAND

Birmingham

London

ENGLAND

UNITED
KINGDOM

WALES

MAP 1-2 European Union

14 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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

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

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

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

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

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

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

TABLE 1-2 2018 Global Competitiveness Index 45

2014–2015 Rank Country 2018 Rank

3 United States 1

2 Singapore 2

5 Germany 3

1 Switzerland 4

6 Japan 5

8 Netherlands 6

7 Hong Kong (SAR) 7

9 United Kingdom 8

10 Sweden 9

13 Denmark 10

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

http://www.worldeconomicforum.org

CHAPTER 1 • ASSESSING THE ENVIRONMENT 15

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

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

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

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

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

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

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

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

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

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

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

(Continued )

16 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: © The FInancial Times Limited 2018.

CHINA

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

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

Comparative Management in Focus
China Loses Its Allure 50

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

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

CHAPTER 1 • ASSESSING THE ENVIRONMENT 17

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

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

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

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

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

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

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

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

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

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

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

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

(Continued )

18 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

TEN TIPS FOR DOING BUSINESS IN CHINA63

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

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

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

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

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

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

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

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

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

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

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

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

INDIA

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

CHAPTER 1 • ASSESSING THE ENVIRONMENT 19

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

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

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

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

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

SOUTH ASIA

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

OCEANIA

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

20 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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

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

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

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

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

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

U.S. President Donald J. Trump

MERCOSUR

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

BRAZIL

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

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

CHAPTER 1 • ASSESSING THE ENVIRONMENT 21

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

CAFTA-DR

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

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

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

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

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

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

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

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

22 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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

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

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

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

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

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

Irene Yuan Sun, associate partner at McKinsey & Co.

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

SOUTH AFRICA

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

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

CHAPTER 1 • ASSESSING THE ENVIRONMENT 23

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

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

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

Interdependence

• Ethics

• Sustainability

G
lob

MNC–Host Country
Interdependence

MEGA ENVIRONMENT
Tre

nd
s a

nd
Fo

rce
s Competition

Global

Subsidiary–Host

Economic

Technological
Political

HOST-COUNTRY

Cu
ltu

re
Lo

ca
l C

om
pe

tit
io

n
ENVIRONMENT

OPERATING
ENVIRONMENT

Functions and People

• Regulations • Culture

• Skills
• Social Responsibility

ExHIBIT 1-2 An Open Systems Model

24 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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

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

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

• Economic slowdown

• Regulatory/legislative changes

• Increasing competition

• Damage to reputation/brand

• Business interruption

• Acceleration of changes in market factors

• Cyber security

• Commodity price risk

• Cash flow/liquidity risk

• Inability to innovate/satisfy customer needs.100

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

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

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

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

CHAPTER 1 • ASSESSING THE ENVIRONMENT 25

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

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

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

• Expropriation of corporate assets without prompt and adequate compensation

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

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

• Barriers to repatriation of funds (profits or equity)

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

• Interference in managerial decision making

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

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

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

26 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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

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

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

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

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

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

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

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

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

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

CHAPTER 1 • ASSESSING THE ENVIRONMENT 27

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

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

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

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

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

TABLE 1-3 2019 Index of Economic Freedom

Rank: Free Country Score

1 Hong Kong 90.2

2 Singapore 89.4

3 New Zealand 84.4

4 Switzerland 81.9

5 Australia 80.9

6 Ireland 80.5

Mostly Free

7 United Kingdom 78.9

8 Canada 77.7

9 United Arab Emirates 77.6

10 Taiwan 77.3

11 Iceland 77.1

12 United States 76.8

Moderately Free

35 Botswana 69.5

45 Peru 67.8

55 St. Vincent and the Grenadines 66.8

65 Slovakia 64.5

75 Morocco 62.9

94 Tanzania 60.2

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

http://www.heritage.org

28 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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

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

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

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

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

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

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

CHAPTER 1 • ASSESSING THE ENVIRONMENT 29

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

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

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

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

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

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

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

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

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

30 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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

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

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

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

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

FIGURE 1-2 Cloud computing imagined.

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CHAPTER 1 • ASSESSING THE ENVIRONMENT 31

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

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

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

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

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

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

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

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

32 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: © The Financial Times Limited 2019.

CHAPTER 1 • ASSESSING THE ENVIRONMENT 33

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

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

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

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

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

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

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

• A link and efficiency in distribution124

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

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

TABLE 1-4 The Network Readiness Index 2019

Top Ten Rank by Country Selected Other Ranks

1 Sweden Japan 12

2 Singapore Canada 14

3 Netherlands France 18

4 Norway Iceland 21

5 Switzerland Hong Kong 24

6 Denmark China 41

7 Finland Russia 48

8 United States Brazil 59

9 Germany Indonesia 76

10 United Kingdom India 79

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

https://networkreadinessindex.org/wp-content/uploads/2020/01/The-Network-Readiness-Index-2019_VJan2020

34 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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

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

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

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

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

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

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

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

www.microsoftsmallbusiness.com.130

http://www.microsoftsmallbusiness.com

http://Amazon.com

CHAPTER 1 • ASSESSING THE ENVIRONMENT 35

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

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

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

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

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

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

36 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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

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

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

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

Political Environment Economic Environment

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

Regulatory Environment Technological Environment

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

Cultural Environment (see Part 2)

ExHIBIT 1-3 The Environment of the Global Manager

Summary of Key Points

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

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

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

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

CHAPTER 1 • ASSESSING THE ENVIRONMENT 37

Discussion Questions

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

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

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

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

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

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

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

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

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

Application Exercises

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

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

Experiential Exercise

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

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

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

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

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

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

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

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

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

38 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: © The Financial Times Limited 2019.

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

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

Case Questions

CHAPTER 1 • AssEssing THE EnviRonmEnT 39

Endnotes

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4. R. Foroohar, “Globalization in Reverse,” Time, April 7, 2014.
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16. P. Coy, BusinessWeek, July 31, 2008.
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25. Ibid.
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29. Friedman, p. 6.
30. Economist, September 20, 2008.
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32. Ibid.
33. Adapted from p. 23 of B. Lanvin and F. Monteiro (Eds.), “The

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36. http://ec.europa.eu/trade/policy/countries-and-regions/statistics/.
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39. Excerpts from interviews on the PBS Newshour, February 8,
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40. Global Competitiveness Report 2018, www.worldeconomic forum
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41. Ibid.
42. George Parker and Quentin Peel, “A Fractured Europe,”

Financial Times, September 17, 2003, p. 15.
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44. Eric Beinhocker, Ian Davis, and Lenny Mendonca, The Ten
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45. The Global Competitiveness Report 2018, World Economic
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46. James C. Cooper, A Resurgent Asia Will Lead the Global
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M01_DERE7874_10_SE_C01.indd 39 15/10/20 5:37 PM

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http://www.worldeconomicforum.org

https://ec.europa.eu/eurostat/statistics-explained/index.php/Intra-EU_trade_in_goods_-_recent_trends#Evolution_of_intra-EU_trade_in_goods:_2002-2018

http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_122530

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https://www.infosys.com/careers/discover/locations/Pages/usa.aspx

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40 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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52. G. Wildau and D. Blood, “How Foreign Groups Fare in China’s
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53. W. Chen, X. Chen, C-T. Hseih, and Z. Song, “A Forensic
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54. https://www.census.gov/foreign-trade/statistics/highlights/top/
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55. Sources for this section include: Karabell, 2011; U.S.
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56. China Luxury Report 2019.
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58. U.S. Department of Commerce, Doing Business in China—2011
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59. https://www.un.org/en/sections/issues-depth/population/index
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60. S. Qiu and K. Yao, “UPDATE 1-China’s FX Reserves Fall in 2018
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61. C. Xu, The Fundamental Institutions of China’s Reforms and
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62. U.S. Department of Commerce, September 20, 2011.
63. Mia Doucet, author of the award-winning book China in Motion,

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64. https://www.un.org/en/sections/issues-depth/population/index
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65. www.imf.org (accessed April 27, 2019).
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67. “State-Controlled Firms: The Power and the Glory,” Economist,

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68. https://aric.adb.org/initiative/south-asian-association-for
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69. https://www.census.gov/foreign-trade/balance/c2010.html#2018
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70. “World Briefing,” Time, July 2, 2012.
71. A. T. Kearney 2014–2015 Confidence Index.
72. http://www.promexico.gob.mx/en/mx/tratados-comerciales (ac-

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73. Mary Anastasia O’Grady, “NAFTA at 20: A Model for Trade

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74. The US House of Representatives approved USMCA in 2019.
75. https://ustr.gov/usmca (accessed April 27, 2019).
76. Council on Foreign Relations, “Mercosur: South America’s

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77. Ibid.
78. https://www.imf.org/external/datamapper/NGDP_RPCH

@WEO/BRA?year=2019; https://www.bloomberg.com/news
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79. https://www.ft.com/content/c897ee82-5a02-11e9-9dde
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80. https://www.bloomberg.com/news/articles/2019-03-28/elusive
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81. http://www.doingbusiness.org/en/rankings (accessed April 27,
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82. https://ustr.gov/trade-agreements/free-trade-agreements/cafta
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83. https://www.trade.gov/fta/ (accessed April 27, 2019).
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of the Crimean peninsula by Russia” in 2014. A. Johnson, Russia
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85. Luis Enriquez, Ina Kota, and Sven Smith, “The Outlook for
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86. http://www3.weforum.org/docs/GCR2018/05FullReport
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87. Ibid.
88. http://www3.weforum.org/docs/Arab-World-Competitiveness

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89. Ibid.
90. https://www.nti.org/learn/treaties-and-regimes/african-union-au

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91. http://english.mofcom.gov.cn/article/statistic/lanmubb

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92. Dambisa Moyo, “Beijing, a Boon for Africa,” www.nytimes
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93. https://www.imf.org/en/Countries/ZAF#countrydata (accessed
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94. www.statisticssa.gov.za (accessed February 1, 2009).
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https://www.atkearney.com/foreign-direct-investment-confidence-index/full-report

http://www.export.gov

http://www.statisticssa.gov.za

https://www.imf.org/en/Countries/ZAF#countrydata

http://www.nytimes.com

http://english.mofcom.gov.cn/article/statistic/lanmubb/AsiaAfrica/201901/20190102831255.shtml

https://www.nti.org/learn/treaties-and-regimes/african-union-au/

http://www3.weforum.org/docs/Arab-World-Competitiveness-Report-2018/AWCR%202018.0724_1342 .

http://www3.weforum.org/docs/GCR2018/05FullReport/TheGlobalCompetitivenessReport2018

https://www.euronews.com/2018/11/26/russia-attacks-seizes-three-ukrainian-naval-vessels-coast-crimea-black-n939876

https://www.trade.gov/fta/

https://ustr.gov/trade-agreements/free-trade-agreements/cafta-dr-dominican-republic-central-america-fta

http://www.doingbusiness.org/en/rankings

https://www.bloomberg.com/news/articles/2019-03-28/elusive-economic-growth-points-to-depth-of-brazil-s-problems

https://www.ft.com/content/c897ee82-5a02-11e9-9dde-7aedca0a081a

https://www.bloomberg.com/news/articles/2019-03-28/elusive-economic-growth-points-to-depth-of-brazil-s-problems

https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/BRA?year=2019

https://www.cfr.org/backgrounder/mercosur-south-americas-fractious-trade-bloc

https://ustr.gov/usmca

http://www.promexico.gob.mx/en/mx/tratados-comerciales

https://www.census.gov/foreign-trade/balance/c2010.html#2018

https://aric.adb.org/initiative/south-asian-association-for-regional-cooperation

http://www.imf.org

https://www.un.org/en/sections/issues-depth/population/index.html

https://www.reuters.com/article/china-economy-forex-reserves/update-1-chinas-fx-reserves-fall-in-2018-as-slowing-economy-trade-war-weigh-idUSL3N1Z43CD

https://www.un.org/en/sections/issues-depth/population/index.html

http://www.export.gov

https://www.mckinsey.com/Featured-Insights/China/How-young-Chinese-consumers-are-reshaping-global-luxury?cid=other-eml-alt-mip-mck&hlkid=2c8a085e8ea64850b1a5c80ee12232d7&hctky=1235604&hdpid=5e0eef8d-596b-40df-8c49-cebea1c66c63

http://www.worldeconomicforum.gov

http://FT.com

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https://www.census.gov/foreign-trade/statistics/highlights/top/index.html

https://www.brookings.edu/wp-content/uploads/2019/03/bpea-2019-forensic-analysis-china

https://www.ft.com/content/c4001b5a-43d8-11e9-b168-96a37d002cd3?shareType=nongift

https://www.ft.com/content/961b4b32-3fce-11e9-b896-fe36ec32aece

CHAPTER 1 • ASSESSING THE ENVIRONMENT 41

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98. Ibid.
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100. Ibid.
101. Aon Risk Solutions, 2011.
102. C. J. Levy, “In Hard Times, Russia Tries to Reclaim Industries,”

www.nytimes.com, December 8, 2008.
103. R. Minder and S. Romero, “Spain Weighs Response to

Nationalization of YPF,” www.nytimes.com, April 17, 2012.
104. Adam Smith Institute, “Venezuela Campaign: How

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105. E. F. Micklous, “Tracking the Growth and Prevalence of
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106. W. Shreeve, Be Prepared for Political Changes Abroad. Harvard
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107. G. M. Taoka and D. R. Beeman, International Business (New
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108. Ibid.
109. http://globalterrorismindex.org/ (accessed May 7, 2019).
110. https://www.bsigroup.com/en-US/Our-services/supply-chain

-solutions/resources/Press-releases/2017-news/Impact-of
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111. B. O’Reilly, “Business Copes with Terrorism,” Fortune, January
6, 2004, p. 48.

112. Heritage Foundation, http://www.heritage.org (accessed
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113. F. John Mathis, “International Risk Analysis,” in Global Business
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114. Rahul Jacob, “Asian Infrastructure: The Biggest Bet on Earth,”
Fortune, October 31, 1994, 139–146.

115. M. Ward, “Jack Ma: This Is What to Study If You Want a
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116. http://www.chinadaily.com.cn/business/tech/2017-12/06
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117. http://www.xinhuanet.com/english/2017-05/04/c_136256845
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118. A. Ram, “Google to Set Up German Team to Tackle
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119. World Economic Forum, “Global Information Technology
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120. Jack Goldsmith and Tim Wu, Who Controls the Internet?
Illusions of a Borderless World (London: Oxford University
Press, 2006).

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

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

.indialine.com, February 18, 1999.
124. “Europe’s Borderless Market: The Net,” www.businessweek

.com, May 17, 2003.
125. “E-Management,” Economist, November 11, 2000, pp. 32–34.
126. “E-Commerce Report,” New York Times, March 26, 2001, pp. 7–8.
127. S. Mohanbir and M. Sumant, “Go Global,” Business 2.0, May

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

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

Architecture,” California Management Review 54, No. 2 (Winter
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130. B2B Directory, www.Forbes.com (accessed March 29, 2012).
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from Tariffs This Year,” Financial Times, January 29, 2019,
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6ceb5ffdf (accessed April 28, 2019).

https://www.ft.com/content/cde6b214-23c6-11e9-b329-c7e6ceb5ffdf

http://www.Forbes.com

http://www.businessweek.com

http://www.indialine.com

http://www.businessmedia.org

http://www3.weforum.org/docs/GITR2016/WEF_GITR_Full_Report

https://www.ft.com/content/9e236e3c-7619-11e9-be7d-6d846537acab?shareType=nongift

http://www.xinhuanet.com/english/2017-05/04/c_136256845.htm

http://www.chinadaily.com.cn/business/tech/2017-12/06/content_35234512.htm

https://www.cnbc.com/2017/06/21/jack-ma-this-is-what-to-study-if-you-want-a-good-job-in-the-future.html

http://www.heritage.org

https://www.iata.org/publications/economic-briefings/European-terrorism-impact

https://www.bsigroup.com/en-US/Our-services/supply-chain-solutions/resources/Press-releases/2017-news/Impact-of-supply-chain-attacks-hits-highest-rate-ever

http://globalterrorismindex.org/

https://www.adamsmith.org/blog/venezuela-food

http://www.nytimes.com

https://www.aon.com/getmedia/8d5ad510-1ae5-4d2b-a3d0-e241181da882/2019-Aon-Global-Risk-Management-Survey-Report.aspx

http://www.atkearney.com

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MOZAMBIQUE

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

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

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

Managing Interdependence
Social Responsibility, Ethics, Sustainability

O B J E C T I V E S

2
C H A P T E R

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

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

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

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

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

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

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

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

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

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

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

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

(Continued)

44 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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

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

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

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

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

Source: © The Financial Times Limited 2018.

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

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

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

Charles Robertson, global chief economist of Renaissance Capital

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

CHAPTER 2 • MANAGING INTERDEPENDENCE 45

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

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

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

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

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

46 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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

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

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

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

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

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

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

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

Susanne Pulverer, store manager (New Delhi), 2018

MNC

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

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

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

MNC Stakeholders

ExHIBIT 2-1 MNC Stakeholders

CHAPTER 2 • MANAGING INTERDEPENDENCE 47

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

Business benefits from CSR12

• Improved access to capital

• Secured license to operate

• Revenue increases

• Cost decreases

• Risk reduction

• Increase in brand value

• Improved customer attraction and retention

• Improved reputation

• Improved employee recruitment, motivation, and retention

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

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

Financial Times

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

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

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

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

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

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

48 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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

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

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

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

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

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

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

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

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

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

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

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

CHAPTER 2 • MANAGING INTERDEPENDENCE 49

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: © The Financial Times Limited 2017.

50 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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

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

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

The Nestlé website explains its CSV philosophy as follows:

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

www.nestle.com

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

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

Creating

Shared Value

Nutrition, Water, Rural
development; Our focus areas

Sustainability Protect the future

Compliance Laws, Business Principles,
Codes of Conduct

ExHIBIT 2-2 Nestlé Creates Shared Value

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

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

http://www.nestle.com

CHAPTER 2 • MANAGING INTERDEPENDENCE 51

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

BusinessWeek

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

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

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

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

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

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

(Continued)

52 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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

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

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

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

Beijing

Bay
of

Bengal
South
China
Sea

Pacific
Ocean

East
China
Sea

Yellow
Sea

Sea of
Japan

PHILIPPINES

0 600 mi

0 600 km

Hong Kong

NEI M
ONGGOL

GANSU

ZHEJIANG

GUANGDONG

FUJIAN

JIANGXI

GUANGXI

GUIZHOU
HUNAN

ANHUI

JIANGSU

HUBEI
SICHUAN

YUNNAN

HEBEI
TIANJIN

SHANDONG

SHAANXI

SHANXININGXIA
QINGHAI

XIZANG

HENAN

LIAONING

JILIN

HEILONGJIANG

XINJIANG

HAINAN

RU
SSIA

TAIWAN

C H I N A

R U S S I A

KYRGYZSTAN

KAZAKHSTAN

NORTH
KOREA

SOUTH
KOREA

JAPAN

VIETNAMMYANMAR
(BURMA) LAOS

THAILAND

BANGLADESH

BHUTAN
NEPAL

I N D I A

M O N G O L I A

MAP 2-1 China

CHAPTER 2 • MANAGING INTERDEPENDENCE 53

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

• Do not use child or forced labor.

• Provide a safe working environment.

• Respect workers’ rights to unionize.

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

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

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

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

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

hx
db

zx
y/

Sh
ut

te
rs

to
ck

54 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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

MNE and Host Governments

Economic and Developmental Policies

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

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

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

Political Involvement

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

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

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

MNEs and the Public

Technology Transfer

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

ExHIBIT 2-3 International Codes of Conduct for MNEs

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

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

goodweave.org, 2018

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

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

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

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

Nina Smith. CEO, GoodWeave

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

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

Our Vision

http://www.forbes.com

CHAPTER 2 • MANAGING INTERDEPENDENCE 55

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

Financial Times

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

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

Employment Practices (excerpts)

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

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

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

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

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

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

Human Rights

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

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

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

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

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

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

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

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

Laws and Regulations

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

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

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

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

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

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

Environmental Protection

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

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

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

MNEs and Persons

Consumer Protection

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

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

ExHIBIT 2-3 Continued

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

56 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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

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

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

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

Economic Ideology:
Capitalism versus
Socialism

Culture:
Western versus
Eastern

Societal Moderators:
Language
Religion
Historic traditions

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

Dominant
Moral
Philosophy

Ethical or
Unethical Societal
Norms

Individual
Behavior

Firm Specific
Moderators:
Corporate culture
Policies
Profit motive

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

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

CHAPTER 2 • MANAGING INTERDEPENDENCE 57

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

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

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

Rank Score Country

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

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

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

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

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

http://www.transparencyinternational.org

58 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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

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

Transparency International

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

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

Financial Times

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

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

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

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

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

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

CHAPTER 2 • MANAGING INTERDEPENDENCE 59

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

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

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

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

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

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

Adaire Fox-Martin, SAP board member, 2017

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

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

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

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

(Continued)

60 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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

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

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

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

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

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

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

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

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

Source: © The Financial Times Limited 2018.

CHAPTER 2 • MANAGING INTERDEPENDENCE 61

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

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

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

Rana Foroohar, Financial Times, August 20, 2018

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

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

Steps to an Ethical Decision

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

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

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

62 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

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

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

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

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

UNDER THE LENS
Volkswagen under the Spotlight

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

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

the industry, so guilt could be spread around and penalties diluted, say two people inside the company.
The Volkswagen Scandal, in other words, might helpfully become the Car Scandal.
Vehicles from Fiat, Hyundai and others were tested for harmful nitrogen oxide emissions by VW

engineers at the group’s Wolfsburg headquarters from late 2015 to early 2016. The engineers had a
simple conundrum: VW had just admitted to equipping 11m cars with software to detect laboratory tests
and enable them to enter a low-emissions mode. If VW’s best engineers found regulations so onerous
that they resorted to deliberate fraud, what had its rivals done? A third person in the company insists
there was a more innocent explanation for the tests. Engineers uninvolved in the original cheating had
to use rival cars as control variables to better understand their own sophisticated software—some of it
supplied by third parties and used by rival brands. “We were not dirtying others’ hands to make our own
look clean,” says this employee.

CHAPTER 2 • MANAGING INTERDEPENDENCE 63

MANAGING INTERDEPENDENCE
Because multinational firms (or other organizations, such as the Red Cross) represent global
interdependency, their managers at all levels must recognize that what they do, in the aggre-
gate, has long-term implications for the socioeconomic interdependence of nations. Simply to
describe ethical issues as part of the general environment does not address the fact that manag-
ers must control their activities at all levels—from simple, daily business transactions involving
local workers, intermediaries, or consumers to global concerns of ecological responsibility—for
the future benefit of all concerned. Whatever the situation, the powerful long-term effects of
MNC and MNE action (or inaction) should be planned for and controlled, not haphazardly con-
sidered part of the side-effects of business. The profitability of individual companies depends on
a cooperative and constructive attitude toward global interdependence.

Foreign Subsidiaries in the United States
Much of the preceding discussion has related to U.S. subsidiaries around the world. However, to
highlight the growing interdependence and changing balance of business power globally, foreign
subsidiaries in the United States should also be considered. Since much criticism about a lack of
responsibility has been directed toward MNCs with headquarters in the United States, we must
think of these criticisms from a global perspective. The number of foreign subsidiaries in the
United States has grown and continues to grow dramatically; FDI in the United States by other
countries is, in a number of industries, far more than U.S. investment outward. Americans are
thus becoming more sensitive to what they perceive as a lack of control over their own country’s
business.

Things look very different from the perspective of Americans employed at a subsidiary of
an overseas MNC. Interdependence takes on a new meaning when overseas managers are calling
the shots regarding strategy, expectations, products, and personnel. Often, Americans’ resent-
ment about different ways of doing business by foreign companies in the United States inhibits
the cooperation that gave rise to the companies’ presence in the first place.

Today, managers from all countries must learn new ways, and most MNCs are trying to
adapt. In Japan, corporate social responsibility has traditionally meant that companies take care
of their employees, whereas in the United States both the public and private sectors are expected
to share responsibility for the community. Part of the explanation for this difference is that U.S.
corporations get tax deductions for corporate philanthropy, whereas Japanese firms do not; nor
are Japanese managers usually familiar with community needs. For these and other reasons,
Japanese subsidiaries in the United States have not been active in U.S. philanthropy.

Volkswagen declined to comment on this previously unreported episode.
What the engineers found shocked them. Rival brands’ NOx emissions were considered “a com-

plete disaster.” Performance on the road was “completely different to the technical data,” says a VW
worker briefed on the results. The overall summary of whether rivals were also skewing emissions
results was clear: “It’s not only VW who is cheating.”

What is unclear is whether rivals were deploying the same strategy as VW—using a “defeat device”
to illegally trick regulators into believing its cars were green—or if they had simply become better at
bending the rules on tests, a problem that still exists with petrol cars today, as the European Commission
revealed last month when it disclosed the latest “tricks” carmakers were using to exploit loopholes for
incoming 2020 emissions procedures.

The distinction is blurred but important. VW paid the consequences of crossing the line and cheat-
ing NOx emissions tests in the US. But the efforts of other carmakers to legally undermine testing for
both NOx and CO2 in Europe have never resulted in real penalties.

“Legal optimisation was done on an industrial scale,” says Nick Molden, chief executive of
Emissions Analytics, which conducts real-world driving emissions tests. “It became so ingrained in how
cars were certified that the carmakers didn’t understand they had done something wrong … That’s the
scandal in Europe: that these actions were not illegal.”

Source: © The Financial Times Limited 2018.

2-3. To recognize the impor-
tance of managing inter-
dependence and include
sustainability and shared
value in their long-term
plans

64 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

Managing Subsidiary–Host Country Interdependence
When managing interdependence, international managers must go beyond general issues of
social responsibility and deal with the specific concerns of the MNC subsidiary–host country re-
lationship. Outdated attitudes that focus only on profitability and autonomy are shortsighted and
usually result in only short-term realization of those goals. Managers in those companies must
learn to accommodate the needs of other organizations and countries:

Interdependence rather than independence, and cooperation rather than confrontation are at
the heart of that accommodation … the journey from independence to interdependence man-
aged badly leads to dependence, and that is an unacceptable destination.73

Most of the past criticism levied at MNCs has focused on their activities in less-
developed countries (LDCs). Their real or perceived lack of responsibility centers on the
transfer in of inappropriate technology, causing unemployment, and the transfer out of
scarce financial and other resources, reducing the capital available for internal develop-
ment. In their defense, those corporations and NGOs help developing countries by contribut-
ing new technology and managerial skills, improving the infrastructure, creating jobs, and
bringing in investment capital from other countries by exporting products. The infusion of
outside capital provides foreign-exchange earnings that can be used for further develop-
ment. The host government’s attitude is often referred to as a love–hate relationship. It wants
the economic growth that foreign investment provides, but it does not want the incursions
on national sovereignty or the technological dependence that may result. Most criticisms
of MNC subsidiary activities, whether in less-developed or more-developed countries, are
along the following lines:

• MNCs locally raise their needed capital, contributing to a rise in interest rates in host
countries. The majority (sometimes even 100 percent) of the stock of most subsidiaries is
owned by the parent company. Consequently, host-country people do not have much con-
trol over the operations of corporations within their borders.

• MNCs usually reserve the key managerial and technical positions for expatriates. As a re-
sult, they do not contribute to the development of host-country personnel.

• MNCs do not adapt their technology to the conditions that exist in host countries.

• MNCs concentrate their research and development activities at home, restricting the
transfer of modern technology and know-how to host countries.

• MNCs give rise to the demand for luxury goods in host countries at the expense of essen-
tial consumer goods.

• MNCs start their foreign operations by purchasing existing firms rather than by develop-
ing new productive facilities in host countries.

• MNCs dominate major industrial sectors, thus contributing to inflation by stimulating de-
mand for scarce resources and earning excessively high profits and fees.

• MNCs are not accountable to their host nations but only respond to home-country gov-
ernments; they are not concerned with host-country plans for development.74

Specific MNCs have been charged with tax evasion, union busting, and interference
in host-country politics. Of course, corporations have both positive and negative effects on
different economies. For every complaint about MNC activities (whether about capital mar-
kets, technology transfer, or employment practices), we can identify potential benefits (see
Exhibit 2-6).

Numerous conflicts arise between MNC companies or subsidiaries and host countries,
including conflicting goals (both economic and noneconomic) and conflicting concerns, such
as the security of proprietary technology, patents, or information. Overall, the resulting trade-
offs create an interdependent relationship between the subsidiary and the host government,
based on relative bargaining power. The power of large corporations is based on their large-
scale, worldwide economies, their strategic flexibility, and their control over technology and
production location. The bargaining chips of the host governments include their control of
raw materials and market access and their ability to set the rules regarding the role of private

CHAPTER 2 • MANAGING INTERDEPENDENCE 65

enterprise, the operation of state-owned firms, and the specific regulations regarding taxes,
permissions, and so forth.

MNCs run the risk of their assets becoming hostage to host control, which may take the form
of nationalism, protectionism, or governmentalism. Under nationalism, for example, public
opinion is rallied in favor of national goals and against foreign influences. Under protectionism,
the host institutes a partial or complete closing of borders to withstand competitive foreign prod-
ucts, using tariff and nontariff barriers such as those Japan uses. Under governmentalism, the
government uses its policy-setting role to favor national interests rather than relying on market
forces.75 This was illustrated by the actions of governments around the world to support their
banking systems in 2008 and 2009.

The intricacies of the relationship and the relative power of an MNC subsidiary and a host-
country government are situation specific. Clearly, such a relationship should be managed for
mutual benefit; a long-term, constructive relationship based on the corporation’s socially respon-
sive stance should result in progressive strategic success for the company and economic progress
for the host country. The effective management of subsidiary–host country interdependence must
have a long-term perspective. Although temporary strategies to reduce interdependence through
controls on the transnational flows by firms (for example, transfer-pricing tactics) or by gov-
ernments (such as new residency requirements for skilled workers) are often successful in the
short run, they result in inefficiencies that must be absorbed by one or both parties, with negative
long-term results. In setting up and maintaining subsidiaries, managers are wise to consider the
long-term trade-offs between strategic plans and operational management. By finding out for them-
selves the pressing local concerns and understanding the sources of past conflicts, they can learn
from mistakes and recognize the consequences of the failure to manage problems. Furthermore,

Benefits Costs

Capital Market Effects

• Broader access to outside capital
• Economic growth
• Foreign-exchange earnings
• Import substitution effects allow
governments to save foreign exchange
for priority projects

• Risk sharing
• Increased competition for local scarce capital
• Increased interest rates as supply of local
capital decreases
• Capital service effects of balance
of payments

Technology and Production Effects

• Access to new technology and R&D
developments
• Employee training in new technology
• Infrastructure development and support
• Export diversification
• Introduction of new management techniques

• Technology is not always appropriate
• Plants are often for assembly only and
can be dismantled
• Government infrastructure investment
is higher than expected benefits
• Increased pollution

Employment Effects

• Direct creation of new jobs
• Introduction of more humane employment
standards
• Opportunities for indigenous management
development
• Income multiplier effects on local
community business

• Limited skill development and creation
• Competition for scarce skills
• Low percentage of managerial jobs for
local people
• Employment instability because of ability
to move production operations freely
to other countries

ExHIBIT 2-6 MNC Operations Bring Host Country Benefits and Costs

Source: Based on R. H. Mason and R. S. Spich, Management: An International Perspective (Homewood,
IL: Irwin, 1987), p. 202.

66 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

managers should implement policies that reflect corporate social responsibility regarding local
economic issues, employee welfare, or natural resources. At the least, the failure to manage inter-
dependence effectively results in constraints on strategy. In the worst case, it results in disastrous
consequences for the local area, for the subsidiary, and for the global reputation of the company.

The interdependent nature of developing economies and the foreign companies operating
there is of particular concern when discussing social responsibility because of the tentative and
fragile nature of the economic progression in those countries. Corporations (and nongovern-
mental organizations [NGOs]) must set a high moral standard and lay the groundwork for future
economic development. At the minimum, they should ensure that their actions will do no harm.
Some recommendations for MNEs operating in and doing business with developing countries
are as follows:

• Do no intentional harm. This includes respect for the integrity of the ecosystem and con-
sumer safety.

• Produce more good than harm for the host country.

• Contribute by their activity to the host country’s development.

• Respect the human rights of their employees.

• To the extent that local culture does not violate ethical norms, respect the local culture
and work with and not against it.

• Pay their fair share of taxes.

• Cooperate with the local government in developing and enforcing just background (infra-
structure) institutions (i.e., laws, governmental regulations, unions, and consumer groups,
which serve as a means of social control).76

Managing Environmental Interdependence and Sustainability
Sustainability lies at the intersection of financial, social and environmental health—
described sometimes as the “triple bottom line.”77

International managers can no longer afford to ignore the impact of their activities on the envi-
ronment and their stakeholders. The demand for corporations to consider sustainability in their
CSR plans comes from various stakeholders around the world. A generally accepted definition of
sustainable development for business enterprises is that of

adopting business strategies and activities that meet the needs of the enterprise and its stake-
holders today, while protecting, sustaining and enhancing the human and natural resources
that will be needed in the future.78

Journal of Socio-Economics

Existing literature generally agrees on three dimensions of sustainability: (1) economic,
(2) social, and (3) environmental. A sustainable business has to take into account “the inter-
ests of future generations, biodiversity, animal protection, human rights, life cycle impacts, and
principles like equity, accountability, transparency, openness, education and learning, and local
action and scale.”79

A study by Mirvis et al. found that, although most executives agree that sustainability is
important to the financial success of their companies, fewer than half of them are making serious
commitments to integrate the necessary steps with their business systems. Reasons include a lack
of clear view on what comprises sustainability and the difficulty in allocating responsibility in
the company for the vast and overlapping concerns of environmental, social, and governance is-
sues. As a result, sustainability often is not internalized in the culture or systems of the company,
and competing priorities such as short-term profits intervene.80 However, companies such as
GE, Nike, Nestlé, and Gap are among the world’s prominent sustainable organizations and are
providing leadership in their transparent models for other organizations to resolve the complex
issues involved in implementing sustainability.

A more positive report in 2017 from a survey by McKinsey consultants of 2,711 execu-
tives representing the full range of industries and geographic regions shows that many companies
are actively integrating sustainability principles with their businesses, and they are doing so by

CHAPTER 2 • MANAGING INTERDEPENDENCE 67

pursuing goals that go far beyond earlier concern for reputation management. The McKinsey
report noted a more mature attitude toward sustainability and its expected benefits than in prior
surveys, saying that, “a larger share of respondents than ever before say the top reason for imple-
menting a sustainability agenda is better alignment between an organization’s practices and its
goals, missions, or values (46 percent in 2017 compared with 30 percent in 2012).”81 In addition,
nearly 60 percent said their companies have an increased level of engagement with sustainability
compared with two years earlier, and only 9 percent revealed a decline. The 2017 report shows that
70 percent of the companies in the survey instituted formal governance of sustainability, up from
56 percent in 2014. The survey respondents indicate that technology is playing a growing role in
sustainability. For instance, 54 percent of the companies reveal that advances in sustainability-
related technologies led to an increase in commitment. Another McKinsey report indicates a sig-
nificant drop in the cost of sustainability-related technologies—renewable energy, energy storage,
digital platforms, and advanced data analytics—thus making it more affordable for companies in
general. Another key driver of sustainability engagement is safety and security concerns.82

The dilemma for corporations is that they believe they are faced with trying to meet two
often contradictory requirements: (1) selling at low prices and (2) being environmentally and
socially conscious. However, competitive pressures limit the company’s ability to raise prices to
cover the cost of socially responsible policies. This is obviously contradictory to the well-being
of societies.83 However, a long-term view is that sustainability is good for business, and many
companies, such as BP and Nike, have learned this the hard way.

One example of the turnaround in a company’s sustainability efforts is the Coca-Cola com-
pany in India. The company struggled to accommodate the rising concerns and protests from local
farmers about the company’s depletion of water resources. As reported on the PBS Newshour,84
farmers are particularly angry in Kala Dera, in the drought-stricken state of Rajasthan. The Coca-
Cola factory is one of 49 across India. The company has invested over $1 billion, building a market
for its products in this country. The plant used about 900,000 liters of water in 2007, about a third
of it for the soft drinks, the rest to clean bottles and machinery. It is drawn from wells at the plant
but also from aquifers Coca-Cola shares with neighboring farmers. The water is virtually free to
all users. The farmers say their problems began after the Coca-Cola factory arrived in 1999. At the
heart of the issue is water, which is the principal ingredient in almost every Coca-Cola product.
Yet in locations where Coca-Cola does not use local water resources, the Coca-Cola brand’s per-
vasiveness influences the negative perception that the company is a massive water user.

According to the farmers:

Before, the water level was descending by about one foot per year. Now it’s 10 feet every year. We
have a 3.5-horsepower motor. We cannot cope. They (Coca-Cola) have a 50-horsepower pump.85

PBS Newshour with Jim Lehrer, November 17, 2008

Coca-Cola agreed to an independent third-party assessment of some of its operations in
India, which confirmed that the Rajasthan plant is contributing to a worsening water situation. It
recommended that the company bring water in from outside the area or shut the factory down.
Coca-Cola rejected that recommendation. For his part, Coca-Cola’s India head, Atul Singh, says
it would be irresponsible to leave, saying that “walking away is the easiest thing we can do.
That’s not going to help that community build sustainability.”86

Atul Singh, who became a group president at Coca-Cola, recommended that Coca-Cola
build water facilities not only near its plants, but also in locations where Coca-Cola did not have
operations. The new water facilities did not have the company logo. Beyond India, Coca-Cola set
a goal of completely replacing the water it uses in its finished products at all its facilities, world-
wide. It set this goal for 2020, but it achieved it as of 2015.87

We need to be Coca-Cola—we need to do more than is expected.
Atul Singh, 2018

The Coca-Cola example makes clear to global managers that effectively managing environ-
mental interdependence and sustainability includes considering ecological interdependence as
well as the economic and social implications of MNC activities. According to Greg Koch, Coca-
Cola’s director of global water stewardship, “Ultimately, Kerala became a wake-up call for the
company to address its responsibility for water ‘beyond the four walls of the plant.’”88

68 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

There is an ever-increasing awareness of, and a mounting concern worldwide about, the ef-
fects of global industrialization on the natural environment. Government regulations and power-
ful interest groups are demanding ecological responsibility regarding the use of scarce natural
resources and production processes. MNCs have to deal with each country’s different policies and
techniques for environmental and health protection. Such variations in approach reflect different
levels of industrialization, living standards, government–business relations, philosophies of collec-
tive intervention, patterns of industrial competition, and degrees of sophistication in public policy.

In recent years, the export of hazardous wastes from developed countries to less-developed
ones has increased considerably. E-waste—from electronic components, computers, and cell
phones, for example, all of which are full of hazardous materials—has become a major problem
for developing economies, producing sickness and death for its handlers there; this continues in
spite of laws against such dumping by U.S. companies and others. Often, companies choose to
dispose of hazardous waste in less-developed countries to take advantage of weaker regulations
and lower costs. Until we have strict international regulation of trade in hazardous wastes, com-
panies should take it upon themselves to monitor their activities, as Singh and Lakhan demand:

To export these wastes to countries which do not benefit from waste-generating industrial
processes or whose citizens do not have lifestyles that generate such wastes is unethical. It
is especially unjust to send hazardous wastes to lesser-developed countries which lack the
technology to minimize the deleterious effects of these substances.89

Implementing Sustainability Strategies
Effective implementation of sustainability strategies, according to Epstein and Buhovac, requires
companies to have both formal and informal systems in place: “Companies need the processes,
performance measurement, and reward systems (formal systems) to measure success and to pro-
vide internal and external accountability. But they also need the leadership, culture, and people
(informal systems) to support sustainability implementation. An alignment among the formal
and informal systems along with the organizational structure is critical for success.”90

Epstein’s model (Exhibit 2-7) provides a system for examining, measuring, and managing
the drivers of corporate sustainability. Essential to success is the commitment of top leadership

INPUTS

External
Context

Internal
Context

Business
Context

Leadership

Sustainability
Strategy Sustainability

Performance
(may be both
an output and

outcome)

Stakeholder
Reactions Long-Term

Corporate
Financial

Performance

There are three major sets of impacts.

Feedback Loop

Sustainability
Structure

Sustainability
Systems,

Programs,
and

ActionsHuman and
Financial
Resources

PROCESSES OUTPUTS OUTCOMES

Corporate Financial Costs/Benefits of Actions
Social Impact
Financial Impact through Sustainable Performance

Corporate Costs/Benefits of Actions

ExHIBIT 2-7 Corporate Sustainability Model

Source: Marc J. Epstein, “Implementing Corporate Sustainability: Measuring and Managing Social and
Environmental Impacts,” Strategic Finance, January 2008. © 2008 by IMA, Montvale, NJ, www.imanet
.org, used with permission.

http://www.imanet.org

CHAPTER 2 • MANAGING INTERDEPENDENCE 69

and the recognition of sustainability as a process that will benefit the company—i.e., that it is
a good business idea. Key to understanding the role of corporate sustainability is the relation-
ship between managers’ decisions, their impact on the society and its environment, and financial
performance. In Epstein’s model, the inputs include the external contexts in which the company
operates that are specific to the locations; the internal context of the company’s systems and
structure; the business context, such as the industry sector, customers, and products; and the
human and financial resources available to the corporation for sustainability purposes.91 Output
measures of the success of the corporation’s sustainability would include, for example, reduction
in energy use or hazardous waste, positive change in human rights complaints, and so on. These
could result, among other factors, in cost savings and in increased sales from improved reputa-
tion (as was the case, for example, when Nike turned around its human rights reputation after a
student embargo on its products).

Multinational corporations already have had a tremendous impact on foreign countries, and
this impact will continue to grow and bring about long-lasting changes. Because of interdepen-
dence at both the local and global level, it is not only moral but also in the best interest of MNCs
to establish a single clear posture toward social and ethical responsibilities worldwide and to
ensure that it is implemented. In a real sense, foreign firms enter as guests in host countries and
must respect the local laws, policies, traditions, and culture as well as those countries’ economic
and developmental needs.

CONCLUSION
When research findings and corporate actions indicate differential attitudes toward ethical be-
havior and social responsibility across cultures, MNCs must take certain steps. For example, they
must be careful with overseas assignments if an individual’s values are incongruent with those in
the host country because this could lead to conflicts with local managers, governmental bodies,
customers, and suppliers. As discussed earlier, expatriates, as well as local employees, should be
oriented to the legal and ethical ramifications of questionable foreign payments, the differences
in environmental regulations, and the local expectations of personal integrity. They should also
be supported as they attempt to integrate host-country behaviors with the expectations of the
company’s headquarters.

Social responsibility, ethical behavior, interdependence, and sustainability are important
concerns to be built into management control—not as afterthoughts but as part of the ongoing
process of planning and controlling international operations for the long-term benefit of all. The
perspective of CSV—creating shared value—encompasses a positive and proactive role in in-
cluding those concerns in the strategic planning of the organization. Part 2 focuses on the perva-
sive and powerful influence of culture in the host-country environment in which the international
manager operates. Chapter 3 examines the nature of culture. What are its various dimensions and
roots? How does culture affect the behavior and expectations of employees, and what are the
implications for how managers operating in other countries should behave?

■ The concept of international social responsibility
(known in business circles as CSR—corporate social
responsibility) includes the expectation that MNCs
should be concerned about the social and economic ef-
fects of their decisions on activities in other countries and
that they should build appropriate provisions into their
strategic plans to deal with those potential effects.

■ Moral universalism refers to the need for a moral
standard that is accepted around the world; however,
varying cultural attitudes and business practices
make this goal unattainable at this time. A number

Summary of Key Points

of groups of corporations within industries have col-
laborated on sets of policies for CSR for both their
companies and those in their supply chains. Such
collaborations help to raise the standard in host
countries and level the playing field for managers
within those industries.

■ Concerns about MNC social responsibility revolve
around issues of human rights in other countries. Many
organizations develop codes of conduct that specifi-
cally deal with human rights in their operations around
the world.

70 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

■ International business ethics refers to the conduct of
managers in their relationships to all individuals and
entities with whom they come into contact. Ethical
behavior is judged and based largely on the cultural
value system and the generally accepted ways of
doing business in each country or society. Managers
must decide whether to base their ethical standards
on those of the host country or those of the home
country and whether these different standards can be
reconciled.

■ MNCs must balance their responsibility to various
stakeholders, such as owners, creditors, consumers,
employees, suppliers, governments, and societies.
Firms with a long-term perspective recognize the
need to consider all of their stakeholders in their busi-
ness plans.

■ Managers operating abroad are often faced with dif-
fering attitudes toward bribery or other payments that
raise significant questions about appropriate moral
behavior in either the host nation or other nations, yet
bribery or other payments are frequently demanded to
conduct business. The Foreign Corrupt Practices Act
prohibits most questionable payments by U.S. compa-
nies doing business in other countries.

■ Managers must control their activities relative to in-
terdependent relationships at all levels—from simple,
daily business transactions involving local workers,

intermediaries, or consumers to global concerns of
ecological responsibility. Issues of sustainability have
come to the forefront as firms consider their long-
term relationships with host countries.

■ The failure to manage interdependence effectively
will result in constraints on strategy, at the least, or
in disastrous consequences for the local area, the sub-
sidiary, and the global reputation of the company. The
perspective of CSV—creating shared value—provides
a proactive model to guide companies to incorporate
these concerns into their strategic planning.

■ Managing environmental interdependence includes
the need to consider ecological interdependence as
well as the economic and social implications of MNC
activities.

■ Implementation of sustainability strategies requires
the company to have both formal and informal sys-
tems to support the goals. Essential to success is the
commitment of top leadership and the recognition
of sustainability as a process that will benefit the
company—that it is a good business idea.

■ The organizational response following a legal or ethi-
cal scandal is important. Some companies enact major
governance changes in order to prevent legal and ethi-
cal scandals in the future. Others, unfortunately, fail
to take corrective measures, which may lead to more
problems in the future.

2-1. Discuss the concept of CSR. What role does it play in the re-
lationship between a company and its host country? How does
CSV move beyond CSR?

2-2. Discuss the criticisms that have been leveled against MNCs
in the past regarding their activities in less-developed coun-
tries. What counterarguments are there to those criticisms?

2-3. What does moral universalism mean? Discuss your perspec-
tive on this concept. Do you think the goal of moral univer-
salism is possible? Is it advisable?

2-4. What do you think should be the role of MNCs toward human
rights issues in other countries? What are the major human
rights concerns at this time? What ideas do you have for
dealing with these problems? What is the role of corporate
codes of conduct in dealing with these concerns?

2-5. What is meant by international business ethics? Should
the local culture affect ethical practices? What are the

Discussion Questions

implications of local norms for ethical decisions by MNC
managers?

2-6. If you were a manager of a company bound by the Foreign
Corrupt Practices Act, how can you reconcile local expec-
tations of questionable payments? What is your stance on
the problem of payoffs? How does the degree of law en-
forcement in a particular country affect ethical behavior in
business?

2-7. What do you think are the responsibilities of MNCs toward
the global environment? Give some examples of MNC ac-
tivities that run counter to the concepts of ecological inter-
dependence and sustainability.

2-8. Discuss the ethical issues that have developed regarding the
use of IT in cross-border transactions. What new conflicts
have developed since the printing of this book? What solu-
tions can you suggest?

2-9. Do some research to determine the codes of conduct of two
familiar companies. Compare the issues that they cover and
share your findings with the class. After several students have
presented their findings, prepare a chart showing the com-
monalities and differences of content in the codes presented.
How do you account for the differences?

Application Exercises

2-10. Examine an MNC that faced a human rights or environ-
mental scandal. Critique the organizational responses of the
MNC. What did it do well in the aftermath of the scandal?
How could it have improved its response?

CHAPTER 2 • MANAGING INTERDEPENDENCE 71

Consider the ethical dilemmas in the following situation and
decide what you would do. Then meet in small groups of stu-
dents and come to a group consensus. Discuss your decisions
with the class.

You are the VP for global sales of a telecommunications
equipment company. The accounting manager of your company
recently brought to your attention an unusual charge of a 3 per-
cent commission to a purchasing manager in Russia with whom
your company had recently started doing business. One state-
owned manufacturing company in Russia (for privacy’s sake, we
will call the company “R”) submitted a bid for a large order of
your equipment. You remember being surprised to get the con-
tract with “R” because your company had never been able to do
business with it since it started there many years ago. As it turned
out, your new sales manager for the region had a relative in “R”
who promised to supply him with all of your competitors’ bids
if he paid him a 3 percent commission on all of the sales to his
company. The area manager accepted this arrangement. He got
the competing bids and secured the deal with your company.

Experiential Exercise

What would you do, given the following: (1) If you re-
fuse to accept the business without any legitimate reasons
(presently, there are none), your company will be blacklisted
in that country—which amounts to about 20 percent of gross
yearly profit. (2) If you accept the business and do not pay
the 3 percent commission, the purchasing manager will make
much trouble when he receives your shipment. No doubt he
will not release the 5 percent bank guarantee letter about the
quality and quantity of the material. (3) If you accept the
business and pay the 3 percent commission, you feel that it
would malign your company’s reputation and your beliefs.

You have three ethical problems here: First, your company
has won a rigged bid. Second, you must pay the person who
rigged it or he will make life miserable for you. Third, you have
to decide what to do with the area manager who accepted this
arrangement.

Source: Based on Delaney and D. Sockell, “Ethics in the Trenches,”
Across the Board (October 1990), p. 17.

CASE STUDY
Facebook Faces Fresh Probe After Photo Leak

Tim Bradshaw in London
December 14, 2018

Facebook has been hit with the broadest data protection investigation yet in Europe after the so-
cial media group revealed another leak of private photos belonging to millions of people.

The Irish data protection commission said it had opened a new investigation into Facebook
because of its high number of data breaches this year.

The social network said on Friday that it had discovered a problem with the way hundreds
of third-party developers accessed photos using its app platform. The flaw leaked private photos
that Facebook users had uploaded but not chosen to share publicly.

“Because of this bug, some third-party apps may have had access to a broader set of photos
than usual for 12 days between September 13 to September 25, 2018,” Facebook’s engineering
director Tomer Bar said. “Currently, we believe this may have affected up to 6.8m users and up
to 1,500 apps built by 876 developers.”

The Irish data protection commissioner said in response to Facebook’s revelation that it had
opened an investigation into the Silicon Valley company’s compliance with the EU’s General
Data Protection Regulation—not just on the latest leak but on the broad spread of privacy issues
this year.

“The Irish DPC has received a number of breach notifications from Facebook since the in-
troduction of the GDPR on May 25, 2018,” a spokesperson said. “With reference to these data
breaches, including the breach in question, we have this week commenced a statutory inquiry
examining Facebook’s compliance with the relevant provisions of the GDPR.”

Facebook has been left reeling from a series of privacy and security problems in the wake of
the Cambridge Analytica scandal, which has prompted investigations from regulators in the US,
Europe and the UK.

In September, Facebook disclosed a cyber attack that it said could have exposed the personal
information of tens of millions of its users.

Under GDPR, companies must inform regulators of any data breach within 72 hours of its
discovery. Fines can run to as much as 4 per cent of a company’s global revenues for the prior
year.

72 PART 1 • THE GLOBAL MANAGER’S ENVIRONMENT

Facebook said it was “sorry” the latest photo breach had happened and would release a tool
next week to help developers determine which users had been affected. “We will also notify the
people potentially impacted by this bug via an alert on Facebook,” it said.

1. Song Jung-a. November 23, 2018. “Samsung finally apologises
to workers struck down by disease.” Financial Times. https://
www.ft.com/content/2b57424e-eedc-11e8-89c8-d36339d835c0.
Accessed December 23, 2018.

2. A. Maitland, “No Hiding Place for the Irresponsible Business,”
Financial Times Special Report, September 29, 2003, p. 4.

3. McWilliams, A., & Siegel, D. 2001. Corporate social responsi-
bility: A theory of the firm perspective. Academy of Management
Review, 26, p. 117.

4. J. Thompson, December 2, 2018. “Emerging markets: change
in the air for responsible investment.” Financial Times, https://
www.ft.com/content/b91bddb4-db91-11e8-b173-ebef6ab1374a.
Accessed December 23, 2018.

5. Milton Friedman, Capitalism and Freedom (Chicago: University
of Chicago Press, 1962).

6. Ibid.
7. T. Donaldson, June 3, 2005. “Defining the Value of Doing Good

Business,” Financial Times.
8. IKEA India Breaks Ground for its 3rd India Store in Bengaluru!

https://www.ikea.com/in/en/newsroom/ikea-retail-india
-moves-the-opening-date-to-9-th-of-august-2018-pubc5760e9c.
Accessed January 18, 2019.

9. Ibid.
10. Interview with Susanne Pulverer. June 5, 2018. https://

www.indianretailer.com/interview/retail-people/profiles
/Sustainability-is-an-integral-part-of-our-business-IKEA.i1459/

11. Interview with Susanne Pulverer. June 5, 2018. https://
www.indianretailer.com/interview/retail-people/profiles
/Sustainability-is-an-integral-part-of-our-business-IKEA
.i1459/

12. Based on Manuela Weber, Business Case for Corporate Social
Responsibility: A Company-Level Measurement Approach for
CSR. European-Management Journal 26, No. 4 (2008), pp.
247–261.

13. Financial Times, June 3, 2005.
14. Weber, 2008.

Endnotes

15. N. Bowie, “The Moral Obligations of Multinational Corporations,”
in Problems of International Justice, Steven Luper-Foy, ed. (New
York: Westview Press: 1987), pp. 97–113.

16. Steven Greenhouse, “Nike Agrees to Help Laid-Off Workers in
Honduras,” www.nytimes.com, July 26, 2011.

17. Michael E. Porter and Mark R. Kramer, Creating Shared Value.
Harvard Business Review, 00178012, 89, No. 1/2 (January–
February 2011).

18. Ibid.
19. Ibid.
20. Eric Pfanner, “Google Turns on Charms to Win over Europeans,”

www.nytimes.com, May 15, 2011.
21. Ibid.
22. A. Kazmin, September 25, 2017. Speciality products, support

and shared value are key to success: India. Financial Times;
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23. https://www.nestle.com.sg/csv/creatingsharedvaluecasestudies.
Accessed February 6, 2019.

24. Peter Burrows, “Stalking High-Tech Sweatshops,” BusinessWeek,
June 19, 2006, p. 63.

25. Jem Bendell, “Nike Says Time to Team Up,” The Journal of
Corporate-Citizenship, Autumn 2005, No. 19, p. 10(3).

26. J. Anderlini, “Communist Clampdown: Beijing Blocks ‘Western
Values’ in Classrooms,” Financial Times, January 31, 2015.

27. E. Feng and Y. Jia. September 17, 2018. “China’s Bytedance maps out
route around firewall: Technology. Content challenge Internet group
creates video apps to reach foreign markets without upsetting cen-
sors.” Financial Times; London (UK). Accessed January 19, 2019.

28. J. Anderlini, “Communist Clampdown: Beijing Blocks ‘Western
Values’ in Classrooms,” Financial Times, January 31, 2015.

29. J. Hernández. February 6, 2019. Workers’ activism rises as
China’s economy slows. Xi aims to rein them in. New York Times.
http://www.nytimes.com/2019/02/06/world/asia/china-workers
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Case Questions

2-11. Who are Facebook’s stakeholders? What are the social responsibilities of the company? To what
level of CSR or CSV is the company adhering at the time of this case?

2-12. No doubt, much will have transpired since the writing of this case regarding Facebook’s pri-
vacy challenges. Research and compile an update. What other privacy issues have arisen in
Europe, in the United States, and around the world? What has Mark Zuckerberg done about it to
placate the public and preserve the brand?

2-13. What is your personal opinion about the problems of privacy from using Facebook?
2-14. What regulations or restrictions for Facebook have been put in place in Europe and the United

States? Do you agree with them?

https://www.nestle.com.sg/csv/creatingsharedvaluecasestudies

https://search.proquest.com/businesspremium/docview/1955237031/D9D2E8FB3F944655PQ/17?accountid=7122

http://www.nytimes.com

https://www.indianretailer.com/interview/retail-people/profiles/Sustainability-is-an-integral-part-of-our-business-IKEA.i1459/

https://www.ikea.com/in/en/newsroom/ikea-retail-india-moves-the-opening-date-to-9-th-of-august-2018-pubc5760e9c

https://www.ft.com/content/b91bddb4-db91-11e8-b173-ebef6ab1374a

https://www.ft.com/content/2b57424e-eedc-11e8-89c8-d36339d835c0

CHAPTER 2 • MANAGING INTERDEPENDENCE 73

30. Ibid.
31. Ibid.
32. Li Yuan. January 21, 2019. China Transforms, and a Factory

Owner Struggles to Follow. New York Times. https://www
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33. Wang Xueqiao and Tom Hancock. January 17 2019. Overdoing it:
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34. J. Anderlini. January 30, 2015. ‘Western values’ forbidden in Chinese
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35. Yuan Yang. January 24, 2019. “Access restored in China for
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36. Ibid.
37. Yuan Yang. January 7, 2019. “China turns up heat on individual users

of foreign websites.” Financial Times. https://www.ft.com/content
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7, 2019.

38. Ibid.
39. Po Keung Ip, The Challenge of Developing a Business Ethics in

China. Journal of Business Ethics 88 (2009), pp. 211–224.
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41. “Sweatshop Police,” BusinessWeek, October 20, 1997, pp. 30–32.
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46. C. Skroupa. ‘Impact Beyond Numbers’—GoodWeave’s Global
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47. Kathleen A. Getz, “International Codes of Conduct: An Analysis
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48. Alison Maitland, “How Ethics Codes Can Be Made to Work,”
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49. Swee Hoon Ang, Money: A Cross-Cultural Analysis of Business-
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51. A. Singer, “Ethics—Are Standards Lower Overseas?” Across the
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52. Ibid.
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55. Reena SenGupta, “Trouble at Home for Overseas Bribes,”
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56. Ibid.
57. G. R. Laczniak and J. Naor, “Global Ethics: Wrestling with

the Corporate Conscience,” Business, July–August–September
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58. “How to Respond When Only Bribe Money Talks,” Financial
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59. J. T. Noonan, Jr., Bribes (New York: Macmillan, 1984), p. ii.
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61. Ibid.
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to South Africa kickback allegations.” Financial Times. https://
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63. Ibid.
64. Kanter, 2011.
65. Robinson and Kuchler, 2015.
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68. R. Faroonhar. August 20, 2018. Don’t be evil — Google at war with
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70. J. Ewing. May 3, 2018. https://www.nytimes.com/2018/05/03/
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71. P. McGee July 24, 2018. “VW’s half-throttle reform effort causes
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vourably with Siemens, where change came ‘like a locomotive.’”
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74. Based on Asheghian and Ebrahimi, International Business (NY:
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75. R. H. Mason and R. S. Spich, Management: An International
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76. R. T. De George, Competing with Integrity in International
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77. Hilary Bradbury-Huang, Sustainability by Collaboration: The
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78. György Málovics, Noémi Nagypál Csigéné, and Sascha Kraus, The
Role of Corporate Social Responsibility in Strong Sustainability.
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79. J. A. G. van Kleef and N. J. Roome, Developing Capabilities
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80. Philip Mirvis, Bradley Googins, and Sylvia Kinnicutt, Vision,
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81. “Sustainability’s deepening imprint,” McKinsey Quarterly,
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82. Ibid.
83. B. Atkins, Corporate Social Responsibility: Is It ‘Irresponsibility’?

Corporate Governance Advisor 14 (2006), pp. 28–29.
84. Newshour with Jim Lehrer, PBS news report, November 17, 2008.

85. Ibid.
86. Ibid.
87. B. Carmichael and B. Moriarty. May 31, 2018. How Coca-Cola came

to terms with its own water crisis. The Washington Times, https://www
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88. Ibid.
89. Jang B. Singh and V. C. Lakhan, Business Ethics and the

International Trade in Hazardous Wastes. Journal of Business
Ethics 8 (1989), pp. 889–899.

90. Marc J. Epstein and Adriana Rejc Buhovac, Solving the
Sustainability Implementation Challenge. Organizational
Dynamics 39 (2010), pp. 306–315.

91. Marc J. Epstein, Implementing Corporate Sustainability:
Measuring and Managing Social and Environmental Impacts.
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https://www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-insights/sustain-abilitys-deepening-imprint

P A R T 1 : Comprehensive Cases

as well as cost and pricing pressures. However, some analysts
said Nestlé being a financially sound company, it could do more
to stop slave labor and take more control over its supply chain
management. According to Marianne Smallwood, a diplomat for
the US Agency for International Development, “In initiating the
public examination of its flaws, and in working with an organi-
zation like Verite, Nestlé has already gone a more honorable and
transparent route than other companies have done. But while it
has taken the first step toward being a more responsible com-
pany, Nestlé’s commitment to funding a long-term strategy—and
how it pushes beyond the inevitable roadblocks ahead—will
determine its ultimate footprint and legacy.”4

According to Batato, “Every reasonable person who has
gone to Africa, gone to Asia, who has seen the farmers and
factories, can tell you that [child labor] does exist. It is part
of their life. Do we accept it? No. Are we going to stay quiet
and do nothing? No. But making a big declaration that tomor-
row morning we are going to see it disappear, sometimes the
problem is bigger than us, bigger than a company even the
size of Nestlé.”5 Nevertheless, the critical question before him
was: How to eliminate forced labor from Nestlé’s supply chains
worldover? Could he address the problem and bring real and
sustained change in how the company’s cocoa supply chains
were managed?

Background Note

Nestlé, headquartered in Vevey, Switzerland, was founded in
1866. One of the leading players in the food and beverage
categories, the company had a global presence and employed
more than 328,000 people as of 2017. Its sales and profits for
the year 2016 were CHF 89.5 billion and CHF 8.53 billion
respectively.6

Though Nestlé was among the world’s largest food process-
ing companies and had great consumer brands well known for
their quality, critics pointed out that there seemed to be an ele-
ment of arrogance in its actions.7 The company had a history of
confrontations over a range of issues.8 There were instances of
Nestlé being accused of disregarding its corporate responsibility
in many countries in which it operated. The Swiss conglomer-
ate had had its fair share of controversies and ethical dilemmas
during its nearly 150-year-long history.9 Experts pointed out
that the history of Nestlé’s public relations troubles began in the
1970s with allegations of unethical marketing of baby formula10
in less developed countries.11 Since then, Nestlé had continued
to get into trouble. For instance, in 2008, it was blacklisted by
the Chinese government.12 Later, it was targeted for the mis-
leading promotion of its bottled water brands as well as for in-
terfering in policies that protected natural water resources.13

Case 1 Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the Way?
This case was written by Syeda Maseeha Qumer and Debapratim Purkayastha, IBS Hyderabad.1

In March 2017, a federal judge in California dismissed a
long-running (12-year) class action lawsuit against Nestlé SA
(Nestlé) and two more companies over claims the global choc-
olate manufacturer facilitated the use of forced child labor in
West Africa. Nestlé, one of the world’s largest food processing
companies, had been grappling with accusations of aiding and
abetting child slavery on cocoa plantations in Ivory Coast2 for
more than a decade.

Earlier in 2015, Nestlé surprised many by admitting that it
had found forced labor in its seafood supply chain in Thailand.
Magdi Batato (Batato), Executive Vice President and Head of
Operations at Nestlé, self-reported that Nestle had uncovered
child labor exploitation on fishing boats in Thailand that supplied
its factories. He reported details of the investigation and also initi-
ated a detailed action plan on how it intended to tackle the issue.
The news generated a mixed response from industry observers.
Hailing Nestlé’s honesty, Brian Griffin, CEO of digital marketing
agency Vero PR, said, “First of all, what Nestlé did was brave,
and from a moral perspective, they did the right thing to let stake-
holders know about this issue. They will feel some pain from this
initially, particularly from a consumer standpoint, and it’s not
hard to imagine that sales of seafood products may decline. There
is no question that the issue must be cleaned up, and that it must
happen now. We should appreciate what Nestlé has done to bring
even more attention to the issue.”3 However, Nestlé’s critics con-
tended that the company had done this only to fend off growing
criticism against it. It had admitted to slavery in seafood, a low-
profit area of the company’s business, while not doing enough to
tackle this problem in its lucrative chocolate business.

In September 2015, three class action lawsuits brought in
by consumers in California accused Nestlé of turning a blind
eye to human rights abuses by cocoa suppliers in West Africa
while falsely portraying itself as a socially and ethically respon-
sible company. Nestlé said it was committed to tackling child
labor in its cocoa supply chain, and had been taking action to
address the issue which included increasing access to educa-
tion, stepping up systems of age verification at cocoa farms,
and increasing awareness about the company’s own code of
conduct. Despite Nestlé’s assurances, the use of child labor
continued and became even more prevalent in its cocoa sup-
ply chains. Though Nestlé’s commitment to eliminating slavery
seemed promising, lawsuits related to slavery in its core busi-
ness operations questioned such promises, critics said.

The existence of modern slavery within its cocoa supply
chain posed ethical and reputational risks for Nestlé. Analysts
said addressing slavery would be a critical issue for the com-
pany going forward due to the complexity and limited visibility
of its supply chain, its reputation for reliability among stake-
holders (customers, investors, NGOs), transparency dilemmas,

PC1-1

PC1-2 PART 1 • COMPREHENSIVE CASES

In the UK, the Ethical Consumer Research Association
(ECRA)14 gave Nestlé an ethical rating, Ethiscore,15 of 0.5 out
of 20. ECRA had found the company to be linked to social ills
such as child labor, slavery, rainforest destruction, water extrac-
tion, and debt perpetuation. Critics pointed out that in 2005,
when it launched the ‘Partners Blend’ fair trade16 coffee, Nestlé
was termed as the UK’s most boycotted and irresponsible
corporation.17

Modern Slavery in Global Supply Chains

Modern slavery could be described as control by people or orga-
nizations over vulnerable individuals in order to obtain personal
gain or profit. Modern slavery included forced labor, debt-bond-
age, child labor, wage exploitation, human trafficking, forced

marriage, involuntary domestic servitude, or any other practice
wherein victims were engaged in unreasonable work through
physical or mental threat. According to the 2016 Global Slavery
Index, about 40.3 million people were victims of some form of
modern slavery globally. Of these people, about 24.9 million
were in forced labor. The rate of modern slavery was reported to
be the highest in Africa, with 7.6 victims for every 1,000 people
in the region (See Exhibit I and Exhibit II).

Modern slavery had broader social and economic costs,
in terms of impeding economic development and perpetuating
poverty, said experts. According to them, globalization had led
companies to turn to lower-cost suppliers who sourced cheaper
raw materials and used low-wage labor in order to maximize
profits. According to an ILO report, forced labor generated
about US$ 150 billion in illegal profits annually.

W
or

A
fri

A
sia

a
nd

th
e

Pa
cif

Eu
ro

pe
a

nd
C

en
tra

l
A

sia

A
ra

b
St

at
es

A
m

er
ica

0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0

Forced Marriages
Forced Labour

2.1

3.4

2.8

4.8

4.0

2.0

3.6

0.4

2.2

1.1
1.3
0.7

ExHIBIT I Prevalence of Modem Slavery (per 1,000 population), by Region
and Category

Source: Adapted from https://www.alliance87.org/global_estimates_of_modern_slavery
-forced_labour_and_forced_marriage .

ExHIBIT II Number and Prevalence of Persons in Modern Slavery, by Category and Age

Number in thousands and prevalence in per thousand

Source: Adapted from https://www.alliance87.org/global_estimates_of_modern_slavery-forced_labour_and_ forced_marriage .

Forced labor sub-categories

Forced labor
slavery

exploitation

Forced sexual
exploitation of adults

and commercial sexual
exploitation of children

State-imposed
forced labor

Total
forced
labor

Forced
marriage

Modern
slavery

World
Number 15, 975 4,816 4,060 24,850 15,442 40,293

Prevalence 2.2 0.7 0.5 3.4 2.1 5.4

Age

Adults
Number 12,995 3,791 3,778 20,564 9,762 30,327

Prevalence 2.5 0.7 0.7 3.9 1.9 5.8

Children
Number 2980 1024 282 4286 5679 9965

Prevalence 1.3 0.4 0.1 1.9 2.5 4.4

https://www.alliance87.org/global_estimates_of_modern_slavery-forced_labour_and_forced_marriage

https://www.alliance87.org/global_estimates_of_modern_slavery-forced_labour_and_forced_marriage .

CASE 1 • ELIMINATING MODERN SLAVERY FROM SUPPLY CHAINS: CAN NESTLÉ LEAD THE WAY? PC1-3

to produce a ‘slavery and human trafficking statement’ once a
year disclosing what action they had taken to ensure their sup-
ply chains were free of slave labor. Experts felt that though the
legislation did not impose financial penalties on companies that
failed to comply, the adverse effects of being prosecuted for
failing to do so could lead to reputational risks and could be
more damaging than any fine.

Child Slavery in Nestlé’s Cocoa Supply Chain

Nestlé was a leader in the chocolate confectionery industry and
used 10% of the world’s cocoa production. It worked directly
with almost 165,000 direct suppliers and 695,000 individual
farmers worldwide for procuring raw materials such as cocoa,
dairy, sugar, coffee, etc. Nestlé primarily sourced cocoa from
co-ops and farms in Ivory Coast and Ghana. Nestlé purchased
around 414,000 tons of cocoa annually for chocolate and con-
fectionery as well as beverages. The cocoa supply chain in-
cludes many intermediaries between the farmer and consumer.
Small farmers typically sell their cocoa harvest to local mid-
dlemen for cash. The middlemen work under contract for local
exporters, who, in turn, sell cocoa to international traders and
the major international cocoa brands.

Allegations of child labor and human rights abuses in its
cocoa and agricultural supply chains had dogged Nestlé for
years. Since the late 1990s, Nestlé and its competitors had re-
ceived negative publicity and media coverage over their use of
child slave labor and the lack of transparency within their cocoa
supply chain. Though Nestlé’s Corporate Business Principles
and Supplier Code prohibited both child and forced labor,
Nestlé was aware that cocoa beans from Ivory Coast were pro-
duced using child labor. While Nestlé and its competitors vied
for market share and profits, cocoa farmers suffered due to low
income attributed to the fall in the price of cocoa beans. Cocoa
bean futures on the Intercontinental Exchange in New York
hit US$2,052 per metric ton on February 3, 2017, compared
to US$3,422 per metric ton in December 2015. Many farmers
felt that child labor was a viable option in order to cut produc-
tion and work costs. As a result, child slavery had become ex-
tremely prevalent throughout the cocoa supply chain, and there
had been minimal action taken by the chocolate manufacturing
companies to stop the exploitation of these children.

The practice of child labor was rampant in the cocoa indus-
try wherein harvesting and processing of the cocoa plant was left
to children, often unpaid and living in slavery (See Exhibit IV).
Some children were sold by their parents to traffickers, while
many were kidnapped. Reportedly, they worked from dawn to
dusk each day, were denied sufficient food, and locked in a shed
at night where they were given a tiny cup in which to urinate.18
Some children were forced to do unsafe tasks, including carry-
ing heavy loads, using machetes and sharp tools, and applying
pesticides and fertilizers. “The rules and regulations are so lax
there that there is no government to step in and stop the atroci-
ties. This horrific state of child slavery is also the perfect cheap
labor for candy companies that want to sell you chocolate for
dirt cheap prices. Why do you think it only costs $1 for a choco-
late bar?”18 wrote journalist LJ Vanier.

Analysts pointed out that slavery was an abuse of human
rights in the pursuit of profits and that corporations had a moral
duty not to indulge in or tolerate it. Addressing human rights
and labor issues in the supply chain had become a necessity
for businesses in the consumer goods industry, they said. This
was partly due to rising consumer demand for ethical products.
Several governments had enacted legislations which mandated
that companies ensure respect for human rights in their sup-
ply chains. A number of anti-modern slavery regulations had
also come into existence (See Exhibit III). The California
Transparency in Supply Chains Act, signed in 2010 and enacted
on January 1, 2012, was one of the first anti-modern slavery
regulations. This Act aimed to ensure that “large retailers and
manufacturers provide consumers with information regarding
their efforts to eradicate slavery and human trafficking from
their supply chains.” The United Nations Guiding Principles on
Business and Human Rights (UNGPs) were endorsed by the
UN Human Rights Council in June 2011. These were a set of
guidelines for States and companies to prevent, address, and
remedy human rights abuses committed in business operations.
The UNGPs based on the three pillars ‘Protect, Respect, and
Remedy’ had since become the trusted global framework for
business and human rights.

The most prominent of anti-slavery regulations was the
UK Modern Slavery Act, passed on March 26, 2015. It required
businesses with a turnover of more than £36 million annually

ExHIBIT III Anti-Modern Slavery Regulations

Source: Compiled from various sources

Year Regulation

2000 The United Nations passes the Protocol to Prevent,
Suppress, and Punish Trafficking in Persons as part of
the Convention against Transnational Organized Crime.
It is the first global legally binding treaty with an inter-
nationally agreed definition of trafficking in persons.

2002 The International Cocoa Initiative is established as a
joint effort of anti-slavery groups and major chocolate
companies to protect children and contribute to the
elimination of child labor.

2004 The United Nations appoints a Special Rapporteur on
Human Trafficking.

2008 The Council of Europe Convention on Action against
Trafficking in Human Beings comes into force.

2010 California enacts the California Transparency in Supply
Chains Act.

2014 The ILO adopts a protocol on forced labor, bringing its
1930 Convention on Forced Labor into the modern era
to address practices such as human trafficking.

2015 Britain’s Modern Slavery Act comes into force.

2015 The United Nations adopts 17 Sustainable Development
Goals, including a target of ending slavery and eradi-
cating forced labor and human trafficking.

PC1-4 PART 1 • COMPREHENSIVE CASES

eradicate it,”23 said Paul Bakus, President of Corporate Affairs,
Nestlé USA. After a first dismissal in 2008, the case was exam-
ined again and the lawsuit was reinstated by The US court of
appeals in San Francisco in 2014 on the grounds that the plain-
tiffs had valid reasons to accuse Nestlé of pursuing profits more
than human well-being.

In October 2009, Nestlé launched a companywide initia-
tive called The Nestlé Cocoa Plan (TNCP) in collaboration
with International Cocoa Initiative24 (ICI) in order to ensure
a sustainable future for the cocoa industry worldwide and the
communities depending on it. The goal of TNCP was “to help
cocoa farmers run profitable farms, respect the environment,
have a good quality of life and for their children to benefit from
an education and see cocoa farming as a respectable profes-
sion.”25 To achieve this, Nestlé committed CHF 110 million
to the plan for 10 years and pledged to source 230,000 MT of
cocoa through TNCP by 2020. Despite the industry’s assur-
ances, critics contended that the worst forms of child labor con-
tinued in Ivory Coast.

Amid accusations of failing to carry out checks on child
labor in its cocoa supply chain, in November 2011, Nestlé com-
missioned Fair Labor Association (FLA)26 to assess its cocoa
supply chain in Ivory Coast. The goals of the assessment were
to map stakeholders involved in Nestlé’s cocoa supply chain
and to analyze the associated labor risks in its cocoa supply
chain. The assessment team mapped the cocoa supply chain in
depth including Nestlé’s headquarters in Switzerland, R&D in
Abidjan and local operations in the Ivory Coast; Tier 1 sup-
pliers of Nestlé and their subsidiaries in West Africa, process-
ing facilities and buying centers in the Ivory Coast; third-party
service providers; pisteurs27; cooperatives; traitants28; farmers;
Métayers29; Coxers30 and workers (See Exhibit V). A team of
20 local and international experts visited a total of seven sup-
pliers, 20 co-operatives, and two co-operative unions, and 87
farms. In all, over 500 interviews were conducted with farm-
ers and other stakeholders in the supply chain, including local
community members, local governments, NGOs, suppliers, and
Nestlé staff. The FLA released the results of its audit in 2012,
finding continued evidence of child labor in the Ivory Coast
farms supplying Nestlé. The researchers found 56 workers
under the age of 18, of whom 27 were under 15. According to
Steve Berman (Berman), managing partner at law firm Hagens
Berman Sobol Shapiro LLP, “They claim they’ve been taking

Children in Child Labour
World (5–17 Years)

Children in Hazardous Work
World (5–17 Years)

Number (000s) Prevalence (%) Number (000s) Prevalence (%)

2000 245,500 16.0% 170,500 11.1%

2004 222,294 14.2% 128,381 8.2%

2008 215,209 13.6% 115,314 7.3%

2012 167,956 10.6% 85,344 5.4%

2016 151,622 9.6% 72,525 4.6%

The growing awareness about child slaves working in the
production of cocoa led to consumers questioning where ex-
actly their chocolate was coming from and who was making
it. In 2001, following pressure and outrage from civil society
groups, media, and the general public, eight chocolate manu-
facturing companies in the US including Nestlé, signed the
Harkin-Engel protocol20 to investigate the labor practices and
eliminate the worst forms of child labor in the processing of
cocoa in Ivory Coast and Ghana by 2005. However, when the
2005 deadline arrived, the companies had yet to eradicate child
labor from their supply chains. The target was then extended
to 2008. Unable to meet the new self-imposed deadline again,
in 2010, the signatories of the protocol started afresh with a
treaty called The Declaration of Joint Action to implement the
Harkin-Engel Protocol and to reduce the worst forms of child
labor by 70% across the cocoa plantations of Ivory Coast by
2020.

In 2005, a lawsuit was filed against Nestlé, Archer Daniels
Midland Co,21 and Cargill Inc22 by three former child slavery
victims originally from Mali in West Africa who alleged that
these companies aided and abetted human rights violations
through their active involvement in purchasing cocoa in Ivory
Coast. The lawsuit claimed that the companies were aware of
the child slavery problem and offered financial and technical
assistance to local farmers to procure the cheapest source of
cocoa. In court documents, the three plaintiffs claimed that
they had been trafficked from their homes and put to work on
plantations in Ivory Coast. They described how they had been
whipped, beaten, and forced to work for 14 to 16 hours a day
before being allowed to retire to their dark rooms. One plaintiff
recounted how guards would slice open the feet of any child
worker who tried to escape. The lawsuit accused Nestlé of mak-
ing false assertions to consumers and not disclosing that its
suppliers relied on child laborers to procure cocoa at the point
of purchase.

Nestlé said that the claims against it should be dismissed
as it was committed to the goal of eliminating child labor from
its cocoa supply chain. Claiming that the lawsuit was without
merit, Nestlé said that “proactive and multi-stakeholder efforts”
were required to eradicate child labor, not lawsuits. “Forced
child labor is a complex, global social issue in foreign coun-
tries that is not going to be solved by lawsuits in U.S. courts
against the very companies that are leading the fight to help

ExHIBIT Iv Children’s Involvement in Child Labour and Hazardous Work, 2000-16

Source: Adapted from https://www.ilo.org/wcmsp5/groups/public/@dgreports/@dcomm/documents/publication/wcms_575541 .

https://www.ilo.org/wcmsp5/groups/public/@dgreports/@dcomm/documents/publication/wcms_575541 .

CASE 1 • ELIMINATING MODERN SLAVERY FROM SUPPLY CHAINS: CAN NESTLÉ LEAD THE WAY? PC1-5

Chocolate Products back to the cocoa plantations on which
they are grown, much less ensure that the cocoa beans are not
the product of child or slave labor. And meanwhile Nestlé con-
tinues to profit from the child and forced labor that is used to
make its Chocolate Products. This is shameful.”33

Nestlé’s Initiatives to Address the Issue

Following the findings of the FLA report, Nestlé set out to ad-
dress child labor by undertaking the 11 recommendations the
FLA had made to it which included strengthening the Nestlé
Supplier Code, increasing accountability from the various
tiers of suppliers, and developing a robust and comprehen-
sive internal monitoring and remediation system. Reiterating
the promise made in 2001, Nestlé said it was taking action to
progressively eliminate child labor in cocoa-growing areas by
assessing individual cases and tackling the root causes. “The
use of child labor is unacceptable and goes against every-
thing Nestlé stands for. Nestlé is committed to following and
respecting all international laws and is dedicated to the goal
of eradicating child labor from our cocoa supply chain,”34 the
company said in a statement.

In 2012, Nestlé was the first cocoa purchaser to set up a
Child Labor Monitoring and Remediation System (CLMRS)
in Ivory Coast in association with ICI (See Exhibit VI). The
system locally recruited ‘community liaison people’ and ‘child
labor agents’ who worked to raise awareness about child labor
in communities, identified children at risk, and reported their
findings to Nestlé and its suppliers. By the end of 2015, the
system covered 40 cooperatives and 26,000 cocoa farmers.

steps. They partner with the Fair Labor Association to inves-
tigate, and they claim they’re committed to eradicating it, but
the fact is the recent reports show the number of children in the
cocoa industry has increased. We doubt that Nestlé is taking
this very seriously.”31

Moreover, Nestlé’s claims that it had made progress to-
ward meeting the Harkin-Engel Protocol fell flat when a 2015
report from the Payson Center for International Development
of Tulane University, sponsored by the US Department of
Labor, found that the number of children engaged in cocoa
production in Ivory Coast had increased 51% to 1.4 million in
2013–14, compared to 791,181 children engaged in such work
in 2008–09. However, Nestlé defended itself stating, “cocoa
supply chain is long and complex–making it difficult for food
companies to establish exactly where their cocoa comes from
and under what conditions it was harvested.”32

Nestlé’s failure to bring transparency into its supply chain
again came under the public spotlight in September when con-
sumers filed three class-action lawsuits against Nestlé, The
Hershey Co., and Mars Inc. for allegedly using child labor in
chocolate production. The lawsuit stated that in violation of
California law, the companies did not disclose that their suppli-
ers in Ivory Coast relied on child laborers and instead continued
to profit by tricking consumers into indirectly supporting the
use of such labor. According to the complaint, “Nestlé, as one
of the largest companies in the world, can dictate the terms by
which cocoa beans are produced and supplied to it, including
the labor conditions in the supply chain. But through its own
inadequate efforts over the course of decades Nestlé is pres-
ently not able to trace all of the cocoa beans that make up its

Head Office
Exporter

Nestlé

Exporter in the
Ivory Coast

Union of Cooperatives

Section

Sub-Section

Member Farmers

Farmers

Coxer
Pisteurs

Traitants/
SARL

Buying Centers of
Exporter

Cooperatives
Cooperatives in
Sustainability

Programs

Family/
Workers

Sharecropper/
Family/Workers

Contract
Only with One Cooperative
Cocoa Flow
Not in Every Case

Cooperatives not
in Sustainability

Programs

Procssing Facilities of
Exporter

ExHIBIT v Nestlé’s Cocoa Supply Chain Map in the Ivory Coast

Source: http://www.fairlabor.org/sites/default/files/documents/reports/cocoa
-report-final_0 .

http://www.fairlabor.org/sites/default/files/documents/reports/cocoa-report-final_0 .

PC1-6 PART 1 • COMPREHENSIVE CASES

The child is monitored to ensure the process is
successful, and the Effectiveness of the Remediation
Activities is Critically Revieved on an on-going basis

Step 7:

Step 1:
The Community Liaision Person (CLP) Visits the
Households and Farms of Every Member of the Nestle
Cocoa Plan Co-operative Gather Basic Information
on the Issue
Step 2:
A child is Spotted (or Self-declares) Engaging in a
Hazardous Activity

Step 3:
This Information is Entered into a Centralized
database via Mobile app

Step 4:
At the Co-operative Level, the Child Labour Agent
(CLA) Verifies the Information and Validates the
Report Submitted by the CLP

Step 5:
ICI Analyses the Data Coming from a Co-operative,
Identifies Trends and Suggests a Palette of
Remediation Activities that will be Implemented by
ICI with the Support of the CLA and CLP

Step 6:
ICI, or one of its Local Partners, Implements or
distributes Remediation Support to the Child and/or
their Parents

In 2017, 51% of Children Identified are no
Longer in Child Labour

51%

ExHIBIT vI Child Labor Monitoring & Remediation System

Source: Adapted from www.nestle.com.

In 2016, the CLMRS was extended to a further 29 coopera-
tives, taking the total to 69. By 2016, CLMRS covered 37,130
farmers and identified 3,933 children who were involved in
hazardous tasks on cocoa farms (See Exhibit VII). Half of the
identified children were included in CLMRS and sent to school
while income generating activities were developed for their
families. Nestlé built 40 schools in Ivory Coast to help end un-
lawful child labor. Despite this, allegations that the company
was not doing enough continued. According to a spokesperson

from Nestlé, “Unfortunately, the scale and complexity of the
issue is such that no company sourcing cocoa from Ivory Coast
can guarantee that it has completely removed the risk of child
labour from its supply chain.”35

Earlier in 2010, Nestlé entered into a partnership with the
Danish Institute for Human Rights36 (DIHR) to support its
commitment to respecting human rights as stated in the com-
pany’s Corporate Business Principles. As part of this commit-
ment, Nestlé developed and implemented an 8-pillar Human

ExHIBIT vII Growth of CLMRS

Source: Adapted from Nestle CSV Full Report 2016 and other sources.

2015 2016 2017

Number of co-ops in CLMRS 40 69 95

Number of farmers covered by CLMRS 24 470 37 130 65486

Farmers and community members who attended awareness-raising sessions 120 067 193 424 289657

Number of women supported to carry out an income-generating activity 1311 1073 –

Cumulative total of schools built 42 42 –

Number and % of children participating in child labor 5 135
19%

6 065
16%

–

Number and % of child labor cases assisted 3 591
70%

4 680
77%

–

Number of families of children identified in child labor benefiting from
income-generating activities

1 167 1 305 –

http://www.nestle.com.

CASE 1 • ELIMINATING MODERN SLAVERY FROM SUPPLY CHAINS: CAN NESTLÉ LEAD THE WAY? PC1-7

possibility of forced labor and human trafficking in Nestlé’s
Thai supply chain. The investigation was targeted specifi-
cally at the vessel-to-market place shrimp and fishmeal sup-
ply chain. Verité interviewed more than 100 people, including
about 80 workers from Myanmar and Cambodia, as well as
boat owners, shrimp farm owners, site supervisors, and rep-
resentatives of Nestlé’s suppliers. It visited fishing ports, fish-
meal packing plants, shrimp farms, and docked fishing boats in
Thailand. Verite found indicators of forced labor, human traf-
ficking, and child labor present in land and sea-based work-
ers at the sites assessed. These indicators included deceptive
recruitment practices, little or no employment protections for
workers, restriction on the freedom of movement of workers,
and instances of both verbal and physical abuse.

According to the Verité study, workers were either sold
as slaves to seafood suppliers in Thailand, or trapped in the
fishing industry through false promises and debt bondage.
Often trafficked from Thailand’s neighboring countries such
as Cambodia and Myanmar, the laborers were sold to fishing
boat captains needing crews to man their fishing boats, accord-
ing to the report. The work was strenuous with shifts lasting up
to 20 hours a day with little or no pay and refusal to work to
a supervisor’s satisfaction led to beatings or sometimes even
death. “Sometimes, the net is too heavy and workers get pulled
into the water and just disappear. When someone dies, he gets
thrown into the water. Some have fallen overboard,”40 said a
Burmese worker to Verité.

While Nestlé had publicly accepted the findings of the re-
port, Verité said this problem was not unique to Nestlé’s supply
chain but rather “systemic in nature” within the vulnerable mi-
grant worker communities in Thailand.

Meanwhile, in August 2015, pet food buyers filed a class-
action lawsuit against Nestlé for importing fish-based pet food41
from suppliers in Thailand who used slave labor. According to
the lawsuit, Nestlé supported a system of slave labor and human
trafficking to distribute and market its Purina brand Fancy Feast

Rights Due Diligence Program (HRDD) with the aim of making
Nestlé’s approach to human rights strategic, comprehensive, and
coordinated (See Exhibit VIII). As part of the program, Nestlé
continued to tackle child labor in its cocoa supply chain in Ivory
Coast by focusing on vulnerable groups, especially girls and
children of migrant workers. In 2015, Nestlé was one of the
early adopters of the UNGP Reporting Framework to effectively
manage human rights in its operations. This Framework was
based on the global standard of the UNGPs.

In October 2015, Batato36 was appointed as Executive
Vice President and Head of Operations at Nestlé. Batato con-
trolled all 500 of Nestle’s manufacturing facilities around the
world. He was also responsible for Nestlé’s rural development
activities and procurement. Nestlé operated a Child Labour and
Women’s Empowerment Steering Group, chaired by Batato, to
identify measures, take decisions and monitor progress.

In 2016, Nestlé increased the amount of cocoa purchased
through TNCP to 140,933 tonnes at a cost of about CHF 30 mil-
lion. By 2017, the company planned to source 150,000 tonnes
of cocoa through TNCP and 230,000 tonnes by 2020. The com-
pany claimed that its KitKat brand had become the first global
confectionery brand to be sourced from 100% certified cocoa.
In order to strengthen its cocoa bean supply in a responsible
way, Nestlé encouraged its supplying farms to be UTZ38 certi-
fied. The process included farm selection and farmer training in
good agricultural practices, health and safety, and care for the
environment. Farmer compliance was checked by both Nestlé
agronomists and an external auditor.

Nestlé Admits to Forced Labor

Following allegations that it was using slave labor to catch
and process fish for its popular Fancy Feast cat food, in early
2015, Nestlé commissioned Verité,39 a human rights watchdog,
to conduct an investigation into six of its production sites in
Thailand. Verité conducted a three-month assessment into the

ExHIBIT vIII Nestlé Human Rights Due Diligence Program – Achievements 2016

Source: Adapted from http://www.nestle.com/csv/communities/respecting-human-rights and sources.

HRDD pillar Achievements

1 Policy commitments Preparation of the Nestlé Commitment on Labor Rights in Agricultural Supply Chains.

2 Stakeholder engagement Organized a stakeholder convening in Geneva, which included a specific human rights breakout
session with expert stakeholders.

3 Training and awareness Rolled out human rights training to high-risk countries, training 9573 employees in eight such
countries in 2016.

4 Risk evaluation Having identified 11 salient issues, Nestlé developed detailed action plans for seven of them.

5 Impact assessment Carried out assessments on Nestlé’s tomato supply chains in Spain and Italy and sugarcane supply
chain.

6 Governance Established clear roles and responsibilities at different levels of the company.

7 Partnerships Engaged with vanilla supplier, MANE, to upscale the company’s activities on the ground in
Madagascar.

8 Monitoring and reporting Carried out Human Rights Impact Assessment in Egypt.

http://www.nestle.com/csv/communities/respecting-human-rights

PC1-8 PART 1 • COMPREHENSIVE CASES

factories. According to industry observers, the disclosure came
as a surprise as international companies rarely acknowledged
abuses in their supply chains. Some analysts felt that Nestlé’s
voluntary disclosure could boost its ethical image and possibly
shift the parameters of what could be expected of businesses
when it came to supply chain accountability. “Nestlé’s decision
to conduct this investigation is to be applauded. If you’ve got
one of the biggest brands in the world proactively coming out
and admitting that they have found slavery in their business op-
erations, then it’s potentially a huge game-changer and could
lead to real and sustained change in how supply chains are
managed,”44 said Nick Grono, CEO of NGO the Freedom Fund.

In December 2015, the Central District of California dis-
missed the lawsuit on the grounds that the California Act had
created a ‘safe harbor’ under which companies were sheltered
from liability when they accurately complied with the limited
disclosure obligations that the law mandated.

Following Verité’s investigation and its own admis-
sion, Nestlé launched an action plan on seafood sourced from
Thailand which included a series of actions to protect workers
from abuses and improve working conditions (See Exhibit IX).
The plan included commitments to establish an emergency re-
sponse team with various partners to remediate risks and take
short-term action to protect workers, a grievance mechanism
allowing anonymous reporting, a fishing vessel verification
program involving regular third-party verification of randomly
selected boats to assess working conditions, and a training
program for boat owners and captains based on best practices.
Batato, said, “As we’ve said consistently, forced labor and
human rights abuses have no place in our supply chain. Nestlé
believes that by working with suppliers we can make a positive
difference to the sourcing of ingredients.”45 Batato further added

cat food while hiding its involvement in human rights viola-
tions from the public. Nestlé had partnered with Thai Union
Frozen Products PCL to import seafood-based pet food for its
Purina pet food brand. Melanie Barber, the plaintiff, alleged
that Nestlé had violated consumer protection statutes by fail-
ing to disclose that some ingredients in its cat food products
contained seafood which was sourced from forced labor. She
argued that Nestlé was obliged to make additional disclosures
at the point of sale regarding the probability that the product
contained seafood sourced from forced labor.

According to Berman, “By hiding this from public view,
Nestlé has effectively tricked millions of consumers into sup-
porting and encouraging slave labor on floating prisons. It’s a
fact that the thousands of purchasers of its top-selling pet food
products would not have bought this brand had they known the
truth – that hundreds of individuals are enslaved, beaten or
even murdered in the production of its pet food.”42

The alleged violations were brought under the California
Unfair Competition Law (UCL), the California Legal Remedies
Act, and the California False Advertising law. Nestlé applied
for the lawsuit to be dismissed, arguing that it could rely on
so-called ‘safe harbor’ provisions, as the company had made
specific disclosures on forced labor issues as required by the
California Transparency in Supply Chain Acts of 2010.

After fending off allegations, in November 2015, Nestlé
took observers by surprise when it publicly admitted that its sea-
food supply chain was tainted by modern slavery. The company
emphasized that “no other company sourcing seafood from
Thailand, the world’s third-largest seafood exporter, could have
avoided being exposed to the same risks.”43 In 2015, Batato
in a brave move self-reported that Nestlé had uncovered child
labor exploitation on fishing boats in Thailand that supplied its

ExHIBIT Ix Responsible Sourcing of Seafood-Thailand Action Plan 2015–2016

Objective Action

Incorporate new business requirements into
commercial relationship, based on the current
signature of the Nestlé Supplier Code.

• Work closely with suppliers to ensure development and implementation of capacity
building programs and business requirements that address human rights and labor
standards and demonstrate compliance on an ongoing basis.

• At a minimum the supplier shall run a traceability system enabling the identification of
all potential origins (farms, mills, back to fishing vessels) linked with seafood and other
ingredients used as part of product recipes.

• Additionally the supplier shall operate a seafood responsible sourcing program to
ensure that origins identified are continuously assessed and assisted in meeting business
requirements detailed in the Nestlé Responsible Sourcing Guidelines.

Enforce traceable supply chains identifying all
potential sources of origins as part of a compre-
hensive supply chain risk assessment.

• Ensure a verifiable supply chain traceability system as part of a comprehensive supply
chain risk assessment that is aligned with industry partners and stakeholders within the
Thailand Seafood Industry enabling traceability of seafood ingredients from fishing ves-
sels through the complete supply chain to the receiving manufacturing sites and finished
products.

Define and communicate requirements to boat
owners and/or captains, including recruitment
practices and living/working conditions for boat
workers.

• Building on the Marine Catch Purchasing Document, or any other industry recognized
best practice, create a set of requirements for boat owners and captains.

• Requirements will cover traceability, recruitment practices, fish catching system, living
and working conditions for boat workers.

• A toolkit composed of Employment Contract Template and rules, Worker ID cards,
template to monitor worker’s names, working time, salary, and associated deductions
if any.

CASE 1 • ELIMINATING MODERN SLAVERY FROM SUPPLY CHAINS: CAN NESTLÉ LEAD THE WAY? PC1-9

Objective Action

Implement a training program for boat owners
and/or captains.

• In association with industry partners and stakeholders within the Thailand Seafood
Industry, create a training hub to generate awareness and provide education to ensure
effective worker protections in priority areas as determined by Verite.

• The training hub may take the form of a “demonstration boat” or “university” where a
training program will be given to electable boat owners/captains.

• As reward and enabler for continuous improvement, the program will include a mechanism
to apply for financial support to speed up the implementation of best practices learned.

• Award financial support in the form of sponsoring or micro credit, for instance, for boat
lodging and cooking facilities.

Implement an awareness raising campaign on
human rights and labor conditions, targeting
primarily boat workers.

• In collaboration with local authority and industry partners and stakeholders in the
Thailand Seafood Industry, create an awareness raising campaign addressing the areas
of labor standards & health and safety at the workplace.

• Campaign to be deployed in locations identified as impactful for migrant workforce &
linked with regular boat’s docking, including the introduction of a grievance mechanism
& providing some immediate tangible personal benefits to workers.

• Campaign will incorporate an anonymous reporting system to identify the worst form of
labor conditions to be addressed by the Emergency Response Team.

Enable the work of a Migrant Workforce
Emergency Response team.

• Identify a third-party partner [e.g. project Issara, to be considered] experienced in pro-
tecting individuals from the worst form of labor conditions.

• Deploy and empower this partner organization as the Migrant Workforce Emergency
Response Team in charge to deploy the necessary assessments to identify individuals in
need of immediate assistance.

Create and implement a fishing vessels
verification program.

• Implement, at first, an internal audit program verifying working (labor and health and
safety at workplace) conditions in fishing vessels for 100% of the fleet used

• Along with monitoring of compliance through Key Performance Indicators, randomly
select boats on a monthly basis to undergo a third-party verification audit by an
independent organization, executed every quarter.

• Third-party verification audit should include interview of boat workers and establish the
history of their working career in the region and country

Dedicate resources. • Appoint an executive from Nestlé to implement the action plan. His profile will include
coordination with relevant parties, management of implementation activities, establish-
ment of KPIs and dashboard, effective use of internal and financial resources, represen-
tation to relevant industry parties and stakeholders.

Collaborate and scale up. • Leverage opportunities for collaboration with industry partners and stakeholders with
the Thailand Seafood Industry and seek to become a member of the Shrimp Sustainable
Supply Chain Taskforce, share progress on implementation of action plan and learning,
contribute to testing of innovative solutions and continuously seek to expand imple-
mentation to other supply schemes and locations in South East Asia.

• Achieve similar aims as part of the Good Labor Practices Working Group, convened by
Government of Thailand and supported by the International Labor Organization.

Publicly report. • Report publicly on progress, including challenges and failures identified with how to best
resolve and solutions to address. This should include ongoing monitoring of business
partners’ supply chain management systems by independent third-party assessments and
identification of risks and issues to be addressed.

that it would be neither a quick nor an easy endeavour, but the
company planned to achieve significant progress going forward.

By the end of 2016, over 99% of the seafood ingredients that
Nestlé sourced from its seafood supply chain in Thailand were
traceable back to fishing vessels and farms due to actions taken
as part of the plan. Nestlé worked with Verité, its supplier Thai
Union, the Royal Thai Government, and the Southeast Asian
Fisheries Development Center (SEAFDEC) to develop a train-
ing program to educate fishing vessel owners, captains, and crew
members on living and working conditions onboard the boats,

Source: Adapted from “Responsible Sourcing of Seafood –Thailand Action plan 2015–2016, “https://www.nestle.com

and on workers’ rights. In March 2016, Nestlé partnered with the
Issara Institute, a not-for-profit body focusing on worker voice
and grievance mechanisms, to help workers voice their concerns.

Experts said Nestlé’s disclosures and commitment to
change served as an example to other companies in indus-
tries in which labor trafficking and slavery were rampant.
Praising Nestlé for self-policing and public reporting, Mark
Lagon, president of nonprofit anti-trafficking organization
Freedom House, said, “It’s unusual and exemplary. The pro-
pensity of the PR and legal departments of companies is not

https://www.nestle.com

PC1-10 PART 1 • COMPREHENSIVE CASES

CEO of anti-human trafficking charity Unseen UK. Analysts
said that this apparent double standard had raised doubts
among civil society activists and customers regarding Nestlé’s
true motives. Critics said by its admission, Nestlé had left con-
sumers falsely confident in the ‘goodness’ of its products.

Some anti-trafficking advocates remained highly skepti-
cal of Nestlé’s actions and saw the move toward transparency
as a tactic to deflate other pending civil litigation suits in its
cocoa supply chains. They said Nestlé had been falsely assur-
ing customers that it would eliminate child and forced labor in
its Ivory Coast supply chain since 2001 and in the meantime an
entire generation of children in West Africa had been suffering
due to Nestlé’s false promises.

Nestlé’s admission that it had found slavery in its supply
chain in Thailand was greeted with a negative reaction from
both traditional and social media. According to the LexisNexis
Newsdesk48 analysis, mentions of Nestlé in relation to slavery
rose steeply with 20 to 90 articles per week, discussing slav-
ery in the company’s supply chain. According to the sentiment
chart, more than a third of the coverage was entirely negative,
while only 2.5% was positive (See Exhibit X).

to ‘fess up, not to even say they are carefully looking into a
problem for fear that they will get hit with lawsuits.”46

Criticism

Though Nestlé was applauded for its admission of forced labor
within its seafood supply chain and its move toward transpar-
ency, some analysts felt that this was just an attempt by the
company to cover up bigger allegations of child labor in its
profitable chocolate making business. They felt that in order to
escape the charges of being an unethical company, Nestlé had
admitted to slavery in seafood suppliers, a low-profit area of
the company’s business, in Thailand. Some critics saw Nestlé’s
actions as a public relations stunt to alleviate the criticism it
had received for abetting child slavery in Ivory Coast. “For
me there is a big issue with one part of Nestlé saying, ‘OK we
have been dragged along with everyone else to face the issue of
slavery in Thailand and so let’s take the initiative and do some-
thing about it’, and at the same time fighting tooth and nail
through the courts to avoid charges of child slavery in its core
operations in the Ivory Coast,”47 remarked Andrew Wallis,

ExHIBIT x Nestlé’s Media Coverage Related to Slavery

Nestlé and Slavery

N
ov

0 %

25 %

50 %

75 %

100 %

N
ov

1
6

N
ov

2
3

N
ov

3
0

De
c

Ja
n

Fe
b

Nestlé and Slavery

Neutral 64.10%;
225 Articles,

64.10%

Positive 2.56%;
9 Articles,

2.56%

Negative
33.33%; 117

Articles, 33.33%

Source: Adapted from https://bis.lexisnexis.co.uk/blog/posts/human-trafficking-awareness
/reputational-risks-are-greater-than-ever-for-brands-associated-with-slavery.

https://bis.lexisnexis.co.uk/blog/posts/human-trafficking-awareness/reputational-risks-are-greater-than-ever-for-brands-associated-with-slavery

CASE 1 • ELIMINATING MODERN SLAVERY FROM SUPPLY CHAINS: CAN NESTLÉ LEAD THE WAY? PC1-11

America who were using child labour. But it doesn’t always
solve the bigger problem. There is no one-size fits all solution. If
we took the view to delist every single supplier who is doing the
wrong thing today, it will not improve the situation. It will cut
the income of those who rely on this income. It is lose-lose. But,
with our size, we believe we can change things over time,”51
said Batato.

Modern slavery was considered as a criminal activity often
actively hidden by perpetrators, making it difficult to detect.
Third-party auditors appointed by Nestlé might struggle to get
full access to facilities and victims would be unwilling to speak
up fearing retribution.

Another challenge would be driving workers toward
community awareness-raising sessions. Some families were
often resistant to change as they had few livelihood alterna-
tives. Moreover, the isolation of some of the farms and vil-
lages was a challenge in itself. Supplying school kits and
providing literacy classes to women were all the more diffi-
cult as a result. Some researchers found that though Nestlé’s
code of conduct prohibited the use of child labor in its sup-
ply chain, awareness of the code was low among farmers.
Moreover, the farmers did not attend training sessions either
due to lack of interest or lack of time. “Being a leader in our
industry . . . we do understand we can influence the supply
chains we work with, and that’s what we do. We recognize
it is a difficult issue to deal with,”52 said Marco Goncalves,
Nestlé’s chief procurement officer.

Analysts said that given its global scale and financial
prowess, Nestlé could play a crucial role in driving signifi-
cant changes and abolishing slavery from the global cocoa
supply chain. Going forward, the question before Nestlé was
what more the company could do to ensure its cocoa supply
chain was free from slavery. How could it assure consum-
ers that its products did not come at the expense of inno-
cent people who went through untold suffering. Could Nestlé
have a positive impact on the chocolate industry through its
honest revelations and by raising the bar on labor protection?
Should the company take a clear leadership position on this
issue given its influence? If so, how should Nestlé go about
doing this?

Case Questions

1. What is modern slavery? Where does it fit in with a
company’s CSR strategy?

2. What are the conditions enabling slavery in cocoa supply
chains in Ivory Coast?

3. Why is tackling the issue of modern slavery so important
for a company like Nestlé?

4. Investigate the existence of modern slavery in Nestlé’s
supply chains and its efforts to address the issue.

5. Discuss the key challenges Nestlé faced while addressing
modern slavery in its cocoa supply chain.

6. What more should Nestlé do to mitigate the risk of
modern slavery in its cocoa supply chain

Some analysts contended that Nestlé’s efforts to eliminate
child labor from its global cocoa supply chain were not cred-
ible because of its inadequately transparent self-monitoring
system. For instance, they pointed out that the company pro-
vided incomplete and insufficient information regarding the
details of TNCP and its certification schemes and had omitted
material information related to TNCP’s distribution and prog-
ress in the rest of its global cocoa supply chain. Some analysts
pointed out that the FLA investigation was not an accurate rep-
resentation of the conditions on Nestlé’s cocoa farms because
a majority of Nestlé’s cocoa farms (about 75%) were not part
of TNCP. They also said that there was significant discrep-
ancy between Nestlé’s grand official policies and statements
to combat slavery and the nominal actions it took. Nestlé had
yet to develop a concrete plan outlining when it would source
entirely sustainable cocoa. They said that TNCP was only a
greenwashing ploy aimed at making Nestlé appear to be ethi-
cally responsible.

The Way Forward

Nestlé received some respite in March 2017, when US district
judge Stephen V. Wilson dismissed the case on child slavery in
Africa on the ground that the complaint “seeks an impermis-
sible extraterritorial application of the Alien Tort Statue which
means companies can be sued in the US for actions outside the
country but only when some conduct touches and concerns the
US with sufficient force.”49 He said that the former child slaves
could not sue in the US over wrongdoing that had occurred in
Africa. The judge said that the plaintiffs’ attempt to single out
CSR initiatives as evidence that Nestlé was knowingly aiding
and abetting child slavery was counter-productive because it
would freeze companies’ speech and prevent them from taking
up such initiatives in the future. He said, “Even worse, rely-
ing on corporate social responsibility programs as ‘relevant
conduct’ would also chill corporations from creating these
programs. Corporations would be incentivized to allow human
rights abuses to occur without shedding light on the issue or
trying to combat it out of fear they will displace the presump-
tion and be held responsible.”50

Going forward, analysts said that identifying and tackling
the menace of modern slavery in its cocoa supply chain would
not be an easy task for Nestlé. Nestlé’s cocoa supply chain was
complex, and regulating the co-operatives and farms could be
tough for the senior management, they said. It would be chal-
lenging to continually follow up on the work of co-operatives
given their remote locations, they added. Though Nestlé had
monitoring systems in place to communicate supplier policies
and conduct audits, they often covered only tier one suppliers
at the top of the value chain, while forced labor was mostly
found in the bottom tiers. Moreover, cost and pricing pressures,
supplier engagement, and transparency dilemmas were some
of the issues Nestlé had to deal with while addressing slavery.
“The problem is, we can’t just stop using a supplier. People
ask why we don’t boycott them. We did that in the case of palm
oil. We delisted suppliers. We delisted coffee suppliers in South

PC1-12 PART 1 • COMPREHENSIVE CASES

27. Pisteurs are individuals commissioned to buy cocoa beans from farmers.
28. Traitants are middlemen, licensed by the government, who trade cocoa

beans. Traitants may source beans either from cooperatives or from
pisteurs.

29. Métayers are sharecroppers who manage a cocoa farm on behalf of its
owner.

30. Coxers are individuals who live in the villages and inform pisteurs when
there is a harvest ready to be collected.

31. Abby Haglage, “Lawsuit: Your Candy Bar Was Made by Child Slaves,”
www.thedailybeast.com, September 30, 2015.

32. “Nestle ‘to Act over Child Labour in Cocoa Industry’,” www.bbc.com,
November 28, 2011.

33. “Nestle – Truth in Advertising,” www.truthinadvertising.org, September
28, 2015.

34. Ellen Wulfhorst, “U.S. Supreme Court Gives Boost to Child Slave Labor
Case Against Nestle,” www.reuters.com, January 14, 2016.

35. Joe Sandler Clarke, “Child Labour on Nestlé Farms: Chocolate Giant’s
Problems Continue,” www.theguardian.com, September 2, 2015.

36. The Danish Institute for Human Rights is Denmark’s independent state-
funded human rights institution.

37. Previously, Batato served as the CEO and Managing Director of Nestle
Pakistan Limited from June 6, 2012 to September 1, 2015 and May 25,
2012 to September 1, 2015 respectively. He has extensive experience in
the manufacturing and technical area, combined with business experi-
ence in both developed and emerging markets.

38. UTZ Certified is a program and a label for sustainable farming.
39. Verité is a Massachusetts-based non-profit organization that advocates

workers’ rights worldwide.
40. James Tennent, “Nestlé Admits Forced Labour, Trafficking, and Child

Labour in its Thai Seafood Supply,” www.ibtimes.co.uk, November 24,
2015.

41. The fishmeal used to feed farmed shrimp and a prawn is made from fish
caught by migrant workers. The US is the biggest customer of Thai fish,
and pet food is among the fastest growing exports from Thailand. In
2014, Thai Union shipped more than 28 million pounds of seafood-based
cat and dog food for some of the top brands sold in America including
Iams, Meow Mix, and Fancy Feast.

42. “Nestle Accused of Using Slave-Caught Fish in Cat Food,” www
.nationmultimedia.com, August 28, 2015.

43. Annie Kelly, “Nestlé Admits Slavery in Thailand While Fighting Child
Labour Lawsuit in Ivory Coast,” www.theguardian.com, February 1,
2016.

44. “Control Over Supply Chain a Must,” www.pressreader.com, November
5, 2016.

45. Annie Kelly, “Nestlé Admits Slavery in Thailand While Fighting Child
Labour Lawsuit in Ivory Coast,” www.theguardian.com, February 1,
2016.

46. Marthe Mendoza, “Nestle Confirms Labor Abuse among its Thai
Seafood Suppliers,” www.ap.org, November 23, 2015.

47. Claire Bernish, “Why is Nestle Finally Admitting to Using Slave Labor?”
www.mintpressnews.com, February 2, 2016.

48. LexisNexis is a global provider of legal, regulatory and business infor-
mation and analytics.

49. “Nestlé, Cargill and ADM Cocoa Child Slavery Lawsuit Dismissed,”
www.confectionerynews.com, March 15, 2017.

50. Daniel Fisher, “Judge Tosses Nestlé Suit Over Child Slavery in Africa,”
www.forbes.com, March 13, 2017.

51. Mark Hawthorne, “One Step at a Time, Nestle Slowly Changes its
Ways,” www.smh.com.au, February 24, 2017.

52. Katie Nguyen, “All Companies Have Slave Labour in Supply Chains but
it Can be Stopped-Tesco,” www.reuters.com, November 18, 2015.

1. This was compiled from published sources and is intended to be used
as a basis for class discussion rather than to illustrate either effective or
ineffective handling of a management situation.

2. Ivory Coast, also known as Côte d’Ivoire, is a tropical country in southern
West Africa. It is the world’s largest producer of cocoa, the raw ingredient
used in making chocolates.

3. Faaez Samedi, “Nestlé Admits Forced Labor is Part of its Seafood
Supply Chain,” www.campaignlive.co.uk, November 27, 2015.

4. Marianne Smallwood “Slavery Found within Nestle’s Seafood Supply
Chain … Now What?”www.triplepundit.com, December 14, 2015.

5. Mark Hawthorne, “One Step at a Time, Nestle Slowly Changes its Ways,
“www.smh.com.au, February 24, 2017.

6. “Annual Results 2016,” www.nestle.com.
7. “Nestle’s 12 Dark Secrets Worldwide!”www.theequalizerpost

.wordpress.com, November 18, 2010.
8. Jon Entine, “Greenpeace and Social Media Mob Nestlé,” www.blog

. american.com, March 31, 2010.
9. “Nestlé’s 12 Dark Secrets Worldwide!” www.theequalizerpost

.wordpress.com, November 18, 2010.
10. Baby formula is food manufactured for supporting the adequate growth

of infants.
11. “Starbucks as Fairtrade-lite and Nestlé on the Blacklist,” www

. faircompanies.com, October 8, 2008.
12. “Pepsi and Nestlé Backlisted for Water Pollution in China,” www. polarisinstitute

.org/pepsi_and _nestle_backlisted_for_water_pollution_in_china
13. “Nestlé’s Sinking Division,” www.polarisinstitute.org/nestl%C3

%A9%E2%80%99s_sinking_division
14. The ECRA is a not-for-profit, multi-stakeholder co-operative, dedicated

to the promotion of universal human rights, environmental sustainability,
and animal welfare.

15. The Ethiscore is a numerical rating that differentiates companies based
on the level of criticism that they have attracted. Generally, an Ethiscore
of 15 would be the best, while 0 would be the worst.

16. Fair trade coffee is one that is obtained directly from the growers. It usually
retails at a higher price than standard coffee.

17. “Starbucks as Fairtrade-lite and Nestlé on the Blacklist,” www
. faircompanies.com, October 8, 2008.

18. Abby Haglage, “Lawsuit: Your Candy Bar Was Made by Child Slaves,”
www.thedailybeast.com, September 30, 2015.

19. LJ Vanier, “Hershey, Nestle and Mars Use Child Slaves to Make Your
Chocolate,” http://thespiritscience.net, October 18, 2015.

20. In 2001, the Chocolate Manufacturers Association of the US signed the
protocol for the growing and processing of cocoa beans and their deriva-
tive products in a manner that complied with ILO Convention 182 con-
cerning the prohibition and immediate action for the elimination of the
worst forms of child labor.

21. The Archer Daniels Midland Co is a US-based global food processing
and commodities trading corporation.

22. Based in Minnesota, US, Cargill Inc is a provider of food, agriculture,
financial, and industrial products and services worldwide.

23. Daniel Fisher, “Cue The Documentary: Nestlé Still Fighting Slavery
Lawsuit by Foreign Plaintiffs,” www.forbes.com, October 7, 2016.

24. Established in 2012, The International Cocoa Initiative (ICI) is a multi-
stakeholder partnership between cocoa companies, labor unions, and
NGOs in order to eliminate the worst forms of child labor and forced
labor in the growing and processing of cocoa beans.

25. www.nestle.com.au/creating-shared-value/social-impact/the-nestl
%C3%A9-cocoa-plan.

26. Fair Labor Association is a non-profit multi-stakeholder initiative that
works with major companies to improve working conditions in their sup-
ply chains.

Endnotes

http://www.nestle.com.au/creating-shared-value/social-impact/the-nestl%C3%A9-cocoa-plan

http://www.forbes.com

Blog

http://www.thedailybeast.com

http://www.faircompanies.com

http://www.polarisinstitute.org/nestl%C3%A9%E2%80%99s_sinking_division

http://www.polarisinstitute.org/pepsi_and

http://www.faircompanies.com

http://www.theequalizerpost.wordpress.com

http://www.blog.american.com

http://www.theequalizerpost.wordpress.com

http://www.nestle.com

http://www.smh.com.au

http://www.triplepundit.com

http://www.campaignlive.co.uk

http://www.reuters.com

http://www.smh.com.au

http://www.forbes.com

http://www.confectionerynews.com

http://www.mintpressnews.com

Homepage

http://www.theguardian.com

http://www.pressreader.com

http://www.theguardian.com

http://www.nationmultimedia.com

http://www.ibtimes.co.uk

http://www.theguardian.com

http://www.reuters.com

http://www.truthinadvertising.org

http://www.bbc.com

http://www.thedailybeast.com

Case 2 ‘Enrich Not Exploit’: Can New CSR Strategy Help Body Shop Regain Glory?
This case was written by Syeda Maseeha Qumer and Debapratim Purkayastha, IBS Hyderabad.1

in ethical retail. However, some analysts felt the new CSR
goals were not exceptional. “With leading companies such
as Marks & Spencer, Unilever, Smurfit Kappa and Skanska
all placing sustainability at the heart of their business strate-
gies, all formally disclosing their objectives and targets, and
all committed to driving best practice right through their en-
tire supply chains, the 14 goals of The Body Shop don’t seem
particularly extraordinary,”3 remarked Senior Corporate
Sustainability Adviser, Darina Eades. So going forward what
could Schwartz and Davis do to distinguish Body Shop from
its rivals who were more actively involved in CSR than be-
fore? Would the new CSR approach help the beauty retailer
in regaining its past glory as a leader of ethical business prac-
tices in retail and boost sales?

The Body Shop (1976–2006)

In March 1976, Anita Roddick and her husband Gordon set
up their first Body Shop store at Brighton, UK. The store sold
around 15 lines of homemade cosmetics made with natural in-
gredients such as jojoba oil, rhassoul mud, etc. From its very
early days, Body Shop was associated with the social activism
of Roddick, who was critical of what she called the environ-
mental insensitivity of industry and wanted a change in stan-
dard corporate practices. By the late 1970s, the company had a
number of franchisee stores throughout the UK.

Roddick gave the company’s products brand names
such as, ‘Tea Tree Oil Facial Wash’, ‘Mango Dry Mist’, etc.
Urine sample bottles, the cheapest packaging available at the
time, were used as containers. All labels were hand-written.
Unlike other branded cosmetics, the packaging of its products
contained detailed descriptions of the ingredients and their
properties. The company never ‘sale’ priced its products but
customers who returned product containers for refilling were
offered a 15% discount. In addition to providing product infor-
mation, a number of leaflets and posters on recycled paper pro-
vided information about the social causes the company believed
in and encouraged its customers to get involved. Customers
were greeted with employees wearing T-shirts bearing a social
message. The windows of Body Shop stores featured bills of
local charity and community events.

Under Roddick’s leadership, Body Shop set a new
standard, “retailing with a conscience” on a large scale. The
company sourced the ingredients for its products from indig-
enous farmers in developing countries. The company promoted
recycling, used natural ingredients in its products, and avoided
selling products tested on animals. Body Shop’s core brand
identity was its “profits-with-a-principle” philosophy and the
brand was closely associated with the social justice agenda.

On February 2, 2016, The Body Shop International Plc.
(Body Shop), a UK-based retailer of natural-based and
ethically-sourced beauty products, unveiled a new global
CSR strategy to reassert its leadership in ethical business. The
commitment, entitled ‘Enrich Not Exploit’, outlined 14 new
sustainability targets to be achieved by 2020 that touched
all areas of the business. According to Jeremy Schwartz
(Schwartz), Chairman and CEO of Body Shop, “The Body
Shop can be both a force for good and a successful, profit-
able business. 40 years ago [founder] Anita Roddick set out
a challenge for The Body Shop to tackle the big issues of her
time. We’re now tackling the big issues of today, We want our
Enrich Not Exploit™ commitment to inspire a new genera-
tion of customers, supporters and especially millennials who
truly care about how a company operates. Re-establishing
The Body Shop as a leader will come from delivering our
ambitious aim to be the world’s most ethical and truly sus-
tainable global business.”2

Founded in 1976 by Dame Anita Roddick (Roddick),
Body Shop was regarded as a pioneer of modern CSR. Since
its inception, the beauty retailer, which was strongly associ-
ated with the social activism of Roddick, had endorsed and
championed various social issues that complemented its core
values–opposition to animal testing, developing community
trade, building self-esteem, campaigning for human rights, and
protection of the planet. Through these initiatives, Body Shop
had cultivated a loyal customer base. But following its acqui-
sition by beauty care giant L’Oréal SA (L’Oréal) in March
2006, both Body Shop and Roddick came under severe criti-
cism. Loyal customers felt betrayed as Roddick had previously
been quite vocal in her criticism of companies like L’Oreal that
tested their cosmetics on animals, exploited the sexuality of
women, and sold their products by making women feel inse-
cure. After its acquisition, the fortunes of Body Shop took a
sharp downturn. With a host of new competitors jumping on
the natural products bandwagon and offering their own green
cosmetic lines, its sales plummeted. The beauty retailer’s op-
erating margin narrowed, reaching a seven-year low in 2015.
Body Shop’s ethical message also faded and by the company’s
own admission it had been comparatively quieter on the sus-
tainability front over a period of time.

To re-establish itself as the world’s most ethical and
truly sustainable global business, Body Shop announced a
new CSR commitment with the focus on people, products,
and the planet. According to Christopher Davis (Davis),
International Director of Corporate Responsibility and
Campaigns at Body Shop, the new sustainability commit-
ment would broaden Body Shop’s appeal to the next genera-
tion of customers and revive its image as a pioneering force

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branches globally including 304 in the UK. Its brand portfolio
consisted of more than 600 products.

Takeover by L’Oréal

On March 17, 2006, Body Shop announced that it had agreed
to be taken over by French cosmetics giant L’Oréal in a £652
million (US$ 1.14 billion) deal. Commenting on the acqui-
sition, Lindsay Owen-Jones, chairman and CEO of L’Oréal,
said, “We have always had great respect for The Body Shop’s
success and for the strong identity and values created by its
outstanding founder, Dame Anita Roddick. A partnership
between our companies makes perfect sense. Combining
L’Oreal’s expertise and knowledge of international markets
with The Body Shop’s distinct culture and values will benefit
both companies.”7

Post-acquisition, Body Shop continued to operate inde-
pendently within the L’Oréal Group. The management team of
Body Shop was retained and reported directly to the CEO of
L’Oréal. Roddick continued to act as a consultant till she passed
away in September 2007.

Following the deal with L’Oréal, Body Shop and Roddick
faced an angry backlash. Body Shop was regarded by many
as one of the pioneers of modern CSR. On the other hand,
L’Oréal was viewed by activists as the face of modern con-
sumerism – a company that tested its cosmetics on animals,
exploited the sexuality of women, and sold its products by
making women feel insecure. Body Shop’s critics said they
felt betrayed by the deal as Roddick had previously been
highly critical of companies like L’Oréal.8 She had vocifer-
ously accused the cosmetic industry of making women feel
insecure and particularly criticized L’Oréal for its alleged
policy of employing only “sexy” saleswomen on its coun-
ters. To make matters worse, 26% of L’Oréal was owned by
Nestlé, one of the most boycotted companies in the world
for its alleged unethical business practices and aggressive
promotion of baby milk in developing countries. The move
sparked calls for boycotts from animal welfare activists, who
feared L’Oréal would destroy what remained of the Body
Shop’s eco-friendly ethos. There were also questions raised
about whether L’Oréal was trying to improve its image and
buy CSR through this deal.

Some customers called for a boycott of Body Shop’s
products as they felt that the company had sold out its val-
ues and principles. Some of them vowed never to shop at
Body Shop again. A consumer said, “The Body Shop used
to be my high street ‘safe-house,’ a place where I could walk
into and know that what I bought was okay, that people were
actually benefiting from my purchase. Now the people ben-
efiting are the overpaid, underworked ‘fat-cat’ CEOs of ani-
mal-testing L’Oreal and baby-milk-selling Nestle. By buying
from the Body Shop, you are now no longer supporting ethi-
cal consumerism. If I want legitimate fair-trade, non-animal
tested products, I can find them easily, at the same price,
elsewhere.”9

This was a revolutionary idea at the time, and Body Shop de-
veloped a loyal customer base.

In 1978, Body Shop’s first foreign franchisee opened in
Brussels, Belgium, and shortly after, it entered North America.
In April 1984, the stock of Body Shop opened for the first time
on London’s Unlisted Securities Market, at 95 pence. By the
time it obtained a full listing on the London Stock Exchange in
January 1986, the stock was selling at 820 pence.

In the 1980s, Body Shop was quite vocal on environmen-
tal issues and it launched the ‘Save the Whales’ campaign.
It also teamed up with Amnesty International4 and from the
1990s became vocal in its support for international human
rights. In 1990, The Body Shop Foundation, the charitable
arm of the company, was established to fund human rights,
animal welfare, and environmental protection groups and
projects globally.

During the 1980s and 1990s, Body Shop had its share
of critics who accused the company of hypocrisy as they felt
that it was making profits under the guise of endorsing social
equality. On the other hand, some shareholders complained
that instead of maximizing profits, the company was divert-
ing money into “social work” projects. However, the company
showed strong growth through the 1980s and at its height, in
1991, it was worth £700 million. In 1993, the firm banned any
products tested on animals. Body Shop was regarded as one of
the first firms in the world to publish a proper report on its so-
cial responsibility initiatives, having published its first ‘Values
Report’ in 1996.5

However, problems surfaced for Body Shop in the early
1990s as many “me too” retailers mushroomed in the UK, run-
ning businesses on a similar green agenda. Competitors such as
Boots and Sephora encroached on Body Shop’s market niche
by offering their own natural health and beauty products. Body
Shop’s international expansion strategy too did not achieve
much success. In the US, it faced major reverses as Bath &
Body Works emerged as a tough competitor.

Though Body Shop continued to grow in size, its market
value was on the decline. The board had also got tired of
Roddick’s radicalism and her combative stance on global-
ization. In 1998, Roddick was forced to step down as CEO
and Patrick Gournay (Gournay) replaced her. However, she
continued to carry out PR functions for Body Shop. In 1999,
Body Shop exited manufacturing and wholesaling, and fo-
cused on retailing. The Body Shop At Home, the direct-
selling arm of the retailer, was launched in the UK (1994),
Canada (1995), Australia (1997), and the US (2001). But
problems persisted.

In 2002, both Roddick and Gordon stepped down as co-
chairmen, but Roddick was retained as a creative consultant
of the company. Gournay also quit and was replaced by Peter
Saunders, who had earlier been the CEO of Body Shop’s North
American operations. Body Shop started working on reposi-
tioning itself to the ‘masstige’6 sector of the consumer market.
The re-positioning exercise began to bear fruit and the com-
pany was back to profits. By March 2006, Body Shop had 2,085

CASE 2 • ‘ENRICH NOT EXPLOIT’: CAN NEW CSR STRATEGY HELP BODY SHOP REGAIN GLORY? PC1-15

Body Shop and Roddick defended the deal saying that
L’Oréal would not compromise Body Shop’s ethics and that
the merger would give Body Shop a chance to spread its val-
ues to L’Oréal. Roddick agreed that she had had an issue with
L’Oréal over animal testing earlier, but she was now con-
vinced that the company was sincere in its commitment to
this issue. L’Oréal also announced that it would not dilute
Body Shop’s ethical stance and committed itself to upholding
the values of the company.

Body Shop’s Core Values

According to Davis, Roddick was ahead of her time in estab-
lishing Body Shop as an ethical beauty business.10 Speaking
about this, Schwartz said, “The Body Shop courageously pi-
oneered new ways of thinking, acting and speaking out as a

ExHIBIT I Core Values of Body Shop

ACTIVATE SELF ESTEEM

1995 — UK stores carried ‘What Women Want’ cards, receiving 14,000 responses in three months. These were published in a report and book
and influenced wider campaigning on women’s issues.

1998 — Developed a self-esteem campaign featuring the body-positive Ruby doll, to challenge stereotypes and spark debate.

2013 — Self-esteem related to disability became one of three funding priorities for The Body Shop Foundation.

AGAINST ANIMAL TESTING

1989 — Started campaigning to end animal testing in cosmetics, the first cosmetics company to do so.

1998 — Following the sustained campaign, the UK government banned animal testing of cosmetic products and ingredients.

2004 — Campaigning by Body Shop and BUAV (British Union for the Abolition of Vivisection) contributed to a European Union ban on
animal testing in cosmetic products.

2009 — The European Union banned animal testing of cosmetic ingredients.

2013 — Sale and import of animal tested products and ingredients was banned in the EU. The company’s campaign continued to collect 1
million signatures in support of Cruelty Free International for a global ban on animal testing in cosmetics.

COMMUNITY FAIR TRADE

1987 — The CFT program was started with sourcing ‘footsie’ massage rollers from an education and employment charity in India, which
became a best-selling line.

1989 — Bought Nepalese sustainable paper gifts made from plants clogging local waterways, leading to new employment for people and seed
funding for community projects,

1993 — Sourced its first CFT ingredient–sesame seed oil.

1994 — Roddick discovered shea butter from Tamale, northern Ghana.

1999 — Sourced organic cotton Moisturising Gloves and Socks from Mauritius.

2007 — Awarded ‘The Big Tick’ Business in the Community (BITC) Supply Chain Award.

2008 — First to use fair trade organic alcohol in cosmetics.

2009 — CFT program certified by The Institute for Marketecology (IMO).

2011 — Established the Global Shea Alliance, bringing industry members together to improve benefits for producers and increase the number
of women involved in the trade.

2013 — BITC named The Body Shop International Responsible Business 2013, based on its CFT program.

DEFEND HUMAN RIGHTS

1991 — Supported the ‘Tie a Yellow Ribbon’ campaign, which led to the release of kidnapped journalist John McCarthy after five years of
captivity allegedly by militant groups in Lebanon.

Continued

company. Our ground-breaking campaigns were ahead of their
time and changed laws on animal testing, domestic violence
and human trafficking. We were the first in beauty to use com-
munity trade and we still have the strongest programme in the
industry. We are small, but we lead.”11

The CSR strategy of Body Shop was based on five core
values (See Exhibit I):

Support Community Fair Trade

Launched in 1987, Community Fair Trade (CFT) was Body
Shop’s own independently verified fair trade initiative to help
marginalized communities improve their lives and alleviate
poverty. The objectives of CFT were to source high-quality
ingredients, gifts, and accessories in a fair way; to provide
benefits to smallholders, artisans, and their communities; and
to share stories that inspired the company’s mission. Through

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DEFEND HUMAN RIGHTS

1993 – Its ‘Free the Ogoni 19’ Campaign was supported in 17 countries, raising awareness of people persecuted for protesting against oil
exploitation in Nigeria.

1998 — The ‘Make Your Mark’ campaign with Amnesty International to highlight the plight of human rights defenders collected over
3 million signatures and helped secure the release of 17 prisoners.

2000 — It established the Human Rights Award for grassroots human rights activists.

2004–2008 — The global ‘Stop Violence in the Home’ campaign raised awareness, generated funds for women’s crisis centers, and helped
make domestic violence illegal in Indonesia.

2008–2010 — In partnership with MTV International, Body Shop raised £2 million for the Staying Alive Foundation to raise HIV and AIDS
awareness among young people.

2009–2012 — Its ‘Stop Sex Trafficking of Children and Young People’ campaign mobilized 7 million people to demand action and 24
governments committed to introducing new legislation.

PROTECT THE PLANET

1986 — Launched the ‘Save the Whale’ campaign in partnership with Greenpeace; Set up an Environmental Projects Department to coordi-
nate its campaigns and commercial practices.

1989 — The ‘Stop the Burning’ campaign collected almost 1 million signatures to help save the Brazilian rainforest

1993 — Banned PVC in its packaging

2002 — Its ‘Choose Positive Energy’ campaign with Greenpeace promoted renewable energy, presenting over 6 million signatures to the
World Summit for Sustainable Development

2004 — Was a founder member of the Roundtable on Sustainable Palm Oil (RSPO) – set up to promote the use and growth of sustainable
palm oil.

2007 — All of Body Shop products became 100% vegetarian.

2012 — The company launched its Pulse stores.

Source: Adapted from Body Shop 2015 Value Report and other sources.

CFT, Body Shop sourced products from under developed com-
munities for a fair price in a sustainable way. Annually, Body
Shop’s CFT offered a stable income to thousands of workers
and developed communities by building schools and health
care centers, providing clean water, and offering education
scholarships.

Body Shop developed a set of Fair Trade Guidelines in
1994 (see Exhibit II). The company conducted participatory
audits, and provided its CFT suppliers with information and
feedback to assist them in maximizing long-term benefits. It
helped suppliers to reduce their dependence on Body Shop
by helping them gain access to wider markets and sharing its
best practices with them. With Body Shop being acquired by
L’Oréal, eight of Body Shop’s CFT raw materials were being
used by other brands of L’Oréal as part of their Solidarity
Sourcing program.12

By 2013, Body Shop’s CFT worked with 25 suppliers in
21 countries, buying over 1,200 tonnes of ingredients and 2.2

million gift and accessory items from across the world. In 2014,
Body Shop sourced CFT organic argan oil from six Moroccan
co-operatives, thereby providing 334 rural women with a regu-
lar income, giving them financial independence, reducing relo-
cation, and supporting local economic development. In 2014–
2015, Body Shop spent about £21 million on purchasing over
3 million kilos of CFT ingredients. It worked with 25,000 CFT
producers and farmers in 21 countries.

Activate Self-Esteem

Body Shop valued people and their work and challenged
what it called the “unrealistic beauty ideal presented by the
beauty industry.” The beauty retailer supported and built
self-esteem, particularly among women, through its human
rights campaigns and income-generating projects linked
to its CFT initiative as well as in-store and in the media.
Its campaigns on self-esteem took off in a big way in 1995
when it launched a “Women’s Rights Campaign” during the

ExHIBIT II Body Shop’s Fair Trade Guidelines

Source: Adapted from www.thebodyshop.com/bodyshop/values/support_community_trade.jsp.

Community: We are looking to work with established community organizations which represent the interests of their people.
Community in Need: We target those groups who are disadvantaged in some way, those whose opportunities are limited.
Benefits: We want the primary producers and their wider community to benefit from the trade –socially as well as economically.
Commercial Viability: It has to make good commercial sense meaning that price, quality, capacity and availability are carefully considered.
Environmental Sustainability: The trade has to meet The Body Shop standards for environmental and animal protection.

http://www.thebodyshop.com/bodyshop/values/support_community_trade.jsp

CASE 2 • ‘ENRICH NOT EXPLOIT’: CAN NEW CSR STRATEGY HELP BODY SHOP REGAIN GLORY? PC1-17

a water, sanitation, and hygiene program in Arba Minch Zuria,
Ethiopia, where 40% of people did not have access to clean
water.

Against Animal Testing

Body Shop ensured that none of its products were tested on
animals and that its ingredients were procured from suppliers
who did not test their ingredients on animals for any cosmetic
purpose. Some of the animal-derived ingredients it used such
as honey were harvested without causing harm to the animals.
Reportedly, all the Body Shop products and ingredients un-
derwent extensive testing to ensure that they were safe and ef-
fective, while also remaining cruelty-free. The company used
three main assessment methods involving computer data, lab-
oratory-created tissues, and people15 to make its products safe
and effective.

Along with customers and animal protection groups,
Body Shop campaigned for a change in laws on the testing
of animals for cosmetics purposes in the UK, Europe, the
Netherlands, Germany, and Japan. In 1996, Body Shop pre-
sented the European Union with a petition signed by over
4,000,000 people, which at the time was the largest petition
against animal testing. Body Shop was also instrumental in
the UK government’s decision in 1998 to ban animal test-
ing for cosmetic products and ingredients. In addition to this,
the company’s campaigns also resulted in finished product
test bans in Germany and the Netherlands. In 1997, Body
Shop was one of the first international cosmetics companies
to comply with the Humane Cosmetic Standards.16 In 2006,
Body Shop received the Best Cruelty-free Cosmetics Award
from PETA.17 In 2008, it received the Lifetime Achievement
Award from the Royal Society for the Prevention of Cruelty
to Animals.18

In 2012, Body Shop relaunched its ‘Against Animal Testing’
campaign in partnership with Cruelty Free International.19 On
March 11, 2013, after the anti-animal testing campaign had
gone on for more than 20 years, the European Union banned
the sale and import of animal-tested products and ingredi-
ents. The same year, Body Shop was named International
Responsible Business of 2013 by the prestigious Business
in The Community Organisation, a group of not-for-profit
organizations.

fourth UN World Conference on Women. As a part of the
campaign, the retailer collected more than a million signa-
tures in support of the issue from people in 25 countries. In
1997, it launched a campaign based on ‘Ruby’, a realistic
doll which represented real women as opposed to dolls such
as ‘Barbie’.

In its ads, Body Shop used language and images that
showed respect for women. Every poster displayed in-store
and every image on the company’s website adhered to certain
guidelines such as avoiding altering the size or body shape of
its models and not featuring ultra-thin or very young models,
as was the norm in beauty advertising. Body Shop promoted
diversity, acceptance, and empowerment in its workplace and
maintained equal opportunities standards. Employees were
groomed through volunteering, training, and personal de-
velopment programs. In 2013, self-esteem related to disabil-
ity became one of the funding priorities for The Body Shop
Foundation.

Defend Human Rights

Using its global presence, Body Shop campaigned for human
rights in the media and in its stores. It also partnered with
its suppliers to expand ethical trade practices that respected
workers’ rights. Body Shop conducted and supported many
human rights campaigns. For instance, in 1998, to celebrate
the 50th Anniversary of the Universal Declaration of Human
Rights, it launched a joint worldwide campaign with Amnesty
International to highlight the plight of human rights defenders
around the world, encouraging customers to ‘Make Your Mark’
for human rights. About three million people signed up for this
campaign.

Body Shop’s ‘Stop Sex Trafficking of Children and
Young People’ campaign that ran between September 2009
and March 2012 in partnership with ECPAT International13
made a tremendous impact globally. The campaign called on
governments to protect young survivors of trafficking and
offer specialized services to the survivors. In all, the cam-
paign presented 36 national petitions to governments and
the UN. In response to the petition campaign, 14 countries
changed their policies and laws and 8 countries committed to
adopting international standards to protect children from sex
trafficking.

In 2014–2015, Body Shop started diversity and inclusion
training for its employees at its international headquarters in
the UK. It worked with suppliers in more than 20 countries to
improve workers’ rights and supply chain ethics. Body Shop
was a founding member of the Ethical Trade Initiative and en-
sured that its suppliers complied with its ethical trade standards
and shared good practices with other retailers and local partners
(See Exhibit III).

In 2014, Body Shop raised over £200,000 for War Child14
by selling pre-packed Christmas gifts. The funds raised sup-
ported the education of 6,000 children displaced by war in
Afghanistan, Jordan, the Democratic Republic of the Congo,
and Sudan. During Christmas 2015 and Ramadan 2016, Body
Shop raised funds of about £210,000 through the sale of special
gift sets in order to help Water Aid and fund projects including

ExHIBIT III Body Shop’s Ethical Trade Standards

Source: Adapted from www.thebodyshopinternational.com.

• Employment is freely chosen
• Freedom of association and the right to collective bargaining are

respected
• Working conditions are safe and hygienic
• Child labor is not used
• Living wages are paid
• Working hours are not excessive
• No discrimination is practiced
• Regular employment is provided
• No harsh or inhumane treatment is allowed

http://www.thebodyshopinternational.com.

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protected 200 hectares of forest and restored 89 hectares of
habitat in Mexico, Ecuador, and Brazil.

Criticism

Though Body Shop was considered the poster child of CSR,
it began facing increased scrutiny from environmental groups
of its activities and claims. Environmental watchdogs such as
McSpotlight25 and Greenpeace UK accused Body Shop of ex-
ploiting consumers by championing various agendas, while not
being any different from other corporate entities in its pursuit
of profit. Business ethics expert Jon Entine (Entine) reported
that the Charity Commission for England and Wales records
did not show any charitable contributions from the company in
its first 11 years of operation. In the subsequent years, its con-
tribution to charity was less than 1.5% of pretax profits, which
was the average contribution made by US corporates. Entine
also alleged that the company was making false claims that its
products were natural and that there was extensive use made
of petrochemicals in the preparation of Body Shop’s products.
He quoted many ex-employees who had claimed that the sto-
ries put out to customers about various products were totally
fabricated.26

However, Body Shop clarified that it was not using in-
gredients in its cosmetics that had been tested on animals
for cosmetic purposes after December 31, 1990. It further
pointed out that most of the ingredients used in cosmetic and
toiletry products had been animal tested for some purpose
at some time in their history, and it would be almost impos-
sible to sell products whose ingredients had never been tested
on animals. McSpotlight dismissed the company’s CFT
practices as a mere marketing ploy as it accounted for less
than 1% of sales of Body Shop products.27 Its CFT was also
viewed as patronizing and was said to have created tensions
and divisions within indigenous communities and under-
mined self-sufficiency and self-dependence. The retailer was
also accused of paying exploitative wages and of adopting an
anti-trade union stance.

Some environmental groups accused Body Shop of mar-
keting products by making people feel insecure about their
looks, in the same way that other firms did to sell their personal
care products. Some critics pointed out that the visual on the
home page of Body Shop was no different from the idealized
body images of beauty projected by the cosmetics industry.

Critics felt that there was a huge gap between the image
projected by the company and its actual practice. Retail analyst
Richard Ratner felt that Body Shop’s “anti-city” attitude was
hypocritical for a company that raised funds by listing on the
London Stock Exchange.28 The company was also accused of
being very aggressive in its response to any form of criticism
and of trying to intimidate its critics through invectives and/or
lawsuits.

According to some critics Bodyshop engaged heavily in
CSR to the point that it had deviated from its business strat-
egy, lost its direction and jeopardized the long-term mission
and vision of the company. According to them, Body Shop suc-
cumbed to corporate greed at the expense of consumers and

Protect the Planet

Body Shop was an early pioneer in green business and the com-
pany constantly explored ways to run its business in a more
environmentally sustainable way. In 1986, Body Shop began
its campaign for the protection of the planet and developed its
first international environmental policy in 1992. In 2002, Body
Shop ran a global campaign with Greenpeace International to
promote renewable energy.

In order to reduce CO2 emissions, Body Shop rolled
out increasingly energy-efficient Pulse20 stores, which used
low-energy LED lighting and more recycled materials. The
retailer reduced energy consumption in its stores through
Building Management Systems (BMS) that automatically
controlled heating and lighting in the stores. The company
set a target of reducing CO2 emissions from stores by 50%
between 2010 and 2020. By 2015, just over 50% of all Body
Shop stores sourced renewable energy. In order to reduce its
carbon footprint, Body Shop encouraged third-party contrac-
tors who transported its products globally to adopt more sus-
tainable practices such as using low-emission vehicles and
adopting ways to move more products in fewer journeys.
According to the company, Body Shop reduced its airfreight
by 35% from 2011 to 2013.

Body Shop had set a target of 25% reduction in water
use by 2020. Between 2010 and 2013, it achieved a 37% re-
duction in water use, surpassing its 2020 target. The com-
pany also committed to reducing the amount of landfill waste
it generated. Starting in 2010, Body Shop rolled out waste
management programs on its sites in the UK and the US and
educated staff on issues such as bins removal, recycling, and
composting.

To minimize its environmental impact, Body Shop sourced
sustainable materials for use in its products, packaging, and
stores. In June 2014, Body Shop began reformulating its fa-
cial skincare products to contain naturally derived exfoliants in
line with its body products. By the end of 2015, all Body Shop
products were free from polyethylene microbeads,21 which ad-
dressed the concerns of some key stakeholders who were wor-
ried about the presence of non-biodegradable materials in the
marine food chain. Body Shop was one of the founder members
of the Roundtable on Sustainable Palm Oil22 (RSPO) set up in
2004 to promote the growth and use of sustainable palm oil.
It was the first cosmetics company to source sustainably har-
vested palm oil for use in its products.

On the packaging front, Body Shop introduced 100% re-
cycled PET bottles and also increased the usage of glass pack-
aging as research showed that glass had high recycling rates
among consumers. In 2015, the company replaced the plastic
vac forms used in gift packaging with corrugated cardboard,
thereby reducing the use of plastic by 154 tonnes. All of Body
Shop’s wood-derived packaging, accessories, and shop fit mate-
rials were Forest Stewardship Council23 (FSC) certified, imply-
ing that they were sourced from sustainable forests. Between
2012 and 2014, Body Shop planted and protected more trees
through its Wood Positive program started in association with
the World Land Trust.24 Through this initiative, Body Shop

CASE 2 • ‘ENRICH NOT EXPLOIT’: CAN NEW CSR STRATEGY HELP BODY SHOP REGAIN GLORY? PC1-19

In Q4 2015, Body Shop reported its worst quarterly sales per-

formance with sales dropping 5.8% while all of L’Oréal’s other

divisions surpassed expectations. In 2015, Body Shop’s sales

reached €967 million, a mere 3.8% of L’Oreal’s total sales. The

company’s operating margin plunged to a seven-year low of 5.7%

in 2015, down from 8.1% in 2007 (See Exhibit IV and Exhibit V).
The retailer attributed the drop in sales mainly to the tough mar-

kets in Asia, notably Hong Kong, and poor holiday sales in North

America. However, observers pointed out that Body Shop lacked

in innovation and a core selling proposition to its customers.32

According to Andrew Wood, an analyst at investment man-
agement firm Sanford C. Bernstein, & Company LLC, Body
Shop was the weakest business of L’Oreal, and a major disap-
pointment for the French cosmetics maker as its poor perfor-
mance had dragged down the overall results of the group33 (See
Exhibit VI). Generally, bigger companies acquired small, ethi-
cally driven competitors to transfer some of their environmen-
tal knowledge and skills into their own global supply chains.
Similarly, L’Oréal too had felt it had a lot to gain from the
ethical retailer but was surprised to learn how poor the environ-
mental systems were at the Body Shop, said analysts.34 Though
Body Shop sourced its materials ethically, L’Oréal had, by this
point, developed better mechanisms for monitoring its supply
chain and achieving its environmental goals, they pointed out.

Body Shop was one of the first global businesses to prac-
tice fair trade and conduct social and environmental cam-
paigns. Davis said that while Body Shop had maintained these

thereafter started to lose that special bond with its customers
that had previously made them loyal to the brand.29 Where
Body Shop’s staunchest critics were concerned, its acquisition
by L’Oreal was vindication of their stand that Body Shop was
nothing more than a green washer.

Time for Change

Since its acquisition by L’Oréal, Body Shop’s performance had
been dismal as it struggled to post profits. In 2010, Body Shop’s
net sales were £754 million, accounting for just 4% of L’Oréal’s
net sales. According to some analysts, the beauty retailer had
lost its edge as rivals jumped on the ethical products bandwagon
and devoured its market share. Competitors such as Lush, The
Body Deli, and Skin & Tonic made similar green claims and
benefitted from the growing demand for natural-beauty prod-
ucts. As a result, Body Shop was languishing at a crossroads
with a steady decline in sales, according to some analysts.30

To revive the ailing company, in September 2013,
Schwartz,31 who was then the country manager for L’Oréal
UK and Ireland, was asked to step in as CEO of Body Shop.
Schwartz reoriented the business around skincare, introduced
new products such as ‘Drops of Youth’ creams and lotions, and
hired consultants to advise customers about products that suited
them. He also added more expensive ranges such as ‘Spa of the
World’ and the ‘Hawaiian Kukui’ cream priced between £10
and £23. After Schwartz took over the company, skincare sales
grew at more than 10% annually. However, the surge in sales
was short lived.

Retail Sales of Body Shop (1)

2014 / 2015 Growth

€ Millions 2013 2014 2015 2015 weight Like-For-Like Reported Figures

Western Europe 544.8 562.0 595.2 38.2% +2.8% +5.9%

North America 168.6 179.1 178.7 11.5% –10.2% –0.2%

New Markets 685.5 734.3 785.7 50.4% +1.9% +7.0%

Total 1,398.9 1,475.3 1,559.6 10% +0.7% +5.7%

ExHIBIT Iv

Consolidated Sales

€ MILLIONS 2013 2014 2015 Like-For-Like 2014/2015 Growth

Retail sales (1) 1,398.9 1,475.3 1,559.6 +0.7%

Retail sales with a
comparable store
base (2)

1,306.6 1,319.8 1,402.7 +0.1%

Consolidated sales 835.8 873.8 967.2 0.9%

(1) Total sales to consumers through all channels, including franchisees and e-commerce.
(2) Total consumer sales made by stores and e-commerce websites that were continuously present between January 1 and December 31, 2015 and the

same stores and websites present in 2014 and 2013, and for the same periods for 2014 and 2013, including franchisees.

Source: Adapted from www.loreal-finance.com/eng/brands/the-body-shop.

http://www.loreal-finance.com/eng/brands/the-body-shop.

PC1-20 PART 1 • COMPREHENSIVE CASES

values all the while, they were less distinctive in 2016 than in
1976.35 Critics contended that after its lackluster performance,
the management at Body Shop was more focused on improv-
ing its financial position. By Body Shop’s own admission it
had been comparatively quieter on the CSR front over a pe-
riod of time. However, defending the company, Kate Levine,
director of commitment and corporate communications, Body
Shop, said, “That doesn’t mean we haven’t been doing things.
We had a Stop Sex Trafficking campaign which delivered seven
million signatures to the UN and changed laws in 20 coun-
tries. And in 2013 we were instrumental in changing laws on
animal testing. We just haven’t talked about it in the way we
were in the past.”36

The challenges facing the world had changed signifi-
cantly over the years. Schwartz felt businesses had an impor-
tant role to play in tackling the environmental challenges facing
the planet and its people. According to him, the key challenge

Lik
e-

fo
r-L

ik
e

Sa
le

10%

1Q 2010 1Q 2011 1Q 2012 1Q 2013 1Q 2014 1Q 2015 4Q 2010

ExHIBIT v Body Shop’s Quarterly Sales Growth (2010–2015)

Source: Adapted from www.bloomberg.com/news/articles/2016-02-12/body-shop-s-terrible
-quarter-is-l-oreal-s-sole-blemish-chart.

2011

21
2012 2013

The Body Shop

L’Oreal

2014 2015

Lik
e-

Fo
r-L

ik
e

Sa
le

s (
Pe

rc
en

t C
ha

ng
e)

2016E 2017E 2018E

ExHIBIT vI Growth of L’Oréal vs. Body Shop

Source: Adapted from www.bloomberg.com/news/articles/2016-04-07/body-shop-heads-back
-to-the-body-shop-to-repair-battered-margins.

facing Body Shop was how to orient itself in the new global
landscape marked by climate change, habitat destruction, spe-
cies depletion, and the growing economic inequality and rebuild
itself as a sustainable global business. Schwartz wanted to re-
focus Body Shop to meet the challenges facing the planet and
its people in a more reliable and strategic way and re-establish
Body Shop as the world’s most ethical and sustainable global
business. He wanted to reconnect the company with its values
and attract a new generation of customers. Hoping to find inspi-
ration, Schwartz flew down to South America on an intellectual
journey with a team of colleagues. Standing on the edge of the
Amazon River, he asked himself questions like – What does the
future hold? And how can Body Shop be an original, progres-
sive company? “The idea of a company that made money but is
also a force for good was laughed at 40 years ago. That’s now
mainstream … Lots of people are doing corporate social respon-
sibility now, from BMW to Coke. They have copied us. Anita was

http://www.bloomberg.com/news/articles/2016-04-07/body-shop-heads-back-to-the-body-shop-to-repair-battered-margins.

http://www.bloomberg.com/news/articles/2016-02-12/body-shop-s-terrible-quarter-is-l-oreal-s-sole-blemish-chart.

CASE 2 • ‘ENRICH NOT EXPLOIT’: CAN NEW CSR STRATEGY HELP BODY SHOP REGAIN GLORY? PC1-21

‘Sharing Beauty With All’ sustainability strategy and its four
pillars – Innovating Sustainably, Producing Sustainably, Living
Sustainably, and Developing Sustainably. According to Davis,
the new commitment complemented L’Oréal’s sustainabil-
ity strategy while taking forward the essence of Body Shop’s
founding principles to meet the challenges of a new era. “Our
new Commitment combines all the experience and knowledge
of our expert people with new advances in science and tech-
nology. It means understanding how our business is contrib-
uting to our existence on the planet, understanding what we
need to change to contribute to a sustainable future by work-
ing backwards from a visionary end point to the here and now
and asking ourselves what comes next. We’ll continue to work
in partnership with suppliers, NGOs, academics, governments
and other businesses to deliver the innovation and changes
needed to make our ambitions a reality,”40 he said.

Enrich Not Exploit

On February 2, 2016, Body Shop unveiled its new global CSR
strategy. The new commitment, entitled ‘Enrich Not Exploit’,
was aimed at making Body Shop the world’s most ethical
and truly sustainable global business. As part of the new cam-
paign, Body Shop had set several targets touching all areas of
the business that it planned to achieve by 2020. Davis said the
commitment was intended to make Body Shop the “innovative
troublemaker” within the L’Oréal group. “This commitment is
kind of a statement that The Body Shop is back and that this is
the kind of company that we want to be, and that we can be. Our
goal is to be different and to be what The Body Shop always has
been, which is the agitator, the experimenter,”41 he said.

The new sustainability framework included 14 specific,
measurable CSR targets based on a commitment to enrich peo-
ple, products, and the planet. The goals included doubling Body
Shop’s CFT to 40 ingredients, regenerating 75 million square
metres of habitat to help communities live more sustainably,
powering 100% of Body Shop stores with renewable energy, de-
veloping and delivering new sustainable packaging innovations,
and ensuring 100% of its natural ingredients were traceable and
sustainably sourced, protecting 10,000 hectares of forest and
other habitat (See Exhibit VIII). Schwartz implemented sys-
tems, training, and reporting companywide to monitor progress
against these new targets. He also set up a new internal advisory
group and several inter-departmental working groups to ease
communication and establish new ways of working across the
business.

Body Shop aimed to broaden the brand’s appeal to the next
generation of customers with this new CSR approach. “Today’s
millennial generation doesn’t know the heritage of The Body
Shop the way that some of us do. They didn’t grow up with the
Save the Whales campaign or wearing white musk [from The
Body Shop]. Although they don’t know this heritage, I think a
lot of the interests are aligned. People are interested in brands
that have a social impact, brands that are transparent and
brands that do good,”42 said Jayme Jenkins, vice-president,
marketing & corporate responsibility, Body Shop Canada. The
company also planned to drive the new commitment further

a pioneer, but we can’t just say we are doing this [already]. We
have to find a brand new thought,”37 said Schwartz.

Formulating a New CSR Strategy

The work on the new CSR commitment began in 2013.
Christopher Davis38 was promoted from head of campaigns
to Director of International Corporate Responsibility and
Campaigns at Body Shop. He was responsible for developing
and overseeing the implementation of the company’s global
corporate responsibility and campaign strategy. As the head of
CSR, Davis wanted to maintain the legacy of founder Roddick.
Nearly for two years (2013–2015), Davis and his team under-
took a comprehensive review of Body Shop’s business across
all areas and 67 countries. Their agenda was not looking at
what competitors were doing or at the past performance of
Body Shop, but instead refocusing the company to meet the
challenges facing the planet and its people in a more planned
way. The team spent some months talking to a range of aca-
demics, thought leaders, and campaigners in order to know
what the real issues facing the world were. They wanted to use
the scale and networks of Body Shop to address the critical
problems facing the Earth.

In order to develop a new systemic framework for sustain-
ability, the management at Body Shop adopted the Future-Fit
Business Benchmark,39 which became a starting point for de-
veloping the company’s own seven long-term sustainability
goals (See Exhibit VII). Based on the sustainability objectives
and by mapping the world’s challenges and where Body Shop
would have the most positive impact, Davis and his team for-
mulated a new CSR philosophy under the name ‘Enrich Not
Exploit’ with emphasis on three core pillars – People, Products,
and Planet. The new commitment replaced the earlier five core
values of Body Shop.

The new strategy was developed in close partnership
with Body Shop’s parent L’Oréal and was integrated in its

ExHIBIT vII Body Shop’s 7 Long-Term Sustainability Goals (2016)

Source: Adapted from Body Shop 2015 Value Report

1. Source all inputs in ways that have no negative social or envi-
ronmental impact

2. Emit no substances which could harm the environment or
society

3. Ensure the presence of the business does not cause
disruption to ecosystems

4. Meet needs without any environmental impact, during
product use and at end of life

5. Create a working environment within which all
employees can flourish

6. Help to create thriving communities wherever the
business operates

7. Engage and empower customers to act in the best
interests of people and the environment

PC1-22 PART 1 • COMPREHENSIVE CASES

ExHIBIT vIII ‘Enrich Not Exploit’ Targets

Target How the Target is Measured

TARGET 1: Double CTP from 19 to 40 ingredients and
help enrich the communities that produce them

• By tracking the number of ingredients that have attained CT status and are cur-
rently in production.

TARGET 2: Help 40,000 economically vulnerable people
access work around the world

• Through regular supplier reporting and auditing process to record the number
of people employed.

TARGET 3: Engage 8 million people in Enrich Not
Exploit™ mission, creating its biggest campaign ever

• By counting the number of people who sign petitions.
• By tracking the number of national and international institutions the company

lobbies for change.

TARGET 4: Invest 250,000 hours of its skills and know-
how to enrich the biodiversity of its local communities

• By measuring the number of hours employees contribute in their local com-
munities.

• By sharing stories of employees’ community achievements globally to show
the positive impact of the company’s community involvement.

TARGET 5: Ensure that 100% of our natural ingredients
are traceable and sustainably sourced, protecting 10,000
hectares of forest and other habitats

• 100% traceability & sustainability: Tracking the proportion of renewable raw
materials after confirming the country of origin, establishing legal compliance,
assessing social and environmental risks, and ensuring accountability.

• Protecting 10,000 hectares: Dividing the tonnage of renewable raw materials
purchased from relevant habitats by the area required to generate this volume
of material. This approach is the best practice for monitoring and evaluating the
conservation benefit of non-timber forest products.

TARGET 6: Reduce year on year the environmental
footprint of all our product categories

• By evaluating every ingredient in use to understand how biodegradable it is and
the level of dilution required to avoid any negative environmental impact (its
water footprint). These two indicators will enable comparing of the environ-
mental impact of every formulation the company produces.

• By calculating averages for each formula type or category, which will become
the target for new formulas to meet or exceed.

• By recalculating the averages annually, in order to improve the environmental
footprint of Body Shop products.

TARGET 7: Publish our use of ingredients of natural
origin, ingredients from green chemistry, and the biode-
gradability and water footprint of our products

• By tracking the amount and percentage of product information published on
the company’s website, both by the number of products covered and the type
of information.

TARGET 8: Develop an innovation pipeline that delivers
pioneering cosmetic ingredients which are sustainably
sourced from biodiversity hotspots and help to enrich these
areas

• By tracking the number of ingredients sourced in line with the company’s
rigorous selection criteria:

– proven cosmetic benefit
– feedstock that is traceable to a biodiversity hotspot
– help protect biodiversity
– not currently used by Body Shop
– relatively unknown in the rest of the cosmetics industry.

TARGET 9: Build Bio-bridges, protecting and regen-
erating 75 million square meters of habitat and helping
communities to live more sustainably

• This campaign will be accredited by the Climate, Community and Biodiversity
Alliance (CCBA), demonstrating its climate, social, and biodiversity benefits.

• To comply with this accreditation, Body Shop needs to report impact; primar-
ily areas protected, impact on local biodiversity and community engagement in
addition report on areas it protected annually.

TARGET 10: Reduce the environmental footprint of our
stores every time we refurbish or redesign them

• Using the best practice Material Scoring Mechanism and Low Impact Sustain-
ability Tool (LIST) from the Buildings Research Establishment (BRE) to rate
the environmental credentials of all shop fixtures.

• All countries of operation of Body Shop will report twice annually on their
store energy consumption and stores’ energy source.

TARGET 11: Develop and deliver three new sustainable
packaging innovations

• Body Shop will require any packaging innovations it uses to deliver improved
environmental results.

TARGET 12: Ensure that 70% of our product packaging
does not contain fossil fuels

• Review the company’s existing packaging and calculate the amount of fossil-
fuel based materials the company currently uses.

• Measure the company’s progress against the target every six months and report
the percentage of packaging materials it uses by material type, recycled mate-
rial content, and whether the raw material is from a fossil fuel or alternative
carbon source.

CASE 2 • ‘ENRICH NOT EXPLOIT’: CAN NEW CSR STRATEGY HELP BODY SHOP REGAIN GLORY? PC1-23

and where ingredients were being grown. As part of the ini-
tiative, the company planned to make customer transactions
completely paperless and cashless at its stores in the future.
Schwartz and his team were working on a system where cus-
tomers could pay through their phones and immediately receive
a receipt and loyalty points to the same device. In the long term,
Schwartz planned to invest heavily in redesigning Body Shop’s
stores and making every retail outlet eco-friendly by using lo-
cally sourced SSC-certified wood, sustainable materials in its
flooring, LED lighting, and non-toxic paints.

In order to promote the commitment among customers,
Body Shop planned to create video, in-store, and social media
content. With 65% of its customers aged below 35 years, the
brand began increasingly testing social media channels like
Snapchat, Instagram, and Pinterest to promote its new CSR
strategy. “What we want consumers to think is ‘I want this
and I know when I buy it no person, animal or plant has been
exploited and I’m buying it from a company doing a good
thing,”44 said Kate Levine, director of commitment and corpo-
rate communications, Body Shop.

In June 2016, as part of its new CSR strategy, Body Shop
launched a campaign called ‘Help Reggie Find a Date’, a Bio-
Bridges planting program in Vietnam, which would connect
rainforests that had been deforested to help endangered animals
find a mate and enable them to breed and flourish. The cam-
paign featured an endangered red-shanked douc monkey called
Reggie, drawing attention to the need to build a bridge between
the two islands cut off from each other where the monkeys
lived. Davis, who related the project to a “dating service for en-
dangered species”, said it could drive consumer engagement to
the company’s improved CSR commitment. The campaign was
also launched on dating app Tinder featuring Reggie’s profile,
wherein users could learn more about the Bio-Bridges program.
Every purchase made at Body Shop (in stores or online) from
July 2016 to September 2016 would fund one square meter of
rainforest bio-bridge. Through this initiative, Body Shop aimed
to restore 14.5 million square meters of rainforest in Khe Nuoc
Trong, Vietnam, and aimed to regenerate and reconnect 75 mil-
lion square meters of damaged forests by 2020 in partnership
with the World Land Trust.45

In February 2016, Body Shop entered into a research part-
nership with Newlight Technologies LLC46 to make its packag-
ing free from greenhouse gases that would otherwise pollute
the atmosphere. The partnership was part of Body Shop’s new
commitment to reduce its use of oil-based plastic packaging by
70% by 2020. The initiative would also see Body Shop become
the first company to industrialize AirCarbon47 in the beauty

Target How the Target is Measured

TARGET 13: Power 100% of our stores with renewable or
carbon-balanced energy

• All its countries of operation will report twice annually on how their stores are
powered.

TARGET 14: Reduce by 10% the energy use in all our
stores

• Tracking energy usage in stores, by country.

by engaging with key stakeholders across the globe includ-
ing Future Fit Foundation, the University of Brighton, and the
Cambridge Institute for Sustainability. This would allow the
company to explore and learn how effectively the sustainable
development could be applied across the business.

Marketing the New Commitment

One of the biggest challenges for the management of Body
Shop was to involve all 23,000 employees of the company
across 65 countries in this new initiative. To make employees
aware of the new commitment, the company created a teaser
video and a full-length film outlining its ambitions and how
each employee could contribute. Employees were also pro-
vided with booklets and factsheets to keep them informed and
help them spread the word about the new strategy. Besides, the
company organized workshops and conferences to ensure that
employees and franchise holders were fully involved. At these
events, employees had the opportunity to hear inspiring speak-
ers and informally question senior managers about specific as-
pects of the commitment. “The Commitment is an evolution of
Anita Roddick’s values-led approach; it is very ambitious and
to succeed it needs everyone to be clear and get behind it. By
reaching out to our people – especially our store staff and our
marketing teams – we also reach customers and share and en-
gage them with our new story and new ambition for our com-
pany. It is vital our message has a big impact on those who visit
our stores and engage with our digital community to ensure we
keep our business healthy and profitable,”43 said Davis.

In order to be transparent about its business practices and
to showcase the progress of its new CSR targets, beginning
2016, Body Shop planned to publish annual commitment re-
ports in addition to internal management reporting. Across all
the countries of its operation, the retailer would measure perfor-
mance and progress in waste production, water use, and energy
consumption, including use of renewable energy. According to
Davis, regular reviews of the company’s performance against
clear policies and indicators would help the top management
make changes where necessary and be effective.

The new commitment was mostly promoted in-store. Body
Shop made some cosmetic changes to its stores including the
introduction of a vibrant yellow colour-scheme and an eye-
catching front window featuring a specially designed logo of
the commitment. It placed one square meter of faux-grass at
the checkout point of its stores on which the customer stood to
see what the company was helping to build as they paid their
bills. Webcams were installed inside the stores to show how

Source: Adapted from https://www.thebodyshop.com/en-gb/commitment/manifesto.

https://www.thebodyshop.com/en-gb/commitment/manifesto.

PC1-24 PART 1 • COMPREHENSIVE CASES

and very creative. I hope our new plan does this at The Body
Shop – that’s our vision.”48

However, some analysts contended that offering natural
products with sustainable credentials was not enough to spur
sales as consumers were seeking cosmetics that offered der-
matological benefits in addition to being ethical. They felt that
Body Shop was more focused on its environmental message
than on innovation.49

Moreover, some analysts felt that its new CSR goals were
not outstanding and did not completely align with the strategy
of the parent company, L’Oréal. Corporate responsibility ad-
visor Julien Goy commented, “I would say that these goals
are very good by themselves, but there is the context missing.
Context related to the mother company, related to the sector,
related to sustainable development.”50

Schwartz said that moving forward, the new commitment
would not only be a part of Body Shop’s business strategy, but
would also be central to the development and success of the com-
pany. He was optimistic that the new commitment would help
Body Shop reclaim its past glory as a pioneer in ethical retail and
emerge as the world’s most ethical and truly sustainable global
business. “Because Anita is no longer with us, and she was the
spokesman for the company, our voice has not been as loud and
as clear as we wanted it to be. Our goal is to get more people
to reconsider and re-understand what The Body Shop is about.
We’ve got the products; we’ve got the stores; we’ve got the ser-
vice. What we’ve got to get is people talking again,”51 he said.

industry. In October 2016, Body Shop collaborated with Ben
Eine, one of the most renowned street artists in the world, to
redesign its limited edition Hemp Hand Protector. The prod-
uct featured the artist’s typography spelling out the message
“change” on the front of the product. For every tube of this
product and Almond Hand & Nail Cream sold, £1.50 was do-
nated to The Body Shop Foundation. More than 200,000 hand
creams were sold globally and the company raised £325,000 to
fund innovative social and environmental projects.

Can Body Shop Regain Its Former Glory?

In the first quarter ended March 31, 2016, Body Shop reported
sales of €200.1 million compared to €192.4 million in the cor-
responding quarter of 2015. It delivered growth of +2.1% like-
for-like and +4.0% based on reported figures (see Exhibit IX).
According to analysts, going forward, one of the biggest chal-
lenges for Body Shop would be tough competition from the
ever-increasing numbers of sustainable brands in the cosmetic
marketplace. However, Davis was positive that the renewed
CSR strategy would help Body Shop scale new heights. “The
vast majority of companies are actively embracing a sustain-
ability strategy. If everyone is doing it, can we really suggest
it is a source of competitive advantage or would better be de-
scribed as a licence to operate? I think and hope there is space
for companies who do things radically differently to stand out
but to do this, I think you have to be pretty radical, opinionated

Quarterly Sales Growth

€ Million 1Q 2015 1Q 2016 Like-for-like Reported

By Operational Division

Professional Products 852.6 854.3 2.5% 0.2%

Consumer Products 3,078.3 3,106.0 3.9% 0.9%

L’Oréal Luxe 1,753.7 1,831.4 5.5% 4.4%

Active Cosmetics 559.2 560.7 4.5% 0.3%

Cosmetics Divisions total 6,243.9 6,352.4 4.2% 1.7%

By Geographic Zone

Western Europe 2,100.4 2,127.5 2.0% 1.3%

North America 1,622.0 1,715.9 4.3% 5.8%

New Markets, of which: 2,521.5 2,509.0 6.1% –0.5%

– Asia, Pacific 1,476.1 1,510.4 4.5% 2.3%

– Latin America 460.2 409.0 8.5% –11.1%

– Eastern Europe 396.6 390.6 9.5% –1.5%

– Africa, Middle East 188.7 198.9 8.0% 5.4%

Cosmetics Divisions total 6,243.9 6,352.4 4.2% 1.7%

The Body Shop 192.4 200.1 2.1% 4.0%

Group total 6,436.3 6,552.4 4.2% 1.8%

ExHIBIT Ix L’Oréal’s Sales by Operational Division and Geographic Zone

Source: Adapted from www.loreal-finance.com/eng/news/first-quarter-2016-sales-1059.htm.

http://www.loreal-finance.com/eng/news/first-quarter-2016-sales-1059.htm.

CASE 2 • ‘ENRICH NOT EXPLOIT’: CAN NEW CSR STRATEGY HELP BODY SHOP REGAIN GLORY? PC1-25

3. Critically analyze Body Shop’s new CSR approach.
4. Do you think the revamped strategy will help Body Shop

regain its lost glory as a leader in ethical business? What
possible challenges could Schwartz and Davis face going
forward and how can they be tackled?

Case Questions

1. How did Body Shop emerge as a champion of CSR while
challenging industry norms? How important a contribution
did Roddick make to the creation of Body Shop?

2. How did the acquisition by L’Oréal affect the ethical
image of Body Shop? Discuss the problems Body Shop
faced following the takeover.

Endnotes
1. This case was compiled from published sources, and is intended to be

used as a basis for class discussion rather than to illustrate either ef-
fective or ineffective handling of a management situation. This case
was a Runner Up in the 2017 oikos Global Case Writing Competition
(Corporate Sustainability track), organized by oikos International,
Switzerland. © 2017, IBS Center for Management Research. All rights
reserved. To order copies, call +91 9640901313 or write to IBS Center
for Management Research (ICMR), IFHE Campus, Donthanapally,
Sankarapally Road, Hyderabad 501 203, Telangana, India or email:
casehelpdesk@ibsindia.org www.icrmrindia.org

2. “At Forty, The Body Shop Launches Pioneering New Commitment in
Drive to be the World’s Most Ethical and Sustainable Global Business,”
www. prnewswire.com, February 10, 2016.

3. Darina Eades, “The Pioneer of CSR Launches a New CSR Strategy,”
http://darinaeades.com, February 12, 2016.

4. Amnesty International is one of the leading and most respected human
rights organizations in the world.

5. “Is This the First Ever Corporate Social/Environmental Report?” www
. mallenbaker.net, February 2003.

6. The term ‘masstige’ (Mass-market combined with prestige) covers rela-
tively low-priced retail goods that are sold under the banner of a presti-
gious brand name.

7. “L’Oréal Buys Body Shop for £652m,” www.theguardian.com, March
17, 2006.

8. Fiona Walsh and Julia Finch, “£600m – Because it’s Worth it,” www
.guardian.co.uk, February 24, 2006.

9. “Has the Body Shop Sold Out?” www.newconsumer.org, April 2006.
10. https://www.thebodyshop.com/medias/Values-Report-2015.
11. Sheila Shayon, “Enrich Not Exploit: The Body Shop Turns 40 with

Renewed CSR Strategy,” http://brandchannel.com, February 11, 2016.
12. Through its Solidarity Sourcing program, the L’Oréal Group opens up its

purchasing process and calls for tenders from small new suppliers who
employ people from economically vulnerable communities and enable
them to have access to income. The stated aim was to work with these
suppliers to build commercial partnerships that were equitable and sus-
tainable, creating economic and social value.

13. ECPAT International is a Bangkok-based global network of 90 civil soci-
ety organizations’ in 82 countries fighting against sexual exploitation of
children.

14. War Child is a global charity for children affected by war.
15. Body Shop tests its products using patch testing, which involves placing

a very small amount of product on a person’s skin to ensure that it is safe
and effective, usually at the final stage.

16. The Humane Cosmetics Standard is an internationally recognized stan-
dard for cosmetic products to confirm that they have not been tested on
animals.

17. People for the Ethical Treatment of Animals (PETA) is the largest animal
rights organization in the world.

18. The Royal Society for the Prevention of Cruelty to Animals (RSPCA) is
a UK-based charity that works for the welfare of animals.

19. Cruelty Free International is an international organization working to end
animal testing for cosmetics globally.

20. Launched in 2012, Pulse Stores are Body Shop’s sustainable concept
stores with a boutique feel. The store design combines technology with
nature and offers a vibrant retailing environment wherein customers
are invited to discover the innovations, to take the time to try out the

sensorial products, and to learn about the story behind ingredients. By
the end of 2013, Body Shop had rolled out over 800 Pulse stores across
the globe.

21. Microbeads are little beads that are put in scrubs to remove dry skin, but
then they go through the water and end up in the sea and are consumed
by fish. Such fish are unsafe for human consumption.

22. Roundtable on Sustainable Palm Oil is a not-for-profit association whose
members represent the oil palm growers, palm oil processors and traders,
consumer goods manufacturers, retailers, banks and investors, environ-
mental/nature conservation NGOs, and social/development NGOs.

23. The Forest Stewardship Council is an international non-profit organi-
zation that protects forests by setting standards for responsible forest
management.

24. World Land Trust is a UK-based international conservation charity,
which protects the most biologically important and threatened habitats in
the world.

25. McSpotlight is a website that highlights the alleged exploitation of ani-
mals, people, and the environment by the McDonald’s fast-food restau-
rant chain.

26. “Body Shop’s Packaging Starts to Unravel,” Australian Financial
Review, www.jonentine.com, December 18, 2002.

27. Gerard Bodeker and Marc Cohen, Understanding the Global Spa
Industry, Routledge, August 20, 2010.

28. “Dame Anita’s Radical Approach,” www.news.bbc.co.uk, July 17, 2003.
29. P. V. Gutierrez Zarate, “The CSR Dilemma: An Analysis of the

Complicated Relationship between Firms and Society,” http://arno.uvt
.nl, July 9, 2012.

30. “Guest Opinion: The Body Shop Experiment with Entrepreneurship and
CSR,” www.endeavor.org, July 9, 2013.

31. Schwartz held senior marketing positions at Sainsbury’s and Coca-Cola
before joining News International where he was commercial director and
CMO. Prior to joining Body Shop, he was general manager at L’Oréal
for brands including Maybelline and Garnier.

32. “Guest Opinion: The Body Shop Experiment with Entrepreneurship and
CSR,” www.endeavor.org, July 9, 2013.

33. Paul Jarvis, “Body Shop’s ‘Terrible Quarter’ is L’Oreal’s Sole Blemish:
Chart,” www.bloomberg.com, February 12, 2016.

34. Alexander C. Kaufman and Jo Confino, “What Ever Happened to the
Body Shop?” www.huffingtonpost.in, December 8, 2015.

35. https://www.thebodyshop.com/medias/Values-Report-2015.
36. Jennifer Faull, “How Marketing Will Help The Body Shop Become

the World’s Most Ethical and Sustainable Brand,” www.thedrum.com,
February 22, 2016.

37. Sarah Butler, “Body Shop Boss Goes Back to the Rainforest,” www
. theguardian.com, February 13, 2016.

38. Prior to joining Body Shop, Christopher Davis was responsible for
International Corporate Relations and Global Development at The
International Save the Children Alliance. Davis is also a Director of the
MTV Staying Alive Foundation, a global movement focusing on raising
HIV and Aids awareness among young people.

39. The Future-Fit Business Benchmark (co-developed by Bob Willard and
Geoff Kendall) defines a set of goals that together identify the level of
performance any truly sustainable company must achieve across all criti-
cal social and environmental dimensions, irrespective of its size or sector.
It also provides a set of KPIs on which progress toward each goal can be
measured.

mailto:casehelpdesk@ibsindia.org

http://www.theguardian.com

http://www.thedrum.com

https://www.thebodyshop.com/medias/Values-Report-2015

http://www.huffingtonpost.in

http://www.bloomberg.com

http://www.endeavor.org

http://arno.uvt.nl

http://www.news.bbc.co.uk

Home

http://brandchannel.com

https://www.thebodyshop.com/medias/Values-Report-2015

http://www.newconsumer.org

http://www.guardian.co.uk

http://www.theguardian.com

http://www.mallenbaker.net

http://darinaeades.com

http://www.prnewswire.com

http://www.icrmrindia.org

PC1-26 PART 1 • COMPREHENSIVE CASES

40. “At Forty, The Body Shop Launches Pioneering New Commitment in
Drive to be the World’s Most Ethical and Sustainable Global Business,”
www.prnewswire.com, February 10, 2016.

41. Madeleine Cuff, “The Body Shop Freshens up Climate Commitments
with New Strategy to Become ‘Truly Sustainable’ Global Business,”
www. businessgreen.com, February 10, 2016.

42. Rebecca Harris, “The Body Shop Goes Back to Ethical Roots,” www
. marketingmag.ca, February 16, 2016.

43. Liam Doud, “Leadership Series: Christopher Davis, The Body Shop,”
www.ethicalcorp.com, February 10, 2016.

44. Jennifer Faull, “How Marketing Will Help The Body Shop Become
the World’s Most Ethical and Sustainable Brand,” www.thedrum.com,
February 22, 2016.

45. World Land Trust is a UK-based non-profit environmental organization
that works to protect some of the world’s most threatened habitats.

46. Based in California, Newlight Technologies is a cleantech firm that has
developed, patented, and commercialized the world’s first commercially
scaled carbon capture technology able to produce high-performance
thermoplastics from air and methane emission.

47. AirCarbon is a thermoplastic that behaves in the same way as normal
plastics but uses methane and carbon dioxide as its foundation rather
than oil.

48. Liam Doud, “Leadership Series: Christopher Davis, The Body Shop,”
www.ethicalcorp.com, February 10, 2016.

49. “Guest Opinion: The Body Shop Experiment with Entrepreneurship and
CSR,” www.endeavor.org, July 9, 2013.

50. “The + and – of The Body Shop’s New CSR Programme,” www.linkedin
.com, March 31, 2016.

51. Lubna Hamdan, “Natural Beauty: Body Shop’s Jeremy Schwartz,”
www.arabianbusiness.com, April 1, 2016.

http://www.arabianbusiness.com

http://www.linkedin.com

http://www.endeavor.org

http://www.ethicalcorp.com

http://www.thedrum.com

http://www.ethicalcorp.com

http://www.marketingmag.ca

http://www.businessgreen.com

http://www.prnewswire.com

P A R T

P A R T O U T L I N E

C H A P T E R 3
Understanding the Role of Culture

C H A P T E R 4
Communicating across Cultures

C H A P T E R 5
Cross-Cultural Negotiation and
Decision Making

The Cultural Context
of Global Management 2

3-1. To understand how culture affects all aspects of international management

3-2. To be able to distinguish the major value dimensions that define cultural differences
among societies or groups

3-3. To understand the interaction between culture and the use of the Internet

3-4. To be able to develop a working cultural profile typical of many people within a certain
society as an aid to anticipating attitudes toward work, negotiations, and so on

3-5. To gain some insight into different management styles around the world

Understanding the Role
of Culture

O B J E C T I V E S

3
C H A P T E R

Opening Profile: Social Media Bring Changes
to Saudi Arabian Culture1

Why is Arabic the fastest-growing language of all time on Twitter and Riyadh ranked #10
globally of the cities with the most tweets? What is behind such a rapid growth of this
increasingly tech-savvy population?

As of December 2017, the number of Internet users in Saudi Arabia has reached 90.2% penetration.
With 18 million Facebook users (53.6% penetration), social media is becoming more widespread.2 Each
day, more than 90 million videos are viewed on YouTube, more than 3 million people are on Twitter,
and more than 840,000 are on LinkedIn, with email usage becoming passé. It is clear that not only do
these platforms present important avenues for international businesses to communicate and engage with
customers, but also that cultural and lifestyle factors are involved. Because 70 percent of the Saudi popu-
lation is under 30 and most own smartphones, many are turning to Twitter and YouTube. In addition,
social interaction is sometimes monitored and restricted by patrolling religious police. For some young
people, then, Twitter represents an escape from social restrictions, especially for women. More recently,
however, Twitter was used by Princess Reema bint Bandar to convey that amendments had been made
to labor and civil laws to lift restrictions on women and allowing them to drive and travel independently,
as well as more rights in family matters.3 Perhaps, then, more open dialog between men and women
has changed the power structure and created opportunities for everyone to participate in a broad array
of roles.

However, the young people are not the only ones using Twitter; the use of such media is spreading
to all sectors of society—government officials, the royalty, sheikhs, and those in industry. In addition,
the Saudi government, which is an absolute monarchy with no parliament or political parties, does
review online activity to gather intelligence and monitor public opinion. As such, there are lines that

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 77

cannot be crossed, such as criticizing religion
or allowing accounts that promote adultery
and homosexuality. On the other hand, it has
become apparent that government authorities
can conceal little because information is now
rapidly disseminated through social media, so
now those authorities are more likely to use the
media to give their version of events or updates
to get ahead of the rumors and, in particular,
quell political dissent.

Clearly, social media have presented a
virtual world as a force for modernity in Saudi
Arabia and cause powerful interactions with
cultural mores; it is a matter of personal judg-
ment whether those changes are viewed as
progressive, but it is also clear that there is no
turning back.

Questions
1. Discuss the role of social media in societal

culture. Is this virtual world, with no geo-
graphic boundaries, presenting a normaliz-
ing effect across those boundaries? Is that
a positive or a negative effect?

2. Is societal culture and lifestyle as intri-
cately intertwined with religion in your
country as it is in Saudi Arabia?

3. Discuss other countries where social me-
dia are having a radical effect on cultural
expectations.

This chapter’s opening profile describes the interaction between social media and culture. It is
clear that the widespread use of social media both helps people become familiar with other cul-
tures and ways of life and, perhaps, smooth out the differences. In this chapter, we discuss how
an understanding of the local culture and business environment can give managers an advantage
in competitive industries. Foreign companies—no matter what their size—ignore those aspects to
their peril. Such differences in culture and the way of life in other countries necessitate that manag-
ers develop international expertise to manage on a contingency basis according to the host-country
environment. Powerful, interdependent factors in that environment—-political, economic, legal,
technological, and cultural—influence management strategy, functions, and processes.

Cultural Intelligence: an outsider’s seemingly natural ability to interpret someone’s unfa-
miliar and ambiguous gestures in just the way that person’s compatriots and colleagues
would. 4

Harvard Business Review

There is further discussion of how to adapt to different cultures in Chapter 4. First, we need
to gain an understanding of what culture is, what the variables are that will enable us to adapt,
and how those variables affect the manager’s job. Clearly, it is important for anyone wishing
to be successful when working with people in other countries to be able to plan how to relate
to and adapt to people from different cultures.5 Managers have often seriously underestimated
the significance of cultural factors. According to numerous accounts, many blunders made in

FIGURE 3-1 Saudi Arabian Woman Using a
Smartphone

M
ar

k
Sc

hw
et

tm
an

n/
Sh

ut
te

rs
to

78 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

international operations can be attributed to a lack of cultural sensitivity.6 Examples abound.
Scott Russell, senior vice president for human resources at Cendant Mobility in Danbury, Con-
necticut, recounts the following:

An American company in Japan charged its Japanese HR manager with reducing the work-
force. The Japanese manager studied the issue but couldn’t find a solution within cultural Japanese
parameters; so when he came back to the Americans, he reduced the workforce by resigning—
which was not what they wanted.7

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

International managers can benefit greatly from understanding the nature, dimensions,
and variables of a specific culture and how these affect work and organizational processes.
This cultural awareness enables them to develop appropriate policies and determine how to
plan, organize, lead, and control in a specific international setting. Such a process of adapta-
tion to the environment is necessary to implement strategy successfully. It also leads to effec-
tive interaction in a workforce of increasing cultural diversity, in both the United States and
other countries.

Company reports and management studies make it clear that a lack of cultural sensitiv-
ity costs businesses money and opportunities. One study of U.S. multinational corporations
found that poor intercultural communication skills still constitute a major management problem.
Managers’ knowledge of other cultures lags far behind their understanding of other organizational
processes.8 In a synthesis of the research on cross-cultural training, Black and Mendenhall
found that up to 40 percent of expatriate managers leave their assignments early because of poor
performance or poor adjustment to the local environment. About half of those who remain are
considered only marginally effective. Furthermore, they found that cross-cultural differences are
the cause of failed negotiations and interactions, resulting in losses to U.S. firms of more than
$2 billion a year for failed expatriate assignments alone.9

Other evidence indicates, however, that cross-cultural training is effective in developing
skills and enhancing adjustment and performance. In spite of such evidence, U.S. firms do
little to take advantage of such important research and incorporate it into their ongoing train-
ing programs, whose purpose is ostensibly to prepare managers before sending them overseas.
Too often, the importance of such training in developing cultural sensitivity is realized much
too late.

This chapter provides a conceptual framework with which companies and managers can
assess relevant cultural variables and develop cultural profiles of various countries. This frame-
work is then used to consider the probable effects of cultural differences on an organization and
their implications for management. To do this, the powerful environmental factor of cultural
context is examined. The nature of culture and its variables and dimensions are first explored,
and then specific differences in cultural values and their implications for the on-the-job behavior
of individuals and groups are considered. Cultural variables, in general, are discussed in this
chapter. The impact of culture on specific management functions and processes is discussed in
later chapters as appropriate. We emphasize throughout this book that no one style or manage-
ment practice or culture is deemed overall to be better than others; rather, any manager from any
region or society needs to find the most effective way to achieve objectives that works in that
particular situation or locale.

CULTURE AND ITS EFFECTS ON ORGANIZATIONS
People from different parts of the world, coming from different cultural backgrounds, are now
working and communicating together. Thus, for many businesses, it is very important for manag-
ers and staff to understand cultural diversity.10

Societal Culture
As generally understood, the culture of a society comprises the shared values, understandings,
assumptions, and goals that are learned from earlier generations, imposed by present members
of a society, and passed on to succeeding generations. This shared outlook results, in large part,

3-1. To understand how
culture affects all
aspects of international
management

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 79

in common attitudes, codes of conduct, and expectations that subconsciously guide and control
certain norms of behavior.11 One is born into, not with, a given culture and gradually internalizes
its subtle effects through the socialization process. Culture results in a basis for living grounded
in shared communication, standards, codes of conduct, and expectations.12 Over time, cultures
evolve as societies adapt—by choice or otherwise—to transitions in their external and internal
environments and relationships. Globalization, in all its forms of personal and business contacts
and information crossing borders, brings about changes that result in cultural diffusion. When
immigrants adopt some aspects of the local culture while keeping aspects of their culture of
origin, this process is called creolization. Some countries, such as France, fiercely protect their
culture against outside influences and insist that immigrants assimilate into their society and
respect their values.13

A manager assigned to a foreign subsidiary must expect to find large and small differences
in the behavior of individuals and groups within that organization. As depicted in Exhibit 3-1,
these differences result from the societal, or sociocultural, variables of the culture, such as reli-
gion and language, as well as from prevailing national variables such as economic, legal, and po-
litical factors. National and sociocultural variables, thus, provide the context for the development
and perpetuation of cultural variables. These cultural variables, in turn, determine basic attitudes
toward work, time, materialism, individualism, and change. Such attitudes affect an individual’s
motivation and expectations regarding work and group relations, and they ultimately affect the
outcomes that can be expected from that individual.

Organizational Culture
Compared to societal culture, which is often widely held within a region or nation, organizational
culture varies a great deal from one organization, company, institution, or group to another.
Organizational culture represents those expectations, norms, and goals held in common by mem-
bers of that group. For a business example, consider Apple, whose organizational culture is very
organic, or loose and informal, with its employees typically wearing casual clothes and interacting
informally.

Research shows that societal culture tends to be stronger than organizational culture, so that
employees working with or for a foreign company may not easily fall into the new organizational
culture.14 Clearly, there is a relationship between organizational culture and societal (national)
culture, both of which can cause disputes in the workplace at all levels, including the management
of cross-border alliances.

Individual and Group
Employee Job Behavior
• Motivation • Commitment
• Productivity • Ethics

Attitudes
• Work • Individualism
• Time • Change
• Materialism

Cultural Variables
• Values
• Norms
• Beliefs

National Variables
• Economic system • Physical situation
• Legal system • Technological
• Political system know-how

Sociocultural Variables
• Religion
• Education
• Language

ExHIBIT 3-1 Environmental Variables Affecting Management Functions

80 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Culture’s Effects on Management
Clearly, societal culture affects organizational culture, and there are often interaction effects, as
illustrated by the comments of a Japanese CEO when asked how he would characterize his com-
pany’s corporate culture:

The positives: trust, loyalty, teamwork, long-term commitment. The negatives: resistance to
change and an overly domestic focus. That’s why I tell my people to embrace change and be
world class.15

Kenichi Watanabe, Nomura Group

Which organizational processes—technical and otherwise—are most affected by cultural differ-
ences, and how they are affected, is the subject of ongoing cross-cultural management research
and debate.16 Oded Shenkar suggests that we should

[c]onsider cultural differences as having the potential for both synergy and disruption, [and
that] this point cannot be overstated as it lies at the intersection of strategic logic and opera-
tional challenges that underline the FDI, expatriate adjustment, auditing and other interna-
tional-business issues.17

Oded Shenkar, Journal of International Business Studies

Further, Shenkar poses that, rather than focusing on how different two cultures are—that is,
cultural distance (CD)—in reality, it is the interaction between them that is the working issue in
international management; this is because cultural distance has little effect on management until
the two cultures come in contact with each other. He proposes that we focus on the concept of
friction instead of distance by considering how the relevant people and organizational processes
would interact and what the effects would be on the relative success of the international business
venture.18 Moreover, each situation is unique and may involve people from several cultures meet-
ing in a location relative to one of them, creating a specific, multidimensional arena for under-
standing and communicating. Throw in the local business practices and the corporate cultures of
each, and you have a complex scenario to navigate. An example might be an American preparing
to meet in Russia with the German subsidiary manager there. As Nardon and Steers point out,
several combinations of factors might complicate each specific global encounter, such as:

The broad cultural and institutional context based on local geography or the firm’s industry,
for example.

The organizational culture, as discussed earlier, which may or may not conflict with the
culture and business practices in the specific locale of interaction.

The situational context, which includes factors such as the physical setting, the types of
positions members have in their firms, each person’s individual characteristics and cross-
cultural preparation, and the method of interactions at the time.19

Many researchers have acknowledged the need to recognize and adapt to the overall situational
context.20 Many companies, such as Walmart, have found that their success in some countries
was definitely not transferrable to others. For managers to be successful around the world, there
is no doubt that

[i]t requires contextual intelligence: the ability to understand the limits of our knowledge and
to adapt that knowledge to an environment different from the one in which it was developed.21

Tarun Khanna, Harvard Business Review

Some argue that the effects of culture are more evident at the individual level of personal be-
havior than at the organizational level because of convergence. Convergence describes the phe-
nomenon of shifting individual management styles to become more similar to one another. The
convergence argument is based on the belief that the demands of industrialization, worldwide
coordination, and competition tend to factor out differences in organizational-level processes
such as choice of technology and structure. In a study of Japanese and Korean firms, Lee, Roehl,
and Choe found that globalization and firm size were sources of convergence of management
styles.22 At the individual level, the research we will discuss in this chapter and throughout the

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 81

book clearly shows that whereas an assertive, take-charge management style typically works best
in the West, people across Asia usually respond better to a more subtle leadership style in which
the manager works behind the scenes to accomplish goals; then again, Latino cultures tend to
prefer a paternal management style and look up to leaders who command respect by virtue of
their position in society.23 These factors are discussed in more detail later in this chapter.

The effects of culture on specific management functions are particularly noticeable when
we attempt to impose our own values and systems on another society. Exhibit 3-2 gives some
examples of the values typical of U.S. culture, compares some common perspectives held by
people in other countries, and shows which management functions might be affected, clearly
implying the need for the differential management of organizational processes. For example,
American managers plan activities, schedule them, and judge their timely completion based on

Aspects of U.S. Culture*

People can affect what
happens in the future.

It is acceptable for people to
interfere with nature and make
changes to their environment.

Employees’ goals should be
realistic.

Hard work is valued and will
accomplish our objectives
(Puritan ethic).

People should follow up on
their commitments and their
word.

Leadership is shared and
participative.

It is important to effectively
use one’s time (time is money
that can be saved or wasted).

A primary obligation of an
employee is to the
organization.

People know that their jobs
are impermanent and that they
or their employers may end
that commitment at any time.

The best-qualified people
should be hired.

Other Perspectives

What happens in the future is
determined by the will of God
(fatalistic attitude).
People should live within the
given environment and adjust
to it without interference.

Idealism is valued regardless
of what is “reasonable.”

The will of God, good fortune,
play an important part in
success as well as hard work.

A commitment only indicates
an intention to perform, but
may be changed as
developments occur.

Leadership is often paternal
and/or authoritative.

Relationships and personal
concerns can take priority over
meetings and schedules.

The individual employee has a
primary obligation to his or
her family and friends.

Employment is for a lifetime.

Nepotism is practiced. Family,
friendship, and other
considerations take precedence
in employment.

Management Function

Strategic planning,
scheduling events and
operations
Sustainability management;
productivity

Leadership and motivation

Planning, social
responsibility, human
resource management.
Motivation and reward
system

Negotiating and bargaining

Long-and short-range
planning

Loyalty, commitment,
and motivation

Motivation and commitment
to the company

Employment, promotions,
and reward

ExHIBIT 3-2 The Role of Cultural Variables in Enacting Management Functions: A Comparison
of Some Typical Views of People in the United States with Other Commonly Held
Perspectives around the World

*Aspect here refers to a belief, value, attitude, or assumption that is part of a culture in that a large number
of people in that culture share it.

82 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

the belief that people influence and control the future rather than assuming that events will occur
only at the will of Allah, as managers in an Islamic nation might believe.

Many people in the world understand and relate to others only in terms of their own culture.
This unconscious reference point of one’s own cultural values is called a self-reference
criterion. The result of such an attitude is illustrated in the following story.

Once upon a time there was a great flood, and involved in this flood were two creatures, a mon-
key and a fish. The monkey, being agile and experienced, was lucky enough to scramble up a
tree and escape the raging waters. As he looked down from his safe perch, he saw the poor fish
struggling against the swift current. With the very best of intentions, he reached down and lifted
the fish from the water. The result was inevitable.24

The monkey assumed that its frame of reference applied to the fish and acted accordingly.
Thus, international managers from all countries must understand and adjust to unfamiliar social
and commercial practices—especially the practices of that mysterious and unique nation, the
United States. Japanese workers at a U.S. manufacturing plant learned to put courtesy aside
and interrupt conversations with Americans when there were problems. Europeans, however, are
often confused by Americans’ apparent informality, which then backfires when the Europeans do
not get work done as the Americans expect.

As a first step toward cultural sensitivity, international managers should understand their
own cultures. This awareness helps guard against adopting either a parochial or an ethnocentric
attitude. Parochialism occurs, for example, when a person in France expects those from or in an-
other country to fall automatically into patterns of behavior common in France. Ethnocentrism
describes the attitude of those who operate from the assumption that their ways of doing things
are best—no matter where or under what conditions they are applied. Companies both large and
small have demonstrated this lack of cultural sensitivity in countless subtle (and not so subtle)
ways with varying disastrous effects.

Procter & Gamble (P&G) was one such company. In an early Japanese television commercial
for Camay soap, a Japanese woman is bathing when her husband walks into the bathroom. She starts
telling him about her new beauty soap. Her husband, stroking her shoulder, hints that he has more
on his mind than suds. The commercial, which had been popular in Europe, was a disaster in Japan.
For the man to intrude on his wife “was considered bad manners,” said Edwin L. Artzt, P&G’s then
vice chairman and international chief. “And the Japanese didn’t think it was very funny.” P&G has
learned from its mistakes and now generates about half of its revenue from foreign sales.25

After studying his or her own culture, the manager’s next step toward establishing effective
cross-cultural relations is to develop cultural sensitivity. Managers not only must be aware of cultural
variables and their effects on behavior in the workplace, but also must appreciate cultural diversity
and understand how to build constructive working relationships anywhere in the world. The fol-
lowing sections explore cultural variables and dimensions. Later chapters suggest specific ways in
which managers can address these variables and dimensions to help build constructive relationships.

Given the great variety of cultures and subcultures around the world, how can a student
of cross-cultural management, or a manager wishing to be culturally savvy, develop an under-
standing of the specific nature of a certain people? With such an understanding, how can a man-
ager anticipate the probable effects of an unfamiliar culture within an organizational setting and
thereby manage human resources productively and control outcomes?

One approach is to develop a cultural profile for each country or region with which the
company does or is considering doing business. Developing a cultural profile requires some
familiarity with the cultural variables universal to most cultures. From these universal variables,
managers can identify the specific differences found in each country or people—and, hence,
anticipate their implications for the workplace.

Managers should never assume that they can successfully transplant American, or Japanese,
or any other country’s styles, practices, expectations, and processes. Instead, they should prac-
tice a basic tenet of good management—contingency management. Contingency management
requires managers to adapt to the local environment and people and manage accordingly. That
adaptation can be complex because the manager may confront differences not only in culture
but also in business practices. The need for managers to adapt to local conditions, particularly
within a joint venture, was illustrated by Baruch Shimoni in his research of Thai and Israeli
managers of two MNCs headquartered in Sweden and the United States. He found that the firms’

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 83

local management cultures ran into each other and produced new hybrid forms of management
cultures.26 Shimoni found that the managers developed a hybrid management style that was be-
tween their own and the corporation’s management practices. Whereas the Thai culture focuses on
harmonious personal relationships and avoidance of confrontation, in the Israeli office practices
focused on informal relationships, performance, work processes, and supervision.27

Over time, the Thai managers (Chindakohrn and Hansa) and the Israeli managers (Tamir
and Shuki) came to adapt their feelings and management style to create a hybrid style suited to
the situation. As Hansa said, “I try to compromise. Working together, get your opinion, what you
want, what you think, then I make decisions . . . you [I] have to be very quick and execute imme-
diately. . . I try to change myself, to be adopting to this [the MNC’s] kind of character, culture.”28

Influences on National Culture
Managers should recognize, of course, that generalizations in cultural profiles will produce
only an approximation, or stereotype, of national character. Many countries comprise diverse
subcultures whose constituents conform only in varying degrees to the national character. In
Canada, distinct subcultures include Anglophones and Francophones (English-speaking and
French-speaking people, respectively) and indigenous Canadians.

Above all, good managers treat people as individuals, and they consciously avoid any form
of stereotyping. However, a cultural profile is a good starting point to help managers develop
some tentative expectations—some cultural context—as a backdrop to managing in a specific
international setting. It is useful, then, to look at what cultural variables have been studied and
what implications can be drawn from the results.

Before we can understand the culture of a society, we need to recognize that there are sub-
systems in a society that are a function of where people live; these subsystems influence, and are
influenced by, people’s cultural values and dimensions and thus affect their behaviors, both on and
off the job. Harris and Moran identified eight categories that form the subsystems in any society.29
This system’s approach to understanding cultural and national variables—and their effects on work
behavior—is consistent with the model shown in Exhibit 3-1 that shows those categories as a broad
set of influences on societal culture. Those categories are the kinship system of relationships among
families; the education system; the economic and political systems; the associations that make up
formal and informal groups; the health system; attitudes toward recreation and leisure; and—perhaps
most important—religion (further discussed in the accompanying “Under the Lens” feature).

UNDER THE LENS
Religion and the Workplace

Since the basis of a religion is shared beliefs, values, and institutions, it is closely aligned with the
accepted underpinnings of societal culture; thus, religion and culture are inextricably linked. As
such, religion underlies both moral and economic norms and influences everyday business trans-

actions and on-the-job behaviors. The connections between culture and work behavior for employees
and managers in various countries are discussed throughout this book. Here we note specifically that
managers in the home country or abroad must recognize both the legal religious rights in the work-
place and the value of such diversity in the workplace. Days off for religious holidays, accommodation
for prayers, dietary requirements, and so on, are the more obvious considerations. In addition, foreign
managers abroad must be particularly sensitive to the local religious context and the expectations and
workplace norms of employees and others because those managers will be immersed in that context in
dealing with employees, clients, suppliers, and others. Failure to do so will minimize or negate the goals
of the firm in that location.

Most readers of this book are familiar with the major religions of the world (see Map 3-1), and an
in-depth discussion of religions is beyond the focus here. (The four religions with the largest number of
followers are Christianity, with 33.1% of world population; Islam, with 20.4%; Hinduism, with 13.5%;
and Buddhism, with 6%. These figures are approximate because, of course, they are changing every
day.)30 What we do focus on as we progress through the chapters are the ways in which religion inter-
sects with culture and affects business interactions, expectations, operations, motivations, and leader-
ship, including attitudes toward work, time, ethics, and decision-making.

(Continued)

84 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Hinduism is over 5,000 years old and typically involves worship of many gods. Prayer is usually
a private matter in one’s own home. The traditional caste system, now illegal, still tends to affect
the labor markets. As another example of the effects of religion in the workplace, a Western man-
ager operating in some areas or enterprises in India might note the employees’ lack of sensitivity to
time. As noted by Agam Nag, that attitude is attributed to the religious belief and the philosophical
background: “It has been variously traced to the concept of immortality of soul and reincarnation
in Hinduism that gives a sense of infiniteness to life and hence time.”31 Nag explains that the lack
of sensitivity to time cuts across all religions in India, including the endless variations of Hinduism
as well as many other religions such as Islam, Christianity, and Sikhism.32 Clearly, religious belief
is only one dimension of Indian culture to explain the way they view time. However, we can also
observe the influence and competitiveness of foreign companies operating in the cities in India,
such as the many companies in the information technology industry that are operating there. Their
young, educated workforce has adapted to the competitiveness and expectations in those companies,
resulting in a meld of their traditional value system and the practical approach typical of Western
companies. Foreign firms in India and elsewhere are reaping the benefits of this rapidly growing and
highly effective workforce.33

Christianity originated in the Middle East and is now over 2,000 years old. Christians believe in
one God. Christianity is based on the life and death of Jesus Christ, the son of God, and preaches love,
the value of human life, self-discipline, and ethics. There are four principal denominations: Orthodox,
Pentecostal, Protestant, and Roman Catholic. Roman Catholicism predominates in the Americas and

Buddhist

Buddhist/Confucian

Eastern Orthodox

Hindu

Muslim

Mixed Christian
(Catholic, Protestant, and
other Christian groups)

Protestant

Roman Catholic

Other

MAJOR RELIGIONS

C A N A D A

GREENLAND
(Denmark)

MEXICO
BELIZE

CUBA

GUYANA
SURINAME

FRENCH
GUIANA

URUGUAY

HONDURAS

BAHAMAS

VENEZ.

BRAZIL

COLOMBIA
ECUADOR

CHILE

PERU

BOLIVIA

ARGENTINA

SOUTH
AFRICA

BOTS.

ANGOLA
ZAMBIA

CONGO

GABON

D.R. OF THE
CONGO

C.A.R.
NIGERIA

ZIMB.
MADAGASCAR

LESOTHO

NAMIBIA

MALAWI

BURUN.
RWAN.

DJIBOUTI

ERIT.

EQU. GUINEA

LIBERIA
SIERRA LEONE

GUINEA-BISSAU
GAMBIA
SENEGAL

WESTERN
SAHARA

IRAQ IRAN

INDIA

MONGOLIA

C H I N A

SAUDI
ARABIA

JORDAN
KUWAIT QATAR

OMAN
YEMEN

U.A.E.
PAKISTAN

TAJIKISTAN

KYRGYZSTAN

NEPAL

N.
KOREA

TAIWAN

PHILIPPINES

BHUTAN

MYANMAR

THAILAND

LAOS

MALAYSIA

I N D O N E S I A

AUSTRALIA

PAPUA
NEW GUINEA

NEW
ZEALAND

CAMB.
VIETNAM

BRUNEI

BANG.

JAPAN S.
KOREA

AFGH.

TURKM.
UZBEK.

KAZAKHSTAN

LEB.
ISR.

R U S S I A

MOROCCO

GUINEA

BURK.
FASO

CAM.
TOGO

BENIN

GHANA
UGAN.

SWAZILAND

MOZAM.

SOMALIA

TANZANIA

KENYA

ETHIOPIA

SUDAN

EGYPTLIBYA

CHAD
NIGERMALI

ALGERIA

TUNISIA

MAURIT.

PARAGUAY

NICARAGUAGUATEMALA
EL SALVADOR

COSTA RICA
PANAMA

CÔTE
d’IVOIRE

HONG KONG

SINGAPORE

SRI LANKA

U N I T E D S T A T E S

MAURITIUS

PORTUGAL

IRELAND

SPAIN

FRANCE

UNITED
KINGDOM

ITALY
SWIZ. AUS. HUN.

SERBIA
MAC.

ROM.
MOLDOVA

UKRAINE

POLAND
BELARUS

LITH.

ESTONIA

LUX.

LATVIA

GREECE

MALTA

TURKEY

CYP.

BULG.
ALB.

SL. CRO.
BOS.

BELG.

NETH.

CZ. REP.
SLOV.

RUS.DEN.

NORWAY

SWEDEN

FINLAND

GERMANY

SYRIA

GEOR.

ARM.

MAP 3-1 Major World Religions

Source: Data from various sources, including the U.S. Bureau of the Census international database, U.S. State Department Reports, UN
Human development report.

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 85

CULTURAL VALUE DIMENSIONS
Cultural variables result from unique sets of shared values among different groups of people.
Most of the variations between cultures stem from underlying value systems, which cause
people from different cultures to behave differently under similar circumstances. Values are
a society’s ideas about what is good or bad, right or wrong—such as the widespread belief
that stealing is immoral and unfair. Values determine how individuals will probably respond
in any given circumstance. As a powerful component of a society’s culture, values are com-
municated through the eight subsystems previously described and are passed from genera-
tion to generation. Interaction and pressure among these subsystems (or more recently, from
foreign cultures) may provide the impetus for slow change. The dissolution of the Soviet
Union and the formation of the Commonwealth of Independent States is an example of
extreme political change resulting from internal economic pressures and external encourage-
ment to change.

Project GLOBE Cultural Dimensions
Recent research results on cultural dimensions have been made available by the GLOBE (Global
Leadership and Organizational Behavior Effectiveness) Project team. The team comprises 170 re-
searchers who have collected data over seven years on cultural values and practices and leadership
attributes from 18,000 managers in 62 countries. Those managers were from a wide variety of in-
dustries and sizes of organizations from every corner of the globe. The team identified nine cultural
dimensions that distinguish one society from another and have important managerial implications:

3-2. To be able to distinguish
the major value dimen-
sions that define cultural
differences among societ-
ies or groups

Western Europe. Orthodox Christians mostly live in Eastern Europe. Foreign corporations in Christian
locales can assume that most employees and other contacts behave largely according to the Ten
Commandments. In Europe, employees typically have a number of days off for religious holidays. In the
United States, religious holidays are typically limited to Christmas and Easter; however, there should be
respect for people not wanting to work on Sundays. One wonders, also, if the Protestant ethic of hard
work, saving, and efficiency, common in the West and the basis of capitalism, is spreading because of
global competition and the influence of foreign companies.

Islam was discussed in the opening profile. Muslims believe that there is only one god, Allah,
and that the prophet Muhammad was his final messenger. Their lives are based on the Qur’an and
Muslim law (Sharia). Businesses can be affected by the Sharia law against receiving or paying inter-
est. As a further example of how religious beliefs affect the workplace, respect for Islam requires
companies operating in Muslim countries to make provisions—in time and space allocation—for
employees to pray five times a day. This is true, also, in countries and cities such as in the United
Kingdom where there is a large Muslim population. In addition, out of respect for Ramadan, a month
during which Muslims must fast from dawn until dusk, managers must expect and plan for produc-
tivity to go down in the event that contractual obligations are scheduled. Businesspeople not familiar
with Islam might become frustrated by the lack of precision regarding scheduling and contracts at-
tributable to the perspective that things will happen in good time as Allah wills. However, the Islamic
work ethic is a commitment toward fulfillment and the individual’s obligation to society, so there is
considerable respect for workers and business motives.34 In addition, managers operating in Muslim
countries must take care to avoid conflict with the prescribed gender roles in their hiring and place-
ment practices. More recently, however, attitudes toward women’s roles are changing, resulting in
more job opportunities for women.

Buddhism, founded in India 2,500 years ago, remains the dominant religion of the Far East and is
increasingly popular in the West. Buddhism emphasizes compassion and love and the ways in which
suffering in the world can be relieved by righteous living and the cycle of rebirth. There is a high re-
gard for others as if they are all part of the family and an ethical consideration of one’s actions upon
the well-being of others. Buddhism promotes a strong work ethic, persistence, and hard work and
frowns on laziness. There are likely to be positive outcomes in the work environment by emphasizing
teamwork and responsibility. Foreign managers should acknowledge and respect, for example, that
employees expect to have a shrine on the wall or floor with a statue of Buddha and cups holding food
and drink as offerings.35

86 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

assertiveness, future orientation, performance orientation, humane orientation, gender differentia-
tion, uncertainty avoidance, power distance, institutional collectivism versus individualism, and in-
group collectivism. Only the first four are discussed here; this avoids confusion for readers because
the other five dimensions are similar to those researched by Hofstede, which are presented in the
next section. (Other research results from the GLOBE Project are presented in subsequent chapters
where applicable, such as in the Leadership section in Chapter 11.) The descriptions are as follows,
along with selected rankings based on the GLOBE results shown in the accompanying bar charts.36

Performance Orientation

HK NZ U.S. JPN ENG SPN ITA VENEZ ARGEN

High Medium Low

*Not to scale—indicates relative magnitude.

Source: Based on results from the GLOBE project.

Assertiveness

AUSTRIA GRE U.S. FRA IRE EGT JPN SWZ SWE

High Medium Low

*Not to scale—indicates relative magnitude.

Source: Based on results from the GLOBE project.

Future Orientation

SING NETH CAN IND IRE EGT ITA ARG RUS

High Medium Low

*Not to scale—indicates relative magnitude.

Source: Based on results from the GLOBE project.

FUTURE ORIENTATION
This dimension refers to the level of importance a society attaches to future-oriented behaviors
such as planning and investing in the future. Switzerland and Singapore, high on this dimension,
are inclined to save for the future and have a longer time horizon for decisions. This perspective
compares with societies such as Russia and Argentina, which tend to plan more in the shorter
term and place more emphasis on instant gratification.

PERFORMANCE ORIENTATION
This dimension measures the importance of performance improvement and excellence in society
and refers to whether people are encouraged to strive for continued improvement. Singapore,
Hong Kong, and the United States score high on this dimension; typically, this means that peo-
ple tend to take initiative and have a sense of urgency and the confidence to get things done.
Countries such as Russia and Italy have low scores on this dimension; they hold other priorities
ahead of performance, such as tradition, loyalty, family, and background, and they associate
competition with defeat.

ASSERTIVENESS
This dimension refers to how much people in a society are expected to be tough, confrontational,
and competitive versus modest and tender. Austria and Germany, for example, are highly asser-
tive societies that value competition and have a can-do attitude. This compares with Sweden and
Japan, less assertive societies, which tend to prefer warm and cooperative relations and harmony.
The GLOBE team concluded that those countries have sympathy for the weak and emphasize
loyalty and solidarity.

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 87

HUMANE ORIENTATION
This dimension measures the extent to which a society encourages and rewards people for being
fair, altruistic, generous, caring, and kind. Highest on this dimension are the Philippines, Ireland,
Malaysia, and Egypt, indicating a focus on sympathy and support for vulnerable members of
society. In those societies, paternalism and patronage are important, and people are usually
friendly and tolerant and value harmony. This compares with Spain, France, and the former West
Germany, which scored low on this dimension; people in these countries give more importance
to power and material possessions as well as self-enhancement.

Clearly, research results such as these are helpful to managers seeking to be successful in
cross-cultural interactions. Anticipating cultural similarities and differences allows managers to
develop the behaviors and skills necessary to act and decide in a manner appropriate to the local
societal norms and expectations.

Humane Orientation

PHIL IRE MALAY U.S. SWE HK BRA FRA GER

High Medium Low

*Not to scale—indicates relative magnitude.

Source: Based on results from the GLOBE project.

Cultural Clusters
Gupta et al., from the GLOBE research team, also analyzed their data on the nine cultural di-
mensions to determine where similarities cluster geographically. Their results support the exis-
tence of ten cultural clusters: South Asia, Anglo, Arab, Germanic Europe, Latin Europe, Eastern
Europe, Confucian Asia, Latin America, sub-Saharan Africa, and Nordic Europe. They point out
the usefulness to managers of these clusters:

Multinational corporations may find it less risky and more profitable to expand into more similar
cultures rather than those which are drastically different.37

These clusters are shown in Exhibit 3-3. According to Gupta et al., the Germanic cluster
tends to be masculine, assertive, individualistic, and result-oriented. This compares with the
Latin American cluster, which tends to exhibit high power distance, low performance orienta-
tion, uncertainty avoidance, and collectivism.

Latin American societies tend to enact life as it comes, taking its unpredictability as a fact of life,
and not overly worrying about results.38

Most researchers feel that there is a relationship between geographic cultural clusters and their
similar economic systems, histories, or environmental characteristics.39

Hofstede’s Value Dimensions
Earlier research resulted in a groundbreaking framework for understanding how basic values
underlie organizational behavior; Geert Hofstede developed this framework based on his re-
search on more than 116,000 people in 50 countries. He proposed four value dimensions: power
distance, uncertainty avoidance, individualism, and masculinity.40 We should be cautious when
interpreting these results, however, because his research findings are based on a sample drawn
from one multinational firm, IBM, and because he does not account for within-country differ-
ences in multicultural countries. Although we introduce these value dimensions here to aid in the
understanding of different cultures, their relevance and application to management functions will
be discussed further in later chapters.

88 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

The first of Hofstede’s value dimensions, power distance, is the level of acceptance by a
society of the unequal distribution of power in institutions. What are the attitudes toward hier-
archy and the level of respect for authority? How reluctant are employees to express disagree-
ment with their managers? In the workplace, inequalities in power are normal, as evidenced in
hierarchical boss–subordinate relationships. However, the extent to which subordinates accept
unequal power is societally determined. In countries where people tend to display high power
distance (such as Malaysia, the Philippines, and Mexico), employees acknowledge the boss’s
authority simply by respecting that individual’s formal position in the hierarchy, and they sel-
dom bypass the chain of command. This respectful response results, predictably, in a centralized
structure and autocratic leadership. In countries where people tend to display low power distance
(suchas Austria, Denmark, and Israel), superiors and subordinates are apt to regard one another
as equal in power, resulting in more harmony, open communication of ideas, and better coop-
eration. Clearly, an autocratic management style is not likely to be well received in low power
distance countries.

Anglo
Australia
Canada
England
Ireland
New Zealand
South Africa
United States

Latin
America

Argentina
Bolivia
Brazil
Colombia
Costa Rica
Ecuador
El Salvador
Guatemala
Mexico
Venezuela

Latin
Europe

France
Israel
Italy
Portugal
Spain
Switzerland
(French
speaking)

Eastern
Europe

Albania
Georgia
Greece
Hungary
Kazakhstan
Poland
Russia
Slovenia

Germanic
Europe

Austria
Germany
Netherlands
Switzerland
(German
speaking)

Arab
Egypt
Kuwait
Morocco
Qatar
Turkey

India
Indonesia
Iran
Philippines
Malaysia
Thailand

Nigeria
Zambia
Malawi
South Africa
Namibia
Zimbabwe
(Black spots)

Sub-Sahara
Africa

Denmark
Finland
Sweden

Nordic
Europe

China
Hong Kong
Japan
Singapore
Taiwan
South Korea

Confucian
Asia

Southern
Asia

ExHIBIT 3-3 Geographic Culture Clusters

Source: Data from V. Gupta, P. J. Hanes, and P. Dorfman, Journal of World Business 37, No. 1 (2002), p. 13.

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 89

The second value dimension, uncertainty avoidance, refers to the extent to which people
in a society feel threatened by ambiguous situations. Countries with a high level of uncertainty
avoidance (such as Japan, Portugal, and Greece) tend to have strict laws and procedures to
which their people adhere closely, and a strong sense of nationalism prevails. In a business
context, this value results in formal rules and procedures designed to provide more security
and greater career stability. Managers have a propensity for low-risk decisions, employees ex-
hibit little aggressiveness, and lifetime employment is common. In countries with lower levels
of uncertainty avoidance (such as Denmark, Great Britain, and, to a lesser extent, the United
States), nationalism is less pronounced, and protests and other such activities are tolerated.
Consequently, company activities are less structured and less formal, some managers take more
risks, and high job mobility is common.

Uncertainty Avoidance*

High Desire for Stability Low

GRE JPN FRA KOR ARA GER AUL CAN U.S. UK IND DEN SIN

*Not to scale—indicates relative magnitude.
Note: AUL = Australia

Source: Data based on G. Hofstede, 1983.

Power Distance*

High Orientation Toward Authority Low

MAL ARA MEX IND FRA ITA JPN SPA ARG U.S. GER UK DEN ISR AUT

*Not to scale—indicates relative magnitude.
Note: ARA = Arab Countries
AUT = Austria

Source: Data based on G. Hofstede, “National Cultures in Four Dimensions,”
International Studies of Management and Organization (Spring–Summer, 1983).

The third of Hofstede’s value dimensions, individualism (also referred to as individual-
ism-collectivism), refers to the tendency of people to look after themselves and their immediate
families with less emphasis on the needs of society; the primary focus is on the individual or the
nuclear family. In countries that prize individualism (such as the United States, Great Britain,
and Australia), democracy, individual initiative, and achievement are highly valued; the relation-
ship of the individual to organizations is one of independence on an emotional level, if not on an
economic level.

In countries such as Pakistan and Panama, where low individualism prevails—that is, where
collectivism predominates—there is more emphasis on group achievements and harmony and
the importance of the extended family or group. In such societies, there are tight social frame-
works, emotional dependence on belonging to the organization, and a strong belief in group
decisions. People from a collectivist country, such as Japan, believe in the will of the group
rather than that of the individual, and their pervasive collectivism exerts control over individual
members through social pressure and the fear of humiliation. The society valorizes harmony and
saving face, whereas individualistic cultures generally emphasize self-respect, autonomy, and
independence. Hiring and promotion practices in collectivist societies are based on paternalism
rather than achievement or personal capabilities, which are valued in individualistic societies.
Other management practices (such as the use of quality circles in Japanese factories) reflect
the emphasis on group decision-making processes in collectivist societies. The individualism–
collectivism dimension, then, relates to the manner in which members of a group relate to one
another and work together.41

90 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Hofstede’s findings indicate that most countries scoring high on individualism have both a
higher gross national product and a freer political system than those countries scoring low on
individualism—that is, there is a strong relationship among individualism, wealth, and a political
system with balanced power. Other studies have found that the output of individuals working in
a group setting differs between individualistic and collectivist societies. In general, Americans
tend to work and conduct their private lives independently, valuing individual achievement,
accomplishments, promotions, and wealth above any group goals. In many other countries,
individualism is not valued (as discussed previously in the context of Hofstede’s work). In China,
for example, much more of a “we” consciousness prevails, and the group is the basic building
block of social life and work. For the Chinese, conformity and cooperation take precedence over
individual achievement, and the emphasis is on the strength of the family or community—the
predominant attitude being, “We all rise or fall together.” Chinese cultural values subordinate
personal interests to the greater goal of helping the group succeed. However, more recently,
one sees the younger generation in the cities adopting more of a capitalist and individualistic
attitude toward their jobs as global competition increases, and as more western companies oper-
ate there and hire locals.

Individualism*

Individualism Collectivism

AUL U.S. UK CAN FRA GER SPA JPN MEX ITA KOR SIN

*Not to scale—indicates relative magnitude.

LowHigh

Source: Data based on G. Hofstede, 1983.

Masculinity*

Assertive/Materialistic Relational

JPN MEX GER UK U.S. ARA FRA KOR POR CHC DEN SWE

*Not to scale—indicates relative magnitude.

LowHigh

Source: Data based on G. Hofstede, 1983.

The fourth value dimension, masculinity (also referred to as masculinity-femininity),
refers to the degree of traditionally masculine values. In highly masculine societies (Japan,
Mexico and Austria, for example), social gender roles are distinct such that men are expected
to be “assertive, tough, and focused on material success; women are supposed to be more
modest, tender, and concerned with the quality of life.”42 In organizations located in masculin-
ity societies, one finds considerable job stress, and organizational interests generally encroach
on employees’ private lives. In countries with high femininity (such as Denmark, Sweden,
and the Netherlands), social gender roles tend to overlap such that “[b]oth men and women
are supposed to be modest, tender, and concerned with the quality of life.” 43 In organiza-
tions located in femininity societies, one finds less conflict and job stress, more women in
high-level jobs, and a reduced need for assertiveness. The United States lies somewhat in the
middle, according to Hofstede’s research. American women typically are encouraged to work,
and families often are able to get some support for child care (through day-care centers and
maternity leaves).

The four cultural value dimensions Hofstede proposed do not operate in isolation; rather,
they are interdependent and interactive—and thus complex—in their effects on work attitudes
and behaviors.

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 91

LONG-TERM/SHORT-TERM ORIENTATION
Later research in 23 countries, using a survey developed by Bond and colleagues called the Chinese
Value Survey, led Hofstede to develop a fifth dimension, long-term/short-term orientation—
also called Confucian dynamism.44 He defined long-term orientation as “the extent to which
a culture programs its members to accept delayed gratification of their material, social, and
emotional needs.” 45 Examples of long-term Confucian values include: adapting traditions to
changed conditions, exhibiting a strong propensity to save and invest, demonstrating thriftiness,
and persevering in achieving results. Alternatively, short-term Confucian values are fulfilling
social obligations, showing respect for tradition, and protecting one’s face. In other words, man-
agers in most Asian countries are more future-oriented, so they strive toward long-term goals;
they value investment in the future and are prepared to sacrifice short-term profits. However,
managers in countries such as Great Britain, Canada, and the United States place a higher value
on short-term results and profitability and evaluate their employees accordingly.

Long-Term/Short-Term Orientation*

High Low

CHI HK JPN TAI VIE BRA IND UKU.S. CAN E/W AFR

*Not to scale—indicates relative magnitude.

Source: Data based on G. Hofstede, Culture’s Consequences: Comparing Values,
Behaviors, Institutions, and Organizations across Nations, 2nd ed. (Thousand
Oaks, CA: Sage, 2001).

Trompenaars’s Value Dimensions
Fons Trompenaars also researched value dimensions; his work was spread over a ten-year pe-
riod, with 15,000 managers from 28 countries representing 47 national cultures. Some of those
dimensions, such as individualism, people’s attitude toward time, and relative inner- versus
outer-directedness, are similar to those discussed elsewhere in this chapter and others, and so are
not presented here. Other selected findings from Trompenaars’s research that affect daily busi-
ness activities are explained next, along with the placement of some of the countries along those
dimensions, in approximate relative order.46 If we view the placement of these countries along
a range from personal to societal, based on each dimension, some interesting patterns emerge.47
One can see that the same countries tend to be at similar positions on all dimensions with the
exception of the emotional orientation.

In Trompenaars’s dimension of universalism versus particularism, we find that the uni-
versalistic approach applies rules and systems objectively without consideration for individual
circumstances, whereas the particularistic approach—more common in Asia and Spain, for ex-
ample—puts the first obligation on relationships and is more subjective. Trompenaars found, for
example, that people in particularistic societies are more likely to pass on insider information to
a friend than those in universalistic societies.

In the neutral versus affective dimension, the focus is on the emotional orientation of rela-
tionships. The Italians, Greeks, Mexicans, and Chinese, for example, would openly express emo-
tions, even in a business situation, whereas the British, Germans, and Japanese would consider
such displays unprofessional; they, in turn, would be regarded as hard to read.

Obligation*

Universalistic Particularistic

*Not to scale—indicates relative magnitude.

LowHigh

GERU.S. SWE UK ITA FRA JPN SPA CHI

Source: Data based on F. Trompenaars, 1993.

92 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

It is clear, then, that a lot of what goes on at work can be explained by differences in peo-
ple’s innate value systems as described by Hofstede, Trompenaars, and the GLOBE researchers.
Awareness of such differences and how they influence work behavior can be very useful to you
as a future international manager.

Consequence or Cause?
At this point, it is worth considering the results of a study by Steel and Taras, published in 2010,
in which they challenge the view held by Hofstede and others of culture as the cause, and not the
effect, of variations in cultural values. Steel and Taras argue that the opposite can be true, that
“culture is a consequence of certain individual and national-level factors.” 48 They conclude that
the research results provide a basis for explaining variations in cultural values within and between
countries and that “cultures are determined by a set of individual and country level factors and
are likely to change in response to a change in the culture-determining factors.” 49 Examples of
the factors they considered are macrofactors such as wealth and freedom and microfactors such as

Emotional Orientation in Relationships*

Neutral Affective

*Not to scale—indicates relative magnitude.

LowHigh

U.S.JPN GER SWE UK FRA SPA ITA CHI

Source: Data based on F. Trompenaars, 1993.

*Not to scale—indicates relative magnitude.

U.S.UK FRA GER ITA JPN SWE SPA CHI

Privacy in Relationships*

Specific Diffuse

LowHigh

Source: Data based on F. Trompenaars, 1993.

UKU.S. SWE GER FRA ITA SPA JPN CHI

Source of Power and Status*

Personal Society

*Not to scale—indicates relative magnitude.

LowHigh

Source: Data based on F. Trompenaars, 1993.

As far as involvement in relationships goes, people tend to be either specific or diffuse (or
somewhere along that dimension). Managers in specific-oriented cultures—the United States,
United Kingdom, France—separate work and personal issues and relationships; they compart-
mentalize their work and private lives, and they are more open and direct. In diffuse-oriented
cultures—Sweden, China—work spills over into personal relationships and vice versa.

In the achievement versus ascription dimension, the question that arises is, “What is the
source of power and status in society?” In an achievement society, the source of status and influ-
ence is based on individual achievement—how well one performs the job and what level of edu-
cation and experience one has to offer. Therefore, women, minorities, and young people usually
have equal opportunity to attain position based on their achievements. In an ascription-oriented
society, people ascribe status based on class, age, gender, and so on; one is more likely to be born
into a position of influence. Hiring in Indonesia, for example, is more likely to be based on who
you are (e.g., your status and relational ties) than is the case in Germany or Australia.

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 93

age, gender, education, and socioeconomic status. Steel and Taras stress, therefore, that we should
not rely on national averages to draw conclusions about individuals.50 Other researchers also hold
this broader concept of the origins of cultural behavior; Meuthel and Hoegl, for example, state
that “we extend the traditional view of culture as an exclusive country-level determinant to a more
comprehensive view that integrates social institutions such as the education system, economic
freedom, and civil liberties.” 51

Clearly, the origins, causes, and effects of cultural variables are complex, but the fact re-
mains that culture plays a key role in the workplace, and international managers must be aware
of that role and manage accordingly.

Critical Operational Value Differences
After studying various research results about cultural variables, it helps to identify some specific
culturally based variables that cause frequent problems for managers around the world. Important
variables are those involving conflicting orientations toward time, task-relationship, change, ma-
terial factors, and individualism. We try to understand these operational value differences because
they strongly influence a person’s attitudes and probable responses to work situations.

TIME
Americans often experience much conflict and frustration because of differences in the concept
of time around the world—that is, differences in temporal values. To Americans, time is a valu-
able and limited resource; it is to be saved, scheduled, and spent with precision, lest we waste it.
The clock is always running—time is money. Therefore, deadlines and schedules have to be met.
When others are not on time for meetings, Americans may feel insulted; when meetings digress
from their purpose, Americans tend to become impatient. Similar attitudes toward time occur in
Western Europe and elsewhere.

In many parts of the world, however, people view time from different and longer perspec-
tives, often based on religious beliefs (such as reincarnation, in which time does not end at death),
on a belief in destiny, or on pervasive social attitudes. In Latin America, for example, a common
attitude toward time is mañana, a word that literally means “tomorrow.” A Latin American per-
son using this word, however, usually means an indefinite time in the near future. Similarly, the
word bukra in Arabic can mean “tomorrow” or “some time in the future.” Although Americans
usually regard a deadline as a firm commitment, Arabs often regard a deadline imposed on them
as an insult. They believe that important things take a long time and therefore cannot be rushed.
To ask an Arab to rush something, then, is to imply that you have not given him an important task
or that he would not treat that task with respect. International managers have to be careful not
to offend people—or lose contracts or employee cooperation—because they misunderstand the
local language of time.

TASK VERSUS RELATIONSHIP ORIENTATION
Schuster and Copeland developed a Culture Classification Model based on time, task orientation
and relationship orientation.52 They contended that the importance placed on tasks versus rela-
tionships in making business decisions affects how time is used. As shown in Figure 3-2, cultures

Northwest &
Central Europe

Middle EastCentral &
South America

ChinaMediterranean
Europe

Eastern
Europe &

Russia

North America,
Australia, &
New Zealand

Japan &
KoreaIndia Africa

Task Oriented Relationship Oriented

FIGURE 3-2 Culture Classification Model

Source: C. Schuster & M. Copeland. 1996. Global business practices: Adapting for success. Thomson, p. 13.

94 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

on the left side of the continuum tend to place more emphasis on the task and allocate their time
in accordance with task-specific criteria. In general, Northwest and Central European countries
tend to be the most task-oriented when making business decisions. In contrast, cultures on the
right side of the continuum tend to devote more time to establishing and maintaining business re-
lationships. African and Middle Eastern countries tend to be the most relationship-oriented coun-
tries, followed by Japan and Korea. It is important to note that while these classifications hold
in general, individuals vary within cultures and therefore may deviate from the country-specific
expectations of the Culture Classification Model, or any national culture model for that matter.
For example, bicultural individuals—that is, people who embrace the norms and values of two
cultures—may deviate from cultural expectations of a given country. Nevertheless, it is critical
for the foreign businessperson to recognize and respect cultural differences in order to function
effectively with business associates in other countries.

For example, in Northwest and Central Europe, the principal goal of business activities is to
accomplish a task in a manner that is most efficient and effective. Time tends to be a critical ele-
ment of these cultures and is reflected in different business activities such as meetings. In these
task-oriented countries, business meetings tend to have fixed starting and ending times that are
expected to be respected. Discussions that have not reached conclusion are not continued during
that meeting. That is, extending the discussion beyond the allotted meeting time is not permit-
ted. Instead, another meeting is scheduled or the business will be concluded via correspondence.
Business practices tend to be formal so use titles such as Mister, Ms., Doctor, or Professor. The
structure of meetings tends to be very formal and announced in advance of the meeting. Meeting
organizers will circulate an agenda prior to the meeting. The agenda actually functions as a ve-
hicle to measure the efficiency of the meeting and professionalism of its attendees.53

CHANGE
Because they are based largely on long-standing religious beliefs, values regarding the accep-
tance of change and the pace of change can vary immensely among cultures. Western people
generally believe that an individual can exert some control over the future and can manipulate
events, particularly in a business context—that is, individuals feel they have some internal con-
trol. In many non-Western societies, however, control is considered external; people generally
believe in destiny or the will of their God and, therefore, adopt a passive attitude or even feel
hostility toward those introducing the evil of change. In societies that place great importance on
tradition (such as Japan), one small area of change may threaten an entire way of life. However,
the younger generations are becoming more exposed to change through globalization, technol-
ogy, and media exposure. International firms are agents of change throughout the world. Some
changes are more popular than others are.

MATERIAL FACTORS
In large part, Americans consume resources at a far greater rate than most of the rest of the world.
Their attitude toward nature—that it is there to be used for their benefit—differs from the atti-
tudes of Indians and Koreans, for example, whose worship of nature is part of their religious be-
liefs. Whereas Americans often value physical goods and status symbols, many non-Westerners
find these things unimportant; they value the aesthetic and the spiritual realm. Such differences
in attitude have implications for management functions such as motivation and reward systems
because the proverbial carrot must be appropriate to the employee’s value system.

INDIVIDUALISM
In general, Americans tend to work and conduct their private lives independently, valuing indi-
vidual achievement, accomplishments, promotions, and wealth above any group goals. In many
other countries, individualism is not valued (as discussed previously in the context of Hofstede’s
work). In China, for example, much more of a “we” consciousness prevails, and the group is the
basic building block of social life and work. For the Chinese, conformity and cooperation take
precedence over individual achievement, and the emphasis is on the strength of the family or
community—the predominant attitude being, “We all rise or fall together.” In China, the stability
of society is based on relationships that involve: mutual obligations (e.g., a junior person respects
and obeys a senior person; the senior person protects a junior person); guanxi (friendships with

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 95

continual exchange of favors that bind people together); face (i.e., protection of one’s dignity,
self-respect and prestige); harmony (i.e., relating to others in a harmonious way); and adjusting/
adapting to the environment.54

International managers often face conflicts in the workplace because of differences in these
basic values of time, task-relationship orientation, change, materialism, and individualism. If
these operational value differences and their likely consequences are anticipated, managers can
adjust expectations, communications, work organization, schedules, incentive systems, and so
forth to provide for more-constructive outcomes for the company and its employees.

THE INTERNET AND CULTURE
As of June 30, 2018, South Korea had 92.6% of its population who were internet users—
compared with 34.1% for India, 82.4% for Thailand, and 56.7% for China.55

www.internetworldstats.com

With over 4.2 billion Internet users across the globe as of June 2018,56 we would be remiss if
we did not acknowledge the contemporary phenomenon of the increasingly pervasive use of
the Internet in society, for it seems to be encroaching on many of the social variables discussed
earlier—in particular, associations, education, and the economy, as well as politics. From 2000
to 2018, English Internet user growth increased by 649 percent to 1.055 billion users. However,
Chinese Internet use growth increased 2,390 percent over the same time period to 804 million
users. Spanish Internet users experienced a 1,758 percent increase (to 337 million users) while
Arabic Internet users increased by 8,616 percent to 219 million users.57

At the same time that the Internet is affecting culture, culture is also affecting how the
Internet is used. One of the pervasive ways that culture is determining how the Internet may be
used in various countries is through the local attitude to information privacy—the right to con-
trol information about oneself, as observed in the following quote.

You Americans just don’t seem to care about privacy, do you?58

Swedish executive

Although Americans collect data about consumers’ backgrounds and what they buy, often
trading that information with other internal or external contacts, the Swedes, for example, are as-
tounded that this is done, especially without governmental oversight.59 The Swedes are required to
register all databases of personal information with the Data Inspection Board (DIB), their federal
regulatory agency for privacy, and to get permission from that board before that data can be used.

In May 2018, the EU adopted the General Data Protection Regulation (GDPR), which will
serve as the primary data protection legislation for EU member countries. It will increase har-
monization of data protection albeit other data protection laws remain in force, especially in the
areas of healthcare and financial activities. With the adoption of the GDPR, Sweden will have a
new Data Protection Act (DPA), which complements the GDPR in terms of areas that are subject
to national laws.60

The manner in which Europe views information privacy has its roots in culture and history,
leading to a different value set regarding privacy. The preservation of privacy is considered a
human right, perhaps partially because of an internalized fear about how personal records were
used in war times in Europe. In addition, research by Smith on the relationship between levels
of concern about privacy and Hofstede’s cultural dimensions revealed that high levels of uncer-
tainty avoidance were associated with the European approach to privacy, whereas higher levels
of individualism, masculinity, and power distance were associated with the U.S. approach.61

It seems, then, that societal culture and the resultant effects on business models can render
the assumptions about the global nature of information technology incorrect. U.S. businesspeople,
brought up on a strong diet of the market economy, need to realize that they will often need to
localize their use of IT to different value sets about its use. This advice applies in particular to the
many e-commerce companies doing business overseas. With 75 percent of the world’s Internet
market living outside the United States, multinational e-businesses are learning the hard way that
their websites must reflect local markets, customs, languages, and currencies to be successful in
foreign markets. Different legal systems, financial structures, tastes, and experiences necessitate

3-3. To understand the interac-
tion between culture and
the use of the Internet

http://www.internetworldstats.com

96 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

attention to every detail to achieve global appeal. In other words, e-businesses must localize in
order to globalize, which means much more than translating online content to local languages.

One problem area often beyond the control of e-business is the cost of connecting to the
Internet for people in other countries. Other practical problems in Asia, as well as in Germany,
the Netherlands, and Sweden, include the method of payment, which in most of these places still
involves cash or letters of credit and written receipts. Dell tackled this problem by offering debit
payments from consumers’ checking accounts. Some companies have learned the hard way that
they need to do their homework before launching sites aimed at overseas consumers. Dell, for
example, committed a faux pas when it launched an e-commerce site in Japan with black borders
on its website; black is considered negative in the Japanese culture, so many consumers took one
look and didn’t want anything else to do with it. Dell executives learned that the complexity of
language translation into Japanese was only one area in which they needed to localize.

As much as cultural and societal factors can affect the use of the Internet for business, it is
also clear that IT can impose dramatic changes on culture and society. In addition, cultural pref-
erences and legal institutions may seek to influence attitudes toward work, as illustrated by the
accompanying “Under the Lens” feature about South Korea’s workaholic culture, as well as the
following “Management in Action” feature about work culture in India.

UNDER THE LENS
Seoul Fights Back against Workaholic Culture: Labour Law 62

Overworked South Koreans are set to get a break from this week when a new labour law imposing
a cap on working hours comes into effect, in an effort to improve employees’ work-life balance.

“Worabael”—a portmanteau of worklife balance—has become a buzzword in South
Korea, one of the most overworked nations in Asia, as companies with more than 300 employees and
public institutions are forced to cut the maximum weekly work hours from 68 to 52.

South Korea is notorious for its workaholic culture, which has contributed to its rapid industrialisation
over the past half a century and transformed the once war-torn country into the world’s 11th-largest economy.

The country is home to the longest working hours and highest suicide rate in the developed world.
South Koreans put in an average of 2,024 hours in 2017, the second-most after Mexico among members
of the Organisation for Economic Cooperation and Development (OECD). But the long hours have not
translated into better productivity, with the country’s per-hour productivity ranking near the bottom.

The change in working hours was a campaign promise of President Moon Jae-in, who was elected
last year on a populist platform of improving the lives of ordinary South Koreans by guaranteeing their
“right to rest”.

Mr Moon has secured a 16 per cent increase in the minimum wage this year, the largest jump since
2000. From this month, South Koreans are allowed 40 hours of regular work and 12 hours of overtime
after parliament passed the revised bill in February. A business owner violating the new law can face up
to two years in prison or a fine of up to Won20m ($17,945) but the government gave a six-month grace
period from the penalties. The new law will gradually reach smaller businesses by 2021, with only five
sectors including transport and healthcare exempt.

The change will cost Korean businesses an additional Won12tn a year to maintain the same levels
of production, according to the Korean Economic Research Institute.

Ruling Democratic party lawmakers and labour unions have welcomed the changes, as the govern-
ment hopes that reduced working hours will create jobs and boost productivity. Government officials even
believe it will help increase the falling birth rate, which hit a record low last year in the fast ageing society.

“We should make the utmost effort to help the new system take root as it will bring ‘Worabael’ to
our society,” said Choo Mi-ae, the ruling party leader.

But the new law is facing opposition especially from small and midsized enterprises suffering from
labour shortages. Critics say the change will widen the income gap between workers as those at SMEs,
which offer 90 per cent of jobs in Korea, are unable to make up for lower wages with overtime pay.

“Instead of a life with an evening, it can be a life with another part-time job,” the opposition Liberty
Korea party said in a statement.

Kim Tae-gi, a professor of economics at Dankook University, said: “For most SMEs, it means
rising labour costs and worsening profitability while their workers will have to accept lower pay for
reduced working hours.”

The country is home to the longest working hours and highest suicide rate in the developed world.

Source: © The Financial Times Limited 2018.

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 97

MANAGEMENT IN ACTION
A Cultural Revolution Is Changing India, One Open-Plan Office at a
Time: Office Life Modernisation

The business day used to be a formal affair, with late starts and early finishes for senior staff. But
no longer. 63

When Gaurav Chopra set up IndiaLends, his Delhi-based financial services company, he
was determined to import some of the relatively informal work culture he had encountered during the
eight years he spent in the UK.

Out went office cubicles and in came open-plan seating arrangements. Out went communicating
with bosses only via their assistants and in came regular face-to-face meetings.

That was three years ago. But no matter how hard he has tried to encourage colleagues to adopt a
more relaxed, western-style of working, he has found some habits impossible to change.

“When I first started at the London School of Economics, I managed to offend some of my profes-
sors by calling them ‘Sir’,” he says. “It was a pleasant surprise to me at that time, and so when I started
my company in India I asked my employees to call me by my first name.

But even now, some employees still address Mr Chopra as “Sir”, no matter how much he tries to
stop them.

The deferential culture he describes is, in part, a legacy of colonial rule that ended in 1947. For
nearly 100 years, the British imposed their hierarchical, Victorian-era civil service on the Indian system
of government.

In the decades after independence, that culture was copied by private companies. Not only were
there strict hierarchies, but also those at the top were allowed to arrive late, leave early and take long
lunch breaks — a habit that still exists in many Indian public sector organisations.

“Everyone knows that if a government office says it will open at a certain time, no one will be there by
then,” says Mr Chopra. “And if it is due to close at 5pm, you can be sure no one will be in the office by 5.01pm.”

Since the country started to open its markets in the early 1990s, however, corporate office life has
changed substantially, with office-based service jobs increasing particularly quickly. In 1991, the year
liberalisation started, services accounted for just over 40 per cent of the country’s gross domestic prod-
uct. Last year, that figure was about 55 per cent.

The arrival of multinational companies such as Nestlé, Microsoft and Citigroup, coupled with the
sudden growth in the IT services sector, brought a new style of corporate workplace and a new way of
working. Gone are the late starts and early finishes: a survey by Manpower Group in 2016 found young
Indians work harder than anyone else in the world, clocking up an average of 52 hours a week.

“Hard work is generally measured by the number of hours you put in at the office,” says Prakash
Rao, chief experience officer at PeopleStrong, a human resources services company. “If you leave on
time, your colleagues start to wonder whether you have enough work to do.”

Amit Veer, vice-president of payments at Paytm, a financial technology start-up, says he works
from 9.30am to 8pm. “But given that my commute takes one hour 15 minutes in the morning and two
hours in the evening, it is a very long day.”

Gone, too, are workspaces strictly segregated by seniority. India’s new breed of start-ups have pio-
neered flatter hierarchies and more informal ways of working.

Paytm, for example, has mimicked San Francisco’s culture by creating an open-plan office where
Vijay Shekhar Sharma, the chief executive and billionaire company founder, sits among his colleagues
at a desk indistinguishable from theirs.

The Indian corporate workplace has now become so established it has been given the ultimate mark
of recognition: its own spin-off of the BBC sitcom The Office, the UK programme format that became
a hit in the US and eight other countries. Instead of David Brent, regional manager of Wernham Hogg,
Indian audiences will watch Jagdeep Chaddha and his colleagues at Wilkins Chawla, a company based
in Faridabad, a town outside New Delhi.

Even in the face of rapid technological and cultural change, however, certain elements of the tra-
ditional Indian office have remained. The lunch hour, for example, is still an hour. Even in the most
dynamic start-ups, workers decamp en masse for their meal.

“Lunchtime is the one unmovable part of the day,” says one western worker in a New Delhi office.
“It is where food, office gossip, and complaints about the bosses are all shared.”

Another common feature of the Indian workplace is that there is little, if any, respect for the sepa-
ration between work and family life. Employees describe being called up at any time of the day and at
weekends, and some are forced to come into the office on a Saturday if they are behind on deadlines.

(Continued)

98 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Mr Rao says: “In my previous job, customers expected to be able to contact me at any time of day
or night. There were times when I would get a call at two o’clock in the morning and would be expected
to take it.”

Krishna Rathi, general manager of Paytm’s entertainment business, says he does not have a regular
day off each week. “Our busiest days are Friday and Saturday, when most people go to the cinema, and
I have to be on hand to respond to customers’ problems throughout the weekend.”

Some see a link between such demands and the habit of many senior people in Indian organisations
of turning up very late for meetings or not attending at all. “There is no sense of respecting other peo-
ple’s time,” Kishore Jayaraman, president of Rolls-Royce in India and south Asia, told the FT this year.

Many Indian start-ups have tried to do away with scheduled meetings altogether. “It is quite an
unstructured office,” says Neha Agarwal, general manager of investments at Paytm. “If you want to
work with someone, you just walk up to their desk and ask them. And if they are not there, our mobile
numbers are all printed above our workstations.”

But the changes brought about by new companies are also causing their own problems for those
who are used to more traditional ways of doing business.

“One of the big problems we have is recruiting senior people,” says Mr Chopra. “It takes time for
them to understand the workplace we are trying to create.” Candidates, he adds, are often perplexed
when they ask which office they will be allocated, and he has to explain “there are none”.

Source: © The Financial Times Limited 2018.

DEVELOPING CULTURAL PROFILES
Managers can gather considerable information about cultural variables from current research,
personal observation, and discussions with people. From these sources, managers can develop
cultural profiles of various countries—composite pictures of working environments, people’s at-
titudes, and norms of behavior. As we have previously discussed, these profiles are often highly
generalized; many subcultures, of course, may exist within a country. However, managers can
use these profiles to anticipate drastic variances in motivation, communication, ethics, loyalty,
and individual and group productivity that may be encountered in a given country. More such
homework may have helped Walmart’s expansion efforts into Germany and South Korea, from
which it withdrew in 2006.

Starbucks is a multinational enterprise that has achieved success in Japan. In 1996, Starbucks
opened its first outlet in Japan. Now it has nearly 1,300 outlets in all 47 Japanese prefectures as
of August 2017. The Starbucks brand has earned a reputation for “fast-casual coffee shops” in
Japan. According to Norio Adachi, a director at Starbucks Coffee Japan Ltd.’s corporate affairs
department, the recipe for Starbucks’ ongoing success in Japan has been “respect for the cul-
ture of the local community.”64 In a bold initiative to become embedded in the local culture,
Starbucks dropped its standard-issue decor in order to establish a Japanese-style coffeehouse in
Kyoto in June 2017. 65

Japanese consumers like to try new things . . . so when something new comes from a foreign
country, it often gets attention on TV. And people will stand in a long line in front of the store
without hesitation. . . But in a market where the next new thing comes and goes in the blink of an
eye, a company needs more than just novelty to survive for more than twenty years.66

Norio Adachi, director at Starbucks Coffee Japan Ltd.’s
corporate affairs department

It is relatively simple for Americans to pull together a descriptive profile of U.S. culture,
even though regional and individual differences exist, because Americans know themselves
and because researchers have thoroughly studied U.S. culture. The results of one such study by
Harris and Moran are shown in Exhibit 3-4, which provides a basis of comparison with other
cultures and, thus, suggests the likely differences in workplace behaviors.

It is not so easy, however, to pull together descriptive cultural profiles of peoples in other
countries unless one has lived there and been intricately involved with those people. Still, man-
agers can make a start by using what comparative research and literature are available. The ac-
companying “Comparative Management in Focus” feature provides brief, generalized country
profiles based on a synthesis of research, primarily from Hofstede 67 and England,68 as well as

3-4. To be able to develop a
working cultural profile
typical of many people
within a certain society
as an aid to anticipating
attitudes toward work,
negotiations, and so on

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 99

from numerous other sources.69 These profiles illustrate how to synthesize information and gain
a sense of the character of a society—from which implications may be drawn about how to adapt
to and learn from that society to manage more effectively. More extensive implications and ap-
plications related to managerial functions are drawn in later chapters.

Recent evidence in Japan points to some convergence with Western business culture re-
sulting from Japan’s economic contraction and subsequent bankruptcies. Focus on the group,
lifetime employment, and a pension has given way to a more competitive business environment
with job security no longer guaranteed and an emphasis on performance-based pay. This has led
Japan’s salarymen to recognize the need for personal responsibility on the job and in their lives.
Although only a few years ago emphasis was on the group, Japan’s long economic slump seems
to have caused some cultural restructuring of the individual. Corporate Japan is changing from a
culture of consensus and groupthink to one touting the need for an “era of personal responsibil-
ity” as a solution to revitalize its competitive position in the global marketplace.70

To tell you the truth, it’s hard to think for yourself . . . [but, if you don’t] . . . in this age of cutthroat
competition, you’ll just end up drowning.71

Akio Kuzuoka, an employee for forty years at a Japanese company,
Wall sTReeT JouRnal interview

1. Goal and achievement oriented—Americans think they can accomplish anything, given
enough time, money, and technology.

2. Highly organized and institutionally minded
3. Freedom-loving and self-reliant—a belief that all persons are equal; they admire self-

made people.
4.

5. Friendly and informal—informal in greeting and dress; a noncontact culture (avoid
embracing in public).

6. Competitive and aggressive—driven to achieve and succeed in play and business.
7. Values in transition—traditional family values are undergoing transition.
8. Generosity—Americans are a sharing people.

—a strong work ethic; conscious of time and efficient in
doing things.
Work-oriented and efficient

ExHIBIT 3-4 Americans at a Glance

Source: Based on excerpts from Managing Cultural Differences by Philip R. Harris and Robert T. Moran,
5th ed. © 2000 by Gulf Publishing Company, Houston, TX.

Comparative Management in Focus
Profiles in Culture—Japan, Germany, Latin America

JAPAN
The traditional Japanese business characteristics of politeness and deference have left companies
without the thrusting culture needed to succeed internationally.72

With intense global competition, many Japanese companies are recognizing the need for
more assertiveness and clarity in their business culture to expand abroad. As a result, Japanese
employees are recognizing the need to manage their own careers as companies move away

from lifetime employment to be more competitive. Only a handful of large businesses, such as Toyota,
Komatsu, and Canon, have managed to become indisputable global leaders by maintaining relationships
as a foundation for their operations around the world.73 For the majority of Japanese, the underlying
cultural values still predominate—at least for now.

Japanese culture is strong, formal, and largely homogeneous and inculcated to the young through
the teachings and expectations conveyed by the extended family. Much of Japanese culture—and the

(Continued)

100 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

basis of working relationships—can be explained by the principle of wa, “peace and harmony.” This
principle, embedded in the value the Japanese attribute to amae (“indulgent love”), probably originated
in the Shinto religion, which focuses on spiritual and physical harmony. Amae results in shinyo, which
refers to the mutual confidence, faith, and honor necessary for successful business relationships. Japan
ranks high on pragmatism, masculinity, and uncertainty avoidance and fairly high on power distance. At
the same time, much importance is attached to loyalty, empathy, and the guidance of subordinates. The
result is a mix of authoritarianism and humanism in the workplace, similar to a family system. These
cultural roots are evident in a homogeneous managerial value system, with strong middle management,
strong working relationships, strong seniority systems that stress rank, and an emphasis on looking after
employees. The principle of wa carries forth into the work group—the building block of Japanese busi-
ness. The Japanese strongly identify with their work groups and seek to cooperate with them. The em-
phasis is on participative management, consensus problem solving, and decision making with a patient,
long-term perspective. Open expression and conflict are discouraged, and it is of paramount importance
to avoid the shame of not fulfilling one’s duty. These elements of work culture result in a devotion to
work, collective responsibility, and a high degree of employee productivity. In meetings, punctuality is
essential; the meeting should start with a bow or handshake, then an exchange of business cards (mei-
shi) using both hands, and then reading the card before you put it in your pocket. Titles and last names
should be used, and some small talk should take place before business.74 Do not invade the personal
space of the Japanese, and avoid any confrontation or nonverbal excess. In addition, it is important to
avoid singling out any one Japanese person because it is a group process.

The Japanese culture values patience, or nintai, which, can be used effectively to extract ad-
ditional concessions during negotiations with Western companies. From Japan’s history with
Confucianism, people tend to be obligation oriented—compared to rights oriented in the USA.
That is, a Japanese person’s actions are influenced by obligations of on and giri to others. The need to
repay these obligations motivates a Japanese person’s social life. An “on” refers to a lifelong indebt-
edness, typically to the emperor, a parent, or a sensai. This form of indebtedness is never considered

China, India, and Indonesia are
the first, second, and fourth most
populous countries in the world;
China alone is home to more than
one-fifth of the human race.

The Ural Mountains
divide Russia into its
European and Asian
regions.

Of the top 20 trading
nations—based on the
sum of imports and
exports of goods—7 are
countries in East Asia.

High-income nations

Middle-income nations

Low-income nations

Major industrial areas

Capitals

Cities over 5 million

Capitals over 5 million

Sanaa

Riyadh Doha

Muscat Karachi

Kolkata

Dacca Hanoi

Viangchan

Rangoon

Kolkata

Ho Chi Minh
City

Phnom
Penh

Islamabad

Dushanbe

Lahore

Kabul

Tashkent

Bishkek

Mumbai

Ahmadabad

Jamshedpur

Delhi

Novosibirsk

Ulan Bator

Taiyuan

Harbin

Changchun
Shenyang

Pyongyang

Seoul

Wuhan
Changsha Taipei

Macáo

Kuala
Lumpur

Jakarta

Dili

Tim
or

-Le
ste

Chengdu

Manila

Guangzhou
(Canton)

Chongqing
(Chungking)

Shanghai

Beijing
(Peking) Tianjin

Kitakyushu

Osaka
NagoyaKobe

Tokyo

New
Delhi

Colombo

Chennai

Manama

Kuwait

Baghdad

Tehran Ashgabat

Beirut

Ankara

Istanbul

Yerevan
Baku

Tbilisi

Damascus

Abu
Dhabi

Amman

Jerusalem

Astana

Yekaterinburg
Chelyabinsk

INDIA

C H I N A

N.
KOREA

TAIWAN

S.
KOREA

R U S S I A

K A Z A K H S T A N

M O N G O L I A

JAPAN

IRAN

SAUDI
ARABIA

YEMEN OMAN

U.A.E.

QATAR
BAHRAIN

KUWAIT

IRAQ

SYRIA
AZERBAIJAN

TURKMENISTAN

UZBEKISTAN

TAJIKISTAN

NEPAL BHUTAN

BANG.

MYANMAR
LAOS

THAILAND

CAMBODIA

SRI LANKA

PHILIPPINES

BRUNEI

A U S T R A L I A

M A L A Y S I A

VIETNAM

AFGHANISTAN

PAKISTAN

TURKEY
ARMENIA

GEORGIA

JORDAN

LEBANON

ISRAEL

KYRGYZ REPUBLIC

SINGAPORE

HONG KONG

BORNEO

KURIL
ISLANDS

SUM
ATRA

Black Sea

Ca
sp

ia
n

A r a b i a n
S e a

B a y
o f

B e n g a l

South
China
Sea

Celebes
Sea

East
China
Sea

Sea
of

Japan

Sea
of

Okhotsk

Lake
Baikal

Aral
Sea

I N D O
N

E
S

I
A

P a c i f i c
O c e a n

M
e

d
iterra

n
ea

n Sea

PAPUA
NEW GUINEA

MAP 3-2 Japan/Asia

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 101

to be fully repaid. A “giri” refers to short-term obligations to friends, work colleagues, and other per-
sons of equal or lower status to oneself.75

Professor Nonaka, a specialist in how companies tap the collective intelligence of their workers,
discusses a similar Japanese concept of ba: an interaction among colleagues on the job that leads to
knowledge-sharing. He says that

Ba can occur in a work group, a project team, an ad hoc meeting, a virtual e-mail list, or at
the frontline point of contact with customers. It serves as a petri dish in which shared insights
are cultivated and grown.76

The message is clear that, in Japan, companies that give their employees freedom to interact
informally are likely to benefit from new ideas and collaboration.

If we extend this cultural profile to its implications for specific behaviors in the workplace, we
can draw a comparison with common American behaviors. Most of those American behaviors seem
to be opposite to those of their Japanese counterparts; it is no wonder that many misunderstandings
and conflicts in the workplace arise between Americans and Japanese (see Exhibit 3-5). For example,
a majority of the attitudes and behaviors of many Japanese stems from a high level of collectivism,
compared with a high level of individualism common to Americans. This contrast is highlighted in the
center of Exhibit 3-5—“Maintain the group” compared with “Protect the individual.” In addition, the
strict social order of the Japanese permeates the workplace in adherence to organizational hierarchy
and seniority and in loyalty to the firm. This contrasts markedly with the typical American responses
to organizational relationships and duties based on equality. In addition, the often blunt, outspoken
American businessperson offends the indirectness and sensitivity of the Japanese, for whom the virtue

Man controlling nature
Risk-taking

Bold initiative
Spontaneity

Improvisation
Outspokenness
Critical thinking
Logical reasoning

Clarity and frankness
Confronting
Threatening
Decisiveness

Individuality
Personal principle

Legal safeguards
Individual independence

Protect the individual
Righteous indignation

Being heard
Chaotic anarchy

Proving oneself
Rewarding performance

Track record
Specialists

Opportunities
Fair effort

Guilt
Autonomy

Level playing field
Industrial competition

Ambiguous/informal ranking
Racial equality
Gender equality

Man within nature . . . . . . . . . . . . . . . . . .
Caution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Incremental improvement . . . . . . . . . . . . . . .
Deliberation . . . . . . . . . . . . . . . . . . . . . . .

Adherence to form . . . . . . . . . . . . . . .
Silence . . . . . . . . . . . . . . . . . . .

Memorization . . . . . . . . . . . . . . . .
Emotional sensitivity . . . . . . . . . . . .

Indirectness . . . . . . . . . . . . . . . . . .
Assuaging . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Avoiding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consensus building . . . . . . . . . . . . . . . . . . . . . . . . . .

Conformity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Group convention . . . . . . . . . . . . . . . . .

Trusted relationships . . . . . . . . . . . . .
Collective strength . . . . . . .

Maintain the group . . . . . .
Modest resignation . . . . . . . .

Saving face . . . . . . . . . . . . . . . . . . . . . . .
Oppressive unanimity . . . . . . . . . . . . . . .

Humble cooperation . . . . . . . . . . . . . . . . . . . .
Rewarding seniority . . . . . . . . . . . . . . . .
Loyalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Generalists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations . . . . . . . . . . . . . . . . . . . . . . . .

Untiring effort . . . . . . . . . . . . . . . . . . . . . .
Shame . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Dependency . . . . . . . . . . . . . . . . . .
Dutiful relationships . . . . . . . . . .

Industrial groups . . . . . . . . . . . .
Strict ranking . . . . . . . . . . .

Racial differentiation . . . . . . . . . . . . . . . . . . .
Gender differentiation . . . . . . . . . . . . . . . . . . . .

Action

Freedom

Equality

Patience

Harmony

Hierarchy

Japanese American

ExHIBIT 3–5 The American-Japanese Cultural Divide

Source: R. G. Linowes, “The Japanese Manager’s Traumatic Entry into the United
States: Understanding the American–Japanese Cultural Divide,” Academy of
Management Executive 7, No. 4 (1993), p. 24.

(Continued )

102 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

of patience is paramount, causing the silence and avoidance that so frustrates Americans. As a result,
Japanese businesspeople tend to think of American organizations as having no spiritual quality and lit-
tle loyalty to employees, and they think of Americans as assertive, frank, and egotistic. Their American
counterparts, in turn, respond with the impression that Japanese businesspeople have little experience
and are secretive, arrogant, and cautious.77 Westerners doing business in Japan need to be aware of
the importance of giri—the expectations of reciprocity in relationships and how to behave. Managers
should inform themselves in particular about the practice of gift-giving and the relationship of the type
of gift suitable for the relative status of the parties involved; gift giving is accepted practice, but make
sure it is not too big or it will be an embarrassment and may be considered an attempt to bribe.

GERMANY
The reunited Germany is somewhat culturally diverse inasmuch as the country borders several nations.
Generally, Germans rank quite high on Hofstede’s dimension of individualism, although their behav-
iors seem less individualistic than those of Americans. They score fairly high on uncertainty avoidance
and masculinity and have a relatively small need for power distance. These cultural norms show up in
the Germans’ preference for being around familiar people and situations; they are also reflected in their
propensity to do a detailed evaluation of business deals before committing themselves.

Christianity underlies much of German culture—more than 96 percent of Germans are Catholics
or Protestants. This may be why Germans tend to like rule and order in their lives and why there is
a clear public expectation of acceptable and unacceptable ways to act. Public signs everywhere in
Germany dictate what is allowed or verboten (forbidden). Germans are very strict with their use of
time, whether for business or pleasure, frowning on inefficiency or tardiness.

In business, Germans tend to be assertive, but they downplay aggression. Decisions are typi-
cally centralized, although hierarchical processes sometimes give way to consensus decision making.
However, strict departmentalization is present in organizations, with centralized and final authority at
the departmental manager level. Employees do not question the authority of their managers. German
companies typically have a vertical hierarchical structure with detailed planning and standardized
rules and procedures; the emphasis is on order and control to avoid risk.

In the business setting, Germans look for security, well-defined work procedures, rules, estab-
lished approaches, and clearly defined individual assignments. In short, the German business
environment is highly structured. “Ordnung” (order) is the backbone of company life.78

What the Germans call Ordnung (the usual translation is “order,” but it is a much broader concept) is
the unwritten road map of how to live one’s life. “A group of Germans lined up on an empty street corner,
even in the middle of the night, waiting for a light to change before crossing, is one of the favorite first im-
pressions taken away by visiting Americans, who are usually jaywalking past as they observe it.”79 For self-
reliant Americans, the German adherence to precise rules and regulations is impressive but often stifling.

Hall and Hall describe the German preference for closed doors and private space as evidence of the
affinity for compartmentalization in organizations and in their own lives. They also prefer more physical
space around them in conversation than do most other Europeans, and they seek privacy so as not to be
overheard.80 German law prohibits loud noises in public areas on weekend afternoons. Germans are conser-
vative, valuing privacy, politeness, and formality; they usually use last names and titles for all except those
close to them. Business interactions are specifically task-focused and not for relationship-building. Meetings
are formal and require written documents in both English and German. Deference is given to people of au-
thority on both sides. There is a strict protocol, including the order of people entering the room and getting
seated (e.g., rank and age). It all requires patience with the protocol and formality, and you should wait to
sit until it is indicated to do so. The Germans do not respond well to displays of emotions and promises, and
any confrontational behavior will backfire. Once a contract is in place, it will be strictly followed.81

Most Germans prefer to focus on one task or issue at a time, that task taking precedence over other
demands; strict schedules are important, as is punctuality, both showing respect for all concerned.
Overall, Germany is what Walker et al. call a doing-oriented culture—that is, a task and achievement
orientation of work first, pleasure second.82 Such cultures include Switzerland, Germany, Austria, the
Netherlands, and the Scandinavian countries. (This compares with being-oriented cultures—such as
those of Belgium, France, Greece, Ireland, and most Latin American countries—where the general
predisposition is more toward work to live, rather than live to work. Priority is given to affiliation and
personal qualities in being-oriented cultures.)

In negotiations, Germans want detailed information before and during discussions, which can
become lengthy. They give factors such as voice and speech control much weight. However, since
Germany is a low-context society, communication is explicit, and Americans find negotiations easy to
understand.83 On the other hand, Germans communicating with businesspeople from a high-context
culture such as that in Japan will be perceived as abrupt, insensitive, and indifferent. (Low-context
refers to a direct communication style, compared with a high-context, indirect style. This variable

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 103

is further explained in Chapter 4.) Whereas most Asians, for example, will be implicit and indirect,
always aware of the need to save face for everyone concerned, most Germans are very direct and
straightforward; tact and diplomacy takes second place to voicing their opinions.

LATIN AMERICA
Latin America is not one homogeneous area, of course; rather, it comprises many diverse, indepen-
dent nations (most commonly referred to as those territories in the Americas where the Spanish or
Portuguese languages prevail: Mexico; most of Central and South America; and Cuba, the Dominican
Republic, and Puerto Rico in the Caribbean). Businesspeople are most likely to go to the rapidly
developing economies of Chile and Brazil and, of course, to Mexico. (Portuguese is the language in
Brazil.) Christianity—predominantly Roman Catholicism—prevails throughout Latin America. Latin
America is the second most important emerging area economically, after Southeast Asia, with a GDP
about half of China’s and three times that of India.84

For our purposes here, although we acknowledge some regional cultural differences, we can
draw upon the similarities of Latin American culture and business practices as a starting point in de-
veloping a helpful profile. Indeed, Latin America is relatively homogeneous culturally. Some of these
generalities are discussed in the following paragraphs.

Using Hofstede’s dimensions, we can generalize that most people are high on power distance and
uncertainty avoidance, fairly high on masculinity, low on individualism, and tend to have a compara-
tively short-term orientation toward planning.

Latin Americans are typically being-oriented—with a primary focus on relationships and enjoy-
ing life in the present—as compared with the doing-oriented German (and mostly Western) culture
discussed earlier. For Latin Americans, work lives and private lives are much more closely integrated
than those of Westerners, so they emphasize enjoying life and have a more relaxed attitude toward
work; because of that, Westerners often stereotype them as lazy rather than realizing that it is simply
a different attitude toward the role of work in life. Connected with that attitude is the tendency to be
rather fatalistic—that is, a feeling that events will be determined by God—rather than a feeling of
their own control or responsibility for the future.

Most people in those countries have a fluid orientation toward time and tend to be multifocused,
as discussed earlier in this chapter. Planning, negotiations, and scheduling take place in a relaxed
and loose time framework; those processes take second place to building a trusting relationship and
reaching a satisfactory agreement.85 Communication is based on their high-context culture (this
concept is discussed further in Chapter 4). This means that communication tends to be indirect and
implicit, based largely on nonverbal interactions and the expectation that the listener draws infer-
ence from understanding the people and the circumstances without the need to be blunt or critical.
Westerners need to take time, to be subtle and tactful, and to be incremental in discussing business
to avoid being viewed as pushy and thus cutting off the relationship. Maintaining harmony and sav-
ing face is very important, as is the need to avoid embarrassing the other people involved. Managers
must avoid any public criticism of employees, and any reprimand should be by way of suggestion.

Communication is also very expressive and demonstrative; courtesy, formality, and good manners
are respected and lead to very complimentary and hospitable expressions to guests. Latin Americans
tend to stand closer and touch more often than most Westerners, exuding the warmth and hospitality that
is typical in the region.

Hierarchy prevails in all areas of life, from family to institutions such as government and the
workplace. Each level and relationship is expected to show deference, honor, and respect to the next
person or level. Status is conveyed by one’s position and title and the formality of dress and etiquette.
Traditional managers have the respect of their position and are typically autocratic and paternal.
Loyalty is to the superior as a person. Employees expect to be assigned tasks with little participation
involved, although younger managers who have been educated in Europe or the United States are
starting to delegate. However, although most Latin Americans can show some flexibility in structure,
Chile is probably the most order-oriented country; managers there are very high on uncertainty avoid-
ance and try hard to minimize risk and strictly adhere to social and business norms.86

Relationships have priority whether among family, friends, or business contacts. Loyalty among
family and friends leads to obligations, and often nepotism, which can lead to varying levels of qual-
ity in the work performance and less initiative than a Western businessperson might expect. Business
is conducted through social contacts and referrals—that is, success does not depend as much on what
you know as on whom you know. Latin Americans do business with people with whom they develop
a trusting relationship, so it behooves businesspeople, here as in much of the world, to take time to
develop a friendly, trusting relationship before getting down to business.

Western managers need to develop a warm attitude toward employees and business contacts and
cultivate a sense of family at work; they should communicate individually with employees and colleagues
and develop a trusting relationship.

104 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

CULTURE AND MANAGEMENT STYLES
AROUND THE WORLD
As an international manager, after you have researched the culture of a country in which you may
be going to work or do business, and after you have developed a cultural profile, it is useful then
to apply that information to develop an understanding of the expected management styles and
ways of doing business that predominate in that region or in that type of business setting. The
nearby feature, “Under the Lens: Doing Business in Brazil—Language, Culture, Customs, and
Etiquette,” illustrates the relationship between culture and management. Two further examples
then follow in the sections titled “Saudi Arabia” and “Chinese Small Family Businesses.”

3-5. To gain some insight into
different management
styles around the world

UNDER THE LENS
Doing Business in Brazil—Language, Culture, Customs, and Etiquette

FIGURE 3-3 Christ the Redeemer statue overlooking Rio
de Janeiro

Source: michaeljung/Shutterstock

FIGURE 3-4 Brazilian Flag

Source: CPJ Photography/Fotolia

FACTS AND STATISTICS

Location Eastern South America bordering Argentina, 1,224 km; Bolivia, 3,400 km; Colombia,
1,643 km; French Guiana, 673 km; Guyana, 1,119 km; Paraguay, 1,290 km; Peru, 1,560 km; Suri-
name, 597 km; Uruguay, 985 km; and Venezuela, 2,200 km

Capital Brasília

Climate Mostly tropical but temperate in south

Population 210,867,954 (2018 est.)

Ethnic Makeup White (includes Portuguese, German, Italian, Spanish, and Polish) 55%; mixed
white and black, 38%; black, 6%; other (includes Japanese, Arab, Amerindian), 1%

Religions Christianity 87%

Government Federative republic

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 105

LANGUAGE IN BRAZIL

Language is one of the strongest elements of Brazil’s national unity. Nearly 100 percent of
the population speaks Portuguese. The only exceptions are some members of Amerindian
groups and pockets of immigrants, primarily from Japan and South Korea, who have not
yet learned Portuguese. The principal families of Indian languages are Tupí, Arawak,
Carib, and Gê.

There is about as much difference between the Portuguese spoken in Brazil and that
spoken in Portugal as between the English spoken in the United States and that spoken in the
United Kingdom. Within Brazil, there are no dialects of Portuguese, only moderate regional
variation in accent, vocabulary, and use of personal nouns, pronouns, and verb conjugations.
Variations tend to diminish because of mass media, especially the national television net-
works that the majority of Brazilians view.

BRAZILIAN SOCIETY AND CULTURE

Brazilian Diversity

• Brazil is a mixture of races and ethnicities, resulting in rich diversity.

• Many original Portuguese settlers married native women, which created a new race
called “mestizos.”

• “Mulattoes” are descendants of the Portuguese and African slaves.

• Slavery was abolished in 1888, creating, over time, a further blurring of racial lines.

• Unlike many other Latin American countries that have a distinct Indian population,
Brazilians have intermarried to the point that it sometimes seems that almost everyone
has a combination of European, African, and indigenous ancestry.

BRAZILIAN FAMILY VALUES

• The family is the foundation of the social structure and forms the basis of stability for
most people.

• Families tend to be large (although family size has been diminishing in recent years),
and the extended family is quite close.

• The individual derives a social network and assistance in times of need from the
family.

• Nepotism is considered a positive thing because it implies that employing people one
knows and trusts is of primary importance.

ETIQUETTE AND CUSTOMS IN BRAZIL

Meeting Etiquette

• Men shake hands while maintaining steady eye contact when greeting one another.

• Women generally kiss each other, starting with the left and alternating cheeks.

• Hugging and backslapping are common greetings among Brazilian friends.

• If a woman wishes to shake hands with a man, she should extend her hand first.

Gift-Giving Etiquette

• If invited to a Brazilian’s house, bring the hostess flowers or a small gift.

• Orchids are considered a very nice gift, but avoid purple ones.

• Avoid giving anything purple or black, because these are mourning colors.

• Handkerchiefs are also associated with funerals, so they do not make good gifts.

• Gifts are opened when received.

(Continued )

106 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Dining Etiquette

If you are invited to a Brazilian’s house:

• Arrive at least 30 minutes late if the invitation is for dinner.

• Arrive up to an hour late for a party or large gathering.

• Brazilians dress with a flair and judge others on their appearance. Casual dress is more
formal than in many other countries. Always dress elegantly and err on the side of
overdressing rather than underdressing.

• If you did not bring a gift to the hostess, flowers the next day are always appreciated.

BUSINESS ETIQUETTE AND PROTOCOL IN BRAZIL

Relationships and Communication

Brazilians need to know whom they are doing business with before they can work
effectively.

• Brazilians prefer face-to-face meetings to written communication because it allows
them to know the person with whom they are doing business.

• The individual they deal with is more important than the company.

• Because this is a group culture, it is important not to do anything to embarrass a Brazilian.

• Criticizing an individual causes that person to lose face with the others in the meeting.

• The person making the criticism also loses face because he or she has disobeyed the
unwritten rule.

• Communication is often informal and does not rely on strict rules of protocol. Those
who feel they have something to say will generally add their opinion.

• It is considered acceptable to interrupt someone who is speaking.

• Face-to-face, oral communication is preferred over written communication. At the
same time, when it comes to business agreements, Brazilians insist on drawing up de-
tailed legal contracts.

• Lunch is a very important meal in Brazil. It is a great way to build relationships with
coworkers and clients.

Business Negotiations

• Expect questions about your company because Brazilians are more comfortable doing
business with people and companies they know.

• Wait for your Brazilian colleagues to raise the business subject. Never rush the
relationship-building time.

• Brazilians take time when negotiating. Do not rush them or appear impatient.

• Expect a great deal of time to be spent reviewing details.

• Often, the people you negotiate with will not have decision-making authority.

• It is advisable to hire a translator if your Portuguese is not fluent.

• Use local lawyers and accountants for negotiations. Brazilians resent an outside legal
presence.

• Brazilian business is hierarchical. Decisions are made by the highest-ranking person.

• Brazilians negotiate with people, not companies. Do not change your negotiating team
or you may have to start over from the beginning.

Business Meeting Etiquette

• Business appointments are required and can often be scheduled on short notice; how-
ever, it is best to make them 2 to 3 weeks in advance.

• Confirm the meeting in writing. It is not uncommon for appointments to be canceled
or changed at the last minute.

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 107

• In São Paulo and Brasília, it is important to arrive on time for meetings. In Rio de
Janeiro and other cities, it is acceptable to arrive a few minutes late for a meeting.

• Do not appear impatient if you are kept waiting. Brazilians see time as something out-
side their control, and the demands of relationships take precedence over adhering to a
strict schedule.

• Meetings are generally rather informal.

• Expect to be interrupted while you are speaking or making a presentation.

• Avoid confrontations. Do not appear frustrated with your Brazilian colleagues.

DRESS ETIQUETTE

• Brazilians pride themselves on dressing well.

• Men should wear conservative, dark-colored business suits. Three-piece suits typically
indicate that someone is an executive.

• Women should dress appropriately for the situation.

BUSINESS CARDS

• Business cards are exchanged during introductions with everyone at a meeting.

• It is advisable, although not required, to have the other side of your business card
translated into Portuguese.

• Present your business card with the Portuguese side facing the recipient.

Sources: https://thebrazilbusiness.com/article/dining-culture-in-brazil, August 20, 2020. https://www.brazil.
org.za/traditional-customs.html, August 20, 2020. https://www.everyculture.com/Bo-Co/Brazil.html, August
20, 2020. www.kwintessential.co.uk/resources/global-etiquette/brazil-country-profile.html, September 5, 2011.
Used with permission of www.kwintessential.co.uk.

Saudi Arabia
Understanding how business is conducted in the modern Middle East requires an understand-
ing of the Arab culture because the Arab peoples are the majority there, and most of them
are Muslim. As discussed in the opening profile, the Arab culture is intertwined with the
pervasive influence of Islam. Even though not all Middle Easterners are Arab, Arab culture
and management style predominate in the Arabian Gulf region. Shared culture, religion, and
language underlie behavioral similarities throughout the Arab world. Islam permeates Saudi
life—Allah is always present, controls everything, and is frequently referred to in conversa-
tion.87 Employees may spend more than two hours a day in prayer as part of the life pattern
that intertwines work with religion, politics, and social life.

Arab history and culture are based on tribalism, with its norms of reciprocity of favors,
support, obligation, and identity passed on to the family unit, which is the primary structural
model. Family life is based on closer personal ties than in the West. Arabs value personal rela-
tionships, honor, and saving face for all concerned; these values take precedence over the work
at hand or verbal accuracy. Outsiders must realize that establishing a trusting relationship and
respect for Arab social norms has to precede any attempts at business discussions. Honor, pride,
and dignity are at the core of shame societies such as the Arabs. As such, shame and honor pro-
vide the basis for social control and motivation.88 Circumstances dictate what is right or wrong
and what constitutes acceptable behavior.

Saudi business culture generally tends to avoid displays of what could be considered weak-
ness. It is sometimes difficult for Westerners to get at the truth because of the Arab need to avoid
showing weakness; instead, Arabs present a desired or idealized situation. Shame is also brought
on someone who declines to fulfill a request or a favor; therefore, a business arrangement is left
open if something has yet to be completed.

The communication style of Middle Eastern societies is high context (that is, implicit and
indirect), and their use of time is polychronic; many activities can be taking place at the same time,
with constant interruptions commonplace. The imposition of deadlines is considered rude, and

https://thebrazilbusiness.com/article/dining-culture-in-brazil

108 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

business schedules take a backseat to the perspective that events will occur sometime when Allah
wills (bukra insha Allah). Arabs give primary importance to hospitality; they are cordial to business
associates and lavish in their entertainment, constantly offering strong black coffee (which you
should not refuse) and banquets before considering business transactions. Westerners must realize
the importance of personal contacts and networking, socializing and building close relationships
and trust, practicing patience regarding schedules, and doing business in person. Exhibit 3-6 gives
some selected actions and nonverbal behaviors that may offend Arabs. The relationship between
cultural values and norms in Saudi Arabia and managerial behaviors is illustrated in Exhibit 3-7.

• Introducing business subjects too soon.
• Commenting on a man’s wife or female children over 12 years of age.
• Raising colloquial questions that may be considered as an invasion of privacy.
• Using disparaging or swear words and off-color or obscene attempts at humor.
• Talking about religion, politics, or Israel.
• Bringing gifts of alcohol or using alcohol, which is prohibited in Saudi Arabia.
• Requesting favors from those in authority or esteem, for it is considered impolite for

Arabs to say no.
• Pointing your finger at someone or showing the soles of your feet when seated.

ExHIBIT 3-6 Behavior That Will Likely Cause Offense in Saudi Arabia

Source: Based on excerpts from P. R. Harris and R. T. Moran, Managing Cultural Differences, 5th ed.
(Houston: Gulf Publishing, 2000).

Cultural Values Managerial Behaviors

Tribal and family loyalty Work group loyalty
Paternal sociability

Careful selection of employees
Nepotism

Arabic language Business as an intellectual activity
Access to employees and peers
Management by walking around
Conversation as recreation

Close and warm friendships People orientation
Theory Y management
Avoidance of judgment

Islam Sensitivity to Islamic virtues
Observance of the Qur’an and Sharia

Work as personal or spiritual growth
Adherence to norms

Honor and shame Conflict avoidance
Positive reinforcement
Private correction of mistakes
Avoidance of competition
Responsibility

Polychronic use of time Right- and left-brain facility
Action oriented

Patience and flexibility
Male domination Separation of sexes

Open work life; closed family life

ExHIBIT 3-7 The Relationship between Culture and Managerial Behaviors in Saudi Arabia

Source: Based on excerpts from P. R. Harris and R. T. Moran, Managing Cultural Differences, 5th ed.
(Houston: Gulf Publishing, 2000).

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 109

Chinese Family Small Businesses
The predominance of small businesses in China and the region highlights the need for manag-
ers from around the world to gain an understanding of how such businesses operate. Many
small businesses—most of which are family or extended-family businesses—become part of
the value chain (suppliers, buyers, retailers, etc.) within industries in which foreign firms may
compete.

Some specifics of Chinese management style and practices in particular are presented
here as they apply to small businesses. (Further discussion of the Chinese culture continues
in Chapter 5 in the context of negotiation.) It is important to note that no matter the size of
a Chinese company, but especially in small businesses, it is the all-pervasive presence and
use of guanxi that facilitate business transactions in China. Guanxi means “connections”—
the network of relationships the Chinese cultivate through friendship and affection; it entails
the exchange of favors and gifts to provide an obligation to reciprocate favors. Those who
share a guanxi network share an unwritten code.89 The philosophy and structure of Chinese
businesses comprise paternalism, mutual obligation, responsibility, hierarchy, familialism,
personalism, and connections. Autocratic leadership is the norm with the owners using their
powers—but caring for people may predominate over efficiency.

According to Lee, the major differences between Chinese management styles and those
of their Western counterparts are human-centeredness, family-centeredness, centralization
of power, and small size.90 Their human-centered management style puts people ahead of
a business relationship and focuses on friendship, loyalty, and trustworthiness.91 The fam-
ily is extremely important in Chinese culture, and any small business tends to be run like
a family.

Globalization has resulted in ethnic Chinese businesses (in China or other Asian countries)
adapting to more competitive management styles. They are moving away from the traditional
centralized power structure in Chinese organizations that comprised the boss and a few family
members at the top and the employees at the bottom, with no ranking among the workers. In
fact, family members no longer manage many Chinese businesses. Frequently, the managers are
those sons and daughters who have studied and worked overseas before returning to the family
company—or even foreign expatriates. Examples of Chinese capitalism responding to change
and working to globalize through growth are Eu Yan Sang Holdings Ltd., the Hiap Moh Printing
businesses, and the Pacific International Line.92

As Chinese firms in many modern regions in the Pacific Rim seek to modernize and com-
pete locally and globally, a tug of war has begun between the old and the new: the traditional
Chinese management practices and the increasingly imported Western management styles. As
Lee discusses, this struggle is encapsulated in the different management perspectives of the old
and young generations. A two-generational study of Chinese managers by Ralston et al. also
found generational shifts in work values in China. They concluded that the new generation man-
ager is more individualistic, more independent, and less risk averse in the pursuit of profits.
However, they also found the new generation holding on to their Confucian values, concluding
that the new generation may be viewed as “crossverging their Eastern and Western influences,
while on the road of modernization.”93

CONCLUSION
This chapter has explored various cultural values and how managers can be prepared to un-
derstand them with the help of some general cultural profiles. The following chapters focus
on application of this cultural knowledge to management in an international environment (or,
alternatively in a domestic multicultural environment)—especially as relevant to cross-cultural
communication (Chapter 4), negotiation and decision making (Chapter 5), and motivating and
leading (Chapter 11). Culture and communication are essentially synonymous. What happens
when people from different cultures communicate, and how can international managers under-
stand the underlying process and adapt their styles and expectations accordingly? For the an-
swers, read the next chapter.

110 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

3-1. What is meant by the culture of a society, and why is it im-
portant for international managers to understand it? Do you
notice cultural differences among your classmates? How do
those differences affect the class environment? How do they
affect your group projects?

3-2. Discuss the types of operational conflicts that could occur
in an international context because of different attitudes
toward time, change, material factors, and individualism.
Give examples relative to specific countries.

Discussion Questions

3-3. Discuss how the Internet and culture interact. Which most af-
fects the other, and how? Give some examples.

3-4. Discuss collectivism as it applies to the Japanese workplace.
What managerial functions does it affect?

3-5. Discuss the role of Islam in cross-cultural relations and business
operations.

■ The culture of a society comprises the shared values, un-
derstandings, assumptions, and goals that are passed down
through generations and imposed by members of the soci-
ety. These unique sets of cultural and national differences
strongly influence the attitudes and expectations—and
therefore the on-the-job behavior—of individuals and
groups.

■ Managers must develop cultural sensitivity to antici-
pate and accommodate behavioral differences in vari-
ous societies. As part of that sensitivity, they must
avoid parochialism—an attitude that assumes one’s
own management techniques are best in any situation
or location and that other people should follow one’s
patterns of behavior.

■ From his original research in 50 countries, Hofstede
proposed four underlying value dimensions that help
identify and describe the cultural profile of a country
and affect organizational processes: power distance,
uncertainty avoidance, individualism, and masculin-
ity. In his later research, Hofstede explored the con-
cept of Confucian Dynamism (i.e., long-term versus

Summary of Key Points

short-term orientation) to explain the cultural varia-
tion of the types of decisions people make.

■ Through his research, Fons Trompenaars confirmed
some similar dimensions and found other unique di-
mensions: obligation, emotional orientation, privacy,
and source of power and status.

■ The GLOBE project team of 170 researchers in
62 countries concluded the presence of a number of
other dimensions and ranked countries on those di-
mensions, including assertiveness, performance ori-
entation, future orientation, and humane orientation.
Gupta et al. from that team found geographical clusters
on nine of the GLOBE project cultural dimensions.

■ On-the-job conflicts in international management fre-
quently arise out of conflicting values and orientations re-
garding time, change, material factors, and individualism.

■ Managers can use research results and personal ob-
servations to develop a character sketch, or cultural
profile, of a country. This profile can help managers
anticipate how to motivate people and coordinate work
processes in a particular international context.

3-6. Develop a cultural profile for one of the countries in the fol-
lowing list. Form small groups of students and compare your
findings in class with those of another group preparing a pro-
file for another country. Be sure to compare specific findings
regarding religion, kinship, recreation, and other subsystems.
What are the prevailing attitudes toward time, change, mate-
rial factors, and individualism?

Republic of South Africa

People’s Republic of China

Mexico

France

India

Application Exercises

3-7. In small groups of students, research Hofstede’s findings regard-
ing the four dimensions of power distance, uncertainty avoid-
ance, masculinity, and individualism for one of the following
countries in comparison to the United States. (Your instructor
can assign the countries to avoid duplication.) Present your find-
ings to the class. Assume you are a U.S. manager of a subsid-
iary in the foreign country and explain how differences on these
dimensions are likely to affect your management tasks. What
suggestions do you have for dealing with these differences in
the workplace? Now assume you are a Brazilian manager.

Italy

Denmark

South Korea

Russia

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 111

3-8. A large Baltimore manufacturer of cabinet hardware had
been working for months to locate a suitable distributor for
its products in Europe. Finally invited to present a demonstra-
tion to a reputable distributing company in Frankfurt, it sent
one of its most promising young executives, Fred Wagner, to
make the presentation. Fred not only spoke fluent German but
also felt a special interest in this assignment because his pa-
ternal grandparents had immigrated to the United States from
the Frankfurt area during the 1920s. When Fred arrived at the
conference room where he would be making his presentation,
he shook hands firmly, greeted everyone with a friendly guten
tag, and even remembered to bow the head slightly as is the
German custom. Fred, an effective speaker and past president
of the Baltimore Toastmasters Club, prefaced his presentation
with a few humorous anecdotes to set a relaxed and receptive
atmosphere. However, he felt that his presentation was not
well received by the company executives. In fact, his instincts
were correct, for the German company chose not to distribute
Fred’s hardware products. What went wrong?

3-9. Bill Nugent, an international real estate developer from
Dallas, had made a 2:30 P.M. appointment with Mr.
Abdullah, a high-ranking government official in Riyadh,
Saudi Arabia. From the beginning, things did not go well
for Bill. First, he was kept waiting until nearly 3:45 P.M.
before he was ushered into Mr. Abdullah’s office. When he
finally did get in, several other men were also in the room.
Even though Bill felt that he wanted to get down to busi-
ness with Mr. Abdullah, he was reluctant to get too specific
because he considered much of what they needed to discuss
sensitive and private. To add to Bill’s sense of frustration,
Mr. Abdullah seemed more interested in engaging in mean-
ingless small talk than in dealing with the substantive issues
concerning their business. How might you help Bill deal
with his frustration?

Experiential Exercises

3-10. Tom Forrest, an up-and-coming executive for a U.S. elec-
tronics company, was sent to Japan to work out the details of
a joint venture with a Japanese electronics firm. During the
first several weeks, Tom felt that the negotiations were pro-
ceeding better than he had expected. He found that he had
very cordial working relationships with the team of Japanese
executives, and in fact, they had agreed on the major policies
and strategies governing the new joint venture. During the
third week of negotiations, Tom was present at a meeting
held to review their progress. The meeting was chaired by
the president of the Japanese firm, Mr. Hayakawa, a man
in his mid-forties, who had recently taken over the presi-
dency from his 82-year-old grandfather. The new president,
who had been involved in most of the negotiations during
the preceding weeks, seemed to Tom to be one of the stron-
gest advocates of the plan that had been developed to date.
Hayakawa’s grandfather, the recently retired president, also
was present at the meeting. After the plans had been dis-
cussed in some detail, the octogenarian past president pro-
ceeded to give a long soliloquy about how some of the fea-
tures of this plan violated the traditional practices on which
the company had been founded. Much to Tom’s amazement,
Mr. Hayakawa did nothing to explain or defend the policies
and strategies that they had taken weeks to develop. Feeling
extremely frustrated, Tom then gave a fairly strong argument
in defense of the plan. To Tom’s further amazement, no one
else in the meeting spoke up in defense of the plan. The ten-
sion in the air was quite heavy, and the meeting adjourned
shortly thereafter. Within days, the Japanese firm completely
terminated the negotiations on the joint venture. How could
you help Tom understand better this bewildering situation?

Source: Gary P. Ferraro, The Cultural Dimensions of International Business,
2nd ed. (Upper Saddle River, NJ: Prentice Hall, 1994).

CASE STUDY
An Australian Manager in an American Company

“Qantas Flight 23 to Sydney is now boarding. Please have your boarding passes and passports ready
for the attendant at the gate.”

Les Collins picked up his briefcase and started toward the jet way. He paused to look around
the waiting area and, as had been the case so often here in Houston, he saw nothing to indicate that
he was in a foreign country. Certainly the accents were different from in Sydney, but the language
was English and readily understandable. This superficial familiarity, he concluded, must help ex-
plain why he had had difficulties adjusting to his role at the Global Oil Company office in Houston.

Global Oil Company, or GOC, was headquartered in Houston, Texas, with partners and sub-
sidiaries in countries around the world. Les had worked at GOC’s Sydney office for eight years
before being offered the chance to work at Houston headquarters for two years. His boss, Jim
Branson, had encouraged Les to apply for the job in Houston because he knew it would enhance
Les’s chances for promotion within GOC-Australia. Although Les’s family—his wife and two
middle school-age children—was not very enthusiastic about the move, he reluctantly applied
for the job because he knew it was critical to his success at GOC.

As he settled back in his seat on the flight to Sydney, Les thought back to the day he arrived in
Houston over a year ago. Les had left Sydney on a hot, humid day in January and arrived 30 hours
later to find Houston almost closed down due to a sleet and ice storm. That juxtaposition of

112 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

seasons probably should have alerted him that there would be many differences between Australia
and the United States. When he hailed a taxi outside the terminal at IAH, the driver looked at him
in amazement when Les opened the door to the front seat and sat down next to the driver.

During his first few weeks at the Houston office, everything seemed to go well. He met
with his staff to introduce himself and his goals for his two-year assignment. Everyone seemed
friendly enough, although he didn’t get much feedback at that meeting or in subsequent meet-
ings on his request for their ideas and input on how he could fit in and be effective. Thinking
that maybe he needed to get to know the staff in a more informal setting, he invited them to join
him after work one day at a local pub. Several staff members begged off, citing personal com-
mitments, and the three senior managers who did come were clearly uncomfortable and left after
about 30 minutes of awkward conversation.

Over the next six months, Les stayed busy learning operations for his area at GOC head-
quarters. He met often with his Houston boss, Tom Sanchez, to discuss the changes Tom wanted
Les to help him realize during his tenure there.

“I’m counting on you, Les, to help me bring the staff around on the changes we’ve dis-
cussed. Your group hasn’t moved nearly as fast as I think they could and that’s partly due to
the staff’s reluctance to change the ways they’ve always done things. I’m confident that a new
leader, especially someone from a completely different country, will convince them of the sound-
ness of what I’m proposing.

“Keep me posted on your progress,” Tom concluded, as he walked Les to the reception area
outside his office.

One of the things Les noticed soon after arriving in Houston was how many more manage-
ment levels the U.S. operation had than comparable offices in Australia. The hierarchy seemed
excessive to Les, and he sought to break down some of the communication barriers he perceived
by meeting with all staff members in one large meeting.

At one of these meetings, Les brought up the proposed changes in procedures that he had
discussed with Sanchez. “I know that some of you may not be in favor of the changes we’re pro-
posing and I’d like to know your reasons for this. Let’s have an open discussion of the changes in
general and see where our major disagreement lies.”

After a few minutes of silence, one of the senior managers explained his reasons for resisting
a change in their reporting procedures for expenses. “I’m not sure that the new method will capture
a true picture of expenses and outlay if we change what we’re doing now. I’m not opposed to mak-
ing changes that improve our work—I just am not convinced that the new method will be better.”

“Okay, I’d like to hear from others on that specific change. Let’s table this discussion,” Les said.
The managers and staff at the table looked at each other in confusion at that point. No

one said anything for several minutes, and Les concluded that no one else had an objection or
concern on this particular point. The meeting continued for another hour as Les moved through
the list of changes he was charged with making and when no one offered much objection or
proposed any alternatives, he concluded that his predecessor and Sanchez had misinterpreted the
staff’s resistance to the changes.

A week later, in a meeting with Bill Crosby, one of the senior managers in his department,
Les decided to get his manager’s views on how to involve junior managers in decisions and how
to encourage their ideas on various topics.

“I notice that in most meetings only the senior managers seem to participate in discussions,”
Les began. “I’m eager to have more input on some ideas I have for a new marketing plan, and I’m
wondering how I can get junior managers and staff to contribute in our meetings.”

Bill hesitated before saying, “Sometimes staff are reluctant to put forward ideas when their
bosses are in the same meeting. Perhaps you should have some of the senior managers solicit
ideas in their own staff meetings and then bring these to the meeting with you.”

“But what about the synergy we can create if we have people from different levels discussing an
idea together? Especially if the idea will affect the work staff are expected to do. I think there’s too
much separation of people by level in our department. I’d like to eliminate some of the impediments
to collaboration that hierarchy creates,” Les said. “What are your thoughts on how to do that?”

“I’ll need to take some time to think about that,” Bill said. “Maybe we can talk about it in
our next one-on-one.”

Later that day, during lunch with one of his peers in the company cafeteria, Bill brought up
his discussion with Les. “He wants to eliminate some of the barriers that the hierarchy puts in

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 113

the way of collaboration,” Bill began. “What exactly do you think he means by collaboration?
We all get along just fine as far as I can see. We cooperate when we need to. And I really don’t
know how to get staff to speak their minds if they don’t want to. I don’t feel comfortable forcing
anybody to be part of a discussion in a meeting if they prefer to just listen.”

At the next all-staff meeting, Les began by handing out a sheet with five topics on it. “Rather
than following one of our regular agendas today, I thought we might do a little brainstorming on
the topics I’ve outlined here. As you can see, these topics all relate to marketing, and what we
come up with in our discussion can go a long way toward finalizing that plan.

“And here’s a twist on our usual meeting protocol: instead of my leading the discussion, I’m
going to assign one of these topics to five people and let you take over the discussion.”

In thinking about the meeting afterward, Les decided that although it hadn’t been a complete
success, he thought he had made some progress in getting increased participation. When one of
the senior managers requested a meeting a couple of days later, Les was surprised at the man-
ager’s comments about the meeting.

“I’m sure you were sincere in your request for ideas from everybody but I need to tell you
that you made a lot of people very uncomfortable. Staff are not used to leading a discussion with
senior managers present. When that staff member is leading a brainstorming session and has to
tell a manager that he’s out of order because he’s criticizing someone’s idea, you’re putting the
staff member in a really awkward position.”

“I guess I don’t understand,” Les said. “The whole point of doing what I did was to break
down the barriers that make people feel uncomfortable. I think everybody has good ideas, and
I’m trying to figure out how I can get them to share those ideas. I thought putting people in dif-
ferent roles would be helpful.”

At his next meeting with Tom Sanchez, Les expressed his frustration with achieving as
much as he hoped for when he started.

“It just seems as though I’m being stonewalled at every turn. In fact, I’ve heard that several
people are thinking of transferring to another department,” Les said. “What am I missing? I’ve
done things just like I do at GOC-Sydney, but the results are not the same.

“Maybe I can make some progress when I get back after vacation. Sometimes three weeks
away helps give a different perspective on things.”

“Yes, Les,” Tom began, “we’ll need to talk about this when you get back from vacation.
Three weeks is a pretty long time for a senior manager to be gone, but I know you and your
family have plans to visit a lot of the national parks in the west, so I reluctantly approved your
request. Have a good trip and I’ll talk with you when you get back.”

When Les returned from vacation, Tom Sanchez was out of the office for a week and they
didn’t have a chance to meet before Les got word that his mother had passed away suddenly and
that he needed to return to Sydney for the funeral. As he headed for Sydney, Les wondered how
he could explain to his former boss in Sydney the problems he was having at GOC headquarters.

Case Questions

3-11. Using Geert Hofstede’s cultural characteristics, compare Australia and the United States on various
measures. As you’ll see, the two countries are fairly similar, but there are some differences that may
help explain Les Collins’s apparent lack of success in the American setting. Which of these do you
think is the most significant and why?

3-12. What could GOC have done to prepare Collins for his assignment in the United States? Outline an
action plan for companies to use in preparing executives—and their families—for international
assignments.

3-13. Articulate and evaluate your own opinion about the degree of distance prevalent in U.S. com-
panies between managers and their direct reports. Who is protected by this management style?
What adverse organizational impacts might result from this style?

Source: Linda Catlin. Ms Catlin is an organizational anthropologist and the co-author of International
Business: Cultural Sourcebook and Case Studies. She consults with clients on projects related to crosscul-
tural business communications, organizational culture, and organizational change dynamics. Her clients
include the Mayo Clinic, the Kellogg Foundation, General Motors, Ascension Health, and BASF. Linda
Catlin, Claymore Associates. Used with permission.

114 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Endnotes

1. Ian Black, “Saudi Digital Generation Takes on Twitter,
YouTube, . . . and the Authorities,” Guardian, December 17,
2013; Helen Gaskell, “Saudi Arabia Reviews Social Media
Laws,” ArabianBusiness.com, June 3, 2014, www.socialmedia
-series.com/saudi/(accessed October 1, 2014); “A Virtual
Revolution; Social Media in Saudi Arabia,” Economist, 412,
8904, 57, September 13, 2014; Statista, www.statista.com
/statistics/284451/saudi-arabia-social-network-penetration/ (ac-
cessed October 1, 2014); Saudi Social Media Summit, www
.socialmedia-series.com/saudi/(accessed October 1, 2014);
“Social Media Plays Matchmaking Role in Saudi Arabia,”
February 11, 2014, www.al-monitor.com/pulse/culture/2014/03/
social-media-saudi-breaking-barriers.html##ixzz3FCdKXc5r
(accessed October 3, 2014).

2. www.internetworldstats.com/middle.htm#sa
3. Kareem Fahim, “Saudi Arabia allows women to travel without

permission from men” The Washington Post, August 2, 2019.
4. P. C. Earley and E. Mosakowski, Cultural Intelligence. Harvard

Business Review 82, No. 10 (October 2004), pp. 139–146.
5. P. C. Earley and S. Ang, Cultural Intelligence: Individual Interactions

across Cultures (Palo Alto, CA: Stanford University Press, 2003).
6. David A. Ricks, Big Business Blunders: Mistakes in Multinational

Marketing (Homewood, IL: Dow Jones–Irwin, 1983).
7. Carla Joinson, “Why HR Managers Need to Think Globally,” HR

Magazine (April, 1998), pp. 2–7.
8. Ibid.
9. J. Stewart Black and Mark Mendenhall, Cross-Cultural Training

Effectiveness: A Review and a Theoretical Framework for Future
Research. Academy of Management Review 15, No. 1 (1990), pp.
113–136.

10. A. Bartolome, “Business Mentor: How Cultural Differences Affect
Doing Business,” ABS CBN News, July 1, 2017, https://news.
abs-cbn.com/business/06/30/17/business-mentor-how-cultural
-differences-affect-doing-business (accessed December 31, 2018).

11. Geert Hofstede, Culture’s Consequences: International
Differences in Work-Related Values (Beverly Hills, CA: Sage
Publications, 1980), p. 25; E. T. Hall, The Silent Language
(Greenwich, CT: Fawcett, 1959). For a more detailed definition
of the culture of a society, see A. L. Kroeber and C. Kluckholhn,
“A Critical Review of Concepts and Definitions,” in Peabody
Museum Papers 47, No. 1 (Cambridge, MA: Harvard University
Press, 1952), p. 181.

12. David Dressler and Donald Carns, Sociology: The Study of
Human Interaction (New York: Knopf, 1969), pp. 56–57.

13. Maia de la Baume and Steven Erlanger, “Social and Economic
Ills Feed Rise of a Far-Right Party in France,” March 27, 2011,
www.nytimes.com.

14. Hofstede, 1980.
15. Emma Jacobs, “20 Questions: Kenichi Watanabe, Nomura:

‘I don’t like to analyse myself,’” Financial Times, September 23,
2011, p. 12.

16. Lane Kelley, Arthur Whatley, and Reginald Worthley, Assessing
the Effects of Culture on Managerial Attitudes: A Three-Culture
Test. Journal of International Business Studies (Summer 1987),
pp. 17–31.

17. Oded Shenkar, Cultural Distance Revisited: Towards a More Rigorous
Conceptualization and Measurement of Cultural Differences. Journal
of International Business 43, No. 1 (January 2012), pp. 1–11.

18. Ibid.

19. Luciardo Nardon and Richard M. Steers, Managing Cross-
Cultural Encounters: Putting Things in Context. Organizational
Dynamics 43 (2014), pp. 138–145.

20. Tarun Khanna, Contextual Intelligence. Harvard Business
Review, 59 (September 2014).

21. Ibid.
22. Jangho Lee, T. W. Roehl, and Soonkyoo Choe, What Makes

Management Style Similar and Distinct across Borders?
Growth Experience and Culture in Korean and Japanese Firms.
Journal of International Business Studies 31, No. 4 (2000),
pp. 631–652.

23. C. Sanchez-Runde et al., Looking beyond Western Leadership
Models. Organizational Dynamics (2011), doi:10.1016/j
.orgdyn.2011.04.008.

24. E. T. Hall, The Silent Language in Overseas Business. Harvard
Business Review (May–June 1960).

25. “One Big Market,” Wall Street Journal, February 6, 1989, p. 16.
26. Baruch Shimoni, The Representation of Cultures in International

and Cross Cultural Management: Hybridizations of Management
Cultures in Thailand and Israel. Journal of International
Management 17 (2011), pp. 30–41.

27. Ibid.
28. Ibid.
29. Philip R. Harris and Robert T. Moran, Managing Cultural

Differences (Houston: Gulf Publishing, 1987).
30. Data from various sources, including the U.S. Bureau of the

Census international database, U.S. State Department Reports,
U.N. Human Development Report.

31. Agam Nag, Cross Cultural Management: An Indian Perspective.
Business Review, Cambridge 17.2 (Summer 2011), pp. 255–260.

32. Ibid.
33. Ibid.
34. A. Ali, The Islamic Work Ethic in Arabia. Journal of Psychology

126 (1992), pp. 507–519.
35. “Buddhism in the Thai Workplace,” www.businesstrendsasia

.com (accessed February 10, 2012).
36. Mansour Javidan and Robert J. House, Cultural Acumen for the

Global Manager: Lessons from Project GLOBE. Organizational
Dynamics (Spring 2001), pp. 289–305.

37. V. Gupta, P. J. Hanges, and P. Dorfman, Cultural Clusters:
Methodology and Findings. Journal of World Business 37
(2002), pp. 11–15.

38. Ibid.
39. Taras et al., 2011.
40. Geert Hofstede, Cultures and Organizations: Software of the

Mind (New York: McGraw-Hill, 1997), pp. 79–108.
41. K. Roth, T. Kostova, and M. Dakhli, Exploring Cultural Misfit:

Causes and Consequences. International Business Review 20
(2011), pp. 15–26.

42. G. Hofstede, Culture’s Consequences: Comparing Values,
Behaviors, Institutions, and Organizations across Nations, 2nd
ed. (Thousand Oaks, CA: Sage, 2001), p. 297.

43. Ibid.
44. G. Hofstede and M. Bond, The Confucian Connection: From

Cultural Roots to Economic Growth. Organizational Dynamics,
16, No. 4 (1988), pp. 4–21.

45. G. Hofstede, Culture’s Consequences: Comparing Values,
Behaviors, Institutions, and Organizations across Nations, 2nd
ed. (Thousand Oaks, CA: Sage, 2001), 500–502.

http://www.businesstrendsasia.com

http://www.nytimes.com

https://news.abs-cbn.com/business/06/30/17/business-mentor-how-cultural-differences-affect-doing-business

http://www.internetworldstats.com/middle.htm#sa

http://www.al-monitor.com/pulse/culture/2014/03/social-media-saudi-breaking-barriers.html##ixzz3FCdKXc5r

http://www.socialmedia-series.com/saudi/

http://www.statista.com/statistics/284451/saudi-arabia-social-network-penetration/

http://www.socialmedia-series.com/saudi/

http://ArabianBusiness.com

CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE 115

46. F. Trompenaars, Riding the Waves of Culture (London: Nicholas
Brealey, 1993).

47. L. Hoeklin, Managing Cultural Differences: Strategies for
Competitive Advantage (New York: The Economist Intelligence
Unit/Addison-Wesley, 1995).

48. P. Steel and V. Taras, Culture as a Consequence: A multi-level
multivariate meta-analysis of the effects of individual and coun-
try characteristics on work-related cultural values. Journal of
International Management, 16 (2010), pp. 211–233.

49. Ibid.
50. Ibid.
51. M. Muethel and M. Hoegl, “Cultural and societal influences

on shared leadership in globally dispersed teams,” Journal of
International Management, 16 (2010), pp. 234–246.

52. C. Schuster and M. Copeland, Global Business Practice:
Adapting for Success (Mason, OH: Thomson, 1996).

53. Ibid.
54. Ibid.
55. www.internetworldstats.com (accessed December 19, 2018).
56. Ibid.
57. Ibid.
58. H. Jeff Smith, Information Privacy and Marketing: What the

U.S. Should (and Shouldn’t) Learn from Europe. California
Management Review 43, No. 2 (2001), pp. 30–34.

59. Ibid.
60. International Comparative Legal Guides, https://iclg

.com/practice-areas/data-protection-laws-and-regulations
/sweden#chaptercontent7.

61. Smith, pp. 30–34.
62. Jung-A, Song., “Seoul Fights Back against Workaholic Culture:

Labour Law,” Financial Times, July 3, 2018, p. 7.
63. K. Stacey, “A Cultural Revolution Is Changing India, One Open-

Plan Office at a Time: Office Life. Modernisation,” Financial
Times., September 24, 2018. https://search.proquest.com
/businesspremium/docview/2124647744/citation/22CC39BDF6
58413DPQ/1?accountid=7122 (accessed January 10, 2019).

64. Shusuke Murai, “For Foreign Companies in Japan, Adapting
to Local Culture Seen as Key to Success,” The Japan Times,
August 23, 2017, www.japantimes.co.jp/news/2017/08/23/busi-
ness/foreign-companies-japan-adapting-local-culture-seen-key
-success/#.XCzMW2lRfIU (accessed January 2, 2019).

65. Ibid.
66. Ibid.
67. Geert Hofstede, Culture’s Consequences: International Differences

in Work-Related Values (Beverly Hills, CA: Sage, 1980).
68. George W. England, Managers and Their Value Systems: A

Five-Country Comparative Study. Columbia Journal of World
Business (Summer 1978), pp. 35–44.

69. Philip R. Harris and Robert T. Moran, Managing Cultural
Differences (Houston: Gulf Publishing, 2004); Lennie Copeland
and Lewis Griggs, Going International (New York: Random
House, 1985); Boye De Mente, Japanese Etiquette and Ethics in
Business (Lincolnwood, IL: NTC Business Books, 1989); R. L.
Tung, Business Negotiations with the Japanese (Lexington, MA:
Lexington Books, 1984); W. G. Ouchi and A. M. Jaeger, “Theory
Z Organization: Stability in the Midst of Mobility,” Academy of
Management Review 3, No. 2 (1978), pp. 305–314; Fernando
Quezada and James E. Boyce, “Latin America,” in Comparative
Management, Raghu Nath, ed. (Cambridge, MA: Ballinger

Publishing, 1988), pp. 245–270; Simcha Ronen, Comparative
and Multinational Management (New York: John Wiley and
Sons, 1986); and V. Terpstra and K. David, The Cultural
Environment of International Business, 3rd ed. (Cincinnati, OH:
South-Western, 1991).

70. Akio Kuzuoka, a forty-year employee at a Japanese company,
quoted in the Wall Street Journal, December 29, 2000.

71. Ibid.
72. FT Business School, “Go West for a New Mind-Set,” Financial

Times, October 10, 2004.
73. Ibid.
74. “Doing Business in Japan—Japanese Social and Business

Culture,” www.communicaid.com (accessed April 20, 2012).
75. K. Azumi, 1974. “Japanese Society: A Sociological View,” in A.

Tiedemann (Ed.), An Introduction to Japanese Civilization (New
York: Columbia University Press), pp. 525–526; C. Kim and C.
Lawson, “The Law of the Subtle Mind: The Traditional Japanese
Conception of Law,” The International and Comparative Law
Quarterly, 28(3): 491–513.

76. www.ft.com, November 26, 2008.
77. Y. Ono and W. Spindle, “Japan’s Long Decline Makes One Thing

Rise—Individualism,” Wall Street Journal, December 29, 2000,
p. 5.

78. D. Walker, T. Walker, and J. Schmitz, Doing Business
Internationally, 2nd ed. (New York: McGraw-Hill, 2003), pp.
188–189.

79. N. Kulish, “The Lines a German Won’t Cross,” www.nytimes.
com, April 4, 2009.

80. E. T. Hall and M. R. Hall, Understanding Cultural Differences
(Yarmouth, ME: Intercultural Press, 1990), p. 4.

81. “Germany: Language, Culture, Customs and Business Etiquette,”
www.kwintessential.co.uk (accessed April 21, 2012).

82. Walker et al., 2003.
83. E. T. Hall and M. R. Hall, Understanding Cultural Differences

(Yarmouth, ME: Intercultural Press, 1990), 4.
84. R. S. Vassolo, J. O. De Castro, and L. R. Gomez-Mejia, Managing

in Latin America: Common Issues and a Research Agenda.
Academy of Management Perspectives (November 2011).

85. Walker et al., 2003, p. 188.
86. Ibid., p. 195.
87. P. R. Harris and R. T. Moran, Managing Cultural Differences,

4th ed. (Houston, TX: Gulf Publishing Co., 1996).
88. Ibid.
89. J. A. Pearce II and R. B. Robinson Jr, Cultivating Guanxi as a

Foreign Investor Strategy. Business Horizons 43, No. 1 (2000),
p. 31.

90. J. Lee, Culture and Management: A Study of Small Chinese
Family Business in Singapore. Journal of Small Business
Management (July 1996), pp. 17–24.

91. R. Sheng, “Outsiders’ Perception of the Chinese,” Columbia
Journal of World Business 14, No. 2 (Summer 2000), pp. 16–22.

92. Henry Yeung Wai-chung, “Debunking the Myths of Chinese
Capitalism,” May 11, 2005, www.nus.edu.sg/cororate/research
/gallery/research30.htm.

93. D. A. Ralston, Yu-Kai-Ceng, Xun Wang, R. H. Terpstra, and
He Wei, “An analysis of managerial work values across the six
regions of China.” Presented at the Academy of International
Business, Boston, November 1994.

http://www.nus.edu.sg/cororate/research/gallery/research30.htm

Home

http://www.nytimes.com

http://www.ft.com

http://www.communicaid.com

http://www.japantimes.co.jp/news/2017/08/23/business/foreign-companies-japan-adapting-local-culture-seen-key-success/#.XCzMW2lRfIU

https://search.proquest.com/businesspremium/docview/2124647744/citation/22CC39BDF658413DPQ/1?accountid=7122

https://iclg.com/practice-areas/data-protection-laws-and-regulations/sweden#chaptercontent7

http://www.internetworldstats.com

116

4
C H A P T E R

4-1. To recognize the communication process and how cultural differences can cause noise in
that process

4-2. To appreciate the cultural variables that affect communication for both the sender and the
listener

4-3. To be aware of the impact of IT on cross-border communications

4-4. To learn how to manage cross-cultural business communications successfully

Communicating Across
Cultures

O B J E C T I V E S

Opening Profile: The Impact of Social Media
on Global Business

Brands have gone all in on Instagram.1

Alexa Tonner, Cofounder of Social Media Marketing Agency Collectively,
April 5, 2019

Managers in international business or non-profit enterprises around the world are grappling with
the question of how to benefit from the burgeoning use of social media networks—through
the Internet, video, audio, and phone—both external and internal to the organization. The

networks, such as Facebook, are directly and indirectly linking people and business around the world.
(Facebook, for example, had 2.49 billion monthly users around the world as of 4th quarter 2019).2
eMarketer forecasts that Instagram will make up 6 per cent of global mobile ad spending this year, and
one-fifth of Facebook’s ad revenues.3

Another challenge to the effective use of social media is how to measure the effectiveness of each
source as a benefit to the company, given the considerable investment their use would require. Firms
such as Target, Dell, and Burger King are trying to find what works best for them as social media ap-
plications such as Google+, Facebook, LinkedIn, YouTube, blogs, microblogs such as Twitter, etc., have
changed the way consumers interact with companies and friends about brands and services—with both
positive and negative feedback.4

For early-stage companies looking to develop a following, Instagram has helped pro-
vide a “level playing platform” because it shows users the posts and ads it thinks they
will like most, rather than those from the biggest brands . . .

. . .brands could still build a following for free on social media if they “create great
content and gain buzz.”5

Debra Williamson, analyst at eMarketer, 2019

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 117

Global business managers are realizing that these social media are potential sources of rich in-
formation, outside the normal chain of communication, that their companies could use to find out
more about what customers want, how new ideas might be received, what competitors are doing, what
problems might be lurking and how to deal with them, and so on. As an example, K. Ananth Krishnan,
the chief technology officer (CTO) of Tata Consultancy Services, stated, “I see an enterprise’s move
to ‘Being Digital’ as an inflexion point in its evolution.”6 Krishnan further notes, however, “You can-
not offer to others what you don’t have in abundance in yourself! To me, any enterprise that wants
to meet the demands of its digital native consumers, should start ‘thinking’ digitally, not just ‘adopt’
digital.”7

Social media trends

As firms seek to refine how they will use social media to implement their strategies, several trends
have emerged. According to Social Media Marketing, privacy and security top the list. Data
breaches at Facebook have called into question cybersecurity at many social media platforms.8
The second most salient trend involves video usage. A study conducted by Cisco indicated that 75 per-
cent of mobile traffic will be achieved via video.9 The third social media trend entails a heavier focus
on augmented reality (AR). In June 2016, Snapchat offered the first AR social media app.10 Cosmetics
firm L’Oreal developed AR apps that enabled potential customers to try makeup and hairstyles before
purchasing any products. The L’Oreal AR app was well received, leading to a strong increase in sales.11
The fourth trend is the internet as the primary source of news content. The fifth trend pertains to data and
artificial intelligence (AI) usage. With rising concerns about fake news, AI will be able to better segment
data in order to provide the best information content possible.12

Regardless of how companies interact with and use social media networks, it is clear that they are
here to stay, that they can have considerable impact on global businesses. Social media users worldwide
increased from 0.97 billion to an estimated 2.82 billion over the period 2010 to 2019. Moreover, social
media usage is expected to reach 3.09 billion by 2021.13 In China, for example, roughly 708 million
people use social media, which is very popular because it is less likely to be monitored by the govern-
ment.14 In 2019, Chinese consumers spent an estimated 6 hours and 39 minutes with media daily, of
which 3 hours, 54 minutes involved digital (i.e., 58.8% of time spent with media), which includes inter-
net activities as well as non-internet activities on mobile devices.15 There is no Facebook or Twitter. In
spite of the complexities and challenges, the sheer numbers of users present considerable opportunity
for marketing across the globe.

FIGURE 4-1 Social Media

Source: arrow/Fotolia

Cultural communications are deeper and more complex than spoken or written messages.
The essence of effective cross-cultural communication has more to do with releasing the
right responses than with sending the “right” messages.16

Hall and Hall

118 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

As the opening profile suggests, communication in all its forms is a critical factor in the cross-
cultural management issues discussed in this book, particularly those of an interpersonal nature,
involving motivation, leadership, group interactions, and negotiation. Culture is conveyed and
perpetuated through communication in one form or another. Culture and communication are so
intricately intertwined that they are, essentially, synonymous.17 By understanding this relation-
ship, managers can move toward constructive intercultural management. Nardon et al. point out
that although global managers cite multicultural communication as a serious challenge, at the
same time, it can open up important sources of business opportunity. “It is through communica-
tion that relationships are formed, conflicts are resolved, and innovative ideas are created and
shared.”18

Managers doing business around the world invariably complain that cross-cultural com-
munication challenges have led to lost business, unintended offenses, and embarrassment—in
particular in countries where it is crucial to develop relationships and trust. Communication,
whether in the form of writing, talking, listening, or through the Internet, is an inherent part of a
manager’s role and takes up the majority of a manager’s time on the job. Studies by Mintzberg
demonstrate the importance of oral communication; he found that most managers spend between
50 and 90 percent of their time talking to people.19 The ability of a manager to communicate ef-
fectively across cultural boundaries will largely determine the success of international business
transactions or the output of a culturally diverse workforce. It is useful, then, to break down the
elements involved in the communication process, both to understand the cross-cultural issues
at stake and to maximize the opportunities to establish common meaning among the parties
communicating.

THE COMMUNICATION PROCESS
The term communication describes the process of sharing meaning by transmitting messages
through media such as words, behavior, or material artifacts. Managers communicate to coordi-
nate activities, to disseminate information, to motivate people, and to negotiate future plans. It is
of vital importance, then, for a receiver to interpret the meaning of a particular communication
in the way the sender intended. Unfortunately, the communication process (see Exhibit 4-1) in-
volves stages during which meaning can be distorted. Anything that undermines the communica-
tion of the intended meaning is typically referred to as noise.

The primary cause of noise is that the sender and the receiver each exists in a unique, pri-
vate world thought of as her or his life space. The context of that private world, largely based
on culture, experience, relations, values, and so forth, determines the interpretation of meaning
in communication. People filter, or selectively understand, messages consistent with their own
expectations and perceptions of reality and their values and norms of behavior. The more dis-
similar the cultures of those involved, the greater the likelihood of misinterpretation. In this way,
as Samovar, Porter, and Jain state in their book, Understanding Intercultural Communication,
cultural factors pervade the communication process:

4-1. To recognize the com-
munication process and
how cultural differences
can cause noise in that
process

Feedback

Receiver
Decodes Meaning

Sender
Encodes Meaning

Medium
Message

Noise

Culture

ExHIBIT 4-1 The Communication Process

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 119

Culture not only dictates who talks with whom, about what, and how the communication
proceeds, it also helps to determine how people encode messages, the meanings they have
for messages, and the conditions and circumstances under which various messages may
or may not be sent, noticed, or interpreted. In fact, our entire repertory of communicative
behaviors is dependent largely on the culture in which we have been raised. Culture, con-
sequently, is the foundation of communication. And, when cultures vary, communication
practices also vary.20

Communication, therefore, is a complex process of linking up or sharing the perceptual
fields of sender and receiver; the perceptive sender builds a bridge to the life space of the re-
ceiver.21 After the receiver interprets the message and draws a conclusion about what the sender
meant, he or she will, in most cases, encode and send back a response, making communication
a circular process.

The communication process is rapidly changing, however, as a result of technological devel-
opments; therefore it is propelling global business forward at a phenomenal growth rate. These
changes are discussed later in this chapter.

Cultural Noise in the Communication Process

In Japanese there are several words for “I” and several words for “you” but their use depends
on the relationship between the speaker and the other person. In short, there is no “I” by itself;
the “I” depends on the relationship.22

Because the focus in this text is on effective cross-cultural communication, it is important to
understand what cultural variables cause noise in the communication process. This knowl-
edge of cultural noise—the cultural variables that undermine the communication of intended
meaning—will enable us to take steps to minimize that noise and so improve communication.

When a member of one culture sends a message to a member of another culture,
intercultural communication takes place. The message contains the meaning the encoder
intends. When it reaches the receiver, however, it undergoes a transformation in which the
influence of the decoder’s culture becomes part of the meaning.23 Exhibit 4-2 provides an
example of intercultural communication in which the meaning got all mixed up. Note how the
attribution of behavior differs for each participant. Attribution is the process by which people
look for an explanation of another person’s behavior. When they realize that they do not un-
derstand another person, they tend, say Hall and Hall, to blame their confusion on the other’s
“stupidity, deceit, or craziness.”24

In the situation depicted in Exhibit 4-2, the Indian employee becomes frustrated and resigns
after experiencing communication problems with his manager. How could this outcome have been
avoided? We do not have much information about the people or the context of the situation, but we
can look at some of the variables that might have been involved and use them as a basis for analysis.

THE CULTURE–COMMUNICATION LINK
The following sections examine underlying elements of culture that affect communication. The
degree to which one is able to communicate effectively largely depends on how similar the other
person’s cultural expectations are to our own. However, cultural gaps can be overcome by prior
learning and understanding of those variables and how to adjust to them.

Trust in Communication
Effective communication, and therefore effective collaboration in alliances across national
boundaries, depends on the informal understandings among the parties that are based on the trust
that has developed between them. However, the meaning of trust, and how it is developed and
communicated, varies across societies. In China and Japan, for example, business transactions
are based on networks of long-standing relationships based on trust rather than on the formal
contracts and arm’s-length relationships typical of the United States. When there is trust between
parties, implicit understanding arises within communications. This understanding has numerous

4-2. To appreciate the cultural
variables that affect com-
munication for both the
sender and the listener

120 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

benefits in business, including encouraging communicators to overlook cultural differences and
minimize problems. It allows communicators to adjust to unforeseen circumstances with less
conflict than would be the case with formal contracts, and it facilitates open communication in
exchanging ideas and information.26 From his research on trust in global collaboration, John
Child suggests the following guidelines for cultivating trust:

• Create a clear and calculated basis for mutual benefit. There must be realistic commit-
ments and good intentions to honor them.

• Improve predictability: Strive to resolve conflicts and keep communication open.

• Develop mutual bonding through regular socializing and friendly contact.27

Behavior Attribution

Manager: “What can be done to make Manager: I am giving him some responsibility.
sure this project is completed
on time?”

Employee: Doesn’t he know what to do?
He is the boss.
Why is he asking me?

Employee: “I don’t know. What do you Manager: Can’t he take responsibility?
suggest?”

Employee: I asked him for instructions.
Manager: “You know the scheduling Manager: I want to train him to make some

and staffing situation here decisions.
better than me.”

Employee: What kind of manager is he? Well, he
expects me to say something.

Employee: “I’ll hire another worker, then Manager: One more worker is totally insufficient;
we should be ready in two weeks.” he doesn’t know how to schedule

properly. I need a definite deadline
commitment—not “should be ready.”

Manager: “Hire three workers and give Manager: I offer a contract.
them a deadline of three weeks.
Are we agreed on that deadline?”

Employee: These are my orders: three weeks.

The manager returned to his office in Munich, confident that the project would be completed on time and the order
delivered on schedule, which he conveyed to the client. After four weeks, the customer called to complain that he had
not received the order. The German VP immediately called the Indian employee:

Manager: “Why hasn’t the order been Manager: I am holding him responsible for
sent out as we agreed?” our agreement.

Employee: He wants to know why it is not ready.
Employee: “It will be completed next week.” (Both attribute that it is not ready.)
Manager: “But you told me it would be Manager: I must teach him to take responsibility

sent out in three weeks.” for deadlines.
Employee: This person does not know how to

manage; it was not possible to
complete the project in three weeks.
I am going to get another job where
the boss knows how to manage!

ExHIBIT 4-2 Cultural Noise in International Communication25 The vice president for operations of a German manufacturing company
headquartered in Munich became concerned about satisfying an important client in France with an order that he had outsourced to a subsidiary
in India. He decided to visit the local manager and confirm the importance of delivering the order on time. The following is what transpired in his
interaction with the local production manager in India.

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 121

What can managers anticipate with regard to the level of trust in communications with peo-
ple in other countries? If trust is based on how trustworthy we consider a person to be, then it
must vary according to that society’s expectations about whether that culture supports the norms
and values that predispose people to behave credibly and benevolently. Are there differences
across societies in those expectations of trust? Research on 90,000 people in 45 societies by the
World Values Study Group provides some insight on cultural values regarding predisposition to
trust. When we examine the percentage of respondents in each society who responded that “most
people can be trusted,” we can see that the Nordic countries and China had the highest predis-
position to trust, followed by Canada, the United States, and Britain, whereas Brazil, Turkey,
Romania, Slovenia, and Latvia had the lowest level of trust in people.28

Trust in the Digital Age
Many leading communications, media and technology companies recognize the dual impor-
tance of building digital trust* both as a company, and as an enabler of the overall digital
economy, making it critical for all companies in these industries to act now or be left behind.29

www.accenture.com

The global consulting firm Accenture defines digital trust as “the confidence placed in an
organization to collect, store, and use the digital information of others in a manner that bene-
fits and protects those to whom the information pertains.” The digital age has reshaped the way
companies communicate with customers around the world. In order to communicate effectively,
companies have leveraged digital technologies that have increased the volume and speed with
which companies and customers now share data. Accenture stresses four pillars of digital trust
in order to develop trust with consumers regarding a brand: Security (e.g., virus protection and
data encryption); Accountability (e.g., global and regional data standards); Privacy (e.g., company
data policies and third-party data sharing); and Benefit/Value (e.g., customer value, brand value,
and loyalty).30

The GLOBE Project
Results from the GLOBE research on culture, discussed in Chapter 3, provide some insight into
culturally appropriate communication styles and expectations for the manager to use abroad.
GLOBE researchers Javidan and House make the following observations.31 For people in societ-
ies that ranked high on performance orientation—for example, the United States—presenting
objective information in a direct and explicit way is an important and expected manner of com-
munication; this contrasts with people in Russia or Greece—societies that ranked low on perfor-
mance orientation—for whom hard facts and figures are not readily available or taken seriously.
In those cases, a more indirect approach is preferred. People from countries ranking low on as-
sertiveness, such as Sweden, also recoil from explicitness; their preference is for much two-way
discourse and friendly relationships.

People ranking high in the humane dimension, such as those from Ireland and the Philippines,
make avoiding conflict a priority and tend to communicate with the goal of being supportive of
people rather than of achieving objective results. This contrasts with people from France and
Spain, whose agenda is achievement of goals.

The foregoing provides examples of how to draw implications for appropriate communica-
tion styles from the research findings on cultural differences across societies. Astute global man-
agers have learned that culture and communication are inextricably linked and that they should
prepare themselves accordingly. Most will also suggest that you carefully watch and listen to
how your hosts are communicating and then follow their lead.

Cultural Variables in the Communication Process
On a different level, it is also useful to be aware of cultural variables that can affect the commu-
nication process by influencing a person’s perceptions; some of these variables have been identi-
fied by Samovar and Porter and discussed by Harris and Moran and others.32 These variables are
as follows: attitudes; social organization; thought patterns; roles; language (spoken or written);
nonverbal communication (including kinesic behavior, proxemics, paralanguage, and object lan-
guage); and time. Although these variables are discussed separately in this text, their effects
are interdependent and inseparable—or, as Hecht, Andersen, and Ribeau put it, “Encoders and

http://www.accenture.com

122 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

UNDER THE LENS
Communicating in India—Language, Culture, Customs, and Etiquette

FACTS AND STATISTICS
Location Southern Asia, bordering Bangladesh, 4,053 km; Bhutan, 605 km; Burma, 1,463 km;
China, 3,380 km; Nepal, 1,690 km; and Pakistan, 2,912 km

Capital New Delhi

Climate Varies from tropical monsoon in south to temperate in north

Population 1.354 billion (as of 2018)34

FIGURE 4-2 Map of India

decoders process nonverbal cues as a conceptual, multichanneled gestalt.”33 Understanding com-
munication and cultural differences can be instrumental in developing strong business relation-
ships throughout the world. In the discussion that follows, we seek to gain an appreciation for
the context of communicating and managing in India, as outlined in the feature, “Under the Lens:
Communicating in India—Language, Culture, Customs, and Etiquette.”

Source: Bardocz Peter/Shutterstock

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 123

FIGURE 4-3 Indian Flag

Source: Malgorzata Kistryn/Fotolia LLC

Ethnic Makeup Indo-Aryan, 72%; Dravidian, 25%; Mongoloid and other, 3% (2000)
Religions Hindu, 79.8%; Muslim, 14.2%; Christian, 2.3%; Sikh, 1.7%; other groups,
including Buddhist, Jain, and Parsi, 2.0% (2011 census)
Government Federal republic

LANGUAGES IN INDIA

The different states of India have different official languages, some of them not recognized by
the central government. Some states have more than one official language. Bihar in east India has
three official languages—Hindi, Urdu, and Bengali—that are all recognized by the central gov-
ernment. But Sikkim, also in east India, has four official languages, of which only Nepali is rec-
ognized by the central government. Besides the languages officially recognized by central or state
governments are other languages that don’t have this recognition, and their speakers are waging
political struggles to obtain this recognition. The central government decided that Hindi was to be
the official language of India, and therefore, it also has the status of official language in the states.

INDIAN SOCIETY AND CULTURE
Doing Business in India

India has quickly become a leading global startup hub; many entrepreneurs from both local
and multinational corporations have given rise to a burgeoning tech scene. Add to that the
increasing number of multinational companies already doing business there or attempting to
expand there directly or by joining with local Indian companies, it is clear that managers need
to prepare themselves with a better understanding of life in India – its people, its culture, and
how to do business there. A few points below can help managers to prepare.

Hierarchy
• The influences of Hinduism and the tradition of the caste system have created a culture that

emphasizes established hierarchical relationships.

• Indians tend to be conscious of social order and their status relative to other people, whether
family, friends, or strangers.

(Continued)

124 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

• All relationships involve hierarchies. In schools, teachers are highly respected and viewed
as the source of knowledge. The patriarch, usually the father, is considered the leader of the
family. The boss is seen as the source of ultimate responsibility in business. Every relationship
has a clear-cut hierarchy that must be observed for the social order to be maintained.

The Role of the Family
• People typically define themselves by the groups to which they belong rather than by their

status as individuals. Someone is deemed to be affiliated to a specific state, region, city, family,
career path, religion, and so on.

• This group orientation stems from the close personal ties Indians maintain with their family,
including the extended family.

• The extended family creates a myriad of interrelationships, rules, and structures. Along with
these mutual obligations comes a deep-rooted trust among relatives.

Just Can’t Say No
• Indians do not like to express “no,” whether verbally or nonverbally.

• Rather than disappoint you, for example, by saying something isn’t available, Indians will
offer you the response that they think you want to hear.

• This behavior should not be considered dishonest. An Indian would be considered terribly
rude if he did not attempt to give a person what had been asked.

• Because they do not like to give negative answers, Indians may give an affirmative answer but
be deliberately vague about any specific details. This will require you to look for nonverbal
cues, such as a reluctance to commit to an actual time for a meeting or an enthusiastic response.

Etiquette and Customs in India
Meeting Etiquette

• Religion, education, and social class all influence greetings in India.

• This is a hierarchical culture, so greet the eldest or most senior person first.

• In social settings, when leaving a group, each person must be bade farewell individually.

• Shaking hands is common, especially in the large cities among the more educated who are ac-
customed to dealing with Westerners.

• Men may shake hands with other men, and women may shake hands with other women; how-
ever, there are seldom handshakes between men and women because of religious beliefs. If
you are uncertain, wait for him or her to extend his or her hand.

Naming Conventions
Indian names vary based on religion, social class, and region of the country. The following are some
basic guidelines to understanding the naming conventions.

FIGURE 4-4 Indian engineering students with their university
professor

Source: CRS PHOTO/Shutterstock

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 125

Hindus

• In the north, many people have both a given name and a surname.

• In the south, surnames are less common, and a person generally uses the initial of his or her
father’s name in front of their own name.

• The man’s formal name is their name s/o (son of) and the father’s name. Women use d/o to
refer to themselves as the daughter of their father.

• At marriage, women drop their father’s name and use their first name with their husband’s first
name as a sort of surname.

Muslims

• Many Muslims do not have surnames. Instead, men add the father’s name to their own name
with the connector “bin,” so “Abdullah bin Ahmed” is “Abdullah, the son of Ahmed.”

• Women use the connector binti.

• The title Hajji (m) or Hajjah (f) before the name indicates that the person has made his or her
pilgrimage to Mecca.

Sikhs

• Sikhs all use the “Singh” name. It is either adopted as a surname or as a connector name to the
surname.

Gift-Giving Etiquette
• Indians believe that giving gifts eases the transition into the next life.

• Gifts of cash are given to friends and members of the extended family to celebrate life events
such as birth, death, and marriage.

• It is not the value of the gift, but the sincerity with which it is given, that is important to the
recipient.

• If invited to an Indian’s home for a meal, it is not necessary to bring a gift, although one will
not be turned down.

• Do not give frangipani or white flowers because they are used at funerals.

• Yellow, green, and red are lucky colors, so try to use them to wrap gifts.

• A gift from a man should be said to come from both him and his wife, mother, sister, or some
other female relative.

• Hindus should not be given gifts made of leather.

• Muslims should not be given gifts made of pigskin or alcoholic products.

• Gifts are not opened when received.

Dining Etiquette
• Indians entertain in their homes, restaurants, private clubs, or other public venues, depending

on the occasion and circumstances.

• Although Indians are not always punctual themselves, they expect foreigners to arrive close to
the appointed time.

• Take off your shoes before entering the house.

• Dress modestly and conservatively.

• Politely turn down the first offer of tea, coffee, or snacks. You will be asked again and again.
Saying no to the first invitation is part of the protocol.

There are diverse dietary restrictions in India, and these may affect the foods that are served:

• Hindus do not eat beef, and many are vegetarians.

• Muslims do not eat pork or drink alcohol.

• Sikhs do not eat beef.

• Lamb, chicken, and fish are the most commonly served main courses for nonvegetarian meals
because they avoid the meat restrictions of the religious groups.

(Continued )

126 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Table manners are somewhat formal, but this formality is tempered by the religious beliefs of the various
groups.

• Much Indian food is eaten with the fingers.

• Wait to be told where to sit.

• If utensils are used, they are generally a tablespoon and a fork.

• In social settings, guests are often served in a particular order; the guest of honor is served first,
followed by the men, and the children are served last. Women typically serve the men and eat later.

• You may be asked to wash your hands before and after sitting down to a meal.

• Always use your right hand to eat, whether you are using utensils or your fingers.

• In some situations, food may be put on your plate for you, whereas in other situations, you
may be allowed to serve yourself from a communal bowl.

Business Etiquette and Protocol in India
Relationships and Communication

• Indians prefer to do business with those they know.

• Relationships are built on mutual trust and respect.

• In general, Indians prefer to have long-standing personal relationships prior to doing business.

• It may be a good idea to go through a third-party introduction. This gives you immediate
credibility.

Business Meeting Etiquette
• Be aware of India’s cultural diversity; be cautious about making generalizations.

• If you will be traveling to India from abroad, it is advisable to make appointments at least one
month and, preferably, two months in advance.

• It is a good idea to confirm your appointment one week ahead and then again that morning be-
cause meetings can be cancelled at short notice.

• The best time for a meeting is late morning or early afternoon. Reconfirm your meeting the week
before and call again that morning; it is common for meetings to be cancelled at the last minute.

• Keep your schedule flexible so that it can be adjusted for last-minute rescheduling of meetings.

• You should arrive at meetings on time because Indians are impressed with punctuality.

• Small talk at the beginning of a business meeting is fairly common and may include questions
about your family.

• Always send a detailed agenda several days in advance of your meeting. Send back-up materials,
charts, and other data as well. This allows everyone to review and become comfortable with the
material prior to the meeting.

• Follow up a meeting with an overview of what was discussed and the next steps.

• When entering a business meeting, it is appropriate to greet the most senior person first.

Business Negotiating
• Indians are nonconfrontational. It is rare for them to disagree overtly, although this is begin-

ning to change in the managerial ranks.

• Decisions are reached by the person with the most authority.

• Decision making is a slow process.

• If you lose your temper, you lose face and prove you are unworthy of respect and trust.

• Delays are to be expected, especially when dealing with the government.

• Most Indians expect concessions in both price and terms. It is acceptable to expect concessions
in return for those you grant.

• Never appear overly legalistic during negotiations. In general, Indians do not trust the legal
system, and someone’s word is sufficient to reach an agreement.

• Do not disagree publicly with members of your negotiating team.

• Successful negotiations are often celebrated by a meal.

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 127

Dress Etiquette
• Business attire is conservative.

• Men should wear dark-colored, conservative business suits.

• Women should dress conservatively in suits or dresses.

• The weather often determines clothing. In the hotter parts of the country, dress is less formal,
although dressing as previously suggested for the first meeting will indicate respect.

Titles
• Indians revere titles such as Professor, Doctor, and Engineer.

• Status is determined by age, university degree, caste, and profession.

• If someone does not have a professional title, use the honorific title “Sir” or “Madam.”

• Titles are used with the person’s name or the surname, depending on the person’s name. (See
Social Etiquette for more information on Indian naming conventions.)

• Wait to be invited before using someone’s first name without the title.

Business Cards
• Business cards are exchanged after the initial handshake and greeting.

• If you have a university degree or any honor, put it on your business card.

• Use the right hand to give and receive business cards.

• Business cards need not be translated into Hindi.

• Always present your business card so the recipient may read the card as it is handed to him or her.

Sources: Updated and adapted from https://businessculture.org/indian-business-culture/business-
meeting-etiquette/, August 19, 2020; https://www.aii.unimelb.edu.au/blog/20-essential-tips-for-
doing-business-with-india/; https://www.forbes.com/sites/ajayyadav/2016/08/18/how-startup-culture-
in-india-differs-from-the-u-s/#5cd439b1bedb; www.kwintessential.co.uk/resources/global-etiquette/
India-country-profile.html, September 5, 2011. Used with permission of www.kwintessential.co.uk.

ATTITUDES
We all know that our attitudes underlie the way we behave and communicate and the way we inter-
pret messages from others. Ethnocentric attitudes are a particular source of noise in cross-cultural
communication. In the incident described in Exhibit 4-2, both the employee and the manager are
clearly attempting to interpret and convey meaning based on their own experiences of that kind of
transaction. The manager is probably guilty of stereotyping the Indian employee by quickly jump-
ing to the conclusion that he is unwilling to take responsibility for the task and the scheduling.

This problem, stereotyping, occurs when a person assumes that every member of a society
or subculture has the same characteristics or traits. Stereotyping is a common cause of misun-
derstanding in intercultural communication. It is an arbitrary, lazy, and often destructive way to
find out about people. Astute managers are aware of the dangers of cultural stereotyping and deal
with each person as an individual with whom they may form a unique relationship.

SOCIAL ORGANIZATIONS
Our perceptions can be influenced by differences in values, approach, or priorities relative to
the kind of social organizations to which we belong. These organizations may be based on
one’s nation, tribe, or religious sect, or they may consist of the members of a certain profes-
sion. Examples of such organizations include the Academy of Management and the United Auto
Workers (UAW).35

THOUGHT PATTERNS
The logical progression of reasoning varies widely around the world and greatly affects the
communication process. Managers cannot assume that others use the same reasoning processes, as il-
lustrated by the experience of a Canadian expatriate in Thailand, related in a book by Harris and Moran.

Home

http://www.kwintessential.co.uk/resources/global-etiquette/India-country-profile.html

https://www.forbes.com/sites/ajayyadav/2016/08/18/how-startup-culture-in-india-differs-from-the-u-s/#5cd439b1bedb

https://www.aii.unimelb.edu.au/blog/20-essential-tips-for-doing-business-with-india/

Business meeting etiquette

128 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

While in Thailand a Canadian expatriate’s car was hit by a Thai motorist who had crossed over
the double line while passing another vehicle. After failing to establish that the fault lay with the
Thai driver, the Canadian flagged down a policeman. After several minutes of seemingly futile
discussion, the Canadian pointed out the double line in the middle of the road and asked the
policeman directly, “What do these lines signify?” The policeman replied, “They indicate the
center of the road and are there so I can establish just how far the accident is from that point.”
The Canadian was silent. It had never occurred to him that the double line might not mean “no
passing allowed.”36

In the Exhibit 4-2 scenario, perhaps the manager at the head office did not realize that the
local production manager had a different rationale for his time estimate for the job. Because the
local employee was not used to having to estimate schedules, he just took a guess, which he felt
he had been forced to do.

ROLES
Societies differ considerably in their perceptions of a manager’s role. Much of the difference
is attributable to their perceptions of who should make the decisions and who has responsibil-
ity for what. In the Exhibit 4-2 example, the manager of the firm which is outsourcing the
production assumes that his role as manager is to delegate responsibility, to foster autonomy,
and to practice participative management. He prescribes the role of the employee without any
consideration of whether the employee will understand that role. The local employee’s frame of
reference leads him to think that the manager is the boss and should give the order about when
to have the job completed. He interprets the manager’s behavior as breaking that frame of refer-
ence, and therefore he feels that the boss is “stupid and incompetent” for giving him the wrong
order and for not recognizing and appreciating his accomplishments. The manager should have
considered what behaviors the local workers would expect of him and then either should have
played that role or discussed the situation carefully, in a training mode.

LANGUAGE
Spoken or written language, of course, is a frequent cause of miscommunication, stemming from
a person’s inability to speak the local language, a poor or too-literal translation, a speaker’s
failure to explain idioms, or a person missing the meaning conveyed through body language or
certain symbols. Even among countries that share the same language, problems can arise from
the subtleties and nuances inherent in the use of the language, as noted by George Bernard Shaw:
“Britain and America are two nations separated by a common language.” This problem can exist
even within the same country among different subcultures or subgroups.37

Many international executives tell stories about lost business deals or lost sales because of
communication blunders.

When Pepsi Cola’s slogan “Come Alive with Pepsi” was introduced in Germany, the company
learned that the literal German translation of “come alive” is “come out of the grave.”

A U.S. airline found a lack of demand for its “rendezvous lounges” on its Boeing 747s.
They later learned that “rendezvous” in Portuguese refers to a room that is rented for
prostitution.38

More than just conveying objective information, language also conveys cultural and social
understandings from one generation to the next. Examples of how language reflects what is im-
portant in a society include the 6,000 Arabic words that describe camels and their parts and the
50 or more classifications of snow the Inuit, the Eskimo people of Canada, use.

Inasmuch as language conveys culture, technology, and priorities, it also serves to separate
and perpetuate subcultures. In India, 14 official and many unofficial languages are used, and
more than 800 languages are spoken on the African continent.

Because of increasing workforce diversity around the world, the international business
manager will have to deal with a medley of languages. For example, assembly-line work-
ers at the Ford plant in Cologne, Germany, speak Turkish and Spanish as well as German.

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 129

In Malaysia, Indonesia, and Thailand, many of the buyers and traders are Chinese. Not
all Arabs speak Arabic; in Tunisia and Lebanon, for example, French is the language of
commerce.

International managers need either a good command of the local language or competent
interpreters. The task of accurate translation to bridge cultural gaps is fraught with difficulties:
Joe Romano, a partner of High Ground, an emerging technology-marketing company in Boston,
found out on a business trip to Taiwan how close a one-syllable slip of the tongue can come to
torpedoing a deal. He noted that one is supposed to say to the chief executive “Au-ban,” mean-
ing “Hello, No. 1. Boss.” Instead, he accidentally said “Lau-ban ya,” which means “Hello, wife
of the boss.” Essentially, Mr. Romano called him a woman in front of 20 senior Taiwanese ex-
ecutives, who all laughed; but the boss was very embarrassed because men in Asia have a very
macho attitude.39

Even the direct translation of specific words does not guarantee the congruence of their
meaning, as with the word “yes” used by Asians, which usually means only that they have
heard you, and, often, that they are too polite to disagree. The Chinese, for example, through
years of political control, have built into their communication culture a cautionary stance to
avoid persecution by professing agreement with whatever opinion was held by the person
questioning them.40

Sometimes even a direct statement can be misinterpreted instead as an indirect expression,
as when a German businesswoman said to the Algerian counterpart, “My partner would love
something like that watch your friend was wearing last night. It was fascinating.” The next day
the Algerian gave her a box with the watch in it as a gift to her partner. She realized she needed to
be careful how she expressed such things in the future—such as asking where that kind of jewelry
is sold.41

In much of the world, politeness and a desire to say only what the listener wants to hear cre-
ate noise in the communication process. Often, even a clear translation does not help a person
understand what is meant because the encoding process has obscured the true message. With the
poetic Arab language—replete with exaggeration, elaboration, and repetition—meaning is attrib-
uted more to how something is said than to what is actually said.

For the manager and the local employee cited in Exhibit 4-2, it is highly likely that the man-
ager could have picked up some cues from the employee’s body language that probably implied
problems with the interpretation of meaning. How might body language have created noise in
this case?

Second Language Use
A large number of business professionals speak more than one language. As a result, there
are circumstances in which they will communicate with their counterparts in a nonnative
language, in particular the English language. English is used frequently as a language for
business professionals. Learning a second language—especially English—offers many chal-
lenges along the way. The English vocabulary is rich—full of many synonyms, as well as
words that are spelled and pronounced the same with distinct meanings (e.g., crude), and
words that are spelled differently, pronounced the same, yet have distinct means (e.g., for
and four).42 When communicating with a business professional who is less skilled at speak-
ing a second (or third) language, the native language speaker needs to communicate without
complex terms. Indeed, a culturally intelligent individual will adapt their language—word
choice and style—to the level of the nonnative speaker.43 Some best practices for speaking
with a non-native speaker include:44

• Pronounce words clearly

• Avoid slang

• Use shorter sentences

• Distribute written summaries of a presentation

• Use more pauses and take more breaks

• Repeat important information—even with different words to explain the same point

• Encourage nonnative speakers to repeat concepts to ensure comprehension

130 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Both native and non-native English speakers must accept responsibility for their utterances,
and ensure that they are speaking as clearly and concisely as possible.

B. Clark, Aviation English Research Project, 2017

Language experts have estimated that for each person speaking English as a native language,
four people speak it as a second or third language. Even more, most English communications
that take place across the globe—whether professional or personal—involve nonnative speak-
ers.45 Nowhere is English speaking more prevalent, and perhaps more important, than in the
airline industry where pilots must communicate in controllers on international flights. In a report
authorized by the UK Civil Aviation Authority, native English speakers tend to talk too fast, use
metaphors excessively, and lack understanding of the challenges of communicating in a nonna-
tive language.46 Although the report focused on the airlines industry, comprehension problems
for non-native English speakers also occur with British, Australian, and American speakers. For
example, business professionals have informed researchers that conference calls in English were
progressing well until “a Canadian or New Zealander came on to the line,” as emphasized in the
quote above.47 Indeed, imprecise use of the English language can cause misunderstanding even
among native English speakers, as noted by George Bernard Shaw’s quote “The British and the
Americans are two great peoples divided by a common tongue.” The following “Under the Lens”
elaborates on the perceptions of native and non-native English speakers.

UNDER THE LENS
Native English Speakers Must Learn How They Come Across48

The last time I wrote about the widespread use of English, a reader commented that those who
didn’t speak it as a first language often struggled at work.

“Non-native speakers are at their biggest disadvantage when emotions come into play,” the
reader wrote. “In a heated debate, those able to use cynicism, sarcasm or other weapons requiring lin-
guistic mastery have an unfair advantage – and I have seen such unfair advantage being used many times.
It can determine the course of corporate careers. Like mine.”

The comment reminded me of two leaders who had made similar points about native English
speakers’ advantages.

The first was Steve Biko, the apartheid-era South African student leader, who split from white lef-
twing students because he believed blacks needed to develop self-reliance.

Biko, who died in police custody in 1977, spoke excellent English, but it was not his mother
tongue. He was acutely aware of being at a disadvantage in English-speaking company. He spoke before
his death of the frustration of talking to articulate, intelligent, native English speakers.

“You may be intelligent, but not as articulate,” he said.
In these conversations, a non-native speaker could start to feel intellectually inadequate. “You tend

to feel that that [English-speaking] guy is better equipped than you mentally,” he said.
A very different leader, Percy Barnevik, the founding chief executive of ABB, the Swedish-Swiss

company that adopted English as its corporate language, also spoke of the danger of “mistaking facility
with English for intelligence or knowledge”.

But does it follow, as the Financial Times reader asserted, that English speakers use their linguistic
mastery to dominate discussions deliberately, inserting sarcasm where necessary?

I asked two non-native English-speaking FT readers who have emailed me in the past what they thought.
“Actually, I would tend to say the opposite,” Quentin Toulemonde, a Frenchman working in finan-

cial services in London, told me. “In an argument, I can pretend not to understand – to force my inter-
locutor to rephrase, which can perturb him.

“Furthermore, foreigners have a more limited vocabulary which allows them to use stronger and
almost tactless words, and to be excused for that.”

Ivan Tejeda, a Spanish reader who has worked in the UK, Italy and France, said he had made strenu-
ous efforts to learn about the local culture as a way of improving his ability to talk to colleagues at work.
In the UK, this included watching comedy television programmes such as Fawlty Towers and The Office.

He had to make an effort in non-English speaking environments too. When he worked in Italy, he
kept up with the local football news as it often came up in office conversation.

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 131

He did not think native English speakers dominated work discussions on purpose. “I think what
your reader is describing is more related to the empathy process than the deliberate use of sarcasm by
English speakers.”

Both these readers’ English is excellent, so they are perhaps not representative of most people in
international companies who have to work in the language.

I have certainly seen English-speaking holidaymakers try to use the language to bludgeon waiters,
bus drivers or hotel receptionists into giving them what they wanted.

I do not think I have ever seen it work. And I have never seen such bullying in a business environ-
ment. What I have seen is English speakers not being understood because their language is too quick,
too garbled or overly colloquial.

Of all the communication and public speaking skills, talking to non-native English speakers is one
of the most under-appreciated.

It does not come naturally to most English speakers, but, like all skills, it can be learnt. Rephrasing
points in different ways helps. So do avoiding complex metaphors and watching people’s faces to see
whether you are being understood.

Because so few native English speakers speak another language these days they have little idea how
hard it can be to operate in one.

A failure to understand how you are coming across diminishes your impact, and can lead some to
believe you are being cruel and sarcastic.

Source: © Financial Times Limited 2016.

Nonverbal Communication
Clearly, as explained by Roger Axtel in his book Essential Do’s and Taboos,49 the nonverbal
signal that, in the United States, is interpreted as “okay” is absolutely not “okay” in many coun-
tries. Axtel gives the example of when Vice President Richard Nixon flew to Brazil in an attempt
to improve relations between the two countries. As reported in the newspapers, when Nixon
stepped off the plane in Sao Paulo, he gave the “A-okay” sign—with both hands! The crowd at
the airport booed—of course—given the meaning in Brazil (a private part of a woman’s body);
not surprisingly, photos of this incident were in the paper the next day!

Behavior that communicates without words (although it often is accompanied by words)
is called nonverbal communication. People will usually believe what they see over what they
hear—hence the expression, “A picture is worth a thousand words.” Studies show that these
subtle messages account for between 65 and 93 percent of interpreted communication.50 Even
minor variations in body language, speech rhythms, and punctuality, for example, often cause
mistrust and misperception of the situation among cross-national parties.51 The media for such
nonverbal communication can be categorized into four types: (1) kinesic behavior, (2) proxemics,
(3) paralanguage, and (4) object language.

The term kinesic behavior refers to communication through body movements—posture,
gestures, facial expressions, and eye contact, as illustrated in the accompanying “Under the
Lens: Communicating Italian Style” feature. Although such actions may be universal, often
their meaning is not. Because kinesic systems of meaning are culturally specific and learned,
they cannot be generalized across cultures. Most people in the West would not correctly in-
terpret many Chinese facial expressions; for example, sticking out the tongue expresses
surprise, a widening of the eyes shows anger, and scratching the ears and cheeks indicates
happiness.53 Research has shown for some time, however, that most people worldwide can
recognize displays of the basic emotions of anger, disgust, fear, happiness, sadness, surprise,
and contempt.54

As illustrated previously, visitors to other countries must be careful about their gestures and
how they might be interpreted. For example, people in Japan may point with their middle finger,
which is considered an obscene gesture to others. To Arabs, showing the soles of one’s feet is an
insult; recall the reporter who threw his shoe at President Bush in late 2008 during his visit to
Iraq. This was, to Arabs, the ultimate insult.

Many businesspeople and visitors react negatively to what they feel are inappropriate
facial expressions, without understanding the cultural meaning behind them. In his studies

132 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

of cross-cultural negotiations, Graham observed that the Japanese feel uncomfortable when
faced with the Americans’ eye-to-eye posture. They are taught since childhood to bow their
heads out of humility, whereas the automatic response of Americans is, “look at me when I’m
talking to you!”55

Subtle differences in eye behavior (called oculesics) can throw off a communication badly
if they are not understood. Eye behavior includes differences not only in eye contact but also in
the use of eyes to convey other messages, whether or not that involves mutual gaze. For example,
during speech, Americans will look straight at you, but the British keep your attention by look-
ing away. The British will look at you when they have finished speaking, which signals that it is
your turn to talk. The implicit rationale for this is that you can’t interrupt people when they are
not looking at you.56

It is helpful for U.S. managers to be aware of the many cultural expectations regarding pos-
ture and how they may be interpreted. In Europe or Asia, a relaxed posture in business meetings
may be taken as bad manners or the result of poor upbringing. In Korea, you are expected to sit
upright, with feet squarely on the floor, and to speak slowly, showing a blending of body and
spirit.

Proxemics deals with the influence of proximity and space on communication—both per-
sonal space and office space or layout. Americans expect office layouts to provide private space
for each person and, usually, a larger and more private space as one goes up the hierarchy. In
much of Asia, the custom is open office space with people at all levels working and talking in
close proximity to one another. Space communicates power in both Germany and the United
States, evidenced by the desire for a corner office or one on the top floor. The importance of

UNDER THE LENS
Communicating Italian Style52

When traveling around Europe, you will probably notice that Italians use the most body lan-
guage when communicating; they seem to be walking down the street mumbling while their
hands are going all over wildly, typically while on their telefonini. In fact, it is difficult for

the person listening on the phone to interpret sometimes because the speaker’s hand gestures and other
nonverbal signals are invisible. Their hands convey much meaning, and Italians commonly make about
250 gestures when talking and doing other things simultaneously such as conversing on the cell phone.
Examples are that of wagging the hands downward, meaning “come here”; slowly drawing a circle with
the hand, meaning “whatever”; pressing a finger into the cheek, meaning that something tastes good;
and brushing the back of the hand outward across the chin meaning “I don’t give a damn.” Gestures
can convey that the person feels pride, or shame, or desperation, or fear, giving more meaning than the
words alone. Of course, gestures are culture-specific (varying also according to the area within Italy,
those in the south tending to be louder and more effusive than those in the north) so you should be care-
ful to be aware that their meanings may differ significantly around the world and may cause offense.
Women should realize that flirtatious behavior from Italian men is common and part of their culture.
This behavior, along with the close-talking nature of Italians, including sitting close and perhaps lightly
touching the arm of the other person, can make it uncomfortable for women who are used to more per-
sonal space in communicating.

Italians tend to be gregarious and loud but interrupt one another anyway. They are uncomfortable
with silence but do not seem to lack interesting subjects to discuss, such as their architecture and art,
Italian history and football, and especially their families.

Italians’ dress is conservative and chic and formal for business meetings. One is expected to use
formal titles and last names until requested to do otherwise; and women use their maiden names in busi-
ness. Present your business cards face up, and be sure to read theirs before putting them away.

One is expected to shake hands with everyone present when arriving and when leaving, and it is
customary to kiss friends on both cheeks, left first. Eye contact is essential when talking to an Italian;
otherwise, you would be viewed as unfriendly and perhaps untrustworthy. Italians do not observe per-
sonal space when conversing, so one should expect close contact and much hand movement even with
business contacts. People from reserved cultures such as the British will likely be perceived as disinter-
ested by Italians since they tend to be very emotionally engaged with the conversation.

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 133

French officials, however, is made clear by a position in the middle of subordinates, communi-
cating that they have a central position in an information network, where they can stay informed
and in control.57

Do you ever feel vaguely uncomfortable and start moving backward slowly when someone
is speaking to you? This is because that person is invading your bubble—your personal space.
Personal space is culturally patterned, and foreign spatial cues are a common source of misinter-
pretation. When someone seems aloof or pushy, it often means that she or he is operating under
subtly different spatial rules.

Hall and Hall suggest that cultural differences affect the programming of the senses
and that space, perceived by all the senses, is regarded as a form of territory to be pro-
tected.58 South Americans, southern and eastern Europeans, Indonesians, and Arabs have
high-contact cultures, preferring to stand close, touch a great deal, and experience a close
sensory involvement. Latin Americans, for example, have a highly physical greeting such
as putting their arms around a colleague’s back and grabbing him by the arm. On the other
hand, North Americans, Asians, and northern Europeans have low-contact cultures and pre-
fer much less sensory involvement, standing farther apart and touching far less. They have a
distant style of body language. In France, a relationship-oriented culture, good friends greet
members of the opposite sex with a peck on each cheek; a handshake is a way to make a
personal connection.

Interestingly, high-contact cultures are mostly located in warmer climates, and low-contact
cultures in cooler climates. Americans are relatively nontouching, automatically standing at a
distance so that an outstretched arm will touch the other person’s ear. Standing any closer than
that is regarded as invading intimate space. However, Americans and Canadians certainly expect
a warm handshake and maybe a pat on the back from closer friends, though not the very warm
double handshake of the Spaniards (clasping the forearm with the left hand). The Japanese, con-
siderably less haptic (touching), do not shake hands; an initial greeting between a Japanese busi-
nessperson and a Spanish businessperson would be uncomfortable for both parties if they were
untrained in cultural haptics. The Japanese bow to one another—the depth of the bow revealing
their relative social standing.

Imagine the smartphone app that would ask your identity, the identity of the other greeter,
where you both are and how many times you have greeted each other. It would then propose a
compromise—a namaste followed by a handshake, perhaps, or a bow punctuated by a slap on
the back.59

When considering high- and low-contact cultures, we can trace a correlation between
Hofstede’s cultural variables of individualism and collectivism and the types of kinesic and prox-
emic behaviors people display. Generally, people from individualistic cultures are more remote
and distant, whereas those from collectivist cultures are interdependent; they tend to work, play,
live, and sleep in close proximity.60

The term paralanguage refers to how something is said rather than the content—that is, the
rate of speech, the tone and inflection of voice, other noises, laughing, or yawning. The cultur-
ally aware manager learns how to interpret subtle differences in paralanguage, including silence.
Silence is a powerful communicator. It may be a way of saying “no,” of being offended, or of
waiting for more information to make a decision. There is considerable variation in the use of si-
lence in meetings. Whereas Americans become uncomfortable after 10 or 15 seconds of silence,
Chinese prefer to think the situation over for 30 seconds before speaking. The typical scenario
between Americans and Chinese, then, is that the American gets impatient, says something to
break the silence, and offends the Chinese by interrupting his or her chain of thought and comfort
level with the subject.61

The term object language, or material culture, refers to how we communicate through
material artifacts, whether architecture, office design and furniture, clothing, cars, or cosmetics.
Material culture communicates what people hold as important. In the United States, for example,
someone wishing to convey his important status and wealth would show guests his penthouse
office or expensive car. In Japan and China, a businessman presents his business card to a new
contact and expects the receiver to study it and appreciate his position. The cards are called name
cards in China and are an essential aspect of doing business—a way to build networks. The

134 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

exchange of cards occurs as soon as you meet, and visitors should be careful to get an appropri-
ate translation for their cards.62 In Mexico, a visiting international executive or salesperson is
advised to take time out, before negotiating business, to show appreciation for the surrounding
architecture, which Mexicans prize. The importance of family to people in Spain and much of
Latin America would be conveyed by family photographs around the office and, therefore, an
expectation that the visitor would enquire about the family.

TIME
Another variable that communicates culture is the way people regard and use time (see also
Chapter 3). To Brazilians, relative punctuality communicates the level of importance of those
involved. To Middle Easterners, time is something controlled by the will of Allah.

To initiate effective cross-cultural business interactions, managers should know the differ-
ence between monochronic time systems and polychronic time systems and how they affect com-
munications. Hall and Hall explain that in monochronic cultures (Switzerland, Germany, and
the United States), time is experienced in a linear way, with a past, a present, and a future, and
time is treated as something to be spent, saved, made up, or wasted. Classified and compart-
mentalized, time serves to order life. This attitude is a learned part of Western culture, probably
starting with the Industrial Revolution. Monochronic people, found in individualistic cultures,
generally concentrate on one thing at a time, adhere to time commitments, and are accustomed
to short-term relationships.

In contrast, polychronic cultures tolerate many things occurring simultaneously and em-
phasize involvement with people. Two Latin friends, for example, will put an important con-
versation ahead of being on time for a business meeting, thus communicating the priority of
relationships over material systems. Polychronic people—Latin Americans, Arabs, and those
from other collectivist cultures—may focus on several things at once, be highly distractible, and
change plans often.63

The relationship between time and space also affects communication. Polychronic people, for
example, are likely to hold open meetings, moving around and conducting transactions with one
party and then another, rather than compartmentalizing meeting topics, as do monochronic people.

The nuances and distinctions regarding cultural differences in nonverbal communication are
endless. The various forms are listed in Exhibit 4-3; wise intercultural managers will take careful
account of the role that such differences might play.

What aspects of nonverbal communication might have created noise in the interactions be-
tween the manager and the Indian employee in Exhibit 4-2? Undoubtedly, some cues could have
been picked up from the kinesic behavior of each person. It was the responsibility of the manager,
in particular, to notice any indications from the employee that could have prompted him to change
his communication pattern or assumptions. Face-to-face communication permits the sender of the
message to get immediate feedback, both verbal and nonverbal, and thus to have some idea as to
how that message is being received and whether additional information is needed. What aspects of
the Indian employee’s kinesic behavior or paralanguage might have been evident to a more cultur-
ally sensitive manager? Did both parties’ sense of time affect the communication process?

• Facial expressions
• Body posture
• Gestures with hands, arms, head, etc.
• Interpersonal distance (proxemics)
• Touching, body contact
• Eye contact
• Clothing, cosmetics, hairstyles, jewelry
• Paralanguage (voice pitch and inflections, rate of speech, and silence)
• Color symbolism
• Attitude toward time and the use of time in business and social interactions
• Food symbolism and social use of meals

ExHIBIT 4-3 Forms of Nonverbal Communication

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 135

Context
East Asians live in relatively complex social networks with prescribed role relations; attention
to context is, therefore, important for their effective functioning. In contrast, westerners live in
less constraining social worlds that stress independence and allow them to pay less attention
to context.64

Richard E. Nisbett

A major differentiating factor that is a primary cause of noise in the communication process
is that of context—which actually incorporates many of the variables discussed earlier. The
context in which the communication takes place affects the meaning and interpretation of the
interaction. Cultures are known to be high- or low-context cultures, with a relative range in
between.65 In high-context cultures (Asia, the Middle East, Africa, and the Mediterranean),
feelings and thoughts are not explicitly expressed; instead, one has to read between the lines
and interpret meaning from one’s general understanding. Two such high-context cultures are
the South Korea and Arab cultures. In such cultures, key information is embedded in the context
rather than made explicit. People make assumptions about what the message means through their
knowledge of the person or the surroundings. In these cultures, most communication takes place
within a context of extensive information networks resulting from close personal relationships.
See the following “Management in Action” feature for further explanation of the Asian commu-
nication style.

In low-context cultures (Germany, Switzerland, Scandinavia, and North America),
where personal and business relationships are more compartmentalized, communication
media have to be more explicit. Feelings and thoughts are expressed in words, and informa-
tion is more readily available. Westerners focus more on the individual and therefore tend to
view events as the result of specific agents, whereas Easterners view events in a broader and
longer-term context.66

In cross-cultural communication between high- and low-context people, a lack of under-
standing may preclude reaching a solution, and conflict can arise. Germans, for example, will
expect considerable detailed information before making a business decision, whereas Arabs will
base their decisions more on knowledge of the people involved—the information is present, but
it is implicit. People in low-context cultures, such as those in Germany, Switzerland, Austria, and
the United States, convey their thoughts and plans in a direct, straightforward communication
style, saying something like, “We have to make a decision on this today.” People in high-context
cultures, such as in Asia and, to a lesser extent in England, convey their thoughts in a more in-
direct, implicit manner; this means that someone from Germany needs to have more patience
and tact and be willing to listen and watch for clues—verbal and nonverbal—about his or her
colleagues’ wishes.

People in high-context cultures expect others to understand unarticulated moods, subtle
gestures, and environmental clues that people from low-context cultures simply do not pro-
cess. Misinterpretation and misunderstanding often result.67 People from high-context cul-
tures perceive those from low-context cultures as too talkative, obvious, and redundant. Those
from low-context cultures perceive high-context people as secretive, sneaky, and mysterious.
Research indicates, for example, that Americans find talkative people more attractive, whereas
the Koreans—a high-context people—perceive less-verbal people as more attractive. Finding
the right balance between low- and high-context communications can be tricky, as Hall and Hall
point out: “Too much information leads people to feel they are being talked down to; too little
information can mystify them or make them feel left out.”68 Exhibit 4-4 shows the relative level
of context in various countries.

The following “Management in Action” discusses miscommunications that can arise when
speaking or hearing a nonnative language. As it explains, the nuances of speakers’ and listeners’
cultural tendencies (e.g., high versus low context) can be extremely important to (mis)under-
standing cross-border communications.

The importance of understanding the role of context and nonverbal language to avoid mis-
interpretation is illustrated in the accompanying feature, “Comparative Management in Focus:
Communicating with Arabs.”

136 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

High

Low

(high context/implicit)

(low context/explicit)

Japan
Middle East
Latin America
Africa
Mediterranean
England
France
North America
Scandinavia
Germany
Switzerland

Low Explicitness of communication High
Co

nt
ex

ExHIBIT 4-4 Cultural Context and Its Effects on Communication

Source: Based on information drawn from E. T. Hall and M. R. Hall, Understanding Cultural Differences
(Yarmouth, ME: Intercultural Press, 1990); and Martin Rosch, “Communications: Focal Point of Culture,”
Management International Review 27, No. 4 (1987).

MANAGEMENT IN ACTION
A Guide to (Mis)communication69

In the UK, it is important to finish meetings by summing up key points; but in France they can end
with an ambiguous “Et voila!”

I n recent months, a wry little document called the “Anglo-Dutch translation guide” has been tossed
between the email boxes of bankers, diplomats, business people and journalists. This lists phrases that
are commonly – and completely – misunderstood when English and Dutch people talk to each other.
Take the expression “with all due respect.” If you are British, you interpret this as a polite way

to say, “I think you are wrong.” But if you are Dutch, used to blunt speech, you think it means, “You
are listening to me!” Similarly, “That is an original point of view”: to English ears this subtly suggests
“That’s a stupid idea!”; a Dutch listener thinks, “They like my ideas!” Or again, “I am sure it’s my fault”
to British ears means “It’s not my fault”; to the Dutch, it’s quite the opposite.

So far, so amusing, and none of these examples will surprise any British or Dutch people who have
ever shared an office. But what is fascinating is not simply that these linguistic gaps remain widespread
today – but also how widely they tend to be ignored, in the office or anywhere else. For as the world
becomes more global – “a starburst of interconnections. . . a hum of interconnected voices,” as Christine
Lagarde, head of the IMF, recently put it – it is easy to fall prey to the illusion that you can communicate
with almost anyone in the seemingly neutral sphere of the internet, particularly since so many compa-
nies use English as a lingua franca. But ironically, the more that institutions become globalised, using
that lingua franca, the more these subtle distinctions in speech patterns matter.

To get a sense of this, it is worth taking a look at an amusing new book called The Culture Map by
Erin Meyer, a professor at Insead business school. It draws on theories that Edward Hall, an American
anthropologist, developed in the mid-20th century to interpret the dizzy network of modern cross-
cultural (mis) communications.

The starting point is Hall’s observation – made after living among Navajo and Hopi native
Americans for many years – that human speech varies depending on whether there is a “high” or “low”
level of assumed shared cultural context. In the former, people speak with a narrower vocabulary and
more ambiguous style, since they do not need lots of words to clarify their meaning; in the latter, vo-
cabularies are far wider and the intentions of speakers are clearly spelt out.

Social groups can vary on this spectrum within a single culture (long-married couples have a
high shared context). But different cultures vary radically too. Meyer thinks, for example, that the US,
Australia, Canada and Israel have extreme “low-context” speech patterns, followed by the Netherlands
and Germany.

In those countries people are expected to speak clearly or they will appear dishonest, incompetent
or simply ineffective.

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 137

But countries such as Japan, Korea, India, Singapore and France are “high context”. There is as-
sumed to be a high level of shared knowledge and thus less verbal clarity: everyone just “reads the air”,
as the Japanese say. Spain, Brazil and Argentina lie halfway between. The UK is deemed to be lower
context than France but higher context than Holland. Hence that wry internet guide.

Interestingly, these distinctions persist even when everyone is speaking English. And Meyer ar-
gues that they affect numerous aspects of institutional life: how managers give feedback to their staff,
exercise authority, express dissent or build trust. Thus in some countries it is normal to use “upgrader”
(reassuring) comments when delivering criticism; in others, not. In places such as the US and UK, it is
important to finish meetings by clearly summing up the key points; but in France meetings can just end
with an ambiguous “Et voila!”. “I couldn’t help wonder, ‘but voila what?” Meyer quotes a British inves-
tor saying after one such occasion in Paris. “My French colleagues simply know what has been decided
without going through all the levels of clarification that we are used to in the UK.”

And the miscommunications worsen in mixed teams, with, writes Meyer, “Americans who recap
incessantly and nail everything down in writing, Japanese who read the air, the French who speak at
the second degree [with secondary meanings], the British who love to use deadpan irony as a form of
humour and the Chinese who learn as young children to beat around the bush”.

Is there any solution? Meyer suggests managers at multinational companies should use matrix plan-
ners that plot the position of different cultures on the “context” spectrum, to help them interpret each
other. She also argues that everyone needs to keep international communication ultra “low context” – ie
to spell everything out, as clearly as you can.

Source: © Financial Times Limited 2014.

Comparative Management in Focus
Communicating with Arabs

In the Middle East, the meaning of a communication is implicit and interwoven and, consequently,
much harder for Americans, accustomed to explicit and specific meanings, to understand.

Arabs are warm, emotional, and quick to explode: sounding off is regarded as a safety valve. In
fact, the Arabic language aptly communicates the Arabic culture, one of emotional extremes. The language
contains the means for overexpression, many adjectives, words that allow for exaggeration, and metaphors
to emphasize a position. What is said is often not as important as how it is said. Eloquence and flowery
speech are admired for their own sake, regardless of the content. Loud speech is used for dramatic effect.

At the core of Middle Eastern culture are friendship, honor, religion, and traditional hospitality.
Family, friends, and connections are very important on all levels in the Middle East and will take
precedence over business transactions. Arabs do business with people, not companies, and they make
commitments to people, not contracts. A phone call to the right person can help to get around seem-
ingly insurmountable obstacles. An Arab expects loyalty from friends, and it is understood that giving
and receiving favors is an inherent part of the relationship; no one says no to a request for a favor. A
lack of follow-through is assumed to be beyond the friend’s control.70

Because hospitality is a way of life and highly symbolic, a visitor must be careful not to reject it
by declining refreshment or rushing into business discussions. Part of that hospitality is the elaborate
system of greetings and the long period of getting acquainted, perhaps taking up the entire first meet-
ing. Although the handshake may seem limp, the rest of the greeting is not. Kissing on the cheeks is
common among men, as is handholding between male friends. However, the Arab social code strictly
forbids any public display of intimacy between men and women.

While women have started to play an increasing role in business, the Middle East is still pri-
marily a male-dominated society, and it is impolite to inquire about women. Other nonverbal taboos
include showing the soles of one’s feet and using the left (unclean) hand to eat or pass something. In
discussions, slouching in a seat or leaning against a wall communicates a lack of respect.

The Arab society also values honor. Harris and Moran explain, “Honor, social prestige, and a se-
cure place in society are brought about when conformity is achieved. When one fails to conform, this is
considered to be damning and leads to a degree of shame.”71 Shame results not just from doing some-
thing wrong but from others finding out about that wrongdoing. Establishing a climate of honesty and
trust is part of the sense of honor. Therefore, considerable tact is needed to avoid conveying any con-
cern or doubt. Arabs tend to be quite introverted until a mutual trust is built, which takes a long time.72

(Continued )

138 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Arabian Sea

Palestine

E R I T R E A

E G Y P T

S U D A N

Y E M E N

J O R D A NI S R A E L

LEBANON
S Y R I A

I R A Q

S A U D I
A R A B I A

UNITED ARAB
EMIRATES

OMAN

O M A N

I R A N

QATAR

BAHRAIN

KUWAIT

Mecca

Medina
Ash Shaqra

Riyadh

Jeddah

Dubayy

Ajman
Ash Shariqah

Muscat

Ra’s al Khaymah

Umm al Qaywayn
Al Fujayrah

Abu Dhabi Gulf of Oman

Persian Gulf

Red Sea

Mediterranean
Sea

Emirates

Major cities

0 400 mi

0 400 km

MAP 4-1 Saudi Arabia and the Arabian Peninsula

FIGURE 4-5 Westerner Meeting with Arab
Businessman

Source: Hi Brow Arabia/Alamy

In their nonverbal communication, most Arab countries are high-contact cultures. Arabs stand
and sit closer and touch people of the same sex more than Westerners. They do not have the same
concept of public and private space or, as Hall puts it, “Not only is the sheer noise level much higher,
but the piercing look of the eyes, the touch of the hands, and the mutual bathing in the warm moist
breath during conversation represent stepped-up sensory inputs to a level which many Europeans find
unbearably intense. On the other hand, the distance preferred by North Americans may leave an Arab
suspicious of intentions because of the lack of olfactory contact.”73

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 139

The Muslim expression Bukra insha Allah—“Tomorrow if Allah wills”—explains much about
the Arab culture and its approach to business transactions. A cultural clash typically occurs when an
American tries to give an Arab a deadline. “‘I am going to Damascus tomorrow morning and will have
to have my car tonight,’ is a sure way to get the mechanic to stop work,” explains Hall, “because to give
another person a deadline in this part of the world is to be rude, pushy, and demanding.”74 In such in-
stances, the attitude toward time communicates as loudly as words.

In verbal interactions, managers must be aware of different patterns of Arab thought and communi-
cation. Compared to the direct, linear fashion of American communication, Arabs tend to meander. They
start with social talk, discuss business for a while, loop around to social and general issues, then back
to business, and so on.75 American impatience and insistence on sticking to the subject will cut off their
loops, triggering confusion and dysfunction. Instead, Westerners should accept that considerable time
will be spent on small talk and socializing, with frequent interruptions, before getting down to business.

Exhibit 4-5 illustrates some of the sources of noise that are likely to interfere in the communication
process between Americans and Arabs, thereby causing miscommunications and misunderstandings.

For people doing business in the Middle East, the following are some useful guidelines for effective
communication.

• Be patient. Recognize the Arab attitude toward time and hospitality—take time to develop
friendship and trust because these are prerequisites for any social or business transactions.

• Recognize that people and relationships matter more to Arabs than the job, company, or
contract—conduct business personally, not by correspondence or telephone.

• Avoid expressing doubts or criticism when others are present—recognize the importance of
honor and dignity to Arabs.

• Adapt to the norms of body language, flowery speech, and circuitous verbal patterns in the
Middle East and don’t be impatient to get to the point.

• Expect many interruptions in meetings, delays in schedules, and changes in plans.76

Context
Cultural values, expectations, norms

Display Rules

N O I S E

Decoding Feedback medium Encoding

Physical
distance/cold

directness;
impatience;

monochronic
time system

Dissonance in low/
high contact

and time/logic;
friendship and

loyalty not
established

Hospitality
and honor
offended;
intended
message
cut off

Polychronic
time system;
hospitality;

open meeting
dissonance

Demonstrative
flattery/flowery

and indirect
language;

close contact

Verbal/
nonverbal

incongruence;
high-to-low

contact; events
“if Allah wills”

Sender
AMERICAN

Receiver

Receiver
ARAB
Sender

Encoding Medium/message Decoding

Misunderstood
message

Impatience;
frustration;

honor
misunderstood

ExHIBIT 4-5 Miscommunication between Americans and Arabs Caused by Cross-Cultural Noise

140 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Communication Channels
In addition to the variables related to the sender and receiver of a message, the variables linked
to the channel itself and the context of the message must be taken into consideration. These vari-
ables include fast or slow messages and information flows as well as different types of media.

INFORMATION SYSTEMS
Communication in organizations varies according to where and how it originates, the channels
and the speed at which it flows, whether it is formal or informal, and so forth. The type of or-
ganizational structure, the staffing policies, and the leadership style will affect the nature of an
organization’s information system.

As an international manager, it is useful to know where and how information originates and
the speed at which it flows, both internally and externally. In centralized organizational struc-
tures, as in South America, most information originates from top managers. Workers take less
responsibility for keeping managers informed in a South American company than in a typical
company in the United States, where delegation results in information flowing from the staff to
the managers. In a decision-making system in which many people are involved, such as the ringi
system of consensus decision making in Japan, the expatriate needs to understand that there is a
systematic pattern for information flow.

Context also affects information flow. In high-context cultures (such as in the Middle East),
information spreads rapidly and freely because of the constant close contact and the implicit ties
among people and organizations. Information flow is often informal. In low-context cultures
(such as Germany or the United States), information is controlled and focused and thus does not
flow so freely.77 Compartmentalized roles and office layouts stifle information channels; infor-
mation sources tend to be more formal.

It is crucial for an expatriate manager to find out how to tap into a firm’s informal sources
of information. In Japan, employees usually have a drink together on the way home from work,
and this becomes an essential source of information. However, such communication networks
are based on long-term relationships in Japan (and in other high-context cultures). The same
information may not be readily available to outsiders. A considerable barrier in Japan separates
strangers from familiar friends, a situation that discourages communication.

Americans are more open and talk freely about almost anything, whereas Japanese will
disclose little about their inner thoughts or private issues. Americans are willing to have a wide
public self, disclosing their inner reactions verbally and physically. In contrast, the Japanese pre-
fer to keep their responses largely to their private self. The Japanese expose only a small portion
of their thoughts; they reduce, according to Barnlund, “the unpredictability and emotional inten-
sity of personal encounters.”78 In intercultural communication between Americans and Japanese,
cultural clashes between the public and private selves result when each party forces its cultural
norms of communication on the other. In the American style, the American’s cultural norms
of explicit communication impose on the Japanese by invading the person’s private self. The
Japanese style of implicit communication causes a negative reaction from the American because
of what is perceived as too much formality and ambiguity, which wastes time.79

Cultural variables in information systems and context underlie the many differences in com-
munication style between Japanese and Americans. Exhibit 4-6 shows some specific differences.
The Japanese ningensei (human beingness) style of communication refers to the preference for
humanity, reciprocity, a receiver orientation, and an underlying distrust of words and analytic
logic.80 The Japanese believe that true intentions are not readily revealed in words or contracts
but are, in fact, masked by them. In contrast to the typical American’s verbal agility and explicit-
ness, Japanese behaviors and communications are directed to defend and give face for everyone
concerned; to do so, they avoid public disagreements at all costs. In cross-cultural negotiations,
this last point is essential.

The speed with which we try to use information systems is another key variable that needs
attention to avoid misinterpretation and conflict. Americans expect to give and receive informa-
tion very quickly and clearly, moving through details and stages in a linear fashion to the con-
clusion. They usually use various media for fast messages—IMs, emails, Skype, faxes, social
media, and familiar relationships—to give all the facts up front. In contrast, the French use the
slower message channels of deep relationships, culture, and sometimes mediators to exchange
information. A French written communication will be tentative, with subsequent letters slowly

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 141

building up to a new proposal. The French preference for written communication, even for infor-
mal interactions, echoes the formality of their relationships—and results in slowing a message
transmission down that often seems unnecessary to Americans.81

In short, it behooves Americans to realize that, because much of the world exchanges
business information through slower message media, it is wise to schedule more time for trans-
actions, develop patience, and learn to get at needed information in more subtle ways—after
building rapport and taking time to observe the local system for exchanging information.

We have seen that cross-cultural misinterpretation can result from noise in the actual trans-
mission of the message—the choice or speed of media. Interpreting the meaning of a message
can thus be as much a function of examining the transmission channel (or medium) as it is of
examining the message itself.

INFORMATION TECHNOLOGY: GOING GLOBAL
AND ACTING LOCAL

All information is local; IT systems can connect every corner of the globe, but IT managers are
learning they have to pay attention to regional differences.82

Computerworld

Using the Internet as a global medium for communication has enabled companies of all sizes to
develop a presence quickly in many markets around the world—and, in fact, has enabled them to
go global. However, their global reach cannot alone translate into global business. Those compa-
nies are learning that they have to adapt their e-commerce and their enterprise resource planning
(ERP) applications to regional idiosyncrasies beyond translation or content management issues;
for example, even asking for a name or an email address can incur resistance in many countries
where people do not like to give out personal information.83 Although communication over the
Internet is clearly not as personal as face-to-face, cross-cultural communication, those transac-
tions must still be regionalized and personalized to adjust to differences in language, culture,
local laws, and business models as well as differences in the level of development in the local
telecommunications infrastructure. Yet, if the Internet is a global medium for communication,

ExHIBIT 4-6 Sources of Potential Miscommunication among Japanese and North Americans

Sources: E. T. Hall and M. R. Hall, Understanding Cultural Differences (Yarmouth, ME: Intercultural Press, 1990; W. Gudykunst,
L. Stewart, and S. Ting-Toomey, Communication, Culture, and Organizational Processes (Sage Publications, 1985); G.
Hofstede, Culture’s consequences: International differences in work-related values (Sage, Beverly Hills, CA (1980); Ikushi
Yamaguchi, “Influences of organizational communication tactics on trust with procedural justice effects: A cross-cultural
study between Japanese and American workers, International Journal of Intercultural Relations Vol. 33, 1, January 2009,
pages 21–31; R. G. Linowes, “The Japanese Manager’s Traumatic Entry into the United States: Understanding the American-
Japanese Cultural Divide,” Academy of Management Executive 7, 4 (1993), p.24; A. Goldman, “The Centrality of ‘Ningensei’ to
Japanese Negotiating and Interpersonal Relationships: Implications for U.S.-Japanese Communication,” International Journal of
Intercultural Relations 18, 1. (1994).

Japanese North-American

Purpose/Style Focus toward relationships; implicit, soft, gentle,
humility and understatement.

Focus on task; analytic,
explicit, direct, assertive,
self-confident.

Non-verbal High context; tacit understanding,
based on trust, nuances, face-saving,
silence, sensitivity to others.

Low context; outspoken; bold;
goal-oriented; confrontational;
pointed messages, impersonal.

Negotiations and
Decision-making

Communicate with group for consensus and trust.
Delay decisions; prefer private venue for decisions;
Long-term orientation/cautious, protective of group/
company.
Tentative discussions/inferred meanings; avoids
disagreements.

Individualistic.
Prefer decisions at the table; risk-taking;
straight-forward; short-term orientation
for career and profit motive.
May exert pressure; specific linear presentations;
impersonal.

4-3. To be aware of the impact
of IT on cross-border
communications

142 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

why do so many U.S. companies treat the web as a U.S.-centric phenomenon? Giving preference
to some geographic regions, languages, and cultures is “a short-sighted business decision that
will result in diminished brand equity, market share, profits and global leadership.”84

When Baidu.com—China’s leading search engine—made a business decision in July 2011
to partner with Microsoft to offer web search services in English, it had clearly realized that it
needed to go beyond Chinese. Back in 2011, former Baidu executive, Kaiser Kuo stated, “More
and more people here are searching for English terms.” In October 2018, Baidu announced a new
artificial intelligence (AI) tool that can translate English into Chinese and German with virtu-
ally no delay, which was a strategic response to Google. Voice technology is considered a major
growth segment for technology multinationals such as Apple, Amazon, and Google.85

For its part, Microsoft’s expansion of Bing in China—albeit a temporary block in January
2019—gave it access to the world’s largest Internet population of more than 772 million users.86
Both companies realized that the English-language search results would be censored (as hap-
pened to Google, which pulled out of the mainland and went to Hong Kong), and it is reported
that Microsoft is cooperating with China’s government on censorship rules regarding the content
that can be accessed.87 Beijing requires Internet companies operating on the mainland to censor
results the government considers threatening, including references to human rights issues and
dissidents.88 Clearly, both going global and acting local can be fraught with difficulties.

It seems essential, then, for a global online strategy also to be multilocal. The impersonal
nature of the web must somehow be adapted to local cultures to establish relationships and create
customer loyalty. Effective technological communication requires even more cultural sensitivity
than face-to-face communication because of the inability to assess reactions and get feedback or,
in many cases, even retain contact. It is still people, after all, who respond to and interact with
other people through the medium of the Internet, and those people interpret and respond accord-
ing to their own languages and cultures as well as their local business practices and expectations.
In Europe, for example, significant differences in business cultures and e-business technology
have slowed e-business progress there. However, some companies are making progress in pan-
European integration services, such as leEurope, which aims to cross language, currency, and
cultural barriers. Specifically, leEurope is building a set of services “to help companies tie their
back-end e-business systems together across European boundaries through a series of mergers
involving regional e-business integrators in more than a dozen countries.”89

MANAGING CROSS-CULTURAL COMMUNICATION
Steps toward effective intercultural communication include the development of cultural sensitiv-
ity, careful encoding, selective transmission, careful decoding, and appropriate follow-up actions.

Developing Cultural Sensitivity
When acting as a sender, a manager must make it a point to know the receiver and encode the
message in a form that will most likely be understood as intended. On the manager’s part, this
requires an awareness of his or her own cultural baggage and how it affects the communication
process. In other words, what kinds of behaviors does the message imply, and how will they be
perceived by the receiver? The way to anticipate the most likely meaning that the receiver will
attach to the message is to internalize honest cultural empathy with that person. What is the cul-
tural background—the societal, economic, and organizational context—in which this communi-
cation is taking place? What are this person’s expectations regarding the situation, what are the
two parties’ relative positions, and what might develop from this communication? What kinds of
transactions and behaviors is this person used to? Cultural sensitivity (discussed in Chapter 3) is
really just a matter of understanding the other person, the context, and how the person will re-
spond to the context. Americans, unfortunately, have a rather negative reputation overseas of not
being culturally sensitive. One not-for-profit group, called Business for Diplomatic Action, has
the following advice for Americans when doing business abroad, in its attempts to counteract the
stereotypical American traits such as boastfulness, loudness, and speed.

• Read a map. Familiarize yourself with the local geography to avoid making insulting
mistakes.

• Dress up. In some countries, casual dress is a sign of disrespect.

4-4. To learn how to manage
cross-cultural business
communications
successfully

http://Baidu.com

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 143

• Talk small. Talking about wealth, power, or status—corporate or personal—can create
resentment.

• No slang. Even casual profanity is unacceptable.

• Slow down. Americans talk fast, eat fast, move fast, live fast. Many cultures do not.

• Listen as much as you talk. Ask people you’re visiting about themselves and their way
of life.

• Speak lower and slower. A loud voice is often perceived as bragging.

• Religious restraint. In many countries, religion is not a subject for public discussion.

• Political restraint. Steer clear of this subject. If someone is attacking U.S. politicians or
policies, agree to disagree.90

Careful Encoding
In translating his or her intended meaning into symbols for cross-cultural communication, the
sender must use words, pictures, or gestures that are appropriate to the receiver’s frame of ref-
erence. Of course, language training is invaluable, but senders should also avoid idioms and
regional sayings (such as “Go fly a kite” or “Foot the bill”) in a translation, or even in English
when speaking to a non-American who knows little English.

Literal translation, then, is a limited answer to language differences. Even for people in
English-speaking countries, words can have different meanings. Ways to avoid problems are to
speak slowly and clearly, avoid long sentences and colloquial expressions, and explain things in
several ways and through several media if possible. However, even though English is in common
use around the world for business transactions, the manager’s efforts to speak the local language
will greatly improve the climate. Sometimes people from other cultures resent the assumption by
English-speaking executives that everyone else will speak English.

Language translation is only part of the encoding process; the message also is expressed
in nonverbal language. In the encoding process, the sender must ensure congruence between
the nonverbal and the verbal message. In encoding a message, therefore, it is useful to be as
objective as possible and not to rely on personal interpretations. To clarify their messages fur-
ther, managers can hand out written summaries of verbal presentations and use visual aids such
as graphs or pictures. A good general guide is to move slowly, wait, and take cues from the
receivers.

Selective Transmission
The type of medium chosen for the message depends on the nature of the message, its level
of importance, the context and expectations of the receiver, the timing involved, and the need
for personal interaction, among other factors. Typical media include instant messaging (IM),
email, letters or memos, reports, meetings, telephone calls, teleconferences, videoconferences,
or face-to-face conversations. The secret is to find out how communication is transmitted in
the local organization—how much is downward versus upward or vertical versus horizontal,
how the grapevine works, and so on. In addition, the cultural variables discussed earlier need
to be considered: whether the receiver is from a high- or low-context culture, whether he or she
is used to explicit or implicit communication, and what speed and routing of messages will be
most effective.

For the most part, it is best to use face-to-face interaction for relationship building or for
other important transactions, particularly in intercultural communications, because of the lack
of familiarity between parties. Personal interactions give the manager the opportunity to get im-
mediate verbal and visual feedback and make rapid adjustments in the communication process.

International dealings are often long-distance, of course, limiting the opportunity for face-
to-face communication. However, personal rapport can be established or enhanced through tele-
phone calls or videoconferencing and through trusted contacts. Modern electronic media and
social networks can be used to break down communication barriers by reducing waiting periods
for information, clarifying issues, and allowing instant consultation, such as through Skype, for
one-on-one or group video-chat. Ford Europe uses videoconferencing for engineers in Britain
and Germany to consult about quality problems. Through the video monitors, they examine one
another’s engineering diagrams and usually find a solution that gets the factory moving again in
a short time.

144 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Careful Decoding of Feedback
Timely and effective feedback channels can also be set up to assess a firm’s general communica-
tion about the progression of its business and its general management principles. The best means
for getting accurate feedback is through face-to-face interaction because this allows the manager
to hear, see, and immediately sense how a message is being interpreted. When visual feedback on
important issues is not possible or appropriate, it is a good idea to use several means of attaining
feedback, in particular by employing third parties.

Decoding is the process of translating the received symbols into the interpreted message.
The main causes of incongruence are because (1) the receiver misinterprets the message, (2) the
receiver encodes his or her return message incorrectly, or (3) the sender misinterprets the feed-
back. Two-way communication is thus essential for important issues so that successive efforts
can be made until an understanding has been achieved. Asking other colleagues to help interpret
what is going on is often a good way to break a cycle of miscommunication.

Perhaps the most important means for avoiding miscommunication is to practice careful de-
coding by improving one’s listening and observation skills. A good listener practices projective
listening, or empathic listening—listening, without interruption or evaluation, to the full message
of the speaker; attempting to recognize the feelings behind the words and nonverbal cues; and
understanding the speaker’s perspective.

At the multinational corporation (MNC) level, avenues of communication and feedback
among parent companies and subsidiaries can be kept open through telephone calls, regular
meetings and visits, reports, and plans, all of which facilitate cooperation, performance con-
trol, and the smooth running of the company. Communication among far-flung operations can
be managed best by setting up feedback systems and liaison people. The headquarters people
should maintain considerable flexibility in cooperating with local managers and allowing them
to deal with the local context as they see fit.

Follow-Up Actions
Managers communicate through both action and inaction. Therefore, to keep open the lines of
communication, feedback, and trust, managers must follow through with action on what has
been discussed and then agreed upon—typically a contract, which is probably the most impor-
tant formal business communication. Unfortunately, the issue of contract follow-through is a
particularly sensitive one across cultures because of the different interpretations regarding what
constitutes a contract (perhaps a handshake, perhaps a full legal document) and what actions
should result. Trust, future communications, and future business are based on such interpreta-
tions, and it is up to managers to understand them and follow through on them.

The management of cross-cultural communication depends largely on a manager’s personal
abilities and behavior. Behaviors that researchers indicate to be most important to intercultural
communication effectiveness (ICE) are listed here, as reviewed by Ruben.

• Respect (conveyed through eye contact, body posture, voice tone, and pitch)

• Interaction posture (the ability to respond to others in a descriptive, nonevaluative, and
nonjudgmental way)

• Orientation to knowledge (recognizing that one’s knowledge, perception, and beliefs are
valid only for oneself and not for everyone else)

• Empathy

• Interaction management

• Tolerance for ambiguity

• Other-oriented role behavior (one’s capacity to be flexible and adopt different roles for
the sake of greater group cohesion and group communication)91

Researchers have established a relationship between personality traits and behaviors and
the ability to adapt to the host-country’s cultural environment.92 What is seldom pointed out,
however, is that communication is the mediating factor between those behaviors and the relative
level of adaptation the expatriate achieves. The communication process facilitates cross-cultural
adaptation, and, through this process, expatriates learn the dominant communication patterns of
the host society. Therefore, we can link personality factors shown by research to ease adaptation
with those necessary for effective intercultural communication.

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 145

Kim has consolidated the research findings of these characteristics into two categories:
(1) openness—traits such as open-mindedness, tolerance for ambiguity, and extrovertedness—
and (2) resilience—traits such as having an internal locus of control, persistence, a toler-
ance of ambiguity, and resourcefulness.93 These personality factors, along with the expatriate’s
cultural and racial identity and the level of preparedness for change, comprise that person’s
potential for adaptation. The level of preparedness can be improved by the manager before
his or her assignment by gathering information about the host country’s verbal and nonverbal
communication patterns and norms of behavior. However, we must remember the practicali-
ties of situational factors that can affect the communication process—variables such as the
physical environment, time constraints, the degree of structure, and feelings of irritability or
overwork, among others.

CONCLUSION
Effective intercultural communication is a vital skill for international managers and domestic
managers of multicultural workforces. Because miscommunication is much more likely to occur
among people from different countries or racial backgrounds than among those from similar
backgrounds, it is important to be alert to how culture is reflected in communication—in par-
ticular through the development of cultural sensitivity and an awareness of potential sources of
cultural noise in the communication process. A successful international manager is thus attuned
to these variables and is flexible enough to adjust his or her communication style to address the
intended receivers best—that is, to do it their way.

Cultural variables and the manner in which culture is communicated underlie the pro-
cesses of negotiation and decision making. How do people around the world negotiate?
What are their expectations and their approach to negotiations? What is the importance of
understanding negotiation and decision-making processes in other countries? Chapter 5 ad-
dresses these questions and makes suggestions to help the international manager handle
these important tasks.

■ Communication is an inherent part of a manager’s role,
taking up the majority of the manager’s time on the job.
Effective intercultural communication largely determines
the success of international transactions or the output of a
culturally diverse workforce.

■ Culture is the foundation of communication, and
communication transmits culture. Cultural variables
that can affect the communication process by influ-
encing a person’s perceptions include attitudes, social
organizations, thought patterns, roles, language, non-
verbal language, and time.

■ Language conveys cultural understandings and social
norms from one generation to the next. Body lan-
guage, or nonverbal communication, is behavior that
communicates without words. It accounts for 65 to 93
percent of interpreted communication.

■ Types of nonverbal communication around the world
are kinesic behavior, proxemics, paralanguage, and object
language.

■ Effective cross-cultural communication must take
into account whether the receiver is from a country
with a monochronic or a polychronic time system.

■ Variables related to channels of communication include
high- and low-context cultures, fast or slow messages
and information flows, and various types of media.

■ In high-context cultures, feelings and messages are im-
plicit and must be accessed through an understanding
of the person and the system. In low-context cultures,
feelings and thoughts are expressed, and information
is more readily available.

■ The effective management of intercultural communica-
tion necessitates the development of cultural sensitiv-
ity, careful encoding, selective transmission, careful
decoding, and follow-up actions.

■ Certain personal abilities and behaviors facilitate adap-
tation to the host country through skilled intercultural
communication.

■ Communication through the Internet must still be lo-
calized to adjust to differences in language, culture,
local laws, and business models.

■ Take extra precautions about comprehension when
business professionals are speaking a nonnative
language.

■ Don’t assume that all native speakers of a language
communicate in the same manner. For example, mis-
communications can arise among British, North
Americans, Australians, and New Zealanders.

Summary of Key Points

146 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

4-1. How does culture affect the process of attribution in commu-
nication? Can you relate this to some experiences you have
had with your classmates?

4-2. What is stereotyping? Give some examples. How might
people stereotype you?

4-3. What is the relationship between language and culture?
How is it that people from different countries who speak the
same language may still miscommunicate?

4-4. Give some examples of cultural differences in the interpreta-
tion of body language. What is the role of such nonverbal
communication in business relationships?

4-5. Explain the differences between high- and low-context cul-
tures, giving some examples. What are the differential ef-
fects on the communication process?

4-6. Discuss the role of information systems in a company, how
and why they vary from country to country, and the effects
of these variations.

Discussion Questions

4-7. Invite some students who are from other countries to your
class. Ask them to bring photographs, slides, and so forth
of people and events in their native countries. Have them
explain the meanings of various nonverbal cues such as
gestures, dress, voice inflections, architecture, and events.
Discuss with them any differences between their explana-
tions and the attributions you assigned to those cues.

4-8. Interview a faculty member or a businessperson who has
worked abroad. Ask him or her to identify factors that fa-
cilitated or inhibited adaptation to the host environment. Ask
whether more preparation could have eased the transition
and what, if anything, that person would do differently be-
fore another trip.

Application Exercises

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

CASE STUDY

On Wednesday, November 21, the WeChat account of the official People’s Daily issued a statement
believed to be from the Ministry of Culture and Tourism; the Dolce & Gabbana (D&G) fashion show
in Shanghai had been cancelled. The move to cancel the fashion show was due to an outcry over a se-
ries of promotional videos posted by D&G titled “Eating with Chopsticks” and subsequent insulting
posts made by Stefano Gabbana, the co-founder of the D&G brand, in a private Instagram chat. As a
result, the Italian fashion house was forced to withdraw its products from Chinese e-commerce sites
amid calls to boycott the brand, possibly eliminating years of brand building in the Chinese market.

The videos, which were posted on Dolce & Gabbana’s website, were promotion for the
company’s new campaign D&G Loves China, billed as a Tribute to China. The clips featured
a Chinese model dressed in a red sequined D&G dress, giggling as she clumsily used a pair of
chopsticks to eat pizza, spaghetti, and traditional Sicilian cannolo. A male voiceover in a rather
suggestive tone asks the actress “Is it too big for you?”94 Social media posts on Instagram were
quick to label the ads as stereotypical, racist, culturally insensitive, and disrespectful toward
Asian females. The three clips were originally posted on Weibo, one of the most popular micro-
blogging websites in China, and were promptly deleted after the outrage over the brand’s social
media posts. However, the story did not end there, and Stefano Gabbana went on to defend their
actions on Instagram by saying, “the whole world knows that the Chinese eat with chopsticks
and westerners with a fork.”95

An online spat ensued between Stefano Gabbana and a London-based fashion blogger,
Michaela Tranova, who accused him of being racist. Messages from his Instagram account went

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 147

viral before being quickly deleted, but these messages remained on Tranova’s account. In an
exchange with Tranova, Gabbana commented that the videos were deleted from Chinese social
media “because my office is stupid as the superiority of the Chinese . . . it was my will I never
cancel the post.”96 The post turned nasty when he referred to “China Ignorant Dirty Smelling
Mafia.”97 The comments were accompanied by some rude looking emojis which were not very
complimentary of China. The blogger captured a screen shot of the conversation and posted it on
her own account.

Customers, activists, and celebrities took to social media at warp speed to express criticism
on their social media sites. The crisis blew into arguably its worst public nightmare ever. Fans
of D&G were stunned and shocked that a brand they cherished would actually refer to their cul-
ture as “ignorant” or “dirty smelling.” One social media user renamed the brand Dead and Gone
(D&G). Unfortunately for Gabbana, the rapid escalation into a public relations disaster, fuelled
by social media trolls, enabled people to vent their anger in quick time.

It was not clear who was the target audience of the video, a Chinese or western audience.
Some social media users alleged the fashion house was mocking Chinese culture by featuring an
instructional video on how to use chopsticks to eat foreign food, as stereotyping, portraying them
as ignorant, unrefined, and lacking culture, people who do not know how to eat non-Chinese
food, people ignorant of other cultures. The tone was patronising. The irony was certainly not
lost in translation. Many posts on social media claimed the videos were misinformed and dis-
tasteful. The lack of cultural sensitivity in the promotional videos shook the Chinese national
pride to the core. Reactions were strong and swift with most people expressing disdain for the
hurtful content and at the same time declaring their pride at being Chinese.

A comment on the Stefano Gabbana Instagram account claimed it had been hacked, adding,
“I love China and Chinese culture. I’m sorry for what happened.”98 A parody of the D&G video
showed a white man trying to eat Chinese food with a fork and knife. The brand’s Ambassador
for the Asia Pacific region, singer Karry Wang, was quick to react to the snowballing effect of
the fallout by ending her contract with the company. She said in a statement, “The motherland
is above everything. We are deeply proud and confident about Chinese culture and spiritual aes-
thetics. No doubt you are the best.”99 “Crouching Tiger, Hidden Dragon” star Zhang Ziyi also
used social media to say she would boycott the brand after “they had disgraced itself.”100 Estelle
Chen, a well-known Chinese model, posted on Instagram her outrage at the events of the day.
“China is rich yes, but China is rich in its values, its culture and its people and they won’t spend
a penny on a brand that does not respect that.”101

Later that day Dolce & Gabbana posted on Twitter:

Our dream was to bring to Shanghai a tribute event dedicated to China which tells our
history and vision. It was not simply a fashion show, but something that we created
especially with love and passion for China and all the people around the world who
loves D&G. What happened today was very unfortunate not only for us, but also for all
the people who worked day and night to bring this event to life. From the bottom of our
hearts, we would like to express our gratitude to our friends and guests.102

Social media users felt it was a lukewarm explanation at best but not an apology. The dam-
age was done. The posts on his Instagram site were seen as more damaging than the videos.
Others felt that no one in China would attend the show in Shanghai, thus it was cancelled. Most
posts berated the company D&G for making money in China yet treating the locals like idiots.
Another post on Weibo urged D&G to go someplace else as there is no money for them in China.

Chinese music bands were quick to get in on the act, and Wang Zixin, the leader of CD
Rev, a nationalist rap band, remarked that companies who do not respect China do not deserve
China’s respect and encouraged people not to forget about the actions of the company for a long
time to come. Shaun Rein, founder and managing director of China Market Research Group
in Shanghai, posted that Dolce & Gabbana could expect a real tough time over the next six to
12 months in the Chinese market.

The ruling Communist Party’s People’s Daily newspaper weighed in on the debate on Weibo:
“China has always been friendly to foreign businesses. But it does not mean there’s no bottom
line. There is a deal only when there is respect.”103 A comment on the WeChat account of the offi-
cial People’s Daily requested caution: “If one is not willing to understand China, eventually it will
lose the China market and the benefits arising from China’s growth.”104 The Central Committee

148 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

of the Communist Youth league demanded D&G “respect Chinese people”105 as the basic prin-
ciple of foreign enterprises investing in China. Mr Rein, founder and managing director of China
Market Research in Shanghai, said it is a big mistake when “westerners come up with creative
content but do not understand how the campaigns will be received by Chinese consumers.”106

D&G is the latest multinational company to get in trouble for marketing campaigns that an-
gered customers not only in China but around the world. The local consumers cannot be blamed
for feeling slighted by foreign brands. In 2018, Mercedes-Benz were forced to apologise to
Chinese customers for an Instagram post showing one of its luxury cars along with a quote from
exiled Tibetan spiritual leader Dalai Lama, whom Beijing consider a dangerous activist. In April
2018, the Civil Aviation Administration of China demanded that 36 foreign airlines list Taiwan
as a region of China. Later, in May 2018, Gap, A US clothing retailer, had to apologise and pull
a T-shirt featuring a map of China that left out territories claimed by the country.

In China, previously tolerated actions such as the ones mentioned may have gone unchecked
but multinationals are noticing an increase in the case of companies been reprimanded for failing
to take China seriously. There is a growing need for luxury brands to build trust in the region,
especially at a time when the Chinese government is not encouraging spending money on luxury
items. Most companies have offered appropriate apologies and in the case of Taiwan, referred
to it as Taiwan, China. Fear is growing as companies are double-checking their own websites as
well as those of their suppliers to check they comply and do not cause offense.

The backlash comes at a time what many observers note there is a trend in rising nationalism
compounded by increasing competition and complex challenges in the luxury retail market. The
Chinese market is reported to be worth 30% of the whole luxury market, with increasing growth
expected yearly by 6% according to a study by Boston Consulting. James Robinson, a consultant
at the Shanghai office of APCO, said in May 2018, “Companies are facing a new type of ‘geo-
commercial’ risk as they become more entangled in competing geo-political and geo-economic
agendas.”107 Cultural ignorance is no longer an excuse for breaking culture codes. Many multi-
nationals fear intervention and increased assertiveness by the Chinese government, making trade
with China more complicated. In a globalised competitive luxury market companies need more
than ever to be able to navigate cultural nuances to survive.108 Foreign luxury brands have expe-
rienced a two-thirds growth in demand for luxury items in China. China hosts some high fashion
events like Victoria’s Secret show in Shanghai, cementing its importance for luxury retail.

D&G opened its first store there in 2005 and has 44 boutiques around the country, so it is
not a newcomer to the Asian market. It is not clear why D&G did not demonstrate a better un-
derstanding of the Chinese market and ensure that marketing material is vetted by staff with a
knowledge of the local market, especially as this was not D&G’s first controversy in China. Last
year’s promotional DG Loves China videos featured models with taxi drivers, garbage collectors
and street vendors, a campaign that Chinese consumers felt highlighted the negative side of the
country rather than portraying a modern China. Many multinationals fail to realise that market-
ing in China has to be approached differently from marketing in the west.

Lundquist srl, a Milan-based digital communication consultancy company, ranked D&G
70th in a ranking of Italian listed and non-listed companies. The focus of the study was to analyse
how companies are communicating to investors and other stakeholders and examine the ability
of corporate communication to support competitiveness and to inspire trust. Joakim Lundquist,
CEO and founder of Lundquist srl, said the scandal should be a wake-up call for the company be-
cause they can no longer “ignore stakeholder expectations for transparency, openness, account-
ability and dialogue.”109 He warned that such companies need a structured strategy in place
which builds trust and is not over reliant on celebrity individuals who may be caught up in the
moment in a hyper connected digital age. However, he feels not all is lost and D&G has an op-
portunity to redeem itself by doing the right thing by its customers by encouraging positive social
behaviour change, improve brand image, build trust. D&G needs to build transparency specially
to cater to the needs of Gen Y and X; studies have indicated these generations in particular are
indicating higher ethical brand choices than previous generations. Enthused by the # Me Too
movement these digital natives are active on social media and not scared to call out gender mal-
practice on social media sites.

In the wake of mass consumer boycotts and China’s online retailers pulling products from
their websites, shoppers returning D&G articles, D&G begged for forgiveness to stem the global
outcry. A solemn looking Domenico Dolce and Stefano Gabbana, speaking in Italian, sitting

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 149

side-by-side against a back drop of a red wall, went on camera to apologise to the Chinese people
in an 85-second video with Chinese subtitles. The forgiveness video was posted on the Chinese
platform, Weibo. Following is the transcript of the apology video by Dolce and Gabbana.110

Over the past few days we have thought long and hard with sadness about everything
that has happened and what we have caused in your country and we are very sorry. Our
families have always taught us to respect the various cultures in the world and this is
why we want to ask you for your forgiveness if we have made mistakes in interpret-
ing yours. We also want to apologise to all of the many Chinese people throughout the
world. We take this apology very seriously as well as this message we have always been
in love with China. We have visited it and seen many of its cities, we love your culture
and we certainly have much to learn, this is why we are sorry if we have made mistakes
in the way we expressed ourselves. We will never forget this experience and it will cer-
tainly never happen again. In fact we will work to do things better. We will respect the
Chinese culture in every way possible from the bottom of our hearts we ask for forgive-
ness. Sorry (in Mandarin).

The video with the apology demonstrates the growing importance of the Chinese luxury
retail market and the risks of operating in it. This is not only a worry for the company but also
stakeholders who are interested in performance and good returns. Competition is vying for mar-
ket share in this growing luxury market.

The message from China is clear: do not mess with the Chinese consumer; the tiger has
awoken and is starting to show its teeth. Many brand experts feel it will be a long road back for
the company to gain a level of acceptance in the country they had previously enjoyed a measure
of success. D&G’s behaviour has broken a kind of culture code resulting in a loss of trust and
eventually brand damage. The resulting loss of revenue will shake up a company that could see
up to 30% wiped off their revenue weakening its competitive position and risking elimination.
For this reason alone, the apology from the bottom of their hearts was necessary because without
the Chinese market, the company will be humbled.

Case Questions

4-11. D&G faced a consumer backlash in China after the video scandal. List the main reasons why you
think this happened.

4-12. Using the information above and the cultural dimensions explored in Chapters 3 and 4, discuss
whether Chinese consumers should forgive D&G’s misunderstanding of their culture.

4-13. Fashion houses often use edgy ads to promote products. Such edgy campaigns attract attention
and can cross the line to cause disrespect in global markets. How can multinational companies
ensure advertising content does not antagonize local consumers?

4-14. Discuss the risk of using humor when advertising across borders.
4-15. Multinational is not necessarily multicultural. What do companies need to consider when advertis-

ing in the Chinese luxury market?

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9. https://tubularinsights.com/2020-mobile-video-traffic/
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Endnotes

https://filmora.wondershare.com/youtube-video-editing/social-media-trends-2018.html

https://tubularinsights.com/2020-mobile-video-traffic/

Top 20 Social Media Future Trends [2020 & Beyond]

https://www.tcs.com/blogs/being-digital-blog-ananth-krishnan-cto-tcs

https://www.statista.com/statistics/264810/number-of-monthly-active-facebook-users-worldwide/

150 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

11. www.inc.com/larry-kim/9-social-media-trends-to-pay-attention
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12. Ibid.
13. www.statista.com/statistics/278414/number-of-worldwide

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14. https://www.statista.com/statistics/277586/number-of-social

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with Media 2019 https://www.emarketer.com/content
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16. E. T. Hall and M.R. Hall, Understanding Cultural Differences
(Yarmouth, ME: Intercultural Press, 1990), p. 4.

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19. H. Mintzberg, The Nature of Managerial Work (New York:
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20. L. Samovar, R. Porter, and N. Jain, Understanding Intercultural
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21. P. Harris and R. Moran, Managing Cultural Differences, 3rd ed.
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22. H. Triandis, quoted in The Blackwell Handbook of Cross-Cultural
Management, M. Gannon and K. Newman, eds. (Oxford, UK:
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23. Samovar, Porter, and Jain.
24. Hall and Hall, p. 15.
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Brooks/Cole, 1997), p. 248.
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Organizational Dynamics 29, No. 4 (2001), pp. 274–288.
27. Ibid.
28. World Values Study Group, World Values Survey, ICPSR

Version (Ann Arbor, MI: Institute for Social Research, 1994);
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31. Mansour Javidan and Robert J. House, Cultural Acumen for the
Global Manager. Organizational Dynamics 29, No. 4 (2001),
pp. 289–305.

32. Samovar and Porter; Harris and Moran.
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Dimensions of Nonverbal Communication,” in Handbook of
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34. www.worldometers.info/world-population/india-population/
(accessed February 4, 2019).

35. H. C. Triandis, Interpersonal Behavior (Monterey, CA: Brooks/
Cole, 1977).

36. Harris and Moran.
37. Adapted from N. Adler, International Dimensions of

Organizational Behavior, 2nd ed. (Boston: PWS-Kent, 1991).

38. D. A. Ricks, Big Business Blunders: Mistakes in Multinational
Marketing (Homewood, IL: Dow Jones–Irwin, 1983).

39. P. Garfinkel, “On Keeping Your Foot Safely out of Your Mouth,”
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40. Jiatao Li, Katherine R. Xin, Anne Tsui, and Donald C.
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41. D. Walker, T. Walker, and J. Schmitz, Doing Business
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42. D. Thomas and K. Inkson, Cultural Intelligence: Living and
Working Globally, 2nd ed. (Boston: Berrett-Koehler, Inc., 2009).
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43. Ibid.
44. Ibid.
45. M. Skapinker, “Foreign Pilots Are Failing at English—But

So Are the Brits,” Financial Times, April 3, 2017, www.ft
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February 22, 2019).

46. B. Clark, Aviation English Research Project: Data Analysis
Findings and Best Practice Recommendations (West Sussex,
UK: Civil Aviation Authority, 2017).

47. M. Skapinker, “Foreign Pilots Are Failing at English—But So
Are the Brits.”

48. M. Skapinker, “Native English Speakers Must Learn How They
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49. Roger E. Axtell, Essential Do’s and Taboos” (Hoboken, NJ:
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50. R. L. Daft, Organizational Theory and Design, 3rd ed. (St. Paul,
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51. Li et al., 1999.
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Talking,” www.nytimes.com, Rome Journal, June 30, 2013; www.
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53. O. Klineberg, Emotional Expression in Chinese Literature. Journal of
Abnormal and Social Psychology 33 (1983), pp. 517–530.

54. P. Ekman and W. V. Friesen, Constants Across Cultures in the
Face and Emotion. Journal of Personality and Social Psychology
17 (1971), pp. 124–129.

55. J. Pfeiffer, “How Not to Lose the Trade Wars by Cultural Gaffes,”
Smithsonian 18, No. 10 (January 1988).

56. E. T. Hall, The Silent Language (New York: Doubleday, 1959).
57. Hall and Hall.
58. Hall and Hall.
59. Anand Giridharada, “How to Greet in a Global Microcosm,”

New York Times Online, October 15, 2010.
60. Hecht, Andersen, and Ribeau.
61. Li et al., 1999.
62. “The Name Game: Business Cards an Essential Part of Operating

in China,” The International Herald Tribune, January 10, 2011.
63. Hall and Hall.
64. Robert Matthews, “Where East Can Never Meet West,” Financial

Times, October 21, 2005.
65. Hall and Hall.
66. Matthews, 2005.
67. Hecht, Andersen, and Ribeau.
68. Hall and Hall.

http://www.goinglobal.com/articles/1112/

http://acad.depauw.edu/mkfinney_web/teaching/Com227/culturalPortfolios/ITALY/Italy%20Nonverbal.html

http://www.theguardian.com/world/shortcuts/2013/jul/02/how-speak-italian-with-hand-gestures

http://www.ediplomat.com

http://www.nytimes.com

https://search.proquest.com/businesspremium/docview/1785531659/689B7C6C4B48A1PQ/1?accountid=7122

http://www.ft.com/content/c4012d50-186b-11e7-a53d-df09f373be87

http://www.nytimes.com

http://www.worldometers.info/world-population/india-population/

http://www.accenture.com/t00010101T000000Z__w__/nz-en/_acnmedia/Accenture/Conversion-Assets/DotCom/Documents/Global/PDF/Dualpub_6/Accenture-Four-Keys-To-Digital-Trust-Infographic-v2

http://www.accenture.com/nz-en/insight-four-keys-digital-trust-infographic

http://dx.doi.org/10.1016/j.orgdyn.2011.01.002

https://www.emarketer.com/content/china-time-spent-with-media-2019

https://www.statista.com/statistics/277586/number-of-social-network-users-in-china/

http://www.statista.com/statistics/278414/number-of-worldwide-social-network-users/

http://www.inc.com/larry-kim/9-social-media-trends-to-pay-attention-to-in-2018.html

CHAPTER 4 • COMMUNICATING ACROSS CULTURES 151

69. G. Tett, “A Guide to (Mis)communication,” Financial
Times, June 14, 2014, p. 46, https://search.proquest.com
/businesspremium/docview/1544895622/60E69C47AEC94317
PQ/8?accountid=7122 (accessed February 4, 2019).

70. M. K. Nydell, Understanding Arabs (Yarmouth, ME:
Intercultural Press, 1987).

71. Harris and Moran.
72. E. T. Hall, The Hidden Dimension (New York: Doubleday, 1966),

p. 15.
73. Hall and Hall.
74. Ibid.
75. Based largely on the work of Nydell; and R. T. Moran and P. R.

Harris, Managing Cultural Synergy (Houston: Gulf Publishing,
1982), pp. 81–82.

76. Ibid.
77. Hall and Hall.
78. D. C. Barnlund, Public and Private Self in Communicating with

Japan. Business Horizons (March–April 1989), pp. 32–40.
79. Hall and Hall.
80. A. Goldman, The Centrality of ‘Ningensei’ to Japanese

Negotiating and Interpersonal Relationships: Implications
for U.S.–Japanese Communication. International Journal of
Intercultural Relations 18, No. 1 (1994).

81. Jean-Louis Barsoux and Peter Lawrence, The Making of a
French Manager. Harvard Business Review (July–August 1991),
pp. 58–67.

82. D. Shand, All Information Is Local: IT Systems Can Connect
Every Corner of the Globe, But IT Managers Are Learning They
Have to Pay Attention to Regional Differences. Computerworld
88 No. 1 (2000).

83. Shand.
84. Wilmott.
85. A. Kharpal, “China’s Baidu Challenges Google with A.I. That

Translates Languages in Real-Time,” CNBC.com, October 23, 2018,
www.cnbc.com/2018/10/24/baidu-challenges-google-with-ai-that
-translates-languages-in-real-time.html (accessed February 1, 2019).

86. www.statista.com/statistics/265140/number-of-internet-users
-in-china/ (accessed February 4, 2019).

87. Doug Tsuruoka, Hudong to Help Microsoft’s Bing in Chinese
Search. Investor’s Business Daily,” June 6, 2012.

88. Barboza, July 4, 2011.
89. T. Wilson, “B2B Links, European Style: Integrator Helps

Applications Cross Language, Currency and Cultural Barriers,”
InternetWeek, October 9, 2000, p. 27.

90. Based on www.Businessfordiplomaticaction.org (accessed
August 19, 2006).

91. R. B. Ruben, “Human Communication and Cross-Cultural
Effectiveness,” in Intercultural Communication: A Reader, L.
Samovar and R. Porter, eds. (Belmont, CA: Wadsworth, 1985),
p. 339.

92. D. Ruben and B. D. Ruben, “Cross-Cultural Personnel Selection
Criteria, Issues and Methods,” in Handbook of Intercultural

Training, vol. 1, Issues in Theory and Design, D. Landis and
R. W. Brislin, eds. (New York: Pergamon, 1983), pp. 155–175.

93. Young Yun Kim, Communication and Cross-Cultural
Adaptation: An Integrative Theory (Clevedon, UK; Multilingual
Matters, 1988).

94. Z. Pinghui, “Dolce & Gabbana Cancels Show in China after
Celebrities and Models Boycott over Online Row,” South China
Morning Post, November 21, 2018, www.msn.com/en-sg/news
/other/dolce-26-gabbana-cancels-show-in-china-after
– celebrities-and-models-boycott-over-online-row/ar-BBPXmLj
(accessed December 1, 2018).

95. Stefano Gabbana, retrieved on November, 28, 2018 from
Instagram account Michaela Travona, www.instagram.com/p
/BqbR_47lBIO/

96. Ibid.
97. Ibid.
98. D. Dolce and S. Gabbana, retrieved on November, 28, 2018

from Instagram www.instagram.com/p/BqbjuT3nYa4/?utm
_source=ig_embed&utm_medium=loading

99. Z. Pinghui, “Dolce & Gabbana Cancels Show in China after
Celebrities and Models Boycott over Online Row.”

100. Bloomberg, “Dolce & Gabbana Faces Backlash in China After
an Ad Prompted Accusations of Racism,” November 22, 2018,
http://time.com/5461964/dolce-gabbana-ad-controversy-china/
(accessed November 27, 2018).

101. Bloomberg, “Dolce & Gabbana Faces Backlash in China After
an Ad Prompted Accusations of Racism.”

102. D. Dolce and S. Gabbana, retrieved on November, 28,
2018 from Instagram www.instagram.com/p/BqbjuT3nYa4/?utm
_source=ig_embed&utm_medium=loading

103. K. Moritsugu, “Dolce & Gabbana Goods Pulled in China over
Alleged Insults,” Associated Press, November 23, 2018, www.msn
.com/en-ie/news/other/dolce-and-gabbana-goods-pulled-in-china
-over-alleged-insults/ar-BBQ1wMi (accessed November 27, 2018).

104. K. Moritsugu, “Dolce & Gabbana Goods Pulled in China over
Alleged Insults.”

105. Z. Pinghui, “Dolce & Gabbana Cancels Show in China after
Celebrities and Models Boycott over Online Row.”

106. K. Moritsugu, “Dolce & Gabbana Goods Pulled in China over
Alleged Insults.”

107. T. Hancock, “Multinationals Bow to China’s Political
Sensitivities. US Calls Beijing’s Demands ‘Orwellian Nonsense,’
But Globals Are Apologising,” Financial Times, May 20, 2018,
www.ft.com/content/36c03e40-52a8-11e8-b3ee-41e0209208ec
(accessed November 30, 2018).

108. Ibid.
109. R. Aitken, “Dolce & Gabbana’s Brand Reputation ‘In Rags’ Over

China Ad Outrage,” Forbes, November 24, 2018, www.forbes.com
/sites/rogeraitken/2018/11/24/dolce-gabbanas-brand-reputation-in
-rags-over-china-ad-outrage/ (accessed November 27, 2018).

110. D. Dolce and S. Gabbana, “Issues official apology amid outcry
in China over racist ad,” YouTube video, www.youtube.com
/watch?v=3MnPwLCXiBA (accessed December 2, 2018).

http://www.forbes.com/sites/rogeraitken/2018/11/24/dolce-gabbanas-brand-reputation-in-rags-over-china-ad-outrage/

http://www.ft.com/content/36c03e40-52a8-11e8-b3ee-41e0209208ec

http://www.msn.com/en-ie/news/other/dolce-and-gabbana-goods-pulled-in-china-over-alleged-insults/ar-BBQ1wMi

http://www.instagram.com/p/BqbjuT3nYa4/?utm_source=ig_embed&utm_medium=loading

http://time.com/5461964/dolce-gabbana-ad-controversy-china/

http://www.instagram.com/p/BqbjuT3nYa4/?utm_source=ig_embed&utm_medium=loading

http://www.instagram.com/p/BqbR_47lBIO/

http://www.msn.com/en-sg/news/other/dolce-26-gabbana-cancels-show-in-china-after-celebrities-and-models-boycott-over-online-row/ar-BBPXmLj

http://www.Businessfordiplomaticaction.org

http://www.statista.com/statistics/265140/number-of-internet-users-in-china/

http://www.cnbc.com/2018/10/24/baidu-challenges-google-with-ai-that-translates-languages-in-real-time.html

http://CNBC.com

https://search.proquest.com/businesspremium/docview/1544895622/60E69C47AEC94317PQ/8?accountid=7122

152

5-1. To become familiar with the role of negotiation in implementing a firm’s strategy and the
various stakeholders who must be considered

5-2. To learn the stages of the negotiation process and how to prepare for cross-cultural
business negotiations

5-3. To gain insight into the various types of negotiating styles around the world

5-4. To recognize that managing negotiation requires learning about the culturally based behavioral
differences, values, and agendas of the negotiating parties and how to build trust for successful
negotiations

5-5. To appreciate the variables in the decision-making process and understand the influence
of culture on decision making

Cross-Cultural Negotiation
and Decision Making

O B J E C T I V E S

5
C H A P T E R

Opening Profile: Hitachi Looks for Deal with ABB
on Power Grids Business1

Japan’s Hitachi is in discussions to buy part or all of ABB ‘s power grids business, a division that
analysts have said may be worth around $13bn.

According to people close to the matter, the two sides have been talking privately and the
negotiations are at a fairly developed stage.

However, those people cautioned that a deal was not assured and they declined to disclose the valu-
ation for the unit being discussed or the exact structure of a potential agreement.

One person said ABB might retain a minority stake in the unit, which makes products that channel
electricity over long distances. The two companies declined to comment.

Shares in ABB climbed 1.5 per cent on Friday (November 16, 2018) to SFr20.06 after Reuters
reported that the Swiss company was in talks with three Asian suitors, including Hitachi and Japan’s
Mitsubishi Electric, over a deal for the unit.

Another person close to the situation confirmed that at least one Japanese industrial conglom-
erate was in discussions with ABB about a large asset purchase, but stressed that nothing had been
decided.

Any transaction would add to the record pace of outbound dealmaking by Japanese companies in
2018, which has seen them so far agree nearly $160bn in deals, according to data from Dealogic.

For Hitachi, the talks come as the group has aggressively sold less profitable divisions to expand
its core businesses, including its power and energy operations. Hitachi, which has a joint venture with
ABB to supply equipment for Japan’s energy grids, has said it wants to increase grid-based revenue
60 per cent to ¥120bn ($1bn) in three years.

ABB mulled divesting its power grids arm two years ago after pressure from Cevian Capital, the
European activist fund that holds a 5 per cent stake.

CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 153

A strategic review at the time concluded it was best kept under ABB’s umbrella. Since then, the
division’s performance has improved. Power grids reported pre-tax operating profits of $972m last year
on revenues of $10.4bn.

The proposed transaction would significantly expand Hitachi’s power sector business outside Japan
while freeing up ABB to focus on its robotics, digital industry and automation businesses.

Analysts have said the unit could be worth as much as $13bn including debt, although people close
to the deal hinted at a lower figure.

ABB, which has worked with Hitachi in Japan since 2014, said yesterday it was “in discussions
with Hitachi to expand and redefine the existing strategic power grid partnership between the two
companies”.

The Swiss group gave no further details and warned “there can be no certainty that any transaction
will occur”. But people close to the talks said the deal was likely to involve Hitachi acquiring a majority
stake in the ABB unit, with the Swiss company keeping a minority position.2

The proposed transaction would significantly expand Hitachi’s power sector business outside Japan
while freeing up ABB to focus on its robotics, digital industry and automation businesses.

Analysts have said the unit could be worth as much as $13bn including debt, although people close
to the deal hinted at a lower figure.

Toshiaki Higashihara, Hitachi’s chief executive, has sought to catapult the Japanese group into the
ranks of global industrial players such as General Electric and Siemens.3

Source: © The Financial Times Limited 2019.

As illustrated in the opening profile, global managers negotiate with parties in other countries
to make specific plans for strategies—for example, exporting, joint ventures, acquisitions, and
divestitures—as well as for continuing operations. Even as cross-cultural negotiations offer added
complexity for a firm’s negotiators, those negotiators may also encounter the need to negotiate
with government-owned companies.

Managers must prepare for strategic negotiations. Next, the operational details must be
negotiated—staffing key positions, sourcing raw materials or component parts, and repatriating
profits, to name a few. As globalism burgeons, the ability to conduct successful cross-cultural
negotiations cannot be overemphasized. Failure to negotiate productively will result at best in
confusion and delays and at worst in lost potential alliances and lost business.

During the process of negotiation—whether before, during, or after negotiating sessions—
all kinds of decisions are made, both explicitly and implicitly. A consideration of cross-cultural
negotiations must therefore include the various decision-making processes that occur around the
world. Negotiations cannot be conducted without making decisions.

This chapter examines the processes of negotiation and decision making as they apply to
international and domestic cross-cultural contexts. The objective is a better understanding of
successful management.

NEGOTIATION
Implementing strategy depends on management’s ability to negotiate productively—a skill
widely considered one of the most important in international business. In the global arena,
cultural differences produce great difficulties in the negotiation process. Ignorance of native
bargaining rituals, more than any other single factor, accounts for unimpressive sales efforts.4
Important differences in the negotiation process from country to country include (1) the amount
and type of preparation for a negotiation, (2) the relative emphasis on tasks versus interpersonal
relationships, (3) the reliance on general principles rather than specific issues, and (4) the number
of people present and the extent of their influence.5 In every instance, managers must familiarize
themselves with the cultural background and underlying motivations of the negotiators—and the
tactics and procedures they use—to control the process, make progress, and therefore maximize
company goals.

5-1. To become familiar with
the role of negotiation in
implementing a firm’s
strategy and the various
stakeholders who must be
considered

154 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

The term negotiation describes the process of discussion by which two or more parties aim
to reach a mutually acceptable agreement. For long-term positive relations, the goal should be to
set up a win–win situation—that is, to bring about a settlement beneficial to all parties concerned.
This process, difficult enough when it takes place among people of similar backgrounds, is even
more complex in international negotiations because of differences in cultural values, lifestyles, ex-
pectations, verbal and nonverbal language, approaches to formal procedures, and problem-solving
techniques. The complexity is heightened when negotiating across borders because of the greater
number of stakeholders involved. These stakeholders are illustrated in Exhibit 5-1. In preparing for
negotiations, it is critical to avoid projective cognitive similarity—that is, the assumption that others
perceive, judge, think, and reason in the same way when, in fact, they do not because of differential
cultural and practical influences. Instead, astute negotiators empathically enter the private world or
cultural space of their counterparts while willingly sharing their own view of the situation.6

THE NEGOTIATION PROCESS
The negotiation process comprises five stages, the ordering of which may vary according to
the cultural norms (in any event, for most people, relationship building is part of a continuous
process): (1) preparation, (2) relationship building, (3) the exchange of task-related information,
(4) persuasion, and (5) concessions and agreement.7 Of course, in reality, these are seldom distinct
stages but rather tend to overlap; negotiators may also temporarily revert to an earlier stage. With
that in mind, it is useful to break down the negotiation process into stages to discuss the issues
relevant to each stage and what international managers might expect so that they might man-
age this process more successfully. These stages are shown in Exhibit 5-2 and discussed in the
following sections.

Stage One: Preparation
The importance of careful preparation for cross-cultural negotiations cannot be overstated. To the
extent that time permits, a distinct advantage can be gained if negotiators familiarize themselves
with the entire context and background of their counterparts (no matter where the meetings will
take place) in addition to the specific subjects to be negotiated. Because most negotiation prob-
lems are caused by differences in culture, language, and environment, hours or days of tactical
preparation for negotiation can be wasted if these factors are not carefully considered.8

To understand cultural differences in negotiating styles, managers first must understand their
own styles and then determine how they differ from the norm in other countries. They can do this
by comparing profiles of those perceived to be successful negotiators in different countries. Such
profiles reflect the value system, attitudes, and expected behaviors inherent in a given society.
Other sections of this chapter describe and compare negotiating styles around the world.

Negotiating Teams
It is particularly important to consider the teams of people from both parties who will be
negotiating. Clearly, lack of thought or planning regarding teams can jeopardize the deal at
any point. Selection of the home team must take into account the expectations of the other

5-2. To learn the stages of
the negotiation process
and how to prepare for
cross-cultural business
negotiations

Firm
negotiators

Home
(HQ)

country
Host

country

Investors
Alliance partners
Contractors

Host government
Distributors
Expatriate employees

Host local employees
Host consumers

Headquarters (HQ) employees
Suppliers
Home government

Home consumers
All citizens
Special interest groups

ExHIBIT 5-1 Stakeholders in Cross-Cultural Negotiations

CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 155

firm’s counterparts as far as the number and experience of team members and their rela-
tive hierarchy in their positions. In most Asian countries, senior, older, managers represent
their team, so they expect the foreign team to reflect that composition; a senior Japanese or
Chinese manager, for example, is likely to be insulted if one of the lead team members from
your firm is young and lower on the career ladders, rendering all other preparations a waste
of time and money. Another recommendation is to have managers on the team who have
already established relationships with counterparts; given the extreme focus that is placed
on trust in many countries, existing relationships give the negotiating process a head start,
some information about the motivations of the counterparts, and who has the power to seal
the deal.

After developing thoughtful profiles of the other party or parties, managers can plan for the
actual negotiation meetings, at the same time remaining open to realizing that specific people
may not fit the assumed cultural prototype. Prior to the meetings, they should find out as much as
possible about the kinds of demands that might be made and whether conflicts might occur. After
this, the managers can gear their negotiation strategy specifically to the other side’s firm, allocate
roles to different team members, decide on concessions, and prepare an alternative action plan in
case a negotiated solution cannot be found.9

Following the preparation and planning stage, which is usually done at the home office,
the core of the actual negotiation takes place on-site in the foreign location (or at the manager’s
home office if the other team has decided to travel there). In some cases, a compromise on
the location for negotiations can signal a cooperative strategy, which Weiss calls “Improvise
an Approach: Effect Symphony”—a strategy available to negotiators familiar with each other’s
culture and willing to put negotiation on an equal footing. Weiss gives the following example of
this negotiation strategy:

For their negotiations over construction of the tunnel under the English Channel, British
and French representatives agreed to partition talks and alternate the site between Paris
and London. At each site, the negotiators were to use established, local ways, including the
language . . . thus punctuating approaches by time and space.10

In this way, each side was put into the context and the script of the other culture about half
the time.

The next stage of negotiation—often given short shrift by Westerners—is that of relation-
ship building. In most parts of the world, this stage usually has already taken place or is concur-
rent with other preparations.

Variables in the Negotiation Process
Adept negotiators conduct research to develop a profile of their counterparts so that they know,
in most situations, what to expect, how to prepare, and how to react. Exhibit 5-3 shows some of
the variables to consider when preparing to negotiate. These variables can, to a great degree, help
managers understand the deep-rooted cultural and national motivations and traditional processes
underlying negotiations with people from other countries.

Preparation

Relationship building

Exchange of task-related
information

Persuasion

Concessions and
agreement

ExHIBIT 5-2 The Negotiation Process

156 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Stage Two: Relationship Building
Relationship building is the process of getting to know one’s contacts in a host country and
building mutual trust before embarking on business discussions and transactions. This process is
regarded with much more significance in most parts of the world than it is in the United States.
U.S. negotiators are, generally speaking, objective about the specific matter at hand and usually
want to waste no time getting down to business and making progress. This approach, well under-
stood in the United States, can be disastrous if the foreign negotiators want to take enough time
to build trust and respect as a basis for negotiating contracts. In such cases, American efficiency
interferes with the patient development of a mutually trusting relationship—the very cornerstone
of an Asian business agreement.11

Nontask Sounding
Five minutes of nontask sounding in the United States can translate into five days, weeks, or
even months of nontask sounding in Shanghai, Lagos, Rio de Janeiro, or Jeddah. There is no
other way because in such countries real business cannot be conducted until a good interper-
sonal relationship has been established.12

In many countries, such as Mexico, Saudi Arabia, and China, personal commitments to individu-
als, rather than to the legal system, form the basis for the enforcement of contracts. Effective
negotiators allow plenty of time in their schedules for such relationship building with bargain-
ing partners. This process usually takes the form of social events, tours, and ceremonies along
with much nontask sounding—general, polite conversation and informal communication before
meetings—while all parties get to know one another. In such cultures, one patiently waits for the
other party to start actual business negotiations, aware that relationship building is, in fact, the first
phase of negotiations.13 It is usually recommended that managers new to such scenarios use an
intermediary—someone who already has the trust and respect of the foreign managers and who
therefore acts as a relationship bridge. Middle Easterners, in particular, prefer to negotiate through

1. Approach to negotiation process: Competitive or problem-solving
2. Composition of negotiating team: Number and experience of team members. Relative

hierarchy in position. Relationships with counterparts. Decision-making power
of team members. Motivated by individual, company, or community goals.

3. Method of reaching decisions: By individual determination, by majority opinion, or
by group consensus.

4. Purpose of negotiations: One-time contract. Joint venture or other alliance. Long-term
relationship-building.

5. Negotiation process: Behavioral expectations, typical procedures.
6. Communication context used by teams: Low context, explicit; high-context, implicit;

nature of surroundings.
7. Nature of persuasive arguments: Factual presentations and arguments, accepted

tradition, or emotion.
8. Bases of trust: Relationships, past experience, intuition, or rules.
9. Risk-taking propensity: Level and methods of uncertainty avoidance in trading

information or making a contract.
10. Value and uses of time: Attitude toward time. Use of time in scheduling and proceed-

ing with negotiations; use of time to pressure for agreement.
11. Form of satisfactory agreement: Based on trust (perhaps just a handshake), the

credibility of the parties, commitment, or a legally binding contract.

ExHIBIT 5-3 Variables in the Negotiation Process

Source: Based on excerpts from S. E. Weiss and W. Stripp, Negotiation with Foreign Business Persons: An
Introduction for Americans with Propositions on Six Cultures (New York University Faculty of Business
Administration, February 1985).

CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 157

a trusted intermediary, and for them as well, initial meetings are only for getting acquainted. Arabs
do business with the person, not the company; therefore, mutual trust must be established.

In their best seller on negotiation, Getting to Yes, Fisher and Ury point out the dangers of not
preparing well for negotiations.

In Persian, the word “compromise” does not have the English meaning of a midway solution
which both sides can accept, but only the negative meaning of surrendering one’s principles.
Also, “mediator” means “meddler,” someone who is barging in uninvited. In 1980, United
Nations Secretary-General Kurt Waldheim flew to Iran to deal with the hostage situation.
National Iranian radio and television broadcast in Persian a comment he was said to have
made upon his arrival in Tehran: “I have come as a mediator to work out a compromise.” Less
than an hour later, his car was being stoned by angry Iranians.14

As a bridge to the more formal stages of negotiations, such relationship building is followed by
posturing—that is, general discussion that sets the tone for the meetings. This phase should result
in a spirit of cooperation. To help ensure this result, negotiators must use words such as respect
and mutual benefit rather than language that would suggest arrogance, superiority, or urgency.

Stage Three: Exchanging Task-Related Information
In the next stage—exchanging task-related information—each side typically makes a presenta-
tion and states its position; a question-and-answer session usually ensues, and alternatives are
discussed. From an American perspective, this represents a straightforward, objective, efficient,
and understandable stage. However, negotiators from other countries continue to take a more
indirect approach at this stage. Mexican negotiators tend to be wary of motives and so less direct
and somewhat evasive with their presentations. French negotiators enjoy debate and conflict
and will often interrupt presentations to argue about an issue even if it has little relevance to
the topic being presented. The Chinese also ask many questions of their counterparts and delve
specifically and repeatedly into the details at hand; conversely, Chinese presentations contain
only vague and ambiguous material. For instance, after about 20 Boeing officials spent six weeks
presenting masses of literature and technical demonstrations to the Chinese, the Chinese said,
“Thank you for your introduction.”15

The Russians also enter negotiations well prepared and well versed in the specific details of
the matter being presented. To answer their (or any other side’s) questions, it is generally a good
idea to bring along someone with expertise to answer any grueling technical inquiries. Russians
also put a lot of emphasis on protocol and expect to deal only with top executives.

Adler suggests that negotiators should focus not only on presenting their situation and needs
but also on showing an understanding of their opponents’ viewpoint. Focusing on the entire situ-
ation confronting each party encourages the negotiators to assess a wider range of alternatives
for resolution rather than limiting themselves to their preconceived, static positions. She suggests
that to be most effective, negotiators should prepare for meetings by practicing role reversal.16

Stage Four: Persuasion
In the next phase of negotiations—persuasion—the hard bargaining starts. Typically, both par-
ties try to persuade the other to accept more of their position and to give up some of their own.
Often, some persuasion has already taken place beforehand in social settings and through mutual
contacts. In the Far East, details are likely to be worked out ahead of time through the backdoor
approach (houmani). However, the majority of the persuasion generally takes place over one or
more negotiating sessions. International managers usually find that this process of bargaining
and making concessions is fraught with difficulties because of the different uses and interpreta-
tions of verbal and nonverbal behaviors. Although variations in such behaviors influence every
stage of the negotiation process, they can play a particularly powerful role in persuasion, espe-
cially if they are not anticipated.

Studies of negotiating behavior have revealed the use of certain tactics, which skilled ne-
gotiators recognize and use, such as promises, threats, and so on. Other, less savory tactics are
sometimes used in international negotiations. Often called dirty tricks, these tactics, according to
Fisher and Ury, include efforts to mislead “opponents” deliberately.17 Some negotiators may give
wrong or distorted information or use the excuse of ambiguous authority—giving conflicting

158 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

impressions about who in their party has the power to make a commitment. In the midst of hard
bargaining, the prudent international manager will follow up on possibly misleading information
before taking action based on trust.

Other rough tactics are designed to put opposing negotiators in a stressful situation physi-
cally or psychologically, so that their giving in is made more likely. These include uncomfortable
room temperatures, too-bright lighting, rudeness, interruptions, and other irritations. International
negotiators must keep in mind, however, that what might seem like dirty tricks to Americans is
simply the way other cultures conduct negotiations. In some South American countries, for ex-
ample, it is common to start negotiations with misleading or false information.

The most subtle behaviors in the negotiation process—and often the most difficult to deal
with—are usually the nonverbal messages: the use of voice intonation, facial and body expres-
sions, eye contact, dress, and the timing of the discussions. Nonverbal behaviors, discussed in
previous chapters, are ingrained aspects of culture people use in their daily lives; they are not
specifically changed for the purposes of negotiation. Among those behaviors affecting negotia-
tions is the direct communication style, such as with Germans, compared with the indirect style,
such as with Japanese. Clearly, also, the individualism–collectivism cultural dimension is one
that greatly guides negotiation because of the relative motivation of personal self-interest in in-
dividualistic societies such as the United States; this compares with the group interest in Asian
cultures, so that Asian negotiators will likely give more importance to their social obligations and
the needs of the group.18

Although persuasion has been discussed as if it were always a distinct stage, it is really the
primary purpose underlying all stages of the negotiation process. In particular, persuasion is an
integral part of the process of making concessions and arriving at an agreement.

Stage Five: Concessions and Agreement
In the last stage of negotiation—concessions and agreement—tactics vary greatly across cul-
tures. Well-prepared negotiators are aware of various concession strategies and have decided
ahead of time what their own concession strategy will be. Familiar with the typical initial posi-
tions that various parties are likely to take, they know that Russians and Chinese generally open
their bargaining with extreme positions, asking for more than they hope to gain, whereas Swedes
usually start with what they are prepared to accept.

Research in the United States indicates that better results are attained by starting with ex-
treme positions. With this approach, the process of reaching an agreement involves careful tim-
ing of the disclosure information and of concessions. Most people who have studied negotiations
believe that negotiators should disclose only the information that is necessary at a given point
and that they should try to obtain information piece by piece to get the whole picture gradually
without giving away their goals or concession strategy. These guidelines will not always work
in intercultural negotiations because the American process of addressing issues one at a time, in
a linear fashion, is not common in other countries or cultures. Negotiators in the Far East, for
example, approach issues in a holistic manner, deciding on the whole deal at the end, rather than
making incremental concessions.

Again, at the final stage of agreement and contract, local practices determine how these
agreements will be honored. The sanctity of contracts has not traditionally been as respected a
concept in Russian business as in American business. The Japanese, on the other hand, consider
a formal contract to be somewhat of an insult and a waste of time and money in legal costs, since
they prefer to operate based on understanding and social trust.19

UNDERSTANDING NEGOTIATION STYLES
When negotiating in emerging markets, remember that everything in these countries is dynamic,
and no deal is ever really 100% final.

Erin Meyer, HaRvaRd business RevieW, December 2015

For global managers negotiating joint ventures, acquisitions, outsourcing agreement or supplier
contracts, it is reasonable to assume that the norms of communication will vary from country to
country. As a result, what gets the manager to “Yes” in one culture may lead to a “No” in a different
culture.20 In cross-border negotiations, it is critical to gauge the reactions of the other negotiator.

5-3. To gain insight into the
various types of negoti-
ating styles around the
world

CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 159

However, when managers from different parts of the globe engage in negotiations, it is common to
misread unspoken signals, draw incorrect conclusions, and undermine the intended goals.

When communication styles differ between negotiators, Erin Meyer, an international
negotiations researcher, developed some best practices to recognize signals and alter perceptions
and actions.21

1. Alter the way you disagree. In some countries, open disagreement is normal and may be
an invitation to engage in a spirited discussion. In other countries, the same response may
adversely affect the business relationship.

2. Know when to contain your emotions and when to use them. In some cultures, it is
normal to express emotions and even touch your counterpart (e.g., on the arm). In other
cultures, such emotion and contact may be viewed as unprofessional, intrusive, and
inappropriate.

3. Learn how your counterparts establish trust. Some cultures value cognitive trust,
which is based on the how confident one is with the counterpart’s accomplishments, capa-
bilities, and dependability. Alternatively, some cultures value affective trust, which stems
from a sense of emotional attachment, empathy, and relational strength.

4. Refrain from asking yes or no questions. Some cultures have a difficult time saying
“no.” Other cultures may say “no” as a means to debate the issues.

5. Exercise caution about written agreements. In some countries, a contract signifies a
deal has been reached. In other countries, a contract indicates a non–legally binding com-
mitment to do business or simply the beginning of a business relationship.

Harvard Business School professor James Sebenius stressed that negotiators need to recog-
nize differences in the decision-making process when negotiating abroad. Specifically, he urges
negotiators to seek answers to three questions.

1. Who are the players? When it comes to the players, there may be senior executives, share-
holders, and certain regulatory institutions that influence a particular deal in the United
States. However, in other countries such as Germany, the labor union has representation on
the board of directors and wields considerable influence. In China, for example, local gov-
ernment officials play an important role even for deals involving privately owned firms.

2. Who makes certain decisions? Understanding who makes certain decisions begins with
the roles played by various stakeholders. For example, in countries where labor influences
board membership, a single shareholder may face voting restrictions. In addition, expec-
tations based on one’s home country culture (e.g., relationship-oriented rather than task-
oriented) may make it difficult to ascertain who possesses formal decision-making rights.

3. What informal factors can undermine a negotiation? In terms of information influences,
there are countries in which networks of influence can exert more power than a particular
company. For example, in South Korea, the keiretsu consist of a group of industrial companies
linked together by business ties, cross-holdings of debt and equity, and financial institutions.

Sebenius recommends adapting the negotiating process based on whether the counterpart’s
culture embraces decision making that is top down, consensus, or coalition building. In cultures
with top-down decision making, negotiators may encounter the principal decision maker who
avoids delegating major responsibility. Even in those instances, less-influential agents of the
company may be involved. In these circumstances, the negotiators need to refrain from reveal-
ing key information and making concessions to those agents. In cultures such as Japan, in which
consensus building is the norm, there is a tendency to experience unrelenting requests for infor-
mation. Moreover, the very nature of consensus building can be time intensive because relation-
ship building often takes precedent over the deal. That is, the deal makers will want to learn about
the negotiators and their firm before proceeding with any negotiations. Consensus building also
requires extensive intra-company interactions so that all stakeholders feel their concerns have
been addressed satisfactorily. In cultures that emphasize coalition building, agreement is not of
a particular individual or of all stakeholders, but rather a subset of stakeholders who can effec-
tively exert pressure on or navigate around individuals or stakeholders with dissenting opinions.

Global managers can benefit from studying differences in negotiating behaviors (and the under-
lying reasons for them), which can help them recognize what is happening in the negotiating process.

160 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Exhibit 5-4 shows some examples of differences among North American, Japanese, and Latin
American styles. Brazilians, for example, generally have a spontaneous, passionate, and dynamic
style. They are very talkative and particularly use the word no extensively—more than 40 times per
half-hour, compared with 4.7 times for Americans and only 1.9 times for the Japanese. They also dif-
fer markedly from Americans and the Japanese by their use of extensive physical contact.22

The Japanese are typically skillful negotiators. They have spent a great deal more time and
effort studying U.S. culture and business practices than Americans have spent studying Japanese
practices, and many have been to business school in the United States. However, differences in
philosophy and style between the two countries reflect past feelings of betrayal in trade nego-
tiations. John Graham, a California professor who has studied international negotiating styles,
says that the differences between United States and Japanese styles are well illustrated by their
respective proverbs; the Americans believe that “The squeaking wheel gets the grease,” and the
Japanese say that “The pheasant would not be shot but for its cry.”23 The Japanese are calm,
quiet, patient negotiators; they are accustomed to long, detailed negotiating sessions. Whereas
Americans often plunge straight to the matter at hand, the Japanese instead prefer to develop
long-term, personal relationships. The Japanese want to get to know those on the other side and
will spend some time in nontask sounding.

Japanese North American Latin American

Emotional sensitivity highly Emotional sensitivity not Emotional sensitivity
valued highly valued valued
Hiding of emotions Dealing straightforwardly Emotionally passionate

or impersonally
Subtle power plays; Litigation not so much Great power plays;
conciliation as conciliation use of weakness
Loyalty to employer; Lack of commitment to Loyalty to employer
employer takes care employer; breaking of ties (who is often family)
of employees by either if necessary
Face-saving crucial; decisions Decisions made on a cost- Face-saving crucial in
often on basis of saving some- benefit basis; face-saving decision making to
one from embarrassment does not always matter preserve honor, dignity
Decision makers openly Decision makers influenced Execution of special
influenced by special by special interests but interests on decision
interests often not considered ethical expected, condoned
Not argumentative; quiet Argumentative when right Argumentative when right
when right or wrong, but impersonal or wrong; passionate
What is down in writing Great importance given to Impatient with
must be accurate, valid documentation as evidential documentation as

proof obstacle to understanding
general principles

Step-by-step approach to Methodically organized Impulsive, spontaneous
decision making decision making decision making
Good of group is the Profit motive or good of What is good for group
ultimate aim individual is the ultimate aim is good for the individual
Cultivate a good emotional Decision making impersonal; Personalism necessary for
social setting for decision avoid involvements, conflict good decision making
making; get to know of interest
decision makers

ExHIBIT 5-4 Comparison of Negotiation Styles: Japanese, North American, and Latin American

Source: Pierre Casse, Training for the Multicultural Manager: A Practical and Cross-cultural Approach to
the Management of People (Washington, D.C.: Society for Intercultural Education, Training, and Research,
1982), used with the permission of the Society for Intercultural Education, Training and Research, 2012.

CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 161

In negotiations, the Japanese culture of politeness and hiding of emotions can be disconcerting to
Americans when they are unable to make straightforward eye contact or when the Japanese maintain
smiling faces in serious situations. It is important for Americans to understand what is polite and what
is offensive to the Japanese—and vice versa. Americans must avoid anything that resembles boasting
because the Japanese value humility, and physical contact or touching of any sort must be avoided.24
Consistent with the culture-based value of maintaining harmony, the Japanese are likely to be evasive
or even leave the room rather than give a direct negative answer.25 Fundamental to Japanese culture
is a concern for the welfare of the group; anything that affects one member or part of society affects
the others. Thus, the Japanese view decisions carefully in light of long-term consequences; they use
objective, analytic thought patterns; and they take time for reflection.26

Further insight into negotiating styles around the world can be gained by comparing the
North American, Arab, and Russian styles. Basic cultural values often shed light on the way
information is presented, whether and how concessions will be made, and the general nature and
duration of the relationship. For North Americans, negotiations are businesslike; their factual
appeals are based on what they believe is objective information, presented with the assumption
that it is understood by the other side on a logical basis. Arabs use affective appeals based on
emotions and subjective feelings. Russians employ axiomatic appeals—that is, their appeals are
based on the ideals generally accepted in their society. The Russians are tough negotiators; they
stall until they unnerve Western negotiators by continually delaying and haggling. Much of this
approach is based on the Russians’ different attitude toward time. Because Russians traditionally
do not subscribe to the Western belief that time is money, they are more patient, more deter-
mined, and more dogged negotiators. They try to keep smiles and other expressions of emotion
to a minimum to present a calm exterior.27

In contrast to the Russians, Arabs are more interested in long-term relationships and are,
therefore, more likely to make concessions. Compared with Westerners, Arabs have a casual ap-
proach to deadlines, and the negotiators frequently lack the authority to finalize a deal.28

Successful Negotiators around the World
Following are selected profiles of what it takes to be a successful negotiator as perceived by peo-
ple in their home countries. These are profiles of American, Indian, Arab, Swedish, and Italian
negotiators, based on selections from the work of Pierre Casse, and give some insight into what
to expect from different negotiators and what they expect from others.29

AMERICAN NEGOTIATORS
According to Casse, a successful American negotiator acts as follows:

• They are respectful, courteous, and honest in negotiations but operate from a firm stand
from the beginning, without revealing the options that are open to negotiation.

• They are generally well-versed in the issues at hand and how to time the interactions and
so wait for the other party to make the first move in negotiating.

• They are explicit about their position and will only reveal their compromises when nego-
tiations have come to a stalemate.

INDIAN NEGOTIATORS
Indians have traditionally followed Gandhi’s approach to negotiation, which Gandhi called saty-
agraha, “firmness in a good cause.” This combines strength with the love of truth. Therefore, a
successful Indian negotiator acts as follows:

• They are humble and truthful and act in good faith, at the same time trusting that the op-
ponent will act similarly.

• They act with self-control and attempt to come to a win-win outcome for all parties, in
the spirit of satyagraha, thus putting the negotiation process on a spiritual level.

• They respect the other parties, are very patient in explaining and negotiating, do not insult
others, and keep the big picture in mind.

• They will meditate and trust their instincts to consider the opponents’ viewpoints, do not
keep secrets, and are willing to change their minds.

162 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

ARAB NEGOTIATORS
Many Arab negotiators, following Islamic tradition, use mediators to settle disputes. Successful
Arab mediators act in the following way:

• They possess a level of respect, trust, and prestige to be able to be a mediator.

• They maintain “face” for all the parties by respecting their dignity, minimizing conflicts
among opponents, and avoiding situations that would make any party feel inferior.

• They use persuasive techniques such as referring to other respected people and what those
people would want, and use conferences to mediate issues.

• They retain their impartiality and look for honorable solutions for all parties.

SWEDISH NEGOTIATORS
Swedish negotiators are:

• Polite, punctual, serious, and thoughtful, though tend to be overcautious.

• They run meetings efficiently with little apparent emotion, and like to get straight down to
business.

• They can be quite flexible but are wary of confrontations and take time to react to new
ideas from the other parties in negotiations.

ITALIAN NEGOTIATORS
Italians value negotiators who act as follows:

• They are dramatic, do not hide emotions, and use and read nonverbal gestures—typical of
the Italian culture.

• They use flattery in negotiation communications and—always mindful of creating
a good impression (the bella figura)—are helpful and simpatico to keep up their
reputation.

• They are tactful in handling confrontations and tend not to be opinionated, but they also
are creative in finding ways to come out ahead of the opponents in negotiations.

BRAZILIAN NEGOTIATORS
Good Brazilian negotiators30:

• Emphasize preparation and planning.

• Tend to have, as well as sound judgment and intelligence, product knowledge, and
competitive spirit.

• Value an ability to think during pressure situations.

• Tend to be verbally expressive during negotiations.

• Tend to have an ability to perceive and exploit power during negotiations.

Comparing Profiles
Comparing such profiles is useful. Indian negotiators, for example, are humble, patient, respect-
ful of the other parties, and very willing to compromise compared with Americans, who are
firmer about taking stands. An important difference between Arab negotiators and those from
most other countries is that the negotiators are mediators, not the parties themselves; hence,
direct confrontation is impossible. Successful Swedish negotiators are conservative and careful,
dealing with factual and detailed information. This profile contrasts with Italian negotiators, who
are expressive and exuberant but less straightforward than their Swedish counterparts.

MANAGING NEGOTIATION
Skillful global managers must assess many factors when managing negotiations. They must un-
derstand the position of the other parties concerning their goals—whether national or corporate—
and whether these goals are represented by principles or specific details. They should have the

5-4. To recognize that manag-
ing negotiation requires
learning about the cul-
turally based behavioral
differences, values, and
agendas of the negotiat-
ing parties and how to
build trust for successful
negotiations

CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 163

ability to recognize the relative importance attached to completing the task versus developing
interpersonal relationships. Managers also must know the composition of the teams involved,
the power allotted to the members, and the extent of the teams’ preparation. In addition, they
must grasp the significance of personal trust in the relationship. As stated earlier, the culture of
the parties involved affects their negotiating styles and behavior and thus the overall process
of negotiation. However, whatever the culture, research by Tse, Francis, and Walls has found
person-related conflicts to “invite negative, more relation-oriented (versus information-oriented)
responses,” leading them to conclude that “[t]he software of negotiation—that is, the nature and
the appearance of the relationship between the people pursuing common goals—needs to be
carefully addressed in the negotiation process.”31

This is particularly true when representatives of individual-focused cultures (such as the
Americans) and group-focused cultures (such as the Chinese) are on opposite sides of the table.
Many of these culture-based differences in negotiations came to light in Husted’s study on
Mexican negotiators’ perceptions of the reasons for the failure of their negotiations with U.S.
teams.32 The Mexican managers’ interpretations were affected by their high-context culture, with
the characteristics of an indirect approach, patience in discussing ideas, and maintenance of
dignity. Instead, the low-context Americans conveyed an impatient, cold, blunt communicative
style. To maintain the outward dignity of their Mexican counterparts, Americans must approach
negotiations with Mexicans with patience and tolerance and refrain from attacking ideas because
these attacks may be taken personally. The relationships among the factors of cross-cultural ne-
gotiation discussed in this chapter are illustrated in Exhibit 5-5.

The successful management of intercultural negotiations requires a manager to go beyond
a generalized understanding of the issues and variables involved. As discussed earlier, she or he
must find out as much specific information about the counterparts as possible and consider in
advance how to use that information to create a positive climate that will result in a win–win situa-
tion. Research has shown that a problem-solving approach is essential to successful cross-cultural
negotiations, whether abroad or in the home office, although the approach works differently in
various countries.33 This problem-solving approach requires a negotiator to treat everyone with

Negotiating styles:
objective/subjective/axiomatic

Negotiating behavior:
defense/attack/trust

deception/pressure/concessions
Verbal and nonverbal behavior

Attitudes toward time/scheduling

Goals
National/corporate

Principles versus specific details

Composition of teams
Level of preparation

Task versus
interpersonal
relationships

Trust level
and duration

relations

Culture

ExHIBIT 5-5 Cross-Cultural Negotiation Variables

164 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

respect, avoid making anyone feel uncomfortable, and refrain from criticizing or blaming the
other parties in a personal way that may make someone feel shame—that is, lose face.

Research by the Huthwaite Research Group reveals how successful negotiators, compared
to average negotiators, manage the planning process and their face-to-face behavior. The group
found that during the planning process, successful negotiators consider a wider range of options
and pay greater attention to areas of common ground. Skillful negotiators also tend to make
twice as many comments regarding long-term issues and are more likely to set upper and lower
limits regarding specific points. In their face-to-face behavior, skillful negotiators make fewer ir-
ritating comments—such as, “We’re making you a generous offer”—make counterproposals less
frequently, and use fewer reasons to back up arguments. In addition, skilled negotiators practice
active listening—asking questions, clarifying their understanding of the issues, and summarizing
the issues.34

Dealing with Translators
Sometimes, it is necessary for negotiators to employ a translator for a cross-border negotiation.
Translation adds a layer of complexity to a negotiation, so negotiators need to consider this
as another key element of managing negotiations. International negotiations expert Jeswald
Salacuse developed four basic rules for using a translator that can help facilitate cross-border
negotiations.

1. Avoid using your counterpart’s interpreter; select your own. Use independent
sources (e.g., a consulate) to determine the translator’s linguistic ability.

2. Brief the translator prior to the negotiation. A translator may have sound linguis-
tic skills, but more likely than not, lacks familiarity with a firm and its industry. Also,
Salacuse urges clarifying whether word-for-word translations are required, or simply a
summary.

3. Monitor the translator’s agenda. Translators—because of personal agendas or simply
ego—may try to take charge of a negotiation or inject some bias. This situation may arise
if the translator has a conflict of interest—seeking future business prospects that flow
from the current negotiated deal.

4. Speak in short segments and pause frequently. It is important to give the translator the
opportunity to accurately translate statements. Inexperienced members of a negotiating
team who use lengthy statements and avoid pauses may contribute to inaccurate transla-
tions to the counterpart.35

Using the Internet to Support Negotiations
Modern technology can provide support for the negotiating process, though it can’t take the
place of the essential face-to-face ingredient in many instances. A growing component for elec-
tronic commerce is the development of applications to support the negotiation of contracts and
resolution of disputes. Web applications can provide support for various phases and dimensions,
such as “Multiple-issue, multiple-party business transactions of a buy–sell nature; international
dispute resolution (business disputes, political disputes); and internal company negotiations and
communications, among others.”36

Negotiation support systems (NSS) can provide support for the negotiation process in the
following ways:

• Increasing the likelihood that an agreement is reached when a zone of agreement exists
(solutions that both parties would accept)

• Decreasing the direct and indirect costs of negotiations, such as costs caused by time de-
lays (strikes, violence), and attorneys’ fees, among others

• Maximizing the chances for optimal outcomes37

One Web-based support system—called INSPIRE—developed at Carleton University in
Ottawa, Canada, provides applications for preparing and conducting negotiations and for rene-
gotiating options after a settlement. Users can specify preferences and assess offers; the site also
has graphical displays of the negotiation process.38

CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 165

E-NEGOTIATIONS
The advantages of electronic communications are well known: speed, less travel, and the ability
to lay out much objective information to be considered by the other party over time. The disad-
vantages, however, might kill a deal before it gets off the ground by the inability to build trust
and interpersonal relationships over time before getting down to business. In addition, nonverbal
nuances are lost, although videoconferencing is a compromise for that purpose.

Rosette et al. noted that “opening offers may be especially aggressive in e-mail as com-
pared to face-to-face negotiations because computer-mediated communications, such as e-mail,
loosen inhibitions and cause negotiators to become more competitive and more risk seeking. The
increase in competitive and risky behavior occurs because e-mail does not communicate social
context cues in the same way as does the presence of another person.”39

Managing Conflict Resolution
Much of the negotiation process is fraught with conflict—explicit or implicit—and such conflict
can often lead to a standoff, or a lose–lose situation. This is regrettable, not only because of the
situation at hand, but also because it probably will shut off future opportunities for deals between
the parties. Much of the cause of such conflict can be found in cultural differences between
the parties—in their expectations, in their behaviors, and particularly in their communication
styles—as illustrated in the following “Comparative Management in Focus: Negotiating with the
Chinese” feature.

Comparative Management in Focus
Negotiating with the Chinese

Sunny Zhou, General Manager of Kunming Lida Wood and Bamboo Products

the People’s Republic of China, cultural barriers confront both sides. At the same time, we should rec-
ognize that there are regional cultural differences as well as regional economic differences that may af-
fect negotiation; some examples of regional differences are noted below as researched by Tung et al. In
addition, there are considerable generational differences, in particular with those younger people who
have been educated in the West and are more familiar with Western ways and languages, in contrast
with the older generation, which holds to more traditional culture and negotiation strategies.41

• Beijing (capital) “Political, bureaucratic, educated, diversified, high relationship orientation,
more direct, high ‘face.’”42

• Shanghai (commercial center) “Business savvy, focus on details, bottom line, career-
oriented younger people, materialistic, confident.”43

• Guangzhou/Shenzhen (south, near Hong Kong) “Entrepreneurial, hard-working, manufac-
turing center, outside the norm, more risk-taking, like Hong Kong, more informal.”44

• Western China (Chengdu/Chongqing) “Traditional ‘People’s’ mentality, less experience
with international business/negotiations, socializing importance.”45

For the most part, the negotiation process the Chinese use is mystifying to most Westerners.
For instance, the Chinese put much greater emphasis than Americans and Europeans on respect and
friendship, on saving face, and on group goals. Long-term goals are more important to the Chinese
than the specific current objectives typical of Western negotiators. Even though market forces now
have more influence in China, political and economic agendas are still expected to be considered in
negotiations. Economic conditions, political pervasiveness, and the influence that political and state

(Continued )

166 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Bay
of

Bengal
South
China
Sea

Pacific
Ocean

East
China
Sea

Yellow
Sea

Sea of
Japan

PHILIPPINES

0 600 mi

0 600 km

Hong Kong

NEI M
ONGGOL

GANSU

ZHEJIANG

GUANGDONG

FUJIAN

JIANGXI

GUANGXI

GUIZHOU
HUNAN

ANHUI

JIANGSU

HUBEI
SICHUAN

YUNNAN

HEBEI
TIANJIN

SHANDONG

SHAANXI

SHANXININGXIA
QINGHAI

XIZANG

HENAN

LIAONING

JILIN

HEILONGJIANG

XINJIANG

HAINAN

RU
SSIA

TAIWAN

C H I N A

M O N G O L I A

R U S S I A

KYRGYZSTAN

KAZAKHSTAN

NORTH
KOREA

SOUTH
KOREA

JAPAN

VIETNAMMYANMAR
(BURMA) LAOS

THAILAND

BANGLADESH

BHUTAN
NEPAL

I N D I A

Beijing

MAP 5-1 China

agencies have on the negotiating parties in China are key practical factors that, added to cultural fac-
tors, make up the context affecting Chinese negotiations.

Businesspeople report two major areas of conflict in negotiating with the Chinese: (1) the
amount of detail the Chinese want about product characteristics and (2) their apparent insincerity
about reaching an agreement. In addition, Chinese negotiators frequently have little authority, frus-
trating Americans who do have the authority and are ready to conclude a deal.46 This situation arises
because many Chinese companies report to the government trade corporations, which are involved in
the negotiations and often have a representative on the team. Often, the goals of Chinese negotiators
remain primarily within the framework of state planning and political ideals. Although China has
become more profit-oriented, most deals are still negotiated within the confines of the state budget
allocation for that project rather than because of a project’s profitability or value. It is crucial, then,
to find out which officials—national, provincial, or local—have the power to make, and keep, a deal.
According to James Broering of Arthur Andersen, who does much business in China, “companies
have negotiated with government people for months, only to discover that they were dealing with the
wrong people.”47

Research shows that for the Chinese, three cultural norms greatly affect the negotiation process:
their ingrained politeness and emotional restraint, their emphasis on social obligations, and their be-
lief in the interconnection of work, family, and friendship. Because of the Chinese preference for
emotional restraint and saving face, aggressive or emotional attempts at persuasion in negotiation are
likely to fail. Instead, the Chinese tendency to avoid open conflict will more likely result in negative
strategies such as discontinuing or withdrawing from negotiation.48 The concept of face is at the heart
of this kind of response—it is essential for foreigners to recognize the role that face behavior plays in
negotiations. There are two components of face—lien and mien-tzu. Lien refers to a person’s moral
character; it is the most important thing defining that person, and without it, one cannot function in
society. It can only be earned by fulfilling obligations to others. Mien-tzu refers to one’s reputation or
prestige, earned through accomplishments or through bureaucratic or political power.49 Giving others
one’s time, gifts, or praise enhances one’s own face. In negotiations, it is vital for you not to make it
obvious that you have won, because that means that the other party has lost and will lose face. One
must, therefore, make token concessions and other attempts to show that respect must be demon-
strated, and modesty and control must be maintained; otherwise, anyone who feels he or she has lost
face will not want to deal with you again. The Chinese will later ignore any dealings or incidents that
caused them to lose face, maintaining the expected polite behavior out of social consciousness and

CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 167

concern for others. When encountering an embarrassing situation, they will typically smile or laugh in
an attempt to save face, responses that are confusing to Western negotiators.50

It is critical that you give face, save face and show face when doing business in China.51

Generally, Westerners tend to feel that the Chinese negotiators are not truthful with them and do
not give them straight answers. In turn, the Chinese sense that tension and feel a lack of trust in the
Westerners.52 Research by Chua emphasized the need for Western negotiators to develop their Chinese
counterparts’ trust in their competence and capability; without that trust, there will not be a construc-
tive long-term relationship.53 The emphasis on social obligations underlies the strong orientation of the
Chinese toward collective goals. Therefore, appeals to individual members of the Chinese negotiat-
ing team, rather than appeals to benefit the group as a whole, will probably backfire. The Confucian
emphasis on the kinship system and the hierarchy of work, family, and friends explains the Chinese
preference for doing business with familiar, trusted people and trusted companies. Foreign negotiators,
then, should focus on establishing long-term, trusting relationships, even at the expense of some im-
mediate returns.

Deeply ingrained in the Chinese culture is the importance of harmony for the smooth functioning
of society. Harmony is based primarily on personal relationships, trust, and ritual. After the Chinese
establish a cordial relationship with foreign negotiators, they use this relationship as a basis for the
give-and-take of business discussions. This implicit cultural norm is commonly known as guanxi, which
refers to the intricate, pervasive network of personal relations that every Chinese carefully cultivates. It
is the primary means of getting ahead, in the absence of a proper commercial legal system.54 In other
words, guanxi establishes obligations to exchange favors in future business activities.55 Even within the
Chinese bureaucracy, guanxi prevails over legal interpretations. Although networking is important any-
where to do business, the difference in China is that “guanxi networks are not just commercial, but also
social, involving the exchange both of favor and affection.”56 Firms that have special guanxi connections
and give preferential treatment to one another are known as members of a guanxihu network.57 Sunny
Zhou, general manager of Kunming Lida Wood and Bamboo Products, states that when he shops for
lumber, “The lumber price varies drastically, depending on whether one has strong guanxi with the local
administrators.”58 Western managers should thus anticipate extended preliminary visiting (relationship
building), in which the Chinese expect to learn more about them and their trustworthiness. The Chinese
also use this opportunity to convey their deeply held principles. They attach considerable importance to
mutual benefit.59

Americans often experience two negotiation stages with the Chinese: the technical and the com-
mercial. During the long technical stage, the Chinese want to hammer out every detail of the proposed
product specifications and technology. If there are two teams of negotiators, it actually may be several
days before the commercial team is called in to deal with aspects of production, marketing, pricing,
and so forth. However, the commercial team should sit in on the first stage to become familiar with
the Chinese negotiating style.60 The Chinese negotiating team is usually about twice as large as the
Western team; about a third of the time is spent discussing technical specifications and another third
on price negotiations, with the rest devoted to general negotiations and posturing (see Figure 5-1).61

The Chinese are among the toughest negotiators in the world. American managers must antici-
pate various tactics, such as their delaying techniques and their avoidance of direct, specific answers;
they use both ploys to exploit Americans’ known impatience. The Chinese frequently try to put pres-
sure on Americans by shaming them, thereby implying that the Americans are trying to renege on the
friendship—the basis of the implicit contract. Whereas Westerners come to negotiations with specific
and segmented goals and find it easy to compromise, the Chinese are reluctant to negotiate details. They
find it difficult to compromise and trade because they have entered negotiations with a broader vision of
achieving development goals for China, and they are offended when Westerners don’t internalize those
goals.62 Under these circumstances, the Chinese will adopt a rigid posture, and no agreement or contract
is final until the negotiated activities have actually been completed. Successful negotiations with the
Chinese depend on many factors. Research by Fang et al. found the top success factors to be sincerity
on behalf of the Western team, their team’s preparation, technical expertise, patience, knowledge of PRC
(People’s Republic of China) business practices, and good personal relationships.63 Generally speak-
ing, patience, respect, and experience are necessary prerequisites for anyone negotiating in China. For
the best outcomes, older, more experienced people are more acceptable to the Chinese in cross-cultural
negotiations. The Chinese want to deal with the top executive of an American company, under the as-
sumption that the highest officer has attained that position by establishing close personal relationships
and trust with colleagues and others outside the organization.64 During introductions, the Western group
should line up according to seniority and greet the most senior Chinese representative first. He or she
may be greeted with applause, in which case, he or she should applaud back.65 Use full names and titles

(Continued )

168 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

until invited to do otherwise. “To beckon a Chinese person, face the palm of your hand downward and
move your fingers in a scratching motion. Never use your index finger to beckon anyone.”66

Western delegation practices are unfamiliar to many Chinese, and they are reluctant to come to
an agreement without the presence of the Chinese foreign negotiator.67 From the Western perspective,
confusing jurisdictions of government ministries hamper decisions in negotiations. Americans tend
to send specific technical personnel with experience in the task at hand; therefore, they have to take
care in selecting the most suitable negotiators. In addition, visiting negotiating teams should realize
that the Chinese are probably negotiating with other foreign teams, often at the same time, and will
use that setup to play one company’s offer against the others. On an interpersonal level, Western ne-
gotiators must also realize that, although a handshake is polite, physical contact is not acceptable in
Chinese social behavior, nor are personal discussion topics such as one’s family. However, it is cus-
tomary to give and take small gifts as tokens of friendship. Keep in mind the following tips.68

• Some time before the trip, establish a contact in China who will act as a reference; be your
interpreter; and navigate you through the bureaucracy, legal system, and local business
networks.

• Be very prepared before doing business in China. The Chinese plan meticulously and will
know your business, and possibly you, inside out.

• Send some literature about your company in advance and convey a set agenda before each
meeting. Be punctual, or you will insult them before you start; begin with small, polite social
talk but avoid politics.

• Expect initial meetings to involve long, convoluted discussions that are really intended to get
to know one another, establish trust, and find out the actual goals of your team.

• The Chinese are not confrontational and will not say “no.” You will need to be observant and
recognize that perhaps those items are not negotiable.

• Practice patience. Introducing delays and obstacles is a Chinese negotiating tactic. They
will wait until the deadline has passed and demand another concession, knowing that the
Westerners are focused on their deadline for departure, so let them know your schedule is
open and keep calm.

• Expect prolonged periods of stalemate; hang loose and don’t say anything about the point in
question. Try to change the momentum by, say, suggesting going to dinner.

• Refrain from exaggerated expectations and discount Chinese rhetoric about future prospects.

• Remember at all times to save face for everyone and keep in mind the importance of trust and
guanxi in negotiations.

China’s rapidly changing business environment is apparent in more professionalism in the negotia-
tion process. At the same time, research by Fang et al. shows that “one should not underestimate the
impact of culture on Chinese business negotiations. Western companies that seek to succeed in China
need to demonstrate sincerity and commitment in conducting business in order to gain the Chinese
partner’s trust as this appears to be the ultimate predictor for success of business relations in China.”69

FIGURE 5-1 Chinese-Western negotiation teams

Pa
yl

es
si

m
ag

es
/F

ot
ol

CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 169

Context in Negotiations
As discussed in Chapter 4, much of the difference in communication styles is attributable to
whether you belong to a high-context or low-context culture (or somewhere in between, as shown
in Exhibit 4-4). In low-context cultures such as that in the United States, conflict is handled directly
and explicitly. It is also regarded as separate from the person negotiating—that is, the negotiators
draw a distinction between the people involved and the information or opinions they represent. They
also tend to negotiate based on factual information and logical analysis. That approach to conflict
is called instrumental-oriented conflict.70 In high-context cultures, such as in the Middle East,
the approach to conflict is called expressive-oriented conflict—that is, the situation is handled
indirectly and implicitly, without clear delineation of the situation by the person handling it. Such
negotiators do not want to get into a confrontational situation because it is regarded as insulting and
would cause a loss of face, so they tend to use evasion and avoidance if they cannot reach agree-
ment through emotional appeals. Their avoidance and inaction conflict with the expectations of the
low-context negotiators who are looking to move ahead with this matter and arrive at a solution.

The differences between high- and low-context cultures that often lead to conflict situa-
tions are summarized in Exhibit 5-6. Most of these variables were discussed previously in this
chapter or in Chapter 4. They overlap because the subjects, culture, and communication are
inseparable and because negotiation differences and conflict situations arise from variables in
culture and communication.

So, how can a manager from France, Japan, or Brazil, for example, manage conflict situa-
tions? The solution, as discussed previously, lies mainly in one’s ability to know and understand
the people and the situation to be faced. Managers must be prepared by developing an under-
standing of the cultural contexts in which they will be operating. What are the expectations of the
persons with whom they will be negotiating? What kinds of communication styles and negotiat-
ing tactics should they expect, and how will they differ from their own? It is important to bear
in mind one’s own expectations and negotiating style as well as to be aware of the other parties’
expectations. Managers ought to consider in advance what it will take to arrive at a win–win so-
lution. Often it helps to use the services of a host-country adviser or mediator, who may be able
to help defuse a conflict situation early.

DECISION MAKING
Negotiation actually represents the outcome of a series of small and large decisions. The deci-
sions include those each party makes before actual negotiations start—for example, in deter-
mining the position of the company and what fallback proposals it may suggest or accept. The
decisions also include incremental decisions, made during the negotiation process, about how to
react and proceed, when to concede, and on what to agree or disagree. Negotiation can thus be
seen as a series of explicit and implicit decisions, and the subjects of negotiation and decision
making become interdependent.

5-5. To appreciate the vari-
ables in the decision-
making process and
understand the influence
of culture on decision
making

Low-Context High-Context
Conflict Area Conflict Area

Explicit and direct; verbal; linear Implicit, indirect discussion and
presentation of facts, rationale, decision-making; non-verbal; may be
analysis. circular logic.

Individualistic; tend to be Collective; group motivations and
short-term-oriented. decisions by consensus.

Task-oriented. Up-front, impatient, Tend to be long-term-oriented.
sometimes confrontational; action and “Face” and relationship-oriented;
solution directive. indirect, non-confrontational, patient.

ExHIBIT 5-6 Negotiation Conflicts between Low-Context and High-Context Cultures

Source: Based on W. Gudykunst, L. Stewart, and S. Ting-Toomey, Communication, Culture, and
Organizational Processes (Sage Publications, 1985).

170 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

For instance, sometimes just the way a decision is made during the negotiation process
can have a profound influence on the outcome, as this example from a book by Copeland and
Griggs shows.

In his first loan negotiation, a banker new to Japan met with seven top Japanese bankers who
were seeking a substantial amount of money. After hearing their presentation, the American
agreed on the spot. The seven Japanese then conferred among themselves and told the American
they would get back to him in a couple of days regarding whether they would accept his offer or
not. The American banker learned a lesson he never forgot.71

The Japanese bankers expected the American to negotiate, to take time to think it over, and
to consult with colleagues before giving the final decision. His immediate decision made them
suspicious, so they decided to reconsider the deal.

There is no doubt that the speed and manner of decision making affect the negotiation pro-
cess. In addition, how well negotiated agreements are implemented is affected by the speed and
manner of decision making. In that regard, it is clear that the effective use of technology is play-
ing an important role, especially when dealing with complex cross-border agreements in which
the hundreds of decision makers involved are separated by time and space.

The role of decision making in management, however, goes far beyond the finite occasions
of negotiations. It is part of the manager’s daily routine—from operational-level, programmed
decisions requiring minimal time and effort to those decisions not programmed, of far broader
scope and importance, such as the decision to enter into a joint venture in a foreign country.

The Influence of Culture on Decision Making
It is crucial for international managers to understand the influence of culture on decision-
making styles and processes. Culture affects decision making both through the broader context
of the nation’s institutional culture, which produces collective patterns of decision making,
and through culturally based value systems that affect each individual decision maker’s per-
ception or interpretation of a situation.72 It is also crucial to understand how the political and
business environment affects a firm’s strategic decisions and negotiations as illustrated in the
following “Under the Lens” feature in which Ryanair pursues various deals and wrestles with
ownership rights in a cloud of uncertainty about the fate of the relationship between the UK
and EU, going into 2019.

UNDER THE LENS
Ryanair Secures UK Licence in Preparation for No-Deal Brexit73

Low-cost carrier Ryanair has secured a UK operating licence, meaning the London-listed and
Dublin-based airline can continue domestic flights in the country and flights from Britain to
outside the EU in the event of a no-deal Brexit.

Juliusz Komorek, Ryanair’s chief legal and regulatory officer, warned that the risks of a no-deal
Brexit were rising and called for the UK and EU to agree a transition deal to avoid disruption to holidays
in the summer.

The airline applied for the air operating certificate in late 2017.
Its UK domestic routes accounted for only 1 per cent of capacity in 2018, according to its annual

report, but it also flies from the UK to non-EU destinations, including Morocco and Norway.
Hungary’s Wizz Air obtained a UK operating licence in May 2018 for the same reason, while easy-

Jet, a UK-based company, has been granted an Austrian operating licence to ensure European flights in
the region can continue.

Ryanair is facing ownership problems around Brexit too.
Under existing rules, airlines must prove they are 50 per cent EU owned and controlled to qualify

for operating licences.
Ryanair has tried to respond to the problem by preparing plans to take away voting rights from its

non-EU shareholders to ensure it reaches the threshold.
In November, Ryanair stirred anger among some of its pilots as it started to recruit for a UK subsid-

iary, established to protect the company against a no-deal Brexit.

CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 171

The extent to which decision making is influenced by culture varies among countries. For
example, Hitt, Tyler, and Park have found a “more culturally homogenizing influence on the
Korean executives’ cognitive models” than on those of U.S. executives, whose individualistic
tendencies lead to different decision patterns.74 The ways that culture influences an execu-
tive’s decisions can be studied by looking at the variables involved in each stage of the rational
decision-making process. These stages are (1) defining the problem, (2) gathering and analyz-
ing relevant data, (3) considering alternative solutions, (4) deciding on the best solution, and
(5) implementing the decision.

One of the major cultural variables affecting decision making is whether a people tend to
assume an objective approach or a subjective approach. Whereas the Western approach is based
on rationality (managers interpret a situation and consider alternative solutions based on objec-
tive information), this approach is not common throughout the world. Latin Americans, among
others, tend to be more subjective, basing decisions on emotions.

Another cultural variable that greatly influences the decision-making process is the risk tol-
erance of those making the decision. Research shows that people from Belgium, Germany, and
Austria have a considerably lower tolerance for risk than people from Japan or the Netherlands—
whereas American managers have the highest tolerance for risk.75

In addition, an often-overlooked but important variable in the decision-making process is
the manager’s perception of the locus of control over outcomes—whether that locus is internal
or external. Some managers feel they can plan on certain outcomes because they are in control
of events that will direct the future in the desired way. In contrast, other managers believe that
such decisions are of no value because they have little control over the future—which lies in
the hands of outside forces, such as fate, God, or nature. American managers believe strongly
in self-determination and perceive problem situations as something they can control and should
change. However, managers in many other countries, Indonesia and Malaysia among them, tend
to be resigned to problem situations and do not feel that they can change them. Obviously, these
different value systems will result in a great difference in the stages of consideration of alterna-
tive actions and choice of a solution, often because certain situations may or may not be viewed
as problems in the first place.

Yet another variable that affects the consideration of alternative solutions is how manag-
ers feel about staying with familiar solutions or trying new ones and about how receptive local
customers will be to a company’s offerings, which was the case for Spotify as it sought to
expand globally using licensing agreements in various countries—especially Latin America,
as illustrated in the following “Management in Action: Spotify’s Plan to Beat Apple: Sign the
Rest of the World.”

Pilots said the salaries offered at the subsidiary undermined Ryanair’s claims about how much they
earn — which the airline has insisted would not be lower than those of pilots flying for the parent group
and can be up to €200,000 (£178,000).

The news about its UK licence came as Ryanair faced three days of strikes in January 2019 from
its Spanish cabin crew.

Unions SITCPLA and USO have scheduled industrial action on January 8, 10 and 13 after failing
to reach an agreement with Ryanair on employing its members under local law, rather than Irish, as the
airline does at the moment.

The unions said the airline’s behaviour was “absurd and childish”. Ryanair did not respond to a
request for comment on the Spanish strikes.

The carrier has been engaged in negotiations with its unions since agreeing to recognise them in
late 2017 after a rostering failure and staff shortage led to thousands of cancellations.

It faced several days of strikes last summer, causing the cancellation of thousands of flights.
Ryanair has been making gradual progress in resolving its industrial relations problems.
At the end of November (2018), it signed a framework agreement with its German pilots ahead of

a collective labour agreement early next year, and it has reached collective labour agreements with cabin
crew in Germany, Belgium and Italy.

Source: © The Financial Times Limited 2019.

172 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

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

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

So far Latin America is the only emerging market where the Spotify model has worked
meaningfully — a phenomenon that caught senior executives by surprise when it entered Mexico six years
ago. Spotify became the dominant paid streaming service in Latin America with minimal effort; to this day
a few dozen employees working out of a Miami WeWork office run the operation for the whole continent.

. . .“Chile is now one of our fastest-growing markets, and we’ve never even sent an employee there,”
says Will Page, Spotify’s director of economics, who expects Mexico and Brazil to overtake the UK and
Germany in subscriptions.

Emboldened by the results in Latin America, founder Daniel Ek is convinced that he can replicate
this across the globe…Mr Ek made grand proclamations about the billions of smartphone owners across
the world who do not yet use his music app. “We’re working on launching in some of the biggest mar-
kets in the world, places like India, Russia and Africa,” he said.

Spotify has made strides: in November (2018) it debuted in the Middle East, while last year it also
entered South Africa, Israel, Vietnam and Romania.

In the US, the biggest music market, Apple recently ousted Spotify from its throne to become
the most popular paid music streaming service. And Spotify has hit a large speed bump in its quest for
global domination: India. The country has become a bargaining chip in the jockeying between the tech
company and the music industry.77

Spotify launched in India — a crucial market — on Wednesday [27 February 2019] despite a copy-
right lawsuit filed by Warner Music Group. Warner Music Group, one of the three big record labels, has
gone to the High Court of Mumbai to seek an injunction to prevent Spotify from using its music, claim-
ing in a statement earlier this week that the service had “falsely asserted a statutory license” in India.78

The court has deferred Warner’s application for an injunction, paving the way for Spotify’s launch
in the country.

Spotify is available for free in India with a premium service priced at Rs119 ($1.67) a month. It is
offering its service in multiple languages and has customised Bollywood playlists.

…Music executives in places such as Canada and Japan were hesitant to trust Spotify, resulting in
years of painstaking negotiations to launch in those countries.79

… Spotify launched in Mexico in 2013, and then Brazil a year later. The service was available in all
of Latin America before it entered Canada. The company had a lot of wind in its sails: half the popula-
tion in Latin America is under 30, which is Spotify’s core audience; a rising middle class was growing,
so there were more people able to pay the fee; and the Latin market is radio-driven, which lent itself well
to Spotify’s style of inundating users with playlists and suggested songs.

While CDs were restricted by geography — they had to be pressed and then delivered to shops and
online retailers — anyone with a data plan can participate in the global music industry. Just by scoop-
ing up the initial group of people in populous countries such as Brazil or Mexico who are wealthy, have
credit cards and had heard of Spotify, it was enough to generate a user base on par with that of small
European countries. Mexico has grown into Spotify’s largest user base, ahead of the US and UK. For
many of the biggest western stars, such as Adele and Radiohead, Mexico City is their number one mar-
ket on Spotify.80

There are local challenges that make India a difficult market for western companies, from Amazon
to Walmart. In India, Spotify would compete with Apple, Amazon and YouTube, in addition to local
players such as Hungama, Gaana and Saavn. None of these services has had success in persuading
people to pay for music in India. Although 216m people were using streaming services in the country
at the end of 2017, only 1m of them actually paid for them, according to Midia. …In India, Spotify’s
licensing negotiations reached a stalemate as the major labels pushed back on Spotify’s requests to offer
free trials for several months in the country, according to people briefed on the talks. In China, Spotify
last year exchanged equity stakes with Tencent Music to gain a foothold in the fastgrowing market.81

Source: © The Financial Times Limited 2019.

CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 173

Approaches to Decision Making
In addition to affecting different stages of the decision-making process, value systems influence
the overall approach of decision makers from various cultures. The relative level of utilitarian-
ism versus moral idealism in any society affects its overall approach to problems. Generally
speaking, utilitarianism strongly guides behavior in the Western world. Research has shown that
Canadian executives are more influenced by a short-term, cost–benefit approach to decision
making than their Hong Kong counterparts.

Another important variable in companies’ overall approach to decision making is that of
autocratic versus participative leadership. In other words, who has the authority to make what
kinds of decisions? A society’s orientation—whether it is individualistic or collectivist (see
Chapter 3)—influences the level at which decisions are made. In many countries with hierar-
chical cultures—Germany, Turkey, and India, among others—authorization for action has to
be passed upward through echelons of management before final decisions can be made. Most
employees in these countries simply expect the autocrat—the boss—to do most of the decision
making and will not be comfortable otherwise. Even in China, which is a highly collectivist
society, employees expect autocratic leadership because their value system presupposes the su-
perior to be automatically the most wise. In comparison, decision-making authority in Sweden
is very decentralized. Americans talk a lot about the advisability of such participative leader-
ship, but in practice, they are probably near the middle between autocratic and participative
management styles.

Arab managers have long traditions of consultative decision making, supported by the
Qur’an and the sayings of Muhammad. However, such consultation occurs more on a person-
to-person basis than during group meetings and thus diffuses potential opposition.82 Although
business in the Middle East tends to be transacted in a highly personalized manner, the top
leaders make the final decisions and feel that they must impose their will for the company
to be successful. In comparison, in cultures that emphasize collective harmony, such as
Japan, participatory or group decision making predominates, and consensus is important. The
best-known example is the bottom-up (rather than top-down) decision-making process used
in most Japanese companies, described in more detail in the accompanying ‘‘Comparative
Management in Focus” section.

One final area of frequent incongruence concerns the relative speed of decision making.
A country’s culture affects how fast or slow decisions tend to be made. The relative speed may
be closely associated with the level of delegation, as just discussed—but not always. The pace
at which decisions are made can be very disconcerting for outsiders. North Americans and
Europeans pride themselves on being decisive; managers in the Middle East, with a different
sense of temporal urgency, associate the importance of the matter at hand with the length of time
needed to make a decision. Without knowing this cultural attitude, a hasty American would insult
an Egyptian; a quick decision, to the Egyptian, would reflect a low regard for the relationship
and the deal.

Exhibit 5-7 illustrates, in summary form, ways in which the variables just discussed can
affect the steps in the decision-making process.

Consideration of
alternative solutions

Data
gathering

DecisionProblem
definition

Implementation

Internal/external
locus of control

Objective/subjective
perspective

Past/future orientationRisk tolerance

Culture

Individualism/collectivism
Locus of decision making

Utilitarianism/moral ideals

ExHIBIT 5-7 Cultural Variables in the Decision-Making Process

174 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

Comparative Management in Focus
Decision Making in Japanese Companies

The length of the decision-making process is one of the most common complaints of anyone
who works with or for Japanese organizations.83

Rochelle Kopp, Managing Principal, Japan Intercultural Consulting

Japanese companies are involved in joint ventures throughout the world, especially with U.S. com-
panies. The GM–Toyota joint venture agreement process, for example, was the result of more
than two years of negotiation and decision making; in similar alliances, Americans and Japanese

are involved in decision making at all levels on a daily basis. The Japanese decision-making process
differs greatly not only from the U.S. process but also from that of many other countries—-especially
at the higher levels of their organizations.

An understanding of the Japanese decision-making process—and indeed of many Japanese man-
agement practices—requires an understanding of Japanese national culture. Much of the Japanese
culture and, therefore, the basis of Japanese working relationships, can be explained by the principle
of wa, meaning “peace and harmony.” This principle is one aspect of the value the Japanese attribute
to amae, meaning “indulgent love,” a concept probably originating in the Shinto religion, which fo-
cuses on spiritual and physical harmony. Amae results in shinyo, which refers to the mutual confi-
dence, faith, and honor required for successful business relationships. The principle of wa influences
the work group, the basic building block of Japanese work and management. The Japanese strongly
identify with their work groups, where the emphasis is on cooperation, participative management,
consensus problem solving, and decision making based on a patient, long-term perspective. Open ex-
pression of conflict is discouraged, and it is of utmost importance to avoid embarrassment or shame—
to lose face—because of not fulfilling one’s obligations. These elements of work culture generally
result in a devotion to work, a collective responsibility for decisions and actions, and a high degree
of employee productivity. It is this culture of collectivism and shared responsibility that underlies the
Japanese ringi system of decision making.

In the ringi system, the process works from the bottom up. Americans are used to a centralized
system, where major decisions are made by upper-level managers in a top-down approach typical of
individualistic societies. The Japanese process, however, is dispersed throughout the organization,
relying on group consensus.

The ringi process is one of gaining approval on a proposal by circulating documents to those
concerned throughout the company. It usually comprises four steps: proposal, circulation, approval,
and record.84 Usually, the person who originates the written proposal, which is called a ringi-sho,
has already worked for some time to gain informal consensus and support for the proposal within the
section and then from the department head.85 The next step is to attain a consensus in the company
from those who would be involved in implementation. To this end, department meetings are held, and,
if necessary, expert opinion is sought. If more information is needed, the proposal goes back to the
originator, who finds and adds the required data. In this way, much time and effort—and the input of
many people—go into the proposal before it becomes formal.86

Up to this point, the process has been an informal one to gain consensus; it is called the nema-
washi process. Then the more formal authorization procedure begins, called the ringi process. The
ringi-sho is passed up through successive layers of management for approval—the approval made
official by seals. In the end, many such seals of approval are gathered, thereby ensuring collective
agreement and responsibility and giving the proposal a greater chance of final approval by the presi-
dent. The whole process is depicted in Exhibit 5-8.

The ringi system is cumbersome and very time-consuming prior to the implementation stage,
although implementation is facilitated because of the widespread awareness of and support for the
proposal already gained throughout the organization. However, its slow progress is problematic when
decisions are time-sensitive. This process is the opposite of the Americans’ top-down decisions, which
are made quite rapidly and without consultation, but which then take time to implement because un-
foreseen practical or support problems often arise.

Another interesting comparison is often made regarding the planning horizon (aimed at short-
or long-term goals) in decision making between the American and Japanese systems. The Japanese
spend considerable time in the early stages of the process, defining the issue, considering what the
issue is all about, and determining whether there is an actual need for a decision. They are more likely

CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 175

N
em

aw
as

hi
P

ro
ce

ss
(in

fo
rm

al
c

on
su

lta
tio

Ri
ng

i
(f

or
m

al
a

ut
ho

ri
za

tio
n

pr
oc

ed
ur

4. Record

3. Approval

2. Circulation

1. Proposal

President/top management
(final approval)

Levels of management
(seals of approval)

Formal proposal (ringi-sho)
(problem and details of plan for solution)

Department consensus attained

Additional information/documents
requested from initiator

Experts/specialists consulted

Department heads, section chiefs,
supervisors meet to discuss

Initiator works to gain informal consensus on
proposal in section and department

ExHIBIT 5-8 Decision-Making Procedure in Japanese Companies

than Americans to consider an issue in relation to the overall goals and strategy of the company.
In this manner, they prudently look at the big picture and consider alternative solutions instead of
rushing into quick decisions for immediate solutions, as Americans tend to do.87

The challenge for Japanese companies today is that the quickening rate of technological prog-
ress is leading to radically shortened product lifecycles and rapidly emerging opportunities.88

Rochelle Kopp

Of course, in a rapidly changing environment, quick decisions are often necessary—to respond
to competitors’ actions, a political uprising, and so forth—and it is in such contexts that the ringi sys-
tem sometimes falls short because of its slow response rate. However, the Japanese culture does not
regard time as such a valuable commodity as those in the West; they feel that a good outcome requires
a thorough and consensus-building decision. The system is, in fact, designed to manage continuity
and avoid uncertainty, which is considered a threat to group cohesiveness.89

CONCLUSION
It is clear that competitive positioning and long-term successful operations in a global market
require a working knowledge of the decision-making and negotiating processes of managers from
different countries. These processes are complex and often interdependent, and are deeply in-
grained into their culture. Although managers may make decisions that do not involve negotiating,
they cannot negotiate without making decisions, however small, or they would not be negotiating.
In addition, managers must understand the behavioral aspects of these processes to work effec-
tively with people in other countries or with a culturally diverse workforce in their own countries.

With an understanding of the environment and cultural context of international management
as background, we move next, in Part 3, to planning and implementing strategy for international
and global operations.

176 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

■ The ability to negotiate successfully is one of the most im-
portant in international business. Managers must prepare
for certain cultural variables that influence negotiations,
including the relative emphasis on task versus interper-
sonal relationships, the use of general principles versus
specific details, the number of people present, and the ex-
tent of their influence.

■ The negotiation process typically progresses through
the stages of preparation, relationship building, ex-
change of task-related information, persuasion, and
concessions and agreement. The process of building
trusting relationships is a prerequisite to doing busi-
ness in many parts of the world.

■ Culturally based differences in verbal and nonverbal
negotiation behavior influence the negotiation pro-
cess at every stage. Such tactics and actions include
promises, threats, initial concessions, silent periods,
interruptions, facial gazing, and touching; some par-
ties resort to various dirty tricks.

■ The effective management of negotiation requires an un-
derstanding of the perspectives, values, and agendas of
other parties and the use of a problem-solving approach.

■ The Internet is used increasingly to support the ne-
gotiation of contracts and resolution of disputes.
Websites that provide open auctions take away the
personal aspects of negotiations, though those aspects
are still essential in many instances.

■ Translators can be an important part of cross-border
negotiations. To ensure their effectiveness, negotia-
tors need to hand-pick them and use independent ref-
erences. Also, negotiators need to brief them before
the negotiation and gauge their self-interest during the
negotiation. Lastly, negotiators need to speak in short
segments and pause frequently so translators can inter-
pret and communicate effectively with counterparts.

■ Decision making is an important part of the negotia-
tion process as well as an integral part of a manager’s
daily routine. Culture affects the decision-making pro-
cess both through a society’s institutions and through
individuals’ risk tolerance, their objective versus sub-
jective perspectives, their perceptions of the locus of
control, and their past versus future orientations.

Summary of Key Points

5-1. Discuss the stages in the negotiation process and how cultur-
ally based value systems influence these stages. Specifically,
address the following.
• Explain the role and relative importance of relationship-

building in different countries.
• Discuss the various styles and tactics that can be involved

in exchanging task-related information.
• Describe differences in culturally based styles of persuasion.
• Discuss the kinds of concession strategies a negotiator

might anticipate in various countries.
5-2. Discuss the relative use of nonverbal behaviors, such as si-

lent periods, interruptions, facial gazing, and touching, by

people from various cultural backgrounds. How does this
behavior affect the negotiation process in a cross-cultural
context?

5-3. Describe what you would expect in negotiations with the
Chinese and how you would handle various situations.

5-4. What are some of the differences in risk tolerance around the
world? What is the role of risk propensity in the decision-
making process?

5-5. Explain differences in culturally based value systems rela-
tive to the amount of control a person feels he or she has
over future outcomes. How does this belief influence the
decision-making process?

Discussion Questions

Multicultural Negotiations

Goal
To experience, identify, and appreciate the problems associated
with negotiating with people of other cultures.

Instructions (Note: Your professor will give out additional
instruction sheets)

1. Eight student volunteers will participate in the role-play.
Four represent a Japanese automobile manufacturer, and
four represent a U.S. team that has come to sell micro-
chips and other components to the Japanese company.
The remainder of the class will observe the negotiations.

2. The eight volunteers will divide into the two groups
and then separate into different rooms if possible. At
that point, they will be given instruction sheets. Neither
team can have access to the other’s instructions. After
dividing the roles, the teams should meet for 10 to 15
minutes to develop their negotiation strategies based on
their instructions.

3. While the teams are preparing, the room will be set
up, using a rectangular table with four seats on each
side. The Japanese side will have three chairs at the
table with one chair set up behind the three. The
American side of the table will have four chairs side
by side.

Experiential Exercises

CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 177

4. Following these preparations, the Japanese team will
be brought in so they may greet the Americans when
they arrive. At this point, the Americans will be brought
in, and the role-play begins. Time for the negotiations
should be 20 to 30 minutes. The rest of the class will act
as observers and will be expected to provide feedback
during the discussion phase.

5. When the negotiations are completed, the student par-
ticipants from both sides and the observers will com-
plete their feedback questionnaires. Class discussion of
the feedback questions will follow.

Feedback Questions for the Japanese Team
1. What was your biggest frustration during the negotiations?
2. What would you say the goal of the American team

was?
3. What role (e.g., decider, influencer) did each member

of the American team play?
Mr. Jones
Mr./Ms. Smith
Mr./Ms. Nelson
Mr./Ms. Frost

4. How would you rate the success of each of the American
team members in identifying your team’s needs and ap-
pealing to them?
Mr./Ms. Jones, Vice President and Team Leader
Mr./Ms. Smith, Manufacturing Engineer
Mr./Ms. Nelson, Marketing Analyst
Mr./Ms. Frost, Account Executive

5. What strategy should the American team have taken?

Feedback Questions for the American Team
1. What was your biggest frustration during the negotiations?
2. What would you say the goal of the Japanese team was?
3. How would you rate the success of each of the American

team members?
Mr. Jones, Vice President and Team Leader
Mr./Ms. Smith, Manufacturing Engineer
Mr./Ms. Nelson, Marketing Analyst
Mr./Ms. Frost, Account Executive

4. What would you say the goal of the American team
was?

5. What role (e.g., decider, influencer, etc.) did each member
of the Japanese team play?
Mr. Ozaka
Mr. Nishimuro
Mr. Sheno
Mr. Kawazaka

6. What strategy should the American team have taken?

Feedback Questions for the Observers
1. What was your biggest frustration during the negotiations?
2. What would you say the goal of the Japanese team was?
3. How would you rate the success of each of the American

team members?
Mr./Ms. Jones, Vice President and Team Leader
Mr./Ms. Smith, Manufacturing Engineer
Mr./Ms. Nelson, Marketing Analyst
Mr./Ms. Frost, Account Executive

4. What would you say the goal of the American team was?
5. What role (e.g., decider, influencer, etc.) did each member

of the Japanese team play?
Mr. Ozaka
Mr. Nishimuro
Mr. Sheno
Mr. Kawazaka

6. What strategy should the American team have taken?

Note: Your professor will give the instructions from the Instructor’s
Manual for this exercise.

Source: E. A. Diodati, in C. Harvey and M. J. Allard, Understanding
Diversity (New York: HarperCollins Publishers, 1995). Used with
permission.

CASE STUDY
India’s Ecommerce Crackdown Upends Big Foreign Players90

Saifuddin Bhanpurawala is one of dozens of shopkeepers on a dusty Mumbai back street that bustles
with customers buying everything from tobacco to perfume.

But Mr Bhanpurawala’s mobile phone shop is going through hard times, selling as few as two
handsets in a bad week. He says the reason is obvious: the huge discounts available online at Amazon
and Walmart-owned Flipkart, the two biggest players in India’s fast-growing ecommerce sector.

“If we sell something at Rs5,000 [$70], they might sell it at Rs2,500 — we don’t understand
how it’s possible,” said Mr Bhanpurawala, 28. He argued that the Indian government’s tolerance
of such practices has demonstrated its lack of concern for small businesses: “The rich are getting
richer and the poor are getting poorer.”

178 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

With a general election just four months away, prime minister Narendra Modi is moving to
address such complaints. Amazon and Flipkart have been given until the end of this month to
comply with new restrictions, announced in late December, that sharply restrict the use of their
hefty balance sheets to boost sales on their virtual marketplaces.

But while the move is intended to strengthen the government’s credentials among India’s
millions of small retailers, it has sparked alarm for two of the country’s biggest outside investors.
Walmart’s $16bn buyout of Flipkart last year was the biggest foreign direct investment in Indian
history, while Amazon has committed $5bn in capital to its Indian operation.

“A sudden change in rules is not helpful,” said Mukesh Aghi, president of the US-India
Strategic Partnership Forum, which works to build economic ties between the countries. “It
sends a message to groups that the environment is not transparent.”

‘Behave like a marketplace’
When India opened its economy to foreign capital in the 1990s, it was careful to maintain
protection for small retailers. Foreign investment was allowed in single-brand but not multi-brand
retail—allowing clothing labels, for example, to open stores but keeping out the foreign
supermarket chains that were feared by many shopkeepers.

As ecommerce took off, New Delhi updated these rules for the internet age. Foreign-backed
companies would be allowed to run virtual “marketplaces”—platforms enabling independent
sellers to connect with customers. But they were barred from selling goods themselves, stopping
them from functioning as online supermarkets.

The vague wording of the rules, however, meant that Amazon and Flipkart—backed with
billions in capital from foreign investors led by US fund Tiger Global—quickly found ways to
use their balance sheets to turbo-charge growth, outraging peers in the industry.

“We were flabbergasted all the while at the blatant violations of the FDI policy,” said Sanjay
Sethi, chief executive of ShopClues, one of the largest rivals to the dominant duo. “We started
doubting ourselves—are we not interpreting these rules correctly?”

Partnering a fund controlled by Narayana Murthy, co-founder of IT services group
Infosys, Amazon formed a joint venture that in turn owned Cloudtail India, a new company
that would sell products ranging from electronics to breakfast cereal. Cloudtail is by far the
biggest seller on Amazon’s Indian marketplace, with revenue of $1bn in the last financial year
ending March 2018.

Flipkart pursued a different tack. Instead of forming directly controlled sellers, it supplied
many of them through a huge wholesale distributor, named Flipkart India. The distributor’s rev-
enue has far outstripped that of the online marketplace entity, while incurring heavy losses.

In the last financial year, Flipkart India made a net loss of $293m on sales of $3bn. That
dwarfed the revenue of Flipkart Internet, the marketplace business, which booked sales of
$398m, mostly on commissions charged to sellers.

From 2016, Amazon also dramatically increased the scale of its wholesale operation. In the
last financial year, that business had revenue of $1.7bn, up from $458,000 two years before.

“They would strike a large deal with a brand and buy in bulk,” claimed one rival ecommerce
executive, alleging that the wholesaler would then supply the goods at low prices to certain “con-
trolled sellers”. The sellers would then offer the products on the marketplace at steep discounts
from the prices available in offline shops.

“This was compliant with the letter of the law, but not the spirit,” the person said.
But the new rules, announced in December (2018), strike hard at such practices. They stipu-

late that no seller on foreign-funded online marketplaces can source more than 25 per cent of its
inventory from a wholesaler linked to the marketplace—banning sellers set up to shuttle goods
between the two. They also state that no entity may sell on these marketplaces if any of its equity
is owned by the marketplace or by any of the latter’s “group companies”.

“The government is saying: ‘You’re a marketplace, so behave like a marketplace,’” said
Rajiv Chugh, a partner at EY.

Crackdown to benefit big Indian retailers
Amazon said it had “always operated in compliance with the laws of the land” and was “evalu-
ating the new guidelines to engage as necessary with the government to gain clarity so that we
remain true to our commitment”.

CHAPTER 5 • CROSS-CULTURAL NEGOTIATION AND DECISION MAKING 179

Flipkart said it hoped “to be able to work with the government to promote fair, pro-growth
policies that will continue to develop this nascent sector”, adding that it would “ensure our com-
pliance with all Indian laws”.

But privately, the companies are lobbying the government to allow them more time to comply
with the new rules, arguing the January 31 deadline will cause huge disruption to their businesses.

“There are a lot of sellers who buy from our wholesale entity—it will be hard for them to
diversify the supply base so quickly,” said a person with knowledge of Flipkart’s position. “Such
a massive impact so suddenly will leave capacity under-utilised.”

Amazon-backed Cloudtail, meanwhile, will be faced with “huge losses” from hundreds of
millions of dollars’ worth of inventory that it will be unable to sell by January 31, warned Sanchit
Vir Gogia, founder of retail research firm Greyhound Knowledge Group.

Some analysts have also questioned the motives behind the government’s new rules. Arvind
Singhal at Technopak, a consultancy, noted that the crackdown on foreign-backed ecommerce
companies would benefit big Indian retail groups that are not subject to the new rules.

By far the biggest of these is Reliance Industries, controlled by Mukesh Ambani, Asia’s rich-
est person. While most of its revenue in recent years has come from oil products, Reliance also
includes the country’s biggest retail chain, and is now eyeing large-scale growth in ecommerce,
after its $30bn mobile internet venture Jio signed up more than 250m users. Jio was among the
local groups that took part in government consultations on ecommerce policy last year, to which
Amazon and Flipkart were not invited.

By imposing restrictions on foreign-backed groups but not on locally owned conglomerates,
New Delhi has signalled “that international companies will not have a level playing field”, said
Mr Aghi at USISPF.

But the measures will prove in the interest of Indian consumers, said Kunal Bahl, co-founder
of Snapdeal, which bills itself as an even-handed online marketplace for small vendors. While
shoppers may lose out on short-term discounting, he argued, they will enjoy a more competitive
market in the long run.

“If they were providing great pricing while generating a profit, it would be a different con-
versation,” he said. “But everyone knows that these companies are haemorrhaging cash while
giving out all these promotions, and at some point they’ll want to pull this back. They’re not
charitable organisations.”

Source: © The Financial Times Limited 2019.

Case Questions

1. Arash Massoudi, “Hitachi Looks for Deal with ABB on Power
Grids Business,” Financial Times, November 19, 2018, https://
search-proquest-com.libweb.lib.utsa.edu/businesspremium
/ d o c v i ew / 2 1 6 6 4 3 4 3 4 1 / B 8 D 8 6 A B 5 4 E 1 C 4 0 F 3 P Q / 6
?accountid=7122 (accessed February 14, 2019).

2. Ibid.

Endnotes

3. Ralph Atkins, “Hitachi Lines up Deal for ABB Grids Unit:
Industrials Japanese Group Targets Foreign Growth as Swiss
Engineer Refocuses,” Financial Times, December 13, 2018,
https://search-proquest-com.libweb.lib.utsa.edu/businesspremium/
docview/2166434341/B8D86AB54E1C40F3PQ/6?accountid=7122
(accessed February 14, 2019).

5-6. Who are the stakeholders in this situation, and what is at stake for each of them? (refer to ex. 5-1)
5-7. Discuss the negotiations and decisions among those parties that have been going on in this chang-

ing retail landscape. (refer to ex 5-2). What does the outcome mean at this stage for foreign
companies like Amazon and Flipkart?

5-8. What negotiating power do foreign retail companies have with the Indian government?
5-9. What are the implications for companies like Amazon and Flipkart to expand into other develop-

ing countries?
5-10. Research updates to this retail situation in India.

https://search-proquest-com.libweb.lib.utsa.edu/businesspremium/docview/2166434341/B8D86AB54E1C40F3PQ/6?accountid=7122

180 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT

4. John Pfeiffer, How Not to Lose the Trade Wars by Cultural
Gaffes. Smithsonian 18, No. 10 (1988), pp. 145–156.

5. Nancy J. Adler, International Dimensions of Organizational
Behavior, 4th ed. (Boston: PWS-Kent, 2002), 208–232.

6. Philip R. Harris and Robert T. Moran, Managing Cultural
Differences, 3rd ed. (Houston: Gulf Publishing, 1991).

7. John L. Graham and Roy A. Herberger, Jr., Negotiators
Abroad—Don’t Shoot from the Hip. Harvard Business Review
(July–August 1983), pp. 160–168; Adler; John L. Graham, A
Hidden Cause of America’s Trade Deficit with Japan. Columbia
Journal of World Business (Fall 1981), pp. 5–15.

8. Phillip D. Grub, Cultural Keys to Successful Negotiating. in
Global Business Management in the 1990s, F. Ghader et al., eds.
(Washington, DC: Beacham, 1990), pp. 24–32.

9. R. Fisher and W. Ury, Getting to Yes (Boston: Houghton Mifflin,
1981).

10. S. Weiss, Negotiating with ‘Romans.’ Sloan Management Review
(Winter 1994), pp. 51–61.

11. John A. Reeder, When West Meets East: Cultural Aspects of
Doing Business in Asia. Business Horizons (January–February
1987), pp. 72.

12. John L. Graham and William Hernandez Requejo, Managing
Face-to-Face International Negotiations. Organizational
Dynamics 38, No. 2 (2009), pp. 167–177.

13. Adler, 197.
14. Fisher and Ury.
15. Lennie Copeland and Lewis Griggs, Going International (New

York: Random House, 1985), 85.
16. Adler, 197–98.
17. Fisher and Ury.
18. Jeanne M. Brett, Negotiating Globally (San Francisco, CA: John

Wiley and Sons, 2001).
19. G. Fisher, International Negotiation: A Cross-Cultural

Perspective (Chicago: Intercultural Press, 1980).
20. E. Meyer, “Getting to Sí, Ja, Oui, Hai, and Da,” Harvard Business

Review (December 2015), 74–80.
21. Ibid.
22. Pfeiffer.
23. John L. Graham, Brazilian, Japanese, and American Business

Negotiations. Journal of International Business Studies (Spring–
Summer 1983), pp. 47–61.

24. T. Flannigan, Successful Negotiating with the Japanese. Small
Business Reports 15, No. 6 (1990), pp. 47–52.

25. Graham, 1983; Boye De Mente, Japanese Etiquette and Ethics
in Business (Lincolnwood, IL: NTC Business Books, 1989).

26. Robert H. Doktor, Asian and American CEOs: A Comparative
Study. Organizational Dynamics (Winter 1990), p. 49.

27. Harris and Moran, 461.
28. Adler, 181.
29. These profiles are based on selections from Pierre Casse,

Managing Intercultural Negotiations: Guidelines for Trainers
and Negotiators (Washington, DC: Society for Intercultural
Education, Training, and Research, 1985).

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(1983), pp. 47–56.

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Conducting Intra- and Inter-Cultural Negotiations: A Sino-
Canadian Comparison. Journal of International Business Studies
(3rd quarter 1994), pp. 537–555.

32. B. W. Husted, Bargaining with the Gringos: An Exploratory
Study of Negotiations between Mexican and U.S. Firms.
International Executive 36, No. 5 (1994), pp. 625–644.

33. Nigel Campbell, John L. Graham, Alain Jolibert, and Hans
Meissner, Marketing Negotiations in France, Germany, the
United Kingdom, and the United States. Journal of Marketing
52 (1988), pp. 49–63.

34. Neil Rackham, The Behavior of Successful Negotiators (Reston,
VA: Huthwaite Research Group, 1982).

35. J. Salacuse, The Global Negotiator: Making, Managing, and
Mending Deals around the World in the Twenty-First Century
(Palgrave MacMillan, 2003).

36. J. Teich, H. Wallenius, and J. Wallenius, World-Wide-Web
Technology in Support of Negotiation and Communication.
International Journal of Technology Management 17, Nos. 1/2
(1999), pp. 223–239.

37. Ibid.
38. Ibid.
39. A. Rosette, Jeanne Brette, Zoe Barsness, and Anne Lytle, When

Cultures Clash Electronically: The Impact of E-mail and Culture
on Negotiation Behavior. The Dispute Resolution Research
Center, Northwestern University, accessed February 9, 2009.

40. J. A. Pearce II and R. B. Robinson Jr., Cultivating Guanxi as a
Foreign Investor Strategy. Business Horizons 43, No. 1 (January
2000), pp. 31.

41. Rosalie L. Tung, Verner Worm, and Tony Fang, Sino-Western
Business Negotiations Revisited—30 Years after China’s Open
Door Policy. Organizational Dynamics 37, No. 1 (2008),
pp. 60–74.

42. Tung, 2008.
43. Ibid.
44. Ibid.
45. Ibid.
46. Joan H. Coll, Sino–American Cultural Differences: The Key

to Closing a Business Venture with the Chinese. Mid-Atlantic
Journal of Business 25, No. 2–3 (December 1988/January 1989),
pp. 15–19.

47. M. Loeb, China: A Time for Caution. Fortune (February 20,
1995), pp. 129–130.

48. O. Shenkar and S. Ronen, The Cultural Context of Negotiations:
The Implications of Chinese Interpersonal Norms. Journal of
Applied Behavioral Science 23, No. 2 (1987), pp. 263–275.

49. Tse et al.
50. J. Brunner, teaching notes, the University of Toledo.
51. www.kwintessential.co.uk/etiquette/doing-business-china.html

(accessed September 15, 2011).
52. Kam-hon Lee, Guang Yang, and John L. Graham, Tension

and Trust in International Business Negotiations: American
Executives Negotiating with Chinese Executives. Journal of
International Business Studies 37, No. 5 (2006), p. 623.

53. Roy Y. J. Chua, Building Effective Business Relationships in
China. MIT Sloan Management Review (Summer 2012).

54. J. M. Banthin and L. Stelzer, ‘Opening’ China: Negotiation
Strategies When East Meets West. Mid-Atlantic Journal of
Business 25, No. 2–3 (December 1988/January 1989).

55. Brunner.
56. Pearce and Robinson.
57. Ibid.
58. Ibid.
59. C. Blackman, An Inside Guide to Negotiating. China Business

Review 27, No. 3 (May 2000), pp. 44–45.
60. Boye De Mente, Chinese Etiquette and Ethics in Business

(Lincolnwood, IL: NTC Business Books, 1989), pp. 115–123.
61. S. Stewart and C. F. Keown, Talking with the Dragon: Negotiating

in the People’s Republic of China. Columbia Journal of World
Business 24, No. 3 (Fall 1989), pp. 68–72.

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62. Banthin and Stelzer, “‘Opening’ China.”
63. Tony Fang, Verner Worm, and Rosalie L. Tung, Changing

Success and Failure Factors in Business Negotiations with the
PRC. International Business Review 17 (2008).

64. www.ediplomat.com, accessed May 1, 2015.
65. Ibid.
66. Ibid.
67. Blackman.
68. “Doing Business in China,” www.kwintessential.com, accessed

October 2, 2011; “Avoiding Pitfalls, and Forging Success, in
East-West Contract Negotiations,” International Herald Tribune,
January 24, 2011; Lucian Pye, Chinese Commercial Negotiating
Style (Cambridge, MA: Oelgeschlager, Gunn, and Hain, 1982).

69. Fang et al., 2008.
70. W. B. Gudykunst and S. Ting Tomey, Culture and Interpersonal

Communication (Newbury Park, CA: Sage Publications, 1988).
71. L. Copeland and L. Griggs, Going International (New York:

Random House, 1985), p. 80.
72. M. A. Hitt, B. B. Tyler, and Daewoo Park, “A Cross-Cultural

Examination of Strategic Decision Models: Comparison of
Korean and U.S. Executives,” in Best Papers Proceedings of
the 50th Annual Meeting of the Academy of Management (San
Francisco, CA, August 12–15, 1990), pp. 111–115; G. Fisher,
International Negotiation: A Cross-Cultural Perspective
(Chicago: Intercultural Press, 1980); G. W. England, “Managers
and Their Value Systems: A Five-Country Comparative Study,”
Columbia Journal of World Business 13, No. 2 (1978); W.
Whitely and G. W. England, “Variability in Common Dimensions
of Managerial Values Due to Value Orientation and Country
Differences,” Personnel Psychology 33 (1980), pp. 77–89.

73. J. Spero, “Ryanair Secures UK Licence in Preparation for No-
Deal Brexit,” Financial Times, January 4, 2019, p. 18, https://
search.proquest.com/businesspremium/docview/2175187435
/5571BC3764F64635PQ/11?accountid=7122 (accessed February
21, 2019).

74. Hitt, Tyler, and Park, p. 114.
75. B. M. Bass and P. C. Burger, Assessment of Managers: An

International Comparison (New York: Free Press, 1979), p. 91.

76. Excerpts taken from A. Nicolaou, “Spotify’s Plan to Beat Apple:
Sign the Rest of the World,” Financial Times, January 2, 2019,
p. 7, https://search.proquest.com/businesspremium/docview
/2175184031/372A80B9CE134958PQ/3?accountid=7122
(accessed February 21, 2019).

77. Ibid.
78. S. Findlay, “Spotify Launches in India despite Warner Music

Suit Share on Twitter,” Financial Times, February 27, 2019,
https://www.ft.com/content/82fd2710-3a6e-11e9-b72b
-2c7f526ca5d0?shareType=nongift (accessed February 27, 2019).

79. Excerpts taken from A. Nicolaou, “Spotify’s Plan to Beat Apple:
Sign the Rest of the World.”

80. Ibid.
81. Ibid.
82. Copeland and Griggs; M. K. Badawy, Styles of Mideastern

Managers. California Management Review 22 (1980),
pp. 51–58.

83. Rochelle Kopp, Managing Principal, Japan Intercultural
Consulting, “The Decision-Making Process in Japan,” www
. japanintercultural.com, April 2, 2012.

84. N. Namiki and S. P. Sethi, “Japan,” in Comparative
Management—A Regional View, R. Nath, ed. (Cambridge, MA:
Ballinger Publishing, 1988), pp. 74–76.

85. De Mente, Japanese Etiquette, 80.
86. S. Naoto, Management and Industrial Structure in Japan (New

York: Pergamon Press, 1981); Namiki and Sethi.
87. Harris and Moran, 397.
88. Rochelle Kopp, 2012.
89. S. P. Sethi and N. Namiki, “Japanese-Style Consensus Decision-

Making in Matrix Management: Problems and Prospects of
Adaptation,” in Matrix Management Systems Handbook, D. I.
Cleland, ed. (New York: Van Nostrand, 1984), pp. 431–456.

90. S. Mundy, “India’s Ecommerce Crackdown Upends Big Foreign
Players,” Financial Times, January 14, 2019, www.ft.com
/content/6dd8188a-14c2-11e9-a581-4ff78404524e. Accessed
February 20, 2019.

http://www.ft.com/content/6dd8188a-14c2-11e9-a581-4ff78404524e

HOME

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P A R T 2 : Comprehensive Cases

Andreas added, “Information security and privacy have be-
come board-level challenges as well as issues; we need to act
now.”

Andreas had James Wu, Head of the IT at DeltX, on a
teleconference.

“Hi James, the team are all gathered this morning,”
Andreas reassured. “The information systems and the cyber
defense teams need to work closer together and pay more at-
tention to the situation to contain it, especially as attacks are
becoming more frequent and causing more damage.”

James admitted, “The virus is believed to be ransomware –
one of these pieces of software that shut down a computer sys-
tem, and the perpetrators have already demanded a huge sum of
money to fix the problem. We need to act quickly.”

Eunice asked, “Do we know who is behind the latest at-
tack? Our American and British analysts believe the attack ear-
lier this month was carried out by North Korea.” Andreas said,
“We don’t know yet, but one thing is for sure: we need to come
up with a smart solution.”

After an hour, the team, which was made up of software
experts mostly Eunice’s age, had come up with a solution to
prevent the cyber thieves siphoning off any more personal in-
formation and they were able to put the new measures in place.
The problem was fixed for now.

Andreas was not convinced. “Our promise is to deliver real
lasting benefits for our clients, so we need to reduce the likeli-
hood of it happening again.”

Eunice was head-hunted for the job because of her ex-
perience managing a diverse international team on a number
of security projects in Singapore. Cybot had a good reputa-
tion as firms go; it fosters a collaborative culture for people
to work in as well as an innovative and dynamic environ-
ment. Andreas convinced her the move to Zurich is a good
career move offering a great opportunity to work in a cutting-
edge state-of-the-art company, with a talented team of young
professionals from around the world. Yet, she was only too
aware the move to Zurich meant she would be far away from
Singapore, her family, and friends. Eunice was one of the
youngest project managers in her company, and for a woman
to reach that position so early on in her career was highly
unusual. Her parents were her role models and encouraged
her to strive for perfection. Her colleagues were not surprised
when she landed the job. Eunice had always displayed a pro-
fessional work ethic as well as strong analytical and prob-
lem-solving skills. At the age of five, she had won the junior

Case 3 Cross-Cultural Challenges for a Singaporean Expatriate in Zurich

From her office, Eunice catches a glimpse of the 11.45 A380
bound for Singapore; needless to say, it’s on time – a typical
Swiss cliché. Like the Singapore Airlines campaign slogan,
no detail is too small, Cybot, a leading cybersecurity firm, is
committed to innovation. Eunice is new in her role as Project
Manager at Cybot, one of the big four leaders in the European
marketplace with over 50 cybersecurity specialists staffing thou-
sands of client engagements around Europe. She accepted the job
in Zurich because it offered great professional opportunities. She
relished the challenge of starting in a new city on her own, even
though it was difficult saying goodbye to family and friends in
Singapore. Four years ago, she moved to San Francisco to do a
master’s in cybercrime at the University of Southern California.
Now, Eunice is experiencing homesickness for the first time and
she is not sure why this move is proving so complicated.

“The meeting is about to start, Eunice.”
Her assistant’s voice snapped her out of her daydream. This

morning’s emergency meeting was called in the aftermath of a
cyberattack on one of their biggest clients. The massive cyberat-
tack brought down multiple sites and business units from gov-
ernment offices to shopping centres, even local banks. Andreas
and Sam were huddled together in deep conversation when
she entered the meeting room. Perhaps sensing her hesitation,
Andreas, the CEO of Cybot, motioned to her to take a seat.

“DeltX has been hacked with personal details and credit
card numbers at risk. We are not sure yet, but it looks like
accounts from in excess of 500 customers were potentially
accessed by hackers in the last few hours.”

“This is the second such attack in four months; it’s serious,”
said Sam, Cybot’s Swiss COO, who shifted uncomfortably in
his chair.

She sensed Sam’s anxiety, which added to her own. Sam
was distant, which made her nervous around him. On the other
hand, Andreas liked her; he hired her because of her experience
in the cybercrime industry, and her knowledge of the Asian
market and her fluency in Chinese. Andreas has long-term
plans to open a new office in Singapore but had not shared this
information with anyone on his team. He offered Eunice a fair
relocation package, including a generous salary. Tim, another
member of staff, had applied for Eunice’s job but had been
turned down; Andreas wanted someone who spoke Chinese.

Andreas was stressed. “DeltX, one of the three major con-
sumer credit reporting agencies in Europe, is our biggest cus-
tomer; they will go public with this information in an hour and
we need to come up with a plan quickly.”

This case study was written by Christina Neylan, lecturer of intercultural management at Lucerne University of Applied Sciences and Arts.1

PC2-1

PC2-2 PART 2 • COMPREHENSIVE CASES

superficial, too many fake smiles or “Wow” or “Great” com-
ments. At home, she had lots of friends, both professional as
well as childhood friends. She resented having to start all over
to make new ones. Looking around the table she was unsure
how many of them she would honestly befriend if the scene
was set in Singapore rather than Zurich. In was not that she
disliked meeting new people, or that she had a problem mak-
ing friends; people from work talk shop. Yet, the reality was
sobering: after three months in the country, she had not made
any friends. She consoled herself by blaming the late hours at
work and the language barrier.

Join the Club

In the first week, Sarah, the HR assistant, introduced her to
all the events related to Diversity and Inclusion (D&I) organ-
ised by the company, emphasising the importance placed on
ensuring people felt at home and part of the company. Sarah
did not mention that executives are evaluated based on whether
they reach diversity targets or not. Sarah said enthusiastically,
“We have lots of great events organised to help our new em-
ployees get to know people; in no time you will forget about
Singapore.”

Eunice doubted it.
Sarah spoke enthusiastically, “Yes, we have sports

events, Meet and Lunch, the Alumni, Online further educa-
tion, Mentoring, Women’s networking group, and the Culture
Evenings, something for everyone.”

Eunice smiled; it was, after all, her choice to move to
Switzerland. Within six weeks she had practically ticked off the
list of D&I tools of things to do.

The sports programme consisted of a yoga class before
work, a body toning class at lunch, and football after work.
Not one for sport and sweating, Eunice shuddered at the idea
of being stuck in a room with colleagues all sweating it out
together.

Then there was a business network group meeting, which
she attended once, but most of the others just lapsed into Swiss
German after the polite introductions.

“Learn German as soon as possible; it’s essential to sur-
vival,” was Andreas’s advice. She planned to do it during the
winter but had not got around to finding a convenient class.

The hiking trip was a disaster because she did not have the
proper shoes and could not keep up with the group. In the end,
she turned back.

The Thursday after-work football game was the most pop-
ular activity, as most of the guys in her section headed off to the
football pitch.

John had teased her and said, “Come and join in the kick
around.”

Eunice said, “Oh leave it, John, I am useless at ball
sports.”

John mimicked her by shaking his head.
John did not give up. “At least come down to the pub for a

drink; we go to Pickwick’s after football practice.”
She winced at the idea of waiting around for the guys to

come in and talk about football; it was not for her, she reminded
herself.

Singapore Mathematical Olympiad, a prestigious national
maths competition, beating thousands of other children. Her
parents were so pleased all the extra tutoring had paid off.
Her father harboured high hopes for his only child. He knew,
she enjoyed a challenge; when she was very young she spent
hours playing Animal Chess, a child’s Chinese chess, where
animals are used instead of pawns, kings, and other chess
pieces. She loved showing her father she had grit.

Her phone vibrated on the table; it was a text from Lydia,
her best friend back home. She attached a picture of Tan’s wed-
ding. Tan, her oldest school friend, got married at the weekend.
Tan was the last of her school friends to marry; Eunice was
the only unmarried one. The picture showed the groom fetch-
ing Tan from her house, an old tradition where the groom and
groomsmen picked up the bride at her house, but before they
could enter the brides’ sisters would prepare a series of chal-
lenges for them. It looked like they were eating mooncake or
“Fat Mama” as it is known locally, a pie usually, eaten to cel-
ebrate Mid-Autumn Festival on October 4.

“Are you joining us for lunch?” John asked. His voice
made her jump. She looked around the office and realised the
others had already trickled out of the meeting room.

“No, sorry, can’t today. I have signed up for “Lunch and
Meet.”

“What’s that?” John asked.
“Oh, it’s just lunch in the canteen with some newcomers.

Sarah from HR organised it to help us meet new people within
the company.”

“But you can come and talk to me,” John replied.
She was not sure how to take his comments; his charm-

ing and friendly Irish ways disarmed her. She noticed he was
friendly with everyone, so it probably did not mean anything.
Everyone in the office said John is full of blarney, an Irish col-
loquialism which meant he was good at flattery.

Before heading out to lunch, she checked her emails, as
she looked around the large empty open office, which was quiet
now. But normally it was unbelievably loud; Eunice sometimes
wore earplugs to block out the noise. The office was ultra-
modern, a hybrid style office space with no desk allotments;
everyone sat where he or she wanted. She felt sure she could
never get used to this style of open plan. The clean desk policy
took some getting used to.

Lunch and Meet

“So, you are suggesting we take up football,” joked one of the
newcomers seated at the table specially reserved for the group.

Eunice laughed and joined in the banter. She wanted to
say she would start playing football too if that is what it takes
to make new friends. The animated discussion resounded
throughout the canteen; ten new staff members were hav-
ing lunch together. It was one of only a number of events
organised by HR for new recruits. Eunice thought to her-
self, they were really a lonely bunch sharing stories across
a salad. Immediately, she berated herself for thinking like
that; in fact, she reminded herself she should be happy not
to be eating alone. She had met most of the new employees
at previous events. It was not really her scene; it was all a bit

CASE 3 • CROSS-CULTURAL CHALLENGES FOR A SINGAPOREAN EXPATRIATE IN ZURICH PC2-3

She arranged the food in beautiful colourful bowls and
folded down the napkins in the shape of little butterflies. She
glanced at the food, wondering if there would be enough for
everyone. Slowly her colleagues arranged their food beside her
dishes, even in between the dishes; soon various cakes and pies
covered up the countertop. Eunice realised most of the others
had used Betty Bossi cake mixes, a popular Swiss purveyor of
recipes and ready-to-make cake mixtures. John had brought
a bottle of Bailey’s Irish. Suddenly, she felt bad; she began to
wonder if she had overdone it a bit. It seems if she misunder-
stood the brief and had gone a bit over the top compared to the
others. Something less extravagant would have done. She got
lots of praise from her colleagues. She even felt bad for the oth-
ers who had made food but did not get half the praise.

Walking back into the kitchen, Eunice was shocked to see her
colleagues eating the food with spoons and even fingers; few had
used the chopsticks she had conveniently placed beside the dishes.

There were lots of compliments. Even Mandy, who never
had a polite word to say about anything, said,

“Eunice, this Chinese food is delicious. Where did you buy
it? Oh, you made it yourself? Great! You must give me the recipe.”

More compliments followed. Within 30 minutes the place
looked as it if had been hit by a tornado and everyone started
to pack up.

Anna said, “Eunice, thank you for the food; have a nice
weekend.”

She stood to the side and felt devastated. Slowly she
packed up her expensive dishes and got ready to go home. At
that moment John walked in.

John grinned, “Hey, Eunice want to come to the pub with us?”
Normally, she would politely decline, but she felt so

wretched she surprised herself by agreeing to go.
She replied, “Great, meet me downstairs in 5 minutes.”

Unleashing the Tears

After her third gin and tonic in the Pickwick Pub, she felt a bit
tipsy. The pace of the rounds was too fast; she was not used to
drinking so quickly, and the alcohol made her more talkative than
usual. Only John and herself were left in the pub; all the others had
made excuses to leave to go home to the family or had other plans.

Eunice said almost in tears, “Why can’t I make friends?
What is wrong with me?”

Now she could not stop the tears. She sobbed, “All my at-
tempts have failed. All the Swiss colleagues go home early;
they are very friendly in the office but do not wish to do any-
thing after work.”

John replied, “You can always hang out with me.”
Eunice replied, “But all you English do is go to the pub.”
John said firmly, “That’s not true; you have been invited

out many times, but you have never once come along. You have
only yourself to blame.”

Eunice was almost hysterical. “John, you don’t get it. I
miss my family, I have no friends here, I spend every weekend
alone. Yes the job is great, I have a lovely apartment, and the
salary is super, but there must be more to life.”

John put his arm around Eunice and led her over to a quiet
corner of the pub.

Cultural Evening

The sign caught her attention in the company kitchen. It read
Cultural Evening. Before she could finish reading it, Anna
came up behind her and said,

“Hey Eunice, we are having drinks and food from different
countries in the office after work. Do you want to bring
something from Singapore?”

Taken off guard, she stuttered.
Eunice tried to sound enthusiastic, “Oh yes, of course; I’ll

organise something.”
That night Eunice was hoping for inspiration as she sat

watching Three Little Wishes, her favourite TV drama about
Zhao Chenglong, who was unhappy that his parents were run-
ning his life. It had many similarities to Eunice’s own story.
Before going to bed she Googled some recipes of traditional
food. Finally, she decided it was easier to phone her mother
Jasmine to ask advice on what food to bring.

Jasmine was delighted. “Eating is our national pastime and
food a national obsession; it’s impossible to pick one dish from
the diverse range of ethnic food.”

Her mother inquired, “Will there be Muslims and Hindus
at the party? If so, you need to pay special attention to your
choice of food, to cater to the various dietary needs based on
religious grounds.”

Eunice mumbled that it is not so easy to buy ethnic food
in Zurich.

Eunice confessed, “Mum, you know I can’t really cook. As
a student, I just ate out in the Hawker centres. Our food courts
are the best in the world. Oh how I miss the Maxwell Food
Court Centre! there is nothing like it in Switzerland.”

Eunice asked, “Mum, do you remember the great
Hainanese chicken rice with chili crab and Laksa we had last
time I was home?”

Her mother could detect a sense of homesickness.
Jasmine said, “Yes, Eunice, and we’ll have it again on

your next visit. I’ll send you the ingredients for laksa and chili
crabs.”

Despite Eunice’s objections, her mother persuaded her it
was the best option; she did not want to fight with her mother.

The Party

Eunice could not stop thinking about what she was going to
cook for the event, despite how much she tried to focus on
work. With the pressure to do a good job, Eunice decided to
take Friday off work to cook the chicken rice, chili crabs, and
the laksa in her small apartment. Her mother supervised the
operation via Skype. Nervously, she arranged the food in the
new serving bowls she bought in Globus, an upmarket retail
outlet. She wanted to impress her colleagues with some deli-
cious Singaporean food. When she arrived at the office, some
of her colleagues were having coffee in the kitchen.

Sarah commented, “That smells delicious, Eunice. You
must have been cooking all day.” Anna joined in, “So much
food, you can feed a parish with what you have prepared there.”
She felt maybe she had overdone it, but better to be well pre-
pared than underprepared, her mother’s adage.

PC2-4 PART 2 • COMPREHENSIVE CASES

John said, “Eunice, you are putting too much pressure
on yourself; enjoy life a bit more.” Eunice just looked at him
in disbelief. He has no idea how hard she has worked to get
where she is today, and she does not want to throw it all away.
What would her mother say if she saw her crying her eyes out
and resting her head on the shoulder of an almost complete
stranger?

Case Questions

1. Choosing the right person in the first place is key to the
success of an overseas assignment. Does Eunice have a
global mindset? Use the list of leadership competencies by
Bird and Osland (2004) as a basis for your answer.

2. Identify and evaluate the effectiveness of some of the di-
versity and inclusion tools mentioned in the case.

3. Roche CEO Severin Schwan said about diversity and
inclusion, “I believe that diversity of people enhances
innovation. The different ways of thinking foster creativ-
ity. But just having diversity is not enough. We have to
embrace and appreciate each other’s diversity to trans-
late it into novel ideas – that’s why inclusion of people is
so important.” Comment.

4. Apply the Mapping Bridging Integrating (MBI) Framework
by Professor J. DiStefano and Prof. M. Maznevski to the
case.

5. What advice would you give Eunice? Should she give
Switzerland another chance or return home to Singapore?

1. Sole responsibility for the content rests with the author. It is intended
to be used as a basis for class discussion rather than to illustrate either
effective or ineffective handling of a management situation. This case
illustrates the challenges associated with cross-cultural management,
diversity and inclusion and adjusting to a new social environment.

© 2018 by Lucerne School of Business, Lucerne, Switzerland, www
.hslu.ch. All rights reserved. No part of this publication may be repro-
duced, stored in a retrieval system, reproduced or distributed in any form
or medium whatsoever without the permission of the copyright owner.

Endnotes

http://www.hslu.ch

Case 4 Anuj Pathak Returns to India

same standards!” he thought. Was his dream of a successful
career back in India going to be shattered or could he recover
and improve the situation?

Coming Home

When, as an ambitious young man of 22, Pathak had left in
June 1997 for postgraduate studies at Monash University in
Melbourne, he had not imagined he would become an expatri-
ate for nearly twenty years. After completing the programme,
he had been thrilled to get his first job with a financial con-
sultancy firm in Singapore. Within about four years he moved
to a large MNC in the US. Except for about two years with
a start-up in the Financial Services sector, he had worked at
strategy consultancy firms. He had been thinking off and on of
returning to India and had now decided to do so for both per-
sonal and professional reasons. In his visits prior to deciding
on the move, he had caught up with Chandrashekhar, his old
senior in college back in Bhopal, who was now a Managing
Director at the Impact Group. Chandrashekhar had given him
a glowing picture of the boom in the Indian economy and the
developments in the financial services segment, especially the
vast potential of the private sector. Pathak’s brother-in-law who
worked in one of the new private sector banks in Mumbai had
also given him a thumbs-up, speaking highly of the opportuni-
ties in India.

Pathak’s parents were living in Indore since his father’s
retirement from government service in the state of Madhya
Pradesh. Since they were getting older, and his mother had
been diagnosed with a serious ailment, it was becoming dif-
ficult for them to manage on their own. Pathak was keen to
get back to India so as to help them on a day-to-day basis
rather than just financially and during his annual, or at best,
biannual brief visits. As the only child, he had a nagging sense
of guilt that he lived a comfortable life overseas, while his
parents aged. He had not meant to be an expatriate all his life.
One thing had led to another, and what he had told himself
would be a few years, had turned into nearly twenty years
away from home.

Having been overseas since the age of 22 and enjoying pro-
fessional success in different parts of the world, he felt that he
was an Indian at heart. At the same time, his numerous reloca-
tions had made him feel that the world was becoming quite flat
and professional success knew no borders. He had also been
hearing the buzz around Asia. The West was taking special note
of the rise of India and China and there was talk of the 21st
century as the Asian century. His visits back home had shown
him how the older systems were rapidly transforming. He felt

The pleasant February morning had taken a perplexing turn for
Anuj Pathak. He had reached the office after a jog at the beach as
had become his habit in the last few months in Mumbai. He had
barely settled at his desk to review his schedule when the Vice
President, HR, Gopalkrishna Pillai, had called him to his office.
Pillai had begun with a general question about how Pathak was
settling in. “Quite well!” Pathak replied. “I am very confident
about showing solid results at the earliest.” But Pillai had looked
concerned, and said, “I’m not so sure. What I’m sensing is that
people are quite unhappy with your style. I’m not mentioning
any names, but some people from your department have even
put in requests for transfers to other departments. They say you
are standoffish and extremely critical. I am afraid that the lack of
rapport with people around you will impact your performance.”
Anuj was shocked. “I have a strong track record of performance.
And I’m here to succeed! Of course, I know how essential it is
to take people along and keep morale high,” he said. “We know
your track record and have big expectations from you, but you
need to reflect on your style,” said Pillai.

Pathak had been excited about returning to India and mak-
ing a mark at Impact Finance Ltd. (IFL). He thought he had
been settling in well but Pillai’s words had stopped him in his
tracks. He came back to his office, feeling deflated and per-
plexed. He couldn’t figure out where this was coming from. “I
have consistently proven my leadership qualities and now my
style is being questioned!” he thought. Everyone in the head
office and in his own division team had seemed welcoming
and friendly to him. But all of that seemed questionable now.
“Has it all been mere formality or simply duplicitous behav-
iour? What have I missed?” He had always found clear and
direct communication to be the most effective. “That is why I
have been so upfront about my direct style and my democratic
way of functioning and involving everyone in decision mak-
ing. I have not insisted on hierarchy when it comes to objective
thrashing out of ideas. I have been very specific in spelling out
the targets and have given clear and explicit feedback so as
to get the best out of each person. This is how I have always
got the best work out of people and delivered results. Why
has it led to such a state now?” What really upset him was
the charge of being unfriendly and critical. “If this was true,
why would I have had an open door policy, tried to learn their
names, and encouraged clear communication?” he wondered.
He was baffled by what he could only think of as the strange
reaction of people at IFL. He had been slowly realising that
settling back in his own country was harder than he had ex-
pected it to be. “But it shouldn’t be so different on the profes-
sional front! After all, the ways to get results are not affected
by geography. And professionals everywhere should have the

Indian Institute of Management Ahmedabad

Prepared by Professor Meenakshi Sharma, Indian Institute of Management, Ahmedabad.1

PC2-5

PC2-6 PART 2 • COMPREHENSIVE CASES

now was the time to have the best of both worlds – to be with
his parents in their old age and give his daughters deeper roots
in India, while on the professional front, he could ride the new
wave of growth in the country.

About three months later, he felt happy about having
moved his parents to Mumbai. He had been given a flat in a
posh Mumbai suburb. However, it was a quite an adjustment
in terms of everyday life to move from Boston to Mumbai.
His daughters, aged seven and five, were finding it most chal-
lenging. They had been happy with the idea of coming to
India where the grandparents spoiled them and it was all a
great holiday. But after about two months, Anuj and his wife
were taken aback when the younger one had declared one day,
“Okay, this was fun, let’s go home now!” Telling her that this
was now home, had unleashed many tears. The girls had now
started at a well-known private school. The high fees and the
infrastructure of the school were a surprise to him. However,
he was happy with it, hoping that this would help make the
transition easier for his daughters. He himself had studied at
government schools in the small towns his father used to be
posted in, and had been surprised to be told that even middle-
class people now aspired to send their children to expensive
private schools. Numerous such schools catering to rising as-
pirations had sprung up all around the country. The girls were
still finding their feet in the school and had been behaving
uncharacteristically with temper tantrums and whining. But
he was sure they would soon make new friends and begin
to like the school. He knew it would have been much harder
to return when they were older and had become more en-
trenched in life in the US. His wife had relatives in Mumbai
and had been looking forward to being closer to them.
However, a few months into the move she seemed stressed by
the challenges that kept cropping up in the smallest of things
as she tried to handle the domestic front while he got busy at
work. She had worked as a counsellor and psychotherapist
after completing a degree in the US, but had decided to take
a break before looking for new career opportunities in India.
Getting things organised in the new city was taking a lot of
time and energy, but she hoped that in a couple more months
she would have the home front organised and could turn her
attention to her career. Pathak’s mother’s deteriorating health
also demanded time and energy from both him and his wife.
Although he knew that the doctors here were as competent,
if not more, than the ones abroad, his unfamiliarity with the
hospital systems and other procedural matters made things
somewhat challenging. Fortunately, some of his wife’s rela-
tives had stepped in to help out and that had helped consider-
ably. He felt things were largely under control at home and
he could get going at the office with full energy.

The Organisation

Impact Finance Ltd. (IFL) was one of the top twenty financial
consulting firms in India. Set up in 1997, it was part of the
Impact Group – a USD 8 billion group of companies in the
technology, manufacturing, infrastructure and finance sectors.

The company’s operations were divided into five divisions,
namely Retail Finance, Infrastructure Finance, Corporate
Finance, Housing Finance and Investment Management. With
Retail Finance as the core, the other divisions had been added
over the years to harness the synergies in order to best serve
the full range of the needs of consumers. The company was
headquartered in the Bandra-Kurla Complex in Mumbai, with
a country-wide network of offices.

Anuj Pathak Joins

Around the Christmas break of 2013, Pathak had started look-
ing for openings in India that would be exciting and rewarding.
When the opportunity to work at IFL came up, it seemed like
exactly what he was looking for. In his initial meetings with the
management team, he felt valued and respected for his stellar
track record. He felt comfortable among the capable profes-
sionals who had impressive credentials. Being among fellow
Indians felt good after years of being in a small minority. He
was confident that his successful track record in diverse loca-
tions had given him the necessary skills to fit in anywhere.
“And, after all, this is home!” he thought.

In October 2014, he accepted the position of Senior Vice
President and was made Head of the Housing Finance division.
With the departure of the earlier Head who had left after the
performance of the new division did not match projections, it
was going to be imperative to bring about changes to business
strategy as well as to revitalise the team.

On the day he joined, Anuj had a meeting with the top
management team. They welcomed him and expressed great
confidence in him and an eagerness to benefit from his new
ideas. The Senior Managing Director, Prabha Srinivasan, intro-
duced him to the team and welcomed him to the Impact family.
During the tea that followed the formal part of the meeting, he
was happy with the general feeling of bonhomie and warmth.
He noticed that people were very courteous and respectful in
their behaviour. He put it down to good old Indian traditions.
Overall, he felt a good vibe, and concluded that it was going to
be a great place to work.

Interactions with Departmental Team
and Senior Management

Immediately on joining, Pathak called a meeting to get to know
the team and to share the way ahead. As he shook hands, he
asked each one how they would like to be addressed. He told
them that a very formal style created unnecessary barriers and
that they were all to call him Anuj. He stressed that they were
going to drive results together and the required revitalisation of
the department would mean tough stretch targets. A complete
focus on the task would be expected from everyone, including
himself. He assured them of his help and support in enabling
the best performance from each of them. “I will be always ac-
cessible to all of you and will have an open door policy. I am an
open-minded person and value direct communication, honest
feedback, and critical thinking. I’m sure you don’t need to be

CASE 4 • ANUJ PATHAK RETURNS TO INDIA PC2-7

had never believed in socialising with work colleagues and
felt that it was best to keep work and personal life separate.
Anyway, he had his hands full in his personal time and had to
look after his parents’ needs. He also had to help his wife in
handling the girls who were finding it a little challenging to
settle in.

Driving the Turnaround Plan for the Division

Within two months of joining, Pathak had drawn up a turn-
around plan for the division. His plan had been approved by
the President and he was keen to roll it out at the earliest.
It was a tough plan and the team would need to be driven hard.
But it was unavoidable if they were to come out of the decline
in which the division had fallen in the last two quarters. A new
way to envision the market and design innovative responses
through new analytic tools would involve a sharp learning
curve for all involved. There was no denying that some people
would find it aggressive and unrealistic but there was no way
around it – tough measures were needed in tough times. Pathak
recalled it clearly, “I knew it was not going to be easy but I
had never shied away from tough decisions and I knew how
to show results. I had a very capable team that was technically
sound and very hard working. Therefore I was confident that
with the right support and a clear direction, they would make a
success of the plan. I could not expect everyone to agree with
the finer details but I knew they were all committed to improv-
ing the division’s performance. As the leader, I had to go ahead
and not be slowed down by unrealistically attempting to get
everyone on board from the start. I could also not be satisfied
with anything short of perfection in the quality of work and
in meeting deadlines, however tight.” He felt that he had been
making sure to clearly spell out the expectations from the team
and provide clear feedback to avoid misspent time and effort.
“I was happy to walk around and meet individuals and groups
and to not mince my words when it came to critical assessment
of performance. Letting people continue with no direction and
empty positive words is not going to get results.” Initially he
would even stop by the coffee room and try to catch up with
people on the progress of the initiatives. “But I found the tone
of the interactions quite informal and even casual, with people
talking of personal and domestic matters. I could also see that
most people interacted with others at similar levels and were
uncomfortable in the presence of a senior person. I stopped
these visits and began to rely on frequent meetings to get up-
dates and to give my feedback.”

However, as weeks passed, he felt that the pace of progress
on the tasks he had assigned was not very satisfactory. So he
stepped up the uncompromising tenor of his orders and minced
no words in his feedback. His experience was that this was es-
sential to avoid any ambiguity and provide clear directions to
teams who had to execute plans. Although this was proving to
be an uphill task, he hoped that the team would soon pick up
steam and he would not need to spend so much energy and time
in constantly following up and pushing them.

told about the importance of questioning everything rigorously
so as to come up with robust ideas,” he told them. Everyone
seemed very appreciative and some people came up and told
him that they welcomed the breath of fresh air that he had
brought in. Anuj felt happy that he had clearly laid out his ex-
pectations and preferences and had set the tone for engagement
with the team.

As time passed, he could not help noticing that the style
of his team did not match the expectations he had laid down
so clearly. At departmental meetings, hardly anyone questioned
his ideas. In fact, people spoke very little, allowing him to
drive the discussion and when they did speak, it was to con-
cur with his views. They were respectful and attentive, but if
he asked for an opinion, they would demur and wait for him
to say something. Invariably, they would go on to agree with
his interpretation. On the other hand, whenever he wanted data
and information, they would do so very efficiently. He knew
they had invaluable experience but he wasn’t sure why they
were not more forthcoming with suggestions and assertive in
challenging him or being critical of the ideas of each other. He
decided that he needed to demonstrate his own critical and di-
rect style and people would soon become comfortable using it
themselves.

In meetings with other VPs and the MDs, he found ev-
eryone to be polite and appreciative of his input. The overall
tone of discussions was courteous and there were few disagree-
ments. Although he sometimes got the sense that there were
some cliques that affected the way people responded to issues,
he was not able to get a very clear picture. He observed that
people generally did not openly challenge or contradict each
other during discussions. He found this surprising as he be-
lieved that it was best to discuss matters objectively and treat
disagreement and criticism impersonally. Dissension and dis-
agreement on tasks or issues, in his experience, were not to be
mixed with people’s regard for each other. “There can be no
two ways about this – clear and direct communication whether
one agrees with the views of others or not, is essential. And so
are objective handling of issues and high level of critical rigour.
Without these, one would never get the most robust ideas,” he
told people from his own division.

On the whole, he noticed that his colleagues in middle
management and the technical staff seemed quite deferential
towards senior management. He tried to be informal with ev-
eryone, hoping to make them comfortable by showing that he
did not stand on ceremony. He got to know many by face and
tried to remember their names and departments. However, so
far he had not been able to get to know any of them very well.
Even those in his division did not seem to respond to his at-
tempts to make them comfortable at official interactions. On
the other hand, he received invitations to family events and
informal parties, especially from some of the other VPs and
from his divisional colleagues. He assumed it was done sim-
ply out of politeness, because he and his family did not per-
sonally know them. Moreover, except for Chandrashekhar, he
found it not really necessary to see any of them socially. He

PC2-8 PART 2 • COMPREHENSIVE CASES

on the fast track depends on delivered high performance but I
am stumped! What am I missing? Is this particular team some-
how not gelling with me or has my long stint overseas made me
a stranger back home?”

He knew that he needed to gain the trust of people around
him and be able to connect with them so as to draw out the
best from them in terms of fresh ideas and critical feedback.
Perhaps he was wrong in his easy assumption that he was on
familiar ground in the swanky office that reminded him of those
in overseas locations. He was not sure what he could do to fix
things before they got out of hand and the hopes with which he
had moved back to India withered away.

Case Questions
Develop a written report analyzing the situation, identifying the
problem, and answering the questions:

1. What could Pathak have done differently?
2. What could the company have done differently?
3. How can the situation be improved now?

A Sudden Reality Check

However, today’s meeting had brought him to a grinding halt,
pushing him to introspect. He wondered what had happened.
“Where had the charges of being haughty and unfriendly come
from? Why were people misunderstanding my intentions?
After all, I have been true to myself and encouraged them to be
comfortable. As for being critical, there are no two ways about
the fact that objective feedback needs to be shared and as pro-
fessionals they should know that!” He was puzzled that proven
methods of delivering results by firing up large teams had led
to such dissatisfaction and demotivation. Perhaps he had got a
team of difficult people. Or perhaps they resented him as some-
one who had been brought in laterally. Perhaps he needed to re-
attempt rapport-building and enhancing his personal credibility,
he tried to tell himself. But before he could do that he would
need to understand where his style had backfired. He knew
that if this state of affairs continued, his hopes for making a
mark with his performance would be seriously jeopardised. He
had been inducted at a senior position with high expectations.
“How am I to meet these in such a situation? My advancement

Endnotes
1. Cases of the Indian Institute of Management, Ahmedabad, are prepared

as a basis for classroom discussion. They are not designed to present
illustrations of either correct or incorrect handling of administrative
problems. © 2017 by the Indian Institute of Management, Ahmedabad.

P A R T O U T L I N E

C H A P T E R 6
Formulating Strategy

C H A P T E R 7
Implementing Strategy: Strategic
Alliances, Small Businesses,
Emerging Economy Firms

C H A P T E R 8
Organization Structure
and Control Systems

Formulating and
Implementing Strategy
for International and
Global Operations 3

P A R T

184

6-1. To understand the reasons companies engage in international business

6-2. To become familiar with the strategic formulation process

6-3. To learn the steps in global strategic planning, including assessing entry strategies for
different markets

6-4. To understand the need for strategic planning for emerging markets

O B J E C T I V E S

Formulating Strategy 6
C H A P T E R

Opening Profile: Why Ford Is Stalling in China while
Toyota Succeeds1

As Chinese workers returned to duty following a Lunar New Year break, the Changan Ford plant in
the northeastern city of Harbin remained empty, with staff on an extended vacation until March.

“It’s a much longer break than last year, which was about a week,” said a security guard at
the joint-venture plant, which opened in 2017 after a $1.1bn investment and can produce up to 200,000
Focus models a year.

Ford is one of several carmakers cutting production in China, the world’s largest car market where
passenger vehicle sales fell 4 per cent to 23m last year, their first annual decline in almost three decades.

China accounts for 30 per cent of global car sales, and foreign brands make up two-thirds of the mar-
ket. That means multinationals’ joint ventures with Chinese carmakers are heavily exposed to the downturn.

But not all have fared badly. Sales at Toyota’s joint venture with Guangzhou Automobile surged
nearly 35 per cent last year, while BMW’s venture with Brilliance Auto saw a 20 per cent sales rise.

Their differing fates show a range of factors—from investment in new models, competitive ex-
posure to local brands, dealer relations, after sales service, and quality perceptions—can determine a
brand’s success or failure in China.

With Beijing unwilling to offer large subsidies to car buyers and analysts forecasting a further de-
cline in the market this year, it is crucial for investors to pay attention to factors behind the success and
failure of different brands in the downturn.

Ford: slow to bring new models to market

Ford had a late start in China, compared with rivals GM and Volkswagen. Slowed by years of corporate
indecision and the impact of the 2008 financial crisis, it did not begin to make a mark on the market
until 2012.

Its two joint ventures saw strong demand among consumers for the Escort, Focus and Edge brands.
Ford’s China sales in the four years to 2016 doubled to reach more than 1.2m. The Focus and Escort
qualified for government subsidies on vehicles with engines of 1.6 litres or below introduced at the end
of 2015.

CHAPTER 6 • FORMULATING STRATEGY 185

But sales began to decline at its main joint venture, Changan, in 2017 as the subsidies began to be
reduced, and plunged 54 per cent last year after they were eliminated. Analysts said the company was
slow to bring new models to the market . . . “Their problem is really the model cycle, the majority of their
cars are in year five or six, that’s when the sales drop rapidly,” said Jochen Siebert of consultancy JSC
Automotive.

Ford remedied the problem last year, launching new saloon and hatchback versions of the rede-
signed Focus car, but by then the market was in a slump, making it harder to attract new buyers.

One consolation is that because of its late entry, China is a much smaller part of Ford’s worldwide
sales than for GM and Volkswagen, for which China is their biggest market. Ford’s high-end Lincoln
brand has fared less badly, reflecting stronger demand for premium vehicles.

PSA Group: mid-range brand suffers

The French owner of the Peugeot and Citroën brands saw sales at its joint venture with Dongfeng fall
44 per cent last year, with the fastest losses for its 408 and 308 brands.

Peugeot has also suffered from having older models but were also hit by their mid-range price posi-
tion during last year’s downturn, analysts said. Less well-off consumers refrained from buying cars or
switched to second-hand models last year as subsidies were cut and economic growth slowed.

. . . Analysts said PSA had been squeezed by increasing competition from local brands, such as Geely
and BYD, which have moved up the value chain into mid-range cars, selling for about Rmb120,000
($17,906), hiring teams of overseas designers to make their vehicles more attractive.

“Chinese brands, particularly Geely, are taking market share from the less distinctively defined
global brands. We can specifically point to Ford and Peugeot,” said Michael Dunne, an industry analyst
and former GM executive. “There’s no doubt the Chinese brands are coming up so the global brands
must move upscale or move out.”

. . . “PSA is in the middle of the market and is squeezed by both ends” as premium brands lower
prices in the downturn, said UBS analyst Paul Gong, a risk he added applies to other mass-market
brands such as VW.

JLR: popularity hit by repeated safety recalls

Britain’s Jaguar Land Rover should have been well placed in a market where sales of more expensive,
larger engine vehicles have been strongest. But its sales fell 23 per cent in China last year.

Also a latecomer to the market, locally assembled products such as the Land Rover Evoque and
Discovery, and Jaguar models helped the company raise its Chinese sales to 150,000 in 2017. It modi-
fied interiors to meet local tastes.

Analysts said JLR’s reputation had suffered from repeated safety recalls in China—reportedly cov-
ering more than 100,000 vehicles in 2017. In January it recalled 68,828 vehicles in China over an engine
safety hazard.

The brand received a four star rating in a 2018 survey of Chinese customer satisfaction with post-
sales service by JD Power, but that compared with peers such as Audi who gained five stars.

When sales began to fall, JLR continued with ambitious production targets, pushing inventory on
to dealers who had to make stiff price cuts.

“Some car companies choose to revise down annual targets to help dealers, while others continue to
push inventory, which makes dealers suffer,” said Patrick Yuan, an analyst at investment bank Jefferies.
“The relationship should be a partnership. They cannot fight each other.”

Toyota: reputation for quality boosts sales

Selling a record 1.5m vehicles in China last year, Japan’s Toyota has defied the downturn, and it is tar-
geting 7 per cent growth this year. Its Corolla model, which sells for about Rmb150,000, accounts for
the bulk of its sales.

The brand has a strong reputation for quality in China and has consistently brought new products
to the market, analysts said.

“Toyota stands out as an exception,” said Mr Dunne. “They consistently deliver high quality prod-
ucts, good service, and high resell value. The fundamental things that make Toyota a strong company
are standing out in a tough market.”

The overall decline in car sales last year was partly because of consistently rising petrol prices, a
trend that has benefited Toyota because of its strong fuel-economy and as consumers become more canny.

(Continued)

186 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

As the opening profile illustrates, companies operating in markets abroad need to develop ef-
fective strategies to be successful in those markets. They need to consider the actions of both
multinationals and local rivals. Emerging market firms have become more competitive in their
home markets, and have made great strides in competing abroad. Nowhere is this competitive
trend more pronounced than in the digital economy according to a 2018 Boston Consulting
Group report, which indicated that 60 percent of the emerging market leaders are digitally in-
tensive compared with only 17 percent in 2012.2 These emerging-market firms have catapulted,
or “leapfrogged” past developed-market rivals by developing new digital technology businesses
and leveraging existing digital technologies in traditional businesses. These emerging enterprises
of all sizes have obtained the requisite digital capabilities through internal investment, strategic
partnerships, and acquisitions.

Digital consumption and use among consumers in these countries are widespread
and growing fast—much faster than in developed nations.

2018 BCG Global Challengers: Digital Leapfrogs

Emerging-market firms are taking advantage of opportunities brought about by digital
technology. The strategies of companies such as Alibaba; China Communications Con-
struction Co.; and Tencent of China have placed them atop the list of the strongest emerging
multinationals.3 SABIC of Saudi Arabia, a diversified chemical company, joined those three
firms because it has innovated effectively and leveraged digital technology in order to compete
globally. Although many of the highly competitive emerging MNCs come from China, several
African companies have begun to compete on the world stage: Elsewedy Electric of Egypt, Dan-
gote Cement of Nigeria, Sasol of South Africa, and Safaricom of Kenya.4 Add these new chal-
lengers to the already hypercompetitive arena of global players, and it is clear that managers need
to pay close and constant attention to strategic planning in the presence of digital technology
opportunities and emerging market threats. Indeed, these emerging multinationals are competing
fiercely in many overseas markets. For example, a majority of Tata Consultancy Services’ (India)
business comes from international clients. As will be explained in this chapter, corporate strate-
gies must change in response to shifting global economic conditions and other environmental and
competitive factors. With continuing economic challenges around the world, Tata must consider

“Once you start to replace your second or third car, you probably realise that quality and fuel con-
sumption are very important. In this regard Japanese cars do very well,” said Yale Zhang, founder of
consultancy AutoForesight.

Mercedes, BMW and Audi: wealthy continue to buy
premium brands

About 3m premium vehicles were sold last year, as wealthier consumers have been less affected by the
economic slowdown. Beijing Benz, a joint-venture between Daimler, which owns Mercedes-Benz, and
BAIC Motor, saw 15 per cent sales growth last year. Volkswagen-owned Audi saw 11 per cent growth to
661,000 vehicles. Top-range brands face almost no local competition.

The premium players have concentrated on China’s wealthiest first-tier cities, where car sales rose
last year, whereas mid-range brands may have opened too many dealerships in lower-tier cities, where
the market shrank.

“The mass-market brands have tried to have dealerships everywhere and in the end that might be
a mistake,” said Mr Siebert. While not all brands can switch to luxury, they can learn from premium
brands’ investment, after-sales service and spending on training for dealer staff, he added.

BMW in October said it would take advantage of Beijing’s abolition of joint venture requirements
in the car sector in 2021 by buying a majority stake in its partner Brilliance Automotive. Mid-range
brands could attempt to follow suit as they try to repeat the success of the luxury groups.

. . . “You could see a world in which Ford says let’s allow the joint-venture to sustain itself, but we
will set our sights on going it alone, or getting new partners.”

Source: © The Financial Times Limited 2019.

CHAPTER 6 • FORMULATING STRATEGY 187

how it will respond, but it is strengthened by its geographic diversification. US-based IBM gener-
ates about half its revenues from its services business—in particular in emerging markets—and
has diversified with a two-track approach. The company is helping US clients to cut costs. In
emerging markets, IBM helps customers develop their technology infrastructure.

Because international opportunities—especially in the digital economy—are far more com-
plex than those in traditional sectors, managers must plan carefully in order to benefit from them.
Moreover, many experienced managers are wary about expanding into politically risky areas or
those countries whose government practices they find prohibitive.

The strategic management process refers to the “Full set of commitments, decisions, and
actions required for a firm to achieve strategic competitiveness and earn above average returns.”5
The basic means by which the company competes—its choice of business or businesses in which
to operate and the ways in which it differentiates itself from its competitors—is its strategy.
Strategy requires “intentional, informed, and integrated choices.”6 Almost all successful compa-
nies engage in long-range strategic planning, and those with a global orientation position them-
selves to take full advantage of worldwide trends and opportunities. Multinational companies
(MNCs), in particular, report that strategic planning is essential both to contend with increasing
global competition and to coordinate their far-flung operations.

In reality, however, that rational strategic planning is often tempered, or changed at some
point, by a more incremental process of strategic decision making by some managers. When a
new CEO is hired, for example, she or he will often call for a radical change in strategy. That is
why new leaders are chosen carefully, based on what they are expected to do. So, although the
rational strategic planning process is presented in this text because it is usually the ideal, inclusive
method of determining long-term plans, managers must remember that people are making deci-
sions, and their own personal judgments, experiences, and motivations will shape the ultimate
strategic direction.

REASONS FOR GOING INTERNATIONAL
Companies of all sizes go international for different reasons—some reactive (or defensive), and
some proactive (or aggressive). The threat of their own decreased competitiveness is the over-
riding reason many large companies adopt an aggressive global strategy. To remain competitive,
these companies want to move fast to build strong positions in key world markets with products
or services tailored to the needs of increasingly global and diverse sets of customers.

Reactive Reasons
GLOBALIZATION OF COMPETITORS
One of the most common reactive reasons that prompt a company to go overseas is global com-
petition. If left unchallenged, competitors who already have overseas operations or investments
may get so entrenched in foreign markets that it becomes difficult for other companies to enter
later. In addition, the lower costs and market power available to these competitors operating
globally may also give them an advantage domestically. Nor is this global perspective limited to
industries with tangible products, as a whole range of services have followed suit, including of-
fice functions, engineering, publishing, medical, consulting, media, and so on, facilitated by the
Internet. Following the global expansion of banking, insurance, credit cards, and other financial
services, for example, financial exchanges have been going global by buying or forming partner-
ships with exchanges in other countries, their strategies facilitated by advances in technology.7

Strategic moves by competing global giants prompt countermoves by other firms in the
industry to solidify and expand their global presence. Such was the case when U.S.-based Time
Warner sought to justify its acquisition of AT&T for U.S. $85 billion. CEO Jeffrey Bewkes ar-
gued that Google and Facebook extracted advertising revenues away from television networks
while Amazon’s Prime and Netflix were attracting increase viewership. As such, he asserted that
the acquisition was a competitive response to the ongoing threats stemming from new digital
technology-intensive rivals.8

Another strategic move involves Nokia (Finnish mobile phone company), which has been
raising funds in order to breathe new life into its global brands. Underscoring the need to in-
novate in a competitive marketplace, an industry analyst stated, “There is no room for sub-scale

6-1. To understand the reasons
companies engage in
international business

188 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

mobile phone companies any more other than chasing small niches. I see this almost as a com-
petitive response to Xiaomi, Huawei, OnePlus and others.”9 These strategic challenges facing
Nokia show the growing competitive threat of emerging multinationals as Nokia [and fellow
Nordic rival, Ericsson] compete against China’s Huawei as the telecommunication environment
prepared to unveil “5G” technology (i.e., the next generation of mobile telecommunications ser-
vice), which promises increased speed and connectivity.10 Although Apple and Android played
major roles in Nokia’s lackluster performance and dwindling market share, the Finnish firm has
struggled to commercialize some innovations and made a strategic miscalculation regarding the
transition to smartphones.11

TRADE BARRIERS
Although trade barriers have been lessened in recent years by trade agreements that have led to
increased exports, some countries’ restrictive trade barriers do provide another reactive reason
for companies often switching from exporting to overseas manufacturing. Barriers such as tar-
iffs, quotas, buy-local policies, and other restrictive trade practices can make exports to foreign
markets too expensive and impractical to be competitive. Toyota, for example, has manufactur-
ing plants in the United States to circumvent import quotas. As another example, ZTE—China’s
second largest telecom equipment maker and a state-controlled company listed in Hong Kong—
moved to Brazil; the purpose was to avoid that country’s high import tariffs, even though it is
cheaper to manufacture in China.12

REGULATIONS AND RESTRICTIONS
Similarly, a firm’s home government regulations and restrictions can become so expensive that
companies will seek out less-restrictive foreign operating environments. For instance, Deutsche
Telekom CEO Tim Höttges underscored the burdensome regulatory (and price competition) in
Europe compared to the United States (where it owns T-Mobile US) when considering attractive
investment decisions. Mr. Höttges stated, “I want to invest patriotically for Europe…We need a
superior infrastructure but I see we are falling behind.”13

Home regulations and restrictions contributed to Dyson’s decision to move its headquarters
to Singapore as discussed in the following “Management in Action” profile.

MANAGEMENT IN ACTION
Why Dyson Is Shifting Its HQ to Singapore14

For someone who has trumpeted Britain’s economic potential on the global stage once it leaves
the EU, James Dyson’s decision to move his business headquarters to the other side of the world
struck an odd note.

The switch to Singapore comes at a crucial juncture for his company, which is seeking to evolve
from a household appliance brand to a manufacturer of electric vehicles. It is nothing short of his great-
est gamble, which could secure his legacy or risk his fortune.

The change of HQ would subject Dyson to less rigorous financial disclosure at a time when the
company’s profitability is likely to slump because of investments, according to patent experts.

The Brexit-supporting billionaire, famous for his bagless vacuum cleaners, faced accusations of
hypocrisy after the announcement that the British success story he has built over a quarter of a century
would relocate its corporate head office to the island city-state.

Dyson said it was simply for commercial reasons because most of its customers and all its
manufacturing operations are in Asia, and to give management supervision over the construction of a car
factory in Singapore that will be its largest investment to date.

Nor were Brexit or reducing its tax bill motivations, the privately owned group stressed. But
the timing, just weeks ahead of Brexit, has prompted questions about whether other factors were at
play—and what it means for Dyson’s UK operations, as well as high-tech engineering in the country
more widely.

Normally no stranger to sharing his views with the media, Sir James was conspicuous in his ab-
sence on Tuesday, offering no personal comment and instead leaving chief executive Jim Rowan to
contend with a barrage of questions on a call with journalists.

CHAPTER 6 • FORMULATING STRATEGY 189

“This is to do with making sure we future-proof [the company],” said Mr Rowan. “What we’ve
seen in the last few years is an acceleration of opportunities to grow from a revenue perspective in Asia.”

Dyson is enjoying strong demand for its high-end hair dryers, air purifiers and lighting products
among the region’s burgeoning middle classes. Asia accounts for more than half of the company’s
£1.1bn profit, as measured by earnings before interest, depreciation and amortisation, which overall
jumped by one-third in 2018.

However, Mr Rowan insisted that the HQ move was not a bad omen for the UK, where Dyson
ceased manufacturing in 2003, and pledged it would enlarge its 4,800-strong workforce there.

“We’ll continue to invest in the UK,” said Mr Rowan, pointing out a proposed £350m expansion to one
of two research and development centres in Wiltshire, south-west England, for autonomous vehicle testing.

Indeed, the company sought to play down the significance of the Singapore move. Only two execu-
tives will transfer to the Asian island country—the chief financial officer and chief legal officer—joining
Mr Rowan, who already lives there.

While testament to the international success of the brand, which generates just 4 per cent of its
£4.4bn annual sales in the UK, the relocation delivers a symbolic blow to Britain’s prestige as an attrac-
tive home for big business.

Another concern is that the UK exchequer may lose out. Total tax borne by Dyson worldwide was
£185m in 2017, according to the accounts of its holding company, Weybourne Group, including £61m
in UK corporate tax.

The company said that any impact on its overall tax bill would be “negligible” and it would con-
tinue to pay tax in Britain. But it declined to say whether the UK proportion of its total global bill would
fall at the expense of Singapore.

However, Heather Self, tax partner at Blick Rothenberg, said she did not believe this would happen.
“If all they’re doing is moving head office, it will make very little difference to the UK tax bill. If

as they’ve indicated the R&D and technology is remaining in the UK, then that should account for the
majority of the UK tax bill in any case,” she said.

Others have pointed out that Singapore has no capital gain or inheritance tax, with individuals only
taxed on income earned in the country.

Yet it is far more likely that the move is linked to Dyson’s latest, and boldest, venture—its £2bn
drive to break into the automotive arena.

It has developed a UK site to test the vehicles, but also plans to expand its Singaporean research
and development facilities, a sign that future vehicle work will take place closer to the manufacturing
sites.

The company has always been fiercely secretive. So closely guarded was the HQ move that the UK
government was unaware it was even under consideration, despite frequent meetings between officials
from several departments and the company, according to several people.

Moving to Singapore, some people suggest, would liberate the business from UK disclosure rules
for privately-owned companies, which Sir James has previously criticised as giving too much away to
foreign competitors.

Dyson has ruled out raising fresh funds to support the project, but is preparing to enter an industry
where even the most experienced carmakers face cost overruns.

The company spreads its intellectual property around the globe, with about 1,500 of its 5,000 pat-
ents registered in the UK, according to data from patent research group Cipher.

“Clearly if you have new business like cars that will generate significant IP,” said its chief executive
Nigel Swycher.

However, tax experts said it was unlikely that Dyson would move its existing UK patents to Singapore,
partly because of the cost, and because Britain gives favourable tax treatment to intellectual property.

A Dyson spokesman said the company had no intention of moving its current UK patents to
Singapore.

“IP will not move and our filing strategy will not change. Dyson Technology Ltd [in the UK]
owns Dyson IP and that is a British company. Given the majority of IP is held in the UK entity Dyson
Technology, the majority of IP/patent-related revenue and profit is taxed in the UK as well.”

But if the company decides to register all future patents in its new homeland, then while Britain
will not see a tax fall from the move immediately, it will fail to benefit from the potential growth of the
business in the long run.

THE APPEAL OF SINGAPORE IS ZERO TAX

One of Singapore’s strongest appeals for foreign companies is the potential to lower their tax rate to
zero per cent.

(Continued)

190 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

CUSTOMER DEMANDS
Operations in foreign countries frequently start as a response to customer demands or as a solu-
tion to logistical problems. Certain foreign customers, for example, may demand their supply-
ing company to operate in their local region so that they have better control over their supplies,
forcing the supplier to comply or lose the business. McDonald’s is one company that asks its
domestic suppliers to follow it to foreign ventures. Meat supplier OSI Industries does just that
with joint ventures in 17 countries, such as Germany, so that it can work with local companies
making McDonald’s hamburgers. Moreover, OSI has acquired Baho Foods (Netherlands) and
Flagship Europe in order to broaden its product offerings and better serve European customers
vis-à-vis supermarkets.15

Proactive Reasons
Many more companies are using their bases in the developing world as springboards to
build global empires, such as Mexican cement giant Cemex, Indian drugmaker Ranbaxy, and
Russia’s Lukoil, which has hundreds of gas stations in New Jersey and Pennsylvania.16

Careful, long-term strategic planning encourages firms to go international for proactive reasons,
some of which are described below.

ECONOMIES OF SCALE
One pressing reason for many large firms to expand overseas is to seek economies of scale—that
is, to achieve world-scale volume to make the fullest use of modern capital-intensive manufac-
turing equipment and to amortize staggering research and development costs when facing shorter
product life cycles.17 The high costs of research and development, such as in the pharmaceutical
industry (for example, Merck and Pfizer), along with the cost of keeping up with new technolo-
gies, can often be recouped only through global sales.

GROWTH OPPORTUNITIES
As domestic growth declines in developed markets, opportunities abroad look more attractive, in
particular since the Internet now greatly facilitates the ability to link to contacts in other countries
quickly. For example, Spotify has sought new customers for its streaming services in India, Russia,
Africa, Israel, Vietnam, and Romania among other countries.18 Similarly, several European financial

The headline rate of corporate tax is 17 per cent, a level that the UK will match from 2020, down
from 19 per cent at present.

However, a combination of incentive schemes, which include an international headquarters award,
can bring the country’s rate down to nothing.

“It is very very rare, but it has happened in the past,” said Chris Woo, tax leader at PwC Singapore.
Another corporate tax expert said it was “not impossible” for Dyson to snatch the 0 per cent cor-

porate tax rate given it produces high-end goods that would transfer technology to Singapore; it will
probably increase capital expenditure and high-skilled headcount; and it would boost R&D activity in
the country—all of which is of interest to Singapore.

Dyson on Tuesday said it would expand its Singapore Technology Centre and that “an increasing
proportion” of Dyson’s executive team will be based in the south-east Asian nation given a growing
majority of the company’s customers and manufacturing operations are based in Asia.

In addition, the Singapore Economic Development Board offers companies tax exemptions or con-
cessionary tax rates of 5 or 10 per cent for up to five years, with the possibility of extension.

To qualify, companies must boost employment, generate investment that spills over to the local econ-
omy and commit to developing technology, knowhow and skills in the city state, according to the EDB.

“The EDB must have pulled out all the stops to convince Dyson to relocate its headquarters,” said
Eugene Tan, law professor at Singapore Management University.

Kiren Kumar, assistant managing director at the EDB, said: “Singapore and Dyson have enjoyed a
strong partnership for more than ten years.

“Dyson has grown from a small team developing motors to 1,100 employees undertaking a variety
of functions including supply chain management, advanced manufacturing and R&D”.

Source: © The Financial Times Limited 2019.

CHAPTER 6 • FORMULATING STRATEGY 191

technology companies such as Tandem (app-based bank) and Nutmeg (online wealth management)
have begun to enter Asian markets in an attempt to offer new digital payment and wealth manage-
ment services in order to disrupt retail banking in those markets. According to Nutmeg CEO Martin
Stead, “Asian markets have a large and growing population that is currently under-served and over-
charged by the traditional players, and where there is no established wealth tech player either.” In
addition, London-based Revolut—an app that provides overseas spending and money transferring
services with low fees—has obtained licenses to serve customers in Japan and Singapore.19

The arrival of virtual banks is probably one of the most important developments in recent Hong
Kong financial services history.20

Henri Arslanian, FinTech Association of Hong Kong

Whatever their size, companies in developed countries experience a strategic imperative to
look for growth opportunities, follow key customers, circumvent trade barriers, and increase cost
efficiency, and perhaps to deal with an onerous regulatory environment (i.e., disclosure/taxation
issues) at home, as illustrated in the following “Comparative Management in Focus” feature on
growth opportunities in Africa.

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

Although many firms see political instability and corruption as obstacles to pursuing oppor-
tunities in Africa, optimism abounds with high expectations for digital technology growth,
infrastructure demand, and rapid urbanization.21 Indeed, a decline in armed conflicts, new

educational opportunities, and mobile phone–based technology has spurred African business oppor-
tunities and entrepreneurship. For example, institutions such as the Nigerian-based Tony Elumelu
Foundation have sought to enhance youth entrepreneurship by offering training, financing, and mentor-
ing to African youth.22 Furthermore, the signing by over 40 nations of the African Continental Free
Trade Area in March 2018 can further elevate Africa’s economic potential. See Map 6-1.

The highest-performing African firms seem to have realized these opportunities, yet dealt with
these environmental challenges by: (1) investing in themselves and their partners vis-à-vis vertically
integrating and developing their own water and power supplies, as well as offering financing to sup-
pliers; (2) developing human capital by investing in training programs, offering internships, and part-
nering with universities; and (3) embracing technology through the use of mobile computing, social
computing, and big data analysis.

Numerous African companies have expanded within the African continent. For example, Morocco-
based Saham Finances, which is led by CEO Nadia Fettah, has embarked on an aggressive expansion
within Africa. After becoming a dominant insurance company in Morroco, Ms. Fettah first considered
sub-Saharan Africa because of the low penetration rate. Then, she expanded into ten West Africa French-
speaking countries. At present, her company operates in 23 African countries. Indeed, Burkina Faso—one
of Africa’s poorest countries—has become one of Saham Finances’ fastest growing markets.

Kenyan-based Equity Bank, under the leadership of CEO James Mwangi, has transformed itself
from a small building society into a commercial bank spread over six East and Central African coun-
tries with more than 12 million clients and US$5 billion in total assets. In 2000, roughly 10 percent
of Kenyan adults had bank accounts. Mr. Mwangi sought to make Kenyans comfortable with banking
and thus introduced “mobile village banking,” which, simply put, were banking vehicles.

Long before cellphone banking came along, we created minibank branches that could fit in the

back of a Land Rover and rove them from village to village across rural Kenya.23

Mr. James Mwangi, CEO Equity Bank (Kenya)

Growth opportunities are not reserved only for African multinational companies. One non-
African country that has an extremely positive long-term view of the continent is China. According
to a McKinsey Global Survey, 70 percent of Chinese respondents expect their companies to in-
crease the number of African countries in which they operate, compared with 45 percent for all other

(Continued )

192 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

non-African country respondents. Also, 68 percent of the Chinese respondents expect their orga-
nizations to increase the size of their African workforces, compared with 45 percent for all other
non-African respondents.

Although South Africa has tended to receive the most visibility from the global business com-
munity, Morocco has garnered growing attention from MNCs, which rejoined the African Union in
2017. According to the World Economic Forum Global Competitiveness Index, Morocco ranked 75th

Source: www.cia.gov/library/publications/the-world-factbook/maps/maptemplate_sf.html; Arvind Singh Negi/Red Reef
Design Studio/Pearson India Education Services Pvt. Ltd.

MAP 6-1 Africa

http://www.cia.gov/library/publications/the-world-factbook/maps/maptemplate_sf.html;ArvindSinghNegi/RedReefDesignStudio/PearsonIndiaEducationServicesPvt.Ltd.

CHAPTER 6 • FORMULATING STRATEGY 193

RESOURCE ACCESS AND COST SAVINGS
Resource access and cost savings entice many companies to operate from overseas bases. The
availability of raw materials and other resources offers both greater control over inputs and lower
transportation costs. Lower labor costs (for production, service, and technical personnel)—
another major consideration—lead to lower unit costs and have proved a vital ingredient to com-
petitiveness for many companies.

Sometimes just the prospect of shifting production overseas improves competitiveness at
home. When the Xerox Corporation started moving copier-rebuilding operations to Mexico, the
U.S. union agreed to needed changes in work rules and productivity to keep the jobs at home.
Lower operational costs in other areas—power, transportation, and financing—frequently prove
attractive.

INCENTIVES
Governments in countries such as Poland seeking new infusions of capital, technology, and know-
how willingly provide incentives—including tax exemptions, tax holidays, subsidies, loans, and
the use of property. Because they both decrease risk and increase profits, these incentives are
attractive to foreign companies. And, in 2014, Cuba passed a law offering tax breaks for foreign
companies planning joint ventures with Cuban companies or the Cuban state. In an attempt to
diversify Kuwait’s economy, its government has implemented major reforms to facilitate foreign
investment. For instance, foreign investors can have 100 percent equity ownership through Kuwait
rather than only in special economic zones. Moreover, the Kuwaiti government has offered tax
holidays up to 10 years and customs exemptions. Kuwait is not desperate for capital but instead
has chosen to be selective with investments in an attempt to build its digital economy.

out of 140 countries in 2018. There was some variance, however, with the underpinnings of its com-
petitiveness ranking. For instance, Moroccan institutions, infrastructure, and macroeconomic stability
ranked between 47th and 54th; yet, its ICT adoption—a proxy for technology adoption—ranked 93rd.
Morocco’s financial system ranked 44th, but its innovation capability and labor market were ranked
78th and 119th, respectively.24

“Morocco’s bid to join African trade and political unions is part of its strategy to raise its regional
profile,” says Elisa Parisi-Capone, vice-president and senior analyst at Moody’s, the rating agency.25

Morocco has been looking south since 2010. With slow growth in post–financial crisis Europe and
many Arab economies in disarray following the Arab spring uprisings, Morocco’s government began
encouraging local companies to look for opportunities in fast-growing sub-Saharan African nations.

Casablanca Finance City (CFC) was established that year and launched as a centrepiece of this strategy.
Its mandate was to attract companies that were keen to use Morocco’s political stability and favorable geo-
strategic position between Europe and Africa as a base for expanding their operations south of the Sahara.

The strategy has borne fruit: Morocco’s exports to West Africa tripled between 2006 and 2016.
About 90 percent of greenfield foreign direct investment (new projects or expansion of existing ones)
out of Morocco between 2010 and 2018 went to sub-Saharan Africa, according to fDi Intelligence, a
Financial Times sister publication.26 Ethiopia, Ivory Coast, and Cameroon were the top destinations.

Since its launch, about 160 businesses have acquired the regulatory and fiscal advantages of CFC
status including international consultancies such as McKinsey and Boston Consulting Group, insurance
market Lloyd’s of London, and law firm Clifford Chance.

Businesses in CFC reap certain fiscal benefits: Morocco’s corporate tax rate of 30 percent drops
to zero for the first five years after CFC designation. Employees of those companies, meanwhile, pay
reduced rates of tax, and there are no limits on foreign exchange repatriation.

“It’s good by African standards. It offers quite an attractive set of regulations and the ability to hire
foreigners—kind of a one-stop shop for administration that is helpful, plus competitive fiscal and tax
policy,” says Patrick Dupoux, managing director and head of Africa at Boston Consulting Group, which
joined CFC in 2012. Fast approval for visas—which can take months in other African countries—was
a big draw, he adds.

While the firm’s Johannesburg office is bigger, Casablanca’s reach is broad. “From Casablanca,
primarily we serve Morocco—that’s 50 per cent of our work,” says Mr. Dupoux. “Twenty-five per cent
is firms within Africa; the other 25 per cent is multinationals and pan-African companies that want an
overall Africa strategy.”

194 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

We’re focusing on investment that helps us to attract new technologies and innovations, and
that brings added value to the Kuwait economy. It’s more quality than quantity.27

Sheikh Meshaal Jaber Al-Ahmed Al-Sabah, Director General of the Kuwait
Direct Investment Promotion Authority (KDIPA)

However, the practice (called inversion) of U.S.-based companies changing their domicile
country to one that offers a lower corporate tax rate, such as Ireland, was coming under consider-
able fire in 2015 in the United States because of the loss of taxes and jobs. One such tax haven is
Luxembourg, a grand duchy country with 550,000 people, most of whom are in or near the city
of Luxembourg (a beautiful city and country, situated between Germany, France, and Belgium,
that this author has visited many times). The city has attracted many foreign company head-
quarters seeking to be in the middle of Europe but to gain deep discounts on corporate taxes. In
February 2015, Fortune carried an article indicating that the reporter had discovered a number
of post-office boxes with names of foreign corporations on them, but that was the extent of the
companies’ presence there.28

Luxembourg City, Luxembourg

Pt
np

ho
to

f/
Fo

to
lia

Challenges When Going International
LIABILITY OF FOREIGNNESS (LOF)
When a firm operates abroad, it tends to face a liability of foreignness, defined as “all additional
costs a firm operating in a market overseas incurs that a local firm would not incur.”29 There are
four primary costs associated with the liability of foreignness: spatial costs, unfamiliarity costs,
host-country costs, and home-country costs. Spatial costs refer to the additional costs associated
with operating geographic distance. Unfamiliarity costs reflect “being a stranger in a strange
land” in that the multinational enterprise is unfamiliar with local customers and stakeholders, as
well as local best practices, which can lead to costly missteps.30 For example, when U.S.-based
Kentucky Fried Chicken entered the Chinese market, its long-standing slogan—“It’s Finger-
Lickin’ Good” was translated as “Eat your fingers off.” Unfamiliarity with the cultural, legal, and
regulatory environment can lead to costly errors in the due diligence process when expanding
abroad. Moreover, local customers and stakeholders are unfamiliar with the foreign firm, which
can lead to negative stereotypes and difficulty in gathering local market intelligence in a timely
manner simply for being foreign. As the foreign firm accumulates experience and becomes more
embedded in local social and business networks in the host country, these costs tend to decline.

Host-country costs reflect the discriminatory treatment incurred by foreign firms (e.g., restric-
tions on ownership for foreign firms, impenetrable distribution channels, and unwillingness to pur-
chase products of foreign firms). For instance, many multinational enterprises have complained about
the difficulty in accessing the Japanese distribution system, which has been described as a complex re-
lationship web with many layers of distributors. Also, the discriminatory treatment has been referred
to as a home bias in that local stakeholders may prefer to do business with local firms. Home-country
costs refer to regulations in the firm’s home that make it difficult to compete or operate in the host
country. For example, U.S. firms and their foreign subsidiaries are restricted from transacting with
Cuban interests due to a long-standing U.S. trade embargo against Cuba. Concerns have arisen for

CHAPTER 6 • FORMULATING STRATEGY 195

Canadian subsidiaries of U.S. firms that have been prohibited from offering Cuban-made products
(i.e., cigars) to the dismay of Canadian consumers and government officials. Although U.S. President
Obama relaxed policies with Cuba, U.S. President Trump has sought to reinstate them.

STRATEGIC FORMULATION PROCESS
Typically, the strategic formulation process is necessary both at the headquarters of the corpo-
ration and at each of the subsidiaries. Most organizations operate on planning cycles of five or
more years, with intermediate reviews. However, adjustments are frequently necessary to re-
spond to changes in a dynamic global environment, in particular in rapidly changing industries
such as those driven by technological developments.

The global strategic formulation process, as part of overall corporate strategic management,
parallels the process followed in domestic companies. However, the variables, and therefore the
process itself, are far more complex because of the greater difficulty in gaining accurate and
timely information; the diversity of geographic locations; and the differences in political, legal,
cultural, market, and financial processes. These factors introduce a greater level of risk in stra-
tegic decisions. However, for firms that have not yet engaged in international operations (as
well as for those that do), an ongoing strategic planning process with a global orientation identi-
fies potential opportunities for (1) appropriate market expansion, (2) increased profitability, and
(3) new ventures by which the firm can exploit its strategic advantages. Even in the absence of
immediate opportunities, monitoring the global environment for trends and competition is im-
portant for domestic planning.

The strategic formulation process is part of the strategic management process in which most
firms engage, either formally or informally. The planning modes range from a proactive, long-range
format to a reactive, more seat-of-the-pants method, whereby the day-by-day decisions of key
managers, in particular owner-managers, accumulate to what can be discerned retroactively as the
new strategic direction.31 The stages in the strategic management process are shown in Exhibit 6-1.

6-2. To become familiar with
the strategic formulation
process

St
ra

te
gi

c
Pl

an
ni

Pr
oc

es
s

Im
pl

em
en

ta
tio

n
Pr

oc
es

Define/clarify
mission and objectives

Assess environment for
threats, opportunities

Assess internal strengths
and weaknesses

Consider alternative strategies
using competitive analysis

Choose strategy

Implement strategy through
complementary structure, systems, and

operational processes

Set up control and evaluation
systems to ensure success,

feedback to planning

ExHIBIT 6-1 The Strategic Management Process

196 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

In reality, these stages seldom follow such a linear format. Rather, the process is continuous and
intertwined, with data and results from earlier stages providing information for the next stage.

The first phase of the strategic management process—the planning phase—starts with the
company establishing (or clarifying) its mission and its overall objectives. The next two steps
comprise an assessment of the external environment that the firm faces in the future and an
analysis of the firm’s relative capabilities to deal successfully with that environment. Strategic al-
ternatives are then considered, and plans are made based on the strategic choice. These five steps
constitute the planning phase, which will be further explained in this chapter.

The second part of the strategic management process is the implementation phase. Successful
implementation requires the establishment of the structure, systems, and processes suitable to
make the strategy work. These variables, as well as functional-level strategies, are explored in
detail in the remaining chapters on strategic implementation, organizing, leading, and staffing.
At this point, however, it is important to note that the strategic planning process by itself does
not change the posture of the firm until the plans are implemented. In addition, feedback from
the interim and long-term results of such implementation, along with continuous environmental
monitoring, flows directly back into the planning process.

STEPS IN DEVELOPING STRATEGIES
In the planning phase of strategic management—strategic formulation—managers need to evalu-
ate dynamic factors carefully, as described in the stages that follow. However, as discussed ear-
lier, managers seldom consecutively move through these phases; rather, changing events and
variables prompt them to combine and reconsider their evaluations on an ongoing basis.

Step 1. Establish Mission and Objectives
The mission of an organization is its overall raison d’être, or the function it performs in society.
This mission charts the direction of the company and provides a basis for strategic decision mak-
ing. It also conveys the cultural values that are important to the company, as contrasted in the
following two mission statements:

Sony (a Japanese Company)

Sony’s corporate mission is to be “a company that provides customers with kando—to move
them emotionally—and inspires and fulfills their curiosity.32

Siemens (a German Company)

We make real what matters, by setting the benchmark in the way we electrify, automate and digi-
talize the world around us. Ingenuity drives us and what we create is yours. Together we deliver.33

Although both mission statements indicate a focus on customers, Sony’s offers them a more
enjoyable experience. The notion of kando, which was coined by Sony CEO Kazuo Hirai, means
“emotional involvement” or the “power to stimulate emotional response.” This concept is em-
bedded deeply in Sony’s successful product development and innovation processes. For instance,
Sony’s PlayStation attracts new customers and retains existing ones through emotional connec-
tivity derived from the gaming experience.

Siemens’ mission statement aligns with the three pillars of its vision statement—responsibility
(ethical actions), excellence (superior performance), and innovation (to achieve sustainable
value). Their mission statement is explicit and decisive, typical of German communication; this
compares with the more descriptive and implicit statement provided by Sony.34

A company’s overall objectives flow from its mission, and both guide the formulation of
international corporate strategy. Because we are focusing on issues of international strategy, we
will assume that one of the overall objectives of the corporation is some form of international
operation (or expansion). The objectives of the firm’s international affiliates should also be part
of the global corporate objectives. A firm’s global objectives usually fall into the areas of mar-
keting, profitability, finance, production, research and development, and sustainability, among
others, as shown in Exhibit 6-2. Goals for market volume and profitability are usually set higher
for international than for domestic operations because of the greater risk involved. In addition,

6-3. To learn the steps in global
strategic planning, including
assessing entry strategies for
different markets

CHAPTER 6 • FORMULATING STRATEGY 197

financial objectives on the global level must take into account differing tax regulations in various
countries and the methods to minimize overall losses from exchange rate fluctuations.

Step 2. Assess External Environment
After clarifying the corporate mission and objectives, the first major step in weighing international
strategic options is the environmental assessment. This assessment includes environmental scan-
ning and continuous monitoring to keep abreast of variables around the world that are pertinent
to the firm and that have the potential to shape its future by posing new opportunities (or threats).
Firms must adapt to their environment to survive. The focus of strategic planning is how to adapt.

The process of gathering information and forecasting relevant trends, competitive actions,
and circumstances that will affect operations in geographic areas of potential interest is called
environmental scanning. This activity should be conducted on three levels—global, regional,
and national (discussed in detail later in this chapter). Scanning should focus on the future in-
terests of the firm and cover the major variables such as political and economic risk; major
technological, legal, and physical constraints; and the global competitive arena as well as the op-
portunities available in different countries. Some generalized areas of risk to consider are shown
in Exhibit 6-3.

The firm can also choose varying levels of environmental scanning. To reduce risk in invest-
ments, many firms take on the role of the follower, meaning that they limit their own investi-
gations. Instead, they simply watch their competitors’ moves and go where they go, assuming
that competitors have done their homework. Other firms go to considerable lengths to carefully
gather data and examine options in the global arena.

Ideally, the firm should conduct global environmental analysis on three levels: multina-
tional, regional, and national. Analysis on the multinational level provides a broad assessment
of significant worldwide trends—through identification, forecasting, and monitoring activities.
These trends would include the political and economic developments of nations around the world
as well as global technological progress. From this information, managers can choose certain
appropriate regions of the world to consider further.

Marketing
Total company market share—worldwide, regional, national
Annual percentage sales growth
Annual percentage market share growth
Coordination of regional markets for economies of scale

Production
Relative foreign versus domestic production volume
Economies of scale through global production integration
Quality and cost control
Introduction of cost-efficient production methods

Finance
Effective financing of overseas subsidiaries or allies
Taxation—globally minimizing tax burden
Optimum capital structure
Foreign-exchange management

Profitability
Long-term profit growth
Return on investment, equity, and assets
Annual rate of profit growth

Research and Development
Develop new products with global patents
Develop proprietary production technologies
Worldwide research and development labs

ExHIBIT 6-2 Global Corporate Objectives

198 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

Next, at the regional level, the analysis focuses in more detail on critical environmental factors
to identify opportunities (and risks) for marketing the company’s products, services, or technology.
For example, one such regional location ripe for investigation by a firm seeking new markets is Asia.

Having zeroed in on one or more regions, the firm must, as its next step, analyze at the
national level. Such an analysis explores in depth specific countries within the desired region
for economic, legal, political, and cultural factors significant to the company. For example, the
analysis could focus on the size and nature of the market, any possible operational problems to
consider, and how best to enter the market. In many volatile countries, continuous monitoring of
such environmental factors is a vital part of ongoing strategic planning. Another important factor
that must be considered in the environmental assessment at all levels is that of how institutions
might affect potential opportunities to compete.

INSTITUTIONAL EFFECTS ON INTERNATIONAL COMPETITION35

Various institutions can create opportunities or constraints for firms considering entry into spe-
cific global markets. Recently, researchers such as Peng have argued that “firm strategies and
performance are, to a large degree, determined by institutions popularly known as the ‘rules
of the game’ in a society.”36 Institutions include both formal institutions that promulgate laws,
regulations, and rules and informal ones that exert influence through norms, cultures, and ethics
(discussed elsewhere in this book).37 Specific ways in which formal institutions affect interna-
tional competition are (1) the attractiveness of overseas markets, (2) entry barriers and industry
attractiveness, and (3) antidumping laws.38

ATTRACTIvENESS OF OvERSEAS MARKETS

The extent to which countries have institutions to promote the rule of law affects the attractiveness
of those economies to outside investors. Specifically, institutions provide a broad framework of
liberty and democracy as well as human rights protections. In addition, institutions contribute to
a stable environment for firms by creating specific laws such as those protecting property rights.
Countries with more developed institutions appear more stable and attractive to foreign firms.39

GLOBAL RISKS
Political Turmoil/Wars

Economic and Financial Risk
Energy Availability and Prices

Shifting Production & Consumption
Currency Wars

Varying Fiscal Strategies

REGIONAL RISKS
Regional Instability

Financial & Currency Instability
Economic & Fiscal Policies

NATIONAL RISKS
Legal Protection

Technology Rights
Nationalism/Expropriation

Trade Restrictions
Repatriation Policies

Corruption
Natural Disasters

ExHIBIT 6-3 Levels of Risk for Strategic Entry Scanning

CHAPTER 6 • FORMULATING STRATEGY 199

ENTRY BARRIERS AND INDUSTRY ATTRACTIvENESS

Institutions create barriers to entry in certain industries and, hence, make those industries more
attractive (profitable) for incumbent firms. For example, in the U.S. pharmaceutical industry,
the U.S. Food and Drug Administration creates barriers in the form of stringent drug approval
requirements. Because new entrants (with potentially cheaper drugs) are restricted, Americans
pay double what Canadians and Europeans pay for the same drugs produced in the United States.
Indeed, spending on retail and nonretail prescription drugs in the United States was over US$500
billion in 2018, more than Britain, Canada, France, Germany, Italy, and Japan combined.40 In
China, the government offers some licenses only to domestic firms. For example, US-based
Rackspace sought to host private clouds in its data centers, which required a unique license;
however, the licenses were awarded only to domestic firms. Consequently, Rackspace needed a
local partner in order to compete in China.41

ANTIDUMPING LAWS AS AN ENTRY BARRIER

Current U.S. antidumping laws illustrate a second example of an entry barrier. They place a
foreign entrant at a disadvantage if accused of dumping (defined as selling a product below the
cost of producing that product with the intent to raise prices later) because of the extensive legal
forms and evidence that the United States requires.42

Clearly, many formal institutions affect international strategy, but what explains successes
of companies despite the failure or absence of these formal institutions? China is a common il-
lustration of a country in which domestic firms have built competitive advantages despite poorly
developed formal institutions. The answer lies in the extensive use of informal institutions or
networks of interpersonal connections known in Chinese as guanxi. These networks function as
substitutes for the weaknesses of the formal institutions. Research has shown that these informal
networks are common in a variety of emerging markets with different cultural traditions and are
a response to transitions in many emerging markets where formal institutions are evolving.43

SOURCES OF ENVIRONMENTAL INFORMATION
The success of environmental scanning depends on the ability of managers to take a global per-
spective and ensure that their sources of information and business intelligence are global. A
variety of public resources is available to provide information. In the United States alone, more
than 2,000 business information services are available on computer databases tailored to spe-
cific industries and regions. Other resources include corporate clipping services and information
packages. However, internal sources of information are usually preferable—especially alert field
personnel who, with firsthand observations, can provide up-to-date and relevant information for
the firm. Extensively using its own internal resources, Mitsubishi Trading Company employs
worldwide more than 70,000 people in over 200 offices and subsidiaries located in 90 countries,
many of whom are market analysts, whose job it is to gather, analyze, and feed market informa-
tion to the parent company.44 Internal sources of information help to eliminate unreliable infor-
mation from secondary sources, particularly in developing countries, where even the official data
from such countries can be either misleading or tampered with for propaganda purposes, or it
may be restricted.45

In summary, this process of environmental scanning, from the broad global level down to the
local specifics of entry planning, is illustrated in Exhibit 6-4. The first broad scan of all potential
world markets enables the firm to eliminate from its list markets that are closed or insignificant
or do not have reasonable entry conditions. The second scan of remaining regions, and then
countries, is done in greater detail—perhaps eliminating some countries based on, for example,
political instability. Remaining countries are then assessed for competitor strengths, suitability of
products, and so on. This analysis leads to serious entry planning in selected countries; managers
start to work on operational plans such as negotiations and legal arrangements.

Competitive Analysis
At this point, the firm’s managers perform a competitive analysis to assess the firm’s capabili-
ties and key success factors compared to those of its competitors. They must judge the relative
current and potential competitive position of firms in that market and location—whether that
is a global position or one for a specific country or region. Managers must also specifically
assess their current competitors—global and local—for the proposed market. They must ask

200 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

Decision to enter global markets

Select geographic regions to evaluate

Eliminate regions not suitable for product/service

Scan environments for political and economic risk; major technological, legal, physical
constraints

Evaluate infrastructure constraints

Narrow choice to suitable countries

Assess investment incentives and market potential in those countries

Narrow choice to select countries

Evaluate local markets for cultural, social, technological suitability

Conduct competitive analysis (MNC and local firms)

Evaluate market attractiveness and competitive potential

Select countries for entry

Consider whether/how much to localize products/services

Assess and decide on entry strategy/strategies

Set timetable for implementation: Negotiations with allies, suppliers, distributors, and so on

Launch entry

Continue environmental scanning process

ExHIBIT 6-4 Global Environmental Scanning and Strategic Decision-Making Process

some important questions: What are our competitors’ positions, their goals and strategies, their
resources, and their strengths and weaknesses, relative to those of our firm? What are the likely
competitor reactions to our strategic moves? Like a chess game, the firm’s managers also need
to consider the strategic intent of competing firms and what might be their future moves (strate-
gies). This process enables the strategic planners to determine where the firm has distinctive
competencies that will give it strategic advantage as well as what direction might lead the firm
into a sustainable competitive advantage—that is, one that will not be immediately eroded by
emulation. The result of this process will also help to identify potential problems that can be cor-
rected or that may be significant enough to eliminate further consideration of certain strategies.

This stage of strategic formulation is often called a SWOT analysis (strengths, weaknesses,
opportunities, and threats), in which a firm’s capabilities relative to those of its competitors are
assessed as pertinent to the opportunities and threats in the environment for those firms. In com-
paring their company with potential international competitors in host markets, it is useful for

CHAPTER 6 • FORMULATING STRATEGY 201

managers to draw up a competitive position matrix for each potential location. For example,
Exhibit 6-5 analyzes a U.S. specialty seafood firm’s competitive profile in Malaysia. The U.S.
firm has advantages in financial capability, future growth of resources, and sustainability, but
a disadvantage in quickness. It also is at a disadvantage compared to the Korean MNC in im-
portant factors such as manufacturing capability and flexibility and adaptability. Because the
other firms seem to have little comparative advantage, the major competitor is likely to be the
Korean firm. At this point, then, the U.S. firm can focus in more detail on assessing the Korean
firm’s relative strengths and weaknesses.

Most companies develop their strategies around key strengths, or distinctive competencies.
Distinctive—or core—competencies represent important corporate resources because, as Prahalad
and Hamel explain, they are the “collective learning in the organization, especially how to coordinate
diverse production skills and integrate multiple streams of technologies.”46 Core competencies are
usually difficult for competitors to imitate and represent a major focus for strategic development at
the corporate level.47 Honda has used its core competencies related to engine design and quality—or
as Honda asserts: “We create intelligent technologies.”48 As a result, Honda produces reliable and
durable products “that enrich lives and make the world more fun to move around in—on the
road, on the water, in the air and beyond”—for example, automobiles, trucks, generators, lawn-
mowers, ATVs, boat motors, aircraft, motorcycles, and scooters.49

Apple, for example, has used its capacity to innovate constantly and apply its technology to
new products and services. Firms such as McDonald’s, Disney, the Tata Group, and IKEA, which
have established their business models domestically, have successfully transferred them to global
markets while also adjusting to local tastes.

Managers must also assess their firm’s weaknesses. A company already on shaky ground finan-
cially, for example, will not be able to consider an acquisition strategy, or perhaps any growth strategy.
Of course, the subjective perceptions, motivations, capabilities, and goals of the managers involved in
such diagnoses frequently cloud the decision-making process. The result is that because of poor judg-
ment by key players, sometimes firms embark on strategies that objective information contraindicates.

Porter’s Five Forces Industry-Based Model
The firm’s potential competitive position in its industry can be reviewed by using Michael Porter’s
industry-based model of five forces that examines the dynamics within an industry, as follows:

• The relative level of global and local competition already in the industry; for example, in
computers, social networking sites, and auto manufacturing. A high level of competition
presents barriers to entry; firms may then decide on a different entry strategy or be de-
terred from that market altogether.

C D E
Comparison A B (Local Malaysian (Japanese (Local Malaysian
Criteria (U.S. MNC) (Korean MNC) Firm) MNC) Firm)

Marketing capability 0 0 0 0 –
Manufacturing capability 0 + 0 0 0
R&D capability 0 0 0 – 0
HRM capability 0 0 0 0 0
Financial capability + – 0 0 –
Future growth of resources + 0 – 0 –
Quickness – 0 + – 0
Flexibility/adaptability 0 + + 0 0
Sustainability + 0 0 0 –

ExHIBIT 6-5 Global Competitor Analysis

U.S. Firm Compared with Its International Competitors in Malaysian Market

Key:
+ = Firm is better relative to competition.
0 = Firm is same as competition.
– = Firm is poorer relative to competition.
Source: Diane J. Garsombke, “International Competitor Analysis,” Planning Review 17, No. 3 (1989), pp. 42–47, used with permission
of Emerald Insight.

202 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

• The relative ease with which new competitors may or may not enter the field, which
determines the level of threat of new entrants. In other words, if your firm is already com-
peting in that industry, what level of protection, or barriers to new entrants, do you have?
Toyota, for example, presents huge barriers to entry for new car manufacturers: world-
wide scale, volume, alliance partners and suppliers, and reputation.

• How much power the buyers have within the industry; that is, what is the level of bargain-
ing power that buyers have to influence competition? Walmart, for example, has a lot of
buying power because of the volume of its business and, therefore, has a downward pres-
sure on prices. Potential entrants would therefore have to provide some differentiation or
innovation to combat that pressure on prices and thus the profitability of the firm.

• The level of bargaining power of suppliers in the industry. High bargaining power would
exert pressure on the firm to a potential entrant as well as squeeze profits. Suppliers of raw
materials or component parts could disrupt production if alternate sources are not available.

• The level of threat of substitute products or services, including the likelihood of innova-
tions.50 Kodak, for example, was put out of business by digital photography even though
the company invented it. And, as everyone is aware, the Internet is threatening the survival
of music CDs, print newspapers, movie rental stores, the U.S. Post Office, and so on.

Step 3. Analyze Internal Factors
After the environmental assessment, the second major step in weighing international strategic
options is the internal analysis. This analysis determines which areas of the firm’s operations
represent strengths or weaknesses (currently or potentially) compared to competitors, so that the
firm may use that information to its strategic advantage.

The internal analysis focuses on the company’s resources and operations and on global syn-
ergies. The strengths and weaknesses of the firm’s financial and managerial expertise and func-
tional capabilities are evaluated to determine what key success factors (KSFs) the company has
and how well they can help the firm exploit foreign opportunities. Those factors increasingly
involve superior technological capability (as with Apple and Huawei Technologies) as well as
other strategic advantages such as effective distribution channels (Carrefour and Walmart), su-
perior promotion capabilities (Disney and Proctor & Gamble), a low-cost production and sourc-
ing position (Toyota), a superior patent and new product pipeline (Merck), and so on. These
strengths contribute to a firm’s competitive advantages.

All companies have strengths and weaknesses. Management’s challenge is to identify both
and then take appropriate action. Many diagnostic tools are available for conducting an internal
resource audit. Financial ratios, for example, may reveal an inefficient use of assets that ad-
versely affects profitability. A sales-force analysis may reveal that the sales force is a source of
competitive advantage for the firm. If a company is conducting this audit to determine whether
to start international ventures or to improve its ongoing operations abroad, certain operational is-
sues must be considered. These issues include (1) the difficulty of obtaining marketing informa-
tion in many countries, (2) the often underdeveloped financial markets, (3) the complexities of
exchange rates and government controls, (4) institutional voids in target countries, and (5) poor
infrastructure, whether physical or technological.

STRATEGIC DECISION-MAKING MODELS
We can further explain and summarize the hierarchy of the strategic decision-making process
described here by means of the leading strategic models. Their roles and interactions are concep-
tualized in Exhibit 6-6. At the broadest level are global, regional, and country factors and risks
previously discussed in Chapter 1 that are part of those considerations in an institution-based
theory of existing and potential risks and influences in the host area.51

The below strategic model can provide decision makers with a picture of the kinds of oppor-
tunities and threats that the firm would face in a particular region or country within its industry.
This assumes, of course, that the locations under consideration have already been pinpointed as
attractive and growing markets for the industry. However, that picture would be true for any firm
within the particular industry. In other words, all firms within an industry face the same environ-
mental and industrial factors; the difference among firms’ performance is because of each firm’s

CHAPTER 6 • FORMULATING STRATEGY 203

own resources, capabilities, and strategic decisions. The factors that determine a firm’s unique
niche or competitive advantage within that arena are a function of its own capabilities (strengths
and weaknesses) relative to the opportunities and threats perceived for that location. This is the
resource-based view of the firm when considering the unique value of the firm’s competencies
and that of its products or services.52

Although these models may indicate varying choices, this strategic decision-making process
should enable the managers to give an overall assessment of the strategic fit between the firm and
the opportunities in that location and so result in a go/no go decision for that point in time. Those
managers may want to start the process again toward a different location to compare the relative
levels of strategic fit. If a good strategic fit is determined and a decision is made to enter that mar-
ket/location, the next step, as indicated in Exhibit 6-6, is to consider alternative entry strategies.
A discussion of these entry modes follows after we first examine the elements of strategy, which
form the foundation of the “Strategy Diamond.”53

THE ELEMENTS OF STRATEGY: THE “DIAMOND”
One way in which to formulate strategy is based on the “Strategy Diamond,” which was devel-
oped by Donald Hambrick and James Fredrickson.54 The diamond identifies five elements of a
firm’s strategy: (1) Arenas, (2) Vehicles, (3) Differentiators, (4) Economic Logic, and (5) Staging.

Arenas answer the broadly defined question “In what businesses will we compete?”
Hambrick and Fredrickson describes arenas with a two-part question: “Where will we be active
and with what degree of emphasis?” As such, arenas clarify the product categories it offers,
segments that a firm enters, geographic markets it penetrates (e.g., domestic-regional, domestic-
national, international-regional-international-worldwide), and customer markets it serves (e.g.,
retail, wholesale, millennials, high-net-worth individuals). In addition, it is critical to clearly
specify the firm’s core technologies and value-adding stages (e.g., product design, manufactur-
ing, marketing, servicing) that will be internalized—i.e., remain within the firm rather than being
outsourced.

Identify Potentially
Attractive Markets

Threats/
Opportunities

Assessment of
Market Attractiveness

Strengths/
Weaknesses

Assessment of Strategic Fit

Decide Strategy

FIRM RESOURCES/
COMPETENCIES

•
•
•

Value
Rarity
Imitability
Organization•

INDUSTRY
DYNAMICS
•
•
•
•

Rivalry among firms
Entry barriers
Power of suppliers
Power of buyers
Substitutes•

INSTITUTIONAL
FACTORS
•
•
•
•

Political risk
Trade barriers
Regulatory risk
Currency risk
Cultural distance•

GO NO-GO

Entry Strategy?

Independent
(Non-equity)

Assess
other

locations

Await
further

developments

Strategic
Alliances
(Equity)

Fit/No Fit?

ExHIBIT 6-6 A Hierarchical Model of Strategic Decision Making

204 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

Vehicles describe the manner in which the arenas will be served, or as Hambrick and
Fredrickson asked, “How will we get there?” Some firms use organic growth to build their own
plants. Others use acquisition or strategic alliances to gain access to new markets and capabili-
ties. For example, Corning, the U.S. based specialty glass company, has long focused on strategic
alliances at home and abroad. Some firms use exporting or franchising to serve and penetrate
geographic markets. Indeed, McDonald’s has emphasized franchising in order to be a worldwide
leader in the fast food industry. For international expansion, vehicles correspond to the various
modes of entry that multinational enterprises can use to serve markets abroad.

Differentiators describe how a firm will succeed in the marketplace. Some firms lever-
age one particular attribute (e.g., superior product designs), while others differentiate them-
selves through several attributes (e.g., reliability, durability, and superior value for the price).
Differentiators tend to be developed in the home market. As such, firms that expand abroad may
need to access the scope of its differentiators. In some instances, a multinational enterprise’s
reputation for product/service quality—such as Rackspace’s “fanatical customer service”—has
spread outside the home base, which is the exception rather than the norm.55 As such, MNEs
need to consider carefully the extent to which a differentiator can be leveraged in markets abroad.

Staging captures the pace and sequence of major strategic moves of a firm. It is an over-
looked aspect of strategy, especially for multinational enterprises that may confront liability
of foreignness in overseas markets and wrestle with breadth versus depth of market penetra-
tion of various international markets. For retail firms such as IKEA (Swedish home furnish-
ing company), Starbucks (U.S. coffee company), and Jollibee’s (Filipino fast food company),
staging decisions may involve balancing reputation enhancement and customers education
(i.e., do-it-yourself furniture in India or coffee in tea-drinking cultures) with depth and breadth
decisions—sequential market penetration within a particular country, simultaneous market pen-
etration across many countries, or a combination of both breadth and depth. MNE manufacturers
may face different staging needs related to local sourcing, distribution, and human capital exper-
tise, in addition to reputational concerns.

Economic logic stresses how a firm will generate profits. Hambrick and Fredrickson asserted,
“The most successful strategies have a central economic logic that serves as the fulcrum for profit
creation.” For this reason, they place this element at the heart of the strategic diamond as shown in
Exhibit 6-7. Rather than developing exhaustive lists of reasons why customers will pay premium
prices or why costs are below those of rivals, some firms may focus specifically on premium prices
for unmatched service or product quality. Yet, other firms may focus primarily on cost advantages
(e.g., IKEA’s ability to reduce shipping and operating costs for do-it-yourself furniture).

Arenas

VehiclesDifferen-
tiators

Staging

Economic
Logic

ExHIBIT 6-7 The Strategy Diamond

Based on D. Hambrick & J. Fredrickson. 2001. “Are You Sure You Have a Strategy?” Academy of Management
Executive, 15: 48–59.

CHAPTER 6 • FORMULATING STRATEGY 205

Step 4. Evaluate Global and International Strategic Alternatives
The strategic planning process involves considering the advantages (and disadvantages) of vari-
ous strategic alternatives in light of the competitive analysis. While weighing alternatives, man-
agers must take into account the goals of their firms and the competitive status of other firms in
the industry. Depending on the size of the firm, managers must consider two levels of strategic
alternatives. The first level, global strategic alternatives (applicable primarily to MNCs), de-
termines what overall approach to the global marketplace a firm wishes to take. The second
level, entry strategy alternatives, applies to firms of any size; these alternatives determine what
specific entry strategy is appropriate for each country in which the firm plans to operate. Entry
strategy alternatives are discussed in a later section. The two main global strategic approaches to
world markets—global strategy and regional, or local, strategy—are presented in the following
subsections.

Approaches to World Markets
GLOBAL STRATEGY
In the past decade, increasing competitive pressures have forced businesses to consider global
strategies—to treat the world as an undifferentiated worldwide marketplace.

With global strategies, a firm pursues a low-cost strategy on a global scale and increases
profits by achieving cost advantages derived from economies of scale and location economies.

That is, the MNE establishes worldwide operations and develops standardized products and
marketing. Many analysts, such as Porter, have argued that globalization is a competitive im-
perative for firms in global industries: “In a global industry, a firm must, in some way, integrate
its activities on a worldwide basis to capture the linkages among countries. This includes, but
requires more than, transferring intangible assets among countries.”56 The rationale behind glo-
balization is to compete by establishing worldwide economies of scale, offshore manufacturing
where appropriate, and international cash flows. The term globalization, therefore, is as appli-
cable to organizational structure as it is to strategy. (Organizational structure is discussed further
in Chapter 8.)

The pressures to globalize include (1) increasing competitive clout resulting from regional
trading blocs; (2) declining tariffs, which encourage trading across borders and open up new
markets; and (3) the information technology explosion, which makes the coordination of far-
flung operations easier and increases the commonality of consumer tastes.57 Use of websites
has allowed entrepreneurs, as well as established companies, to go global almost instantaneously
through e-commerce—either B2B or B2C.58 Examples are eBay, Yahoo!, and Lands’ End. In ad-
dition, the success of Japanese companies with global strategies has set the competitive standard
in many industries—most visibly in the automobile industry. Even French-based LVMH, which
is the world’s largest luxury group by revenues, has adopted a global strategy. “We’ve always
been very careful with the way we distribute our products,” said Toni Belloni, LVMH group
managing director, “We have a global strategy that’s built around our stores as the best way to
access customers and China is no different.”59

One of the quickest and cheapest ways to internationalize is through strategic alliances.
Many firms are trying to go global faster by forming alliances with rivals, suppliers, and cus-
tomers. The rapidly developing information technologies are spawning cross-national business
alliances from short-term virtual corporations to long-term strategic partnerships. (Strategic alli-
ances are discussed further in Chapter 7.)

A global strategy is inherently more vulnerable to environmental differences, however, than
is a multidomestic (regionalization) strategy. Global organizations are difficult to manage be-
cause doing so requires the coordination of broadly divergent national cultures. It also means
that firms must lose some of their original identity—they must “denationalize operations and
replace home-country loyalties with a system of common corporate values and loyalties.”60 In
other words, the global strategy necessarily treats all countries similarly, regardless of their dif-
ferences in cultures and systems. Problems often result, such as a lack of local flexibility and
responsiveness and a neglect of the need for differentiated products. Many companies, such as
Google, now believe that incorporating localization/regionalization allows them to capitalize on
local competencies as long as the parent organization and each subsidiary retain a flexible ap-
proach to each other. Walmart is one global company that has learned the hard way that it should

206 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

have acted more local in some regions of the world, including Germany and South Korea, where
it has had to abandon operations.

LOCALIZATION/REGIONALIZATION
Nokia, Nestlé, Google, and Walmart have failed to adjust to the tastes of South Korean
consumers.61

For firms in industries in which competitiveness is determined on a country-by-country basis
rather than on a global basis, local/regional strategies are more appropriate. The multidomestic
strategy (regionalization strategy) refers to a strategy in which a firm increases profitability
by customizing the firm’s goods and services to local markets in order to provide a good fit with
the customer tastes and preferences in different national markets or regions. In the extreme, a
multidomestic strategy involves being “in China for China. . .in Brazil for Brazil. . .in France for
France,” such that top managers within each country decide on their own investment locations,
product mixes, and competitive positioning. In other words, they run their subsidiaries as quasi-
independent organizations. A less extreme approach adopts a strategy that is region-specific—
that is, “in South America for South America. . .in Europe for Europe.”

Although there are pressures to achieve global integration/efficiency—such as the need for
economies of scale to compete on cost—there are opposing pressures to localize/regionalize, es-
pecially for newly developed economies (NDEs) and developing or emerging economies. These
localization pressures include unique consumer preferences resulting from cultural or national
differences (perhaps something as simple as right-hand-drive cars for Japan), domestic subsi-
dies, and new production technologies that facilitate product variation for less cost than before.62
By acting local, firms can focus individually in each country or region on the local market needs
for product or service characteristics, distribution, customer support, and so on. U.S. manufacturer
Corning has been able to enter the Chinese market by providing its specialty glass for residen-
tial and commercial applications in Wuhu, China through its alliance with Youngy Investment
Holding Group. However, Corning sees its strategic alliance as a vehicle through which to serve
customers in China and other markets, as well as to offer its other glass products. According to
Martin Curran, Corning’s executive vice president and innovation officer, “This relationship en-
ables us to integrate our advanced glass into high-end commercial buildings and homes in China
and other parts of the world. . .This relationship also opens the door for us to explore additional
applications for our thin, innovative glass.”63

Ghemawat argues that strategy cannot be decided either on a country-by-country basis or
on a one-size-fits-all-countries basis but, rather, that both the differences and the similarities
between countries must be taken into account. He bases his perspectives on the cultural, adminis-
trative, geographic, and economic (CAGE) distances between countries, for example:

Cultural distance: Differences in values, languages, religion, trust.

Administrative distance: Lack of common trading bloc or currency, difference in regulations and/or
enforcement of laws; political hostility, nonmarket or closed economy.

Geographical distance: Remoteness, different time zones, weak transportation or communication
links.

Economic distance: Differences in the levels of development and per capita income, natural
or human resources, infrastructure, information or knowledge.

He concludes:

A semiglobalized perspective helps companies resist a variety of delusions derived from visions
of the globalization apocalypse: growth fever, the norm of enormity, statelessness, ubiquity, and
one-size-fits-all.
Semi-globalization is what offers room for cross-border strategy to have content distinct from
single-country strategy.64

As with any management function, the strategic choice of where a company should position
itself along the globalization/regionalization continuum is contingent on the nature of the indus-
try, the type of company, the company’s goals and strengths (or weaknesses), and the nature of
its subsidiaries, among many factors. In addition, each company’s strategic approach should be
unique in adapting to its own environment. Many firms may try to go global but act local to trade
off the best advantages of each strategy.

CHAPTER 6 • FORMULATING STRATEGY 207

Transnational Strategies
Many MNE firms face pressures to be both globally efficient and locally responsive. In these
circumstances, firms develop a transnational strategy, which entails achieving low costs through
global efficiency and providing differentiated product/service offerings across geographic mar-
kets to account for local customer differences. A transnational strategy can take different forms.
For example, a firm may adopt a transnational approach to its value chain–for example, research
and manufacturing emphasize standardization, but marketing and sales vary across countries/
regions, thus embracing local responsiveness. Alternatively, a firm may employ a transnational
strategy to its business divisions. For example, one division may have strong pressures for global
integration, thus emphasizing standardization in order to drive down costs; yet, another division
may have strong pressures for local responsiveness, thus focusing on customization in overseas
markets. Sometimes, a firm can invoke a transnational strategy on a product-specific basis or
country-specific basis. For instance, BRL Hardy (Australian wine producer), like most of its
rivals, required a multidomestic approach due to country-specific differences in wine preferences
and volume constraints, yet it began to develop global brands for some of its wines. Relatedly,
IKEA has long emphasized global integration, but the nuances of the Indian market suggested
that it needed to customize its approach in order to best serve Indian customers.

Many MNCs have developed their global operations to the point of being fully integrated—
often both vertically and horizontally, including suppliers, productive facilities, marketing and
distribution outlets, and contractors around the world. Dell, for example, is a globally integrated
company, with worldwide sourcing and a fully integrated production and marketing system. It
has factories in Ireland, Brazil, China, Malaysia, Tennessee, and Texas, and it has an assembly
and delivery system from 47 locations around the world. At the same time, it has extreme flex-
ibility. Because Dell builds each computer to order, it carries very little inventory and, therefore,
can change its operations at a moment’s notice. Thomas Friedman described the process that his
notebook computer went through when he ordered it from Dell:

The notebook was co-designed in Austin, Texas, and in Taiwan. . . . The total supply chain for
my computer, including suppliers of suppliers, involved about four hundred companies in North
America, Europe, and primarily Asia, but with thirty key players. (It was delivered by UPS 17
days after ordering.) 65

Although some companies move very quickly to the stage of global integration—often
through mergers or acquisitions—many companies evolve into multinational corporations by
going through the entry strategies in stages, taking varying lengths of time between stages.
Typically, a company starts with simple exporting, moves to large-scale exporting with sales
branches abroad (or perhaps begins licensing), then—for a manufacturing company—proceeds
to assembly abroad (either by itself or through contract manufacturing), and eventually evolves
to full production abroad with its own subsidiaries. Finally, the company will undertake the
global integration of its foreign subsidiaries, setting up cooperative activities among them to
achieve economies of scale. By this point, the MNC has usually adopted a geocentric orientation,
viewing opportunities and entry strategies in the context of an interrelated global market instead
of regional or national markets. In this way, alternative entry strategies are viewed on an over-
all portfolio basis to take maximum advantage of potential synergies and leverage arising from
operations in multicountry markets.66 Whereas Procter & Gamble, for example, took around 100
years to go fully global, many companies more recently are “born global”—that is, they start out
with a global reach, typically by using their Internet capabilities and hiring people with interna-
tional experience and contacts around the world.

Born globals globalize some aspects of their business—manufacturing, service delivery,
capital sourcing, or talent acquisition, for instance—the moment they start up.

. . . Standing conventional theory on its head, start-ups now do business in many countries
before dominating their home markets.67

Isenberg notes that successful entrepreneurs can establish multinational organizations from
the outset by setting up and managing global supply chains and striking alliances from positions
of weaknesses. The major challenges for born globals are those of accessing resources and the
physical and cultural distances in their markets and operations.68

208 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

Using E-Business for Global Expansion
Companies of all sizes are increasingly looking to the Internet as a means of expanding their
global operations. Clearly, the Internet is available to anyone and levels the playing field for
small businesses. E-commerce businesses can become global with relative ease; however, many
small business owners miss out on opportunities abroad. Some small business owners that have
leveraged the power of the Internet have achieved great success, as shown in the quote below by
an executive of an e-commerce shipping platform:

We have a customer that sells wallets here in Brooklyn, they opened up the Japanese market
and now 70 percent of their revenue comes from Japan.69

Ryan Powell, senior director for North America, Easyship

There are many micro-multinationals such as the one described above and, just as with large
companies, they run their businesses using email, web pages, voice-over-Internet phone services,
and other Internet technology to serve customers around the globe.

The globalization of the web is evident, as shown in Table 6-1, which compares the statistics
between 2014 and 2018. Out of the total number of Internet users as of 2018, Asia already had
49.0 percent of world usage, up slightly from 2014. The penetration rate of users for Asia, for
example, of 49.0 percent, is a considerable increase in people using the Internet yet shows the
growth opportunities in this region. Nevertheless, of particular note is that Africa’s penetration
rate has increased substantially, although still low, which indicates a far greater growth capac-
ity than in Europe and North America. In China alone there are more than 800 million Internet
users.70 However, in China, as in other countries, the logistics of providing customer service is
often a barrier to efficient e-commerce. The growth of express delivery over a broad geographic
base has lagged behind the growth of the e-commerce market there.71 Three strategies are recom-
mended to deal with the logistics problems in China and elsewhere:

• Build your own internal logistics network.

• Outsource delivery services to third-party providers.

• Form partnerships with or acquire existing logistics companies.72

Many developing nations, in particular, are realizing the opportunities for e-commerce and im-
proving their infrastructure to take advantage of those opportunities. Governments and businesses are
experiencing pressure to go online, especially those companies that export goods to countries where
a significant amount of business is conducted through the Internet, such as the United States. For
example, Everest S.A., a family-run business in San Salvador, sold a 69- kilogram lot (152 pounds) of
coffee beans from one of its five farms in an Internet auction for a record price of $14.06 a pound.73

As a result, American technology giants and e-retailers such as Amazon are devoting great
amounts of money and time to build and develop foreign-language websites and services. “Gone
are the days in which you can launch a website in English and assume that readers from around
the globe are going to look to you simply because of the content you’re providing.”74

There are many benefits of e-business, including rapid entrance into new geographic markets
and lower operational costs, as indicated by respondents to the IDC Internet Executive Advisory

TABLE 6-1 Change in World Internet Usage as of Q2 2018

Regions Usage %
of World

Penetration
Rates (%)

2018 2014 2018 2014

Africa 11.0 9.8 36.1 26.5

Asia 49.0 45.7 49.0 34.7

Europe 16.8 19.2 85.2 70.5

Middle East 3.9 3.7 64.5 48.3

North America 8.2 10.2 95.0 87.7

Latin America/Caribbean 10.4 10.5 67.2 52.3

Oceana/Australia 0.7 0.9 68.9 72.9

Source: Based on selected data from www.internetworldstats.com, accessed March 9, 2019.

http://www.internetworldstats.com

CHAPTER 6 • FORMULATING STRATEGY 209

Council surveys (see Exhibit 6-8). Less touted, however, are the many challenges inherent in
a global B2B or B2C strategy. These include cultural differences and varying business models
as well as governmental wrangling and border conflicts—in particular the question over which
country has jurisdiction and responsibility over disputes regarding cross-border electronic transac-
tions.75 Potential problem areas that managers must assess in their global environmental analysis
include conflicting consumer protection, intellectual property, and tax laws; increasing isolation-
ism, even among democracies; language barriers; and a lack of tech-savvy legislators worldwide.76

Savvy global managers will realize that e-business cannot be regarded as just an extension of
current businesses. It is a whole new industry in itself, complete with a different pool of competitors
and entirely new sets of environmental issues. A reassessment of the environmental forces in the
newly configured industry, using Michael Porter’s five forces analytical model, should take account
of shifts in the relative bargaining power of buyers and suppliers, the level of threat of new com-
petitors, existing and potential substitutes, and a present and anticipated competitor analysis.77 The
level of e-competition will be determined by how transparent and imitable the company’s business
model is for its product or service as observed on its website. In addition, competitors may also be
other bricks-and-mortar stores as well as their own—such as for Staples or JCPenney.

There is no doubt that the global e-business competitive arena is a challenging one, both
strategically and technologically; but many companies around the world are plunging in, fearing
that they will be left behind in this fast-developing global e-marketplace.

For companies such as eBay, e-business is their business—services are provided over the
Internet for end users and for businesses. With a unique business model, eBay embarked on a
global e-strategy. The company has positioned itself to be global and giant: part international
swap meet, and part clearinghouse for the world’s manufacturers and retailers.

E-GLOBAL OR E-LOCAL?
Although Alibaba’s Chinese e-commerce operations had 636 million active buyers in 2018, the com-
pany’s strategy involves expanding in other countries such as South Korea, India, and especially Japan.78

Alibaba Group has a goal to serve two billion consumers, and we hope to partner with
Japanese brands and retailers that share an interest to expand their global market presence.
Japan is an important market for Alibaba’s globalization strategy, because it offers world-
class, high-quality products in popular demand by Chinese consumers . . . we aim to empower
Japanese brands and retailers to enter the Chinese and Asian markets with a cross-border
e-commerce solution that best serves their interest and needs.79

Alibaba Group CEO Daniel Zhang

Although the Internet is a global medium, a company still faces the same set of decisions re-
garding how much its products or services can be globalized or how much they must be localized

Expanded sales
channels

Benefits of B2B

Lower operational
costs

Better customer
service

Rapid entrance into
new geographic markets

Improved customer
loyalty

Better relationships with
distributors/channels

0 10 20 30 40 50 60 70
(Percent)

ExHIBIT 6-8 Benefits of B2B

Source: Data from IDC Internet executive Advisory Council Surveys.

210 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

to national or regional markets. Local cultural expectations, differences in privacy laws, government
regulations, taxes, and payment infrastructure are just a few of the complexities encountered in trying
to globalize e-commerce. Further complications arise because the local physical infrastructure must
support e-businesses that require the transportation of actual goods for distribution to other businesses
in the supply chain or to end users. In those instances, adding e-commerce to an existing old-economy
business in those international markets is likely to be more successful than starting an e-business from
scratch without the supply and distribution channels already in place. However, many technology
consulting firms, such as NextLinx, provide software solutions and tools to penetrate global markets,
extend their supply chains, and enable new buyer and seller relationships around the globe.

Going global with e-business, as Yahoo! has done, necessitates a coordinated effort in a
number of regions around the world at the same time to gain a foothold and grab new markets
before competitors do. Certain conditions dictate the advisability of going e-global:

The global beachhead strategy makes sense when trade is global in scope; when the business
does not involve delivering orders; and when the business model can be hijacked relatively
easily by local competitors.80

This strategy would work well for global B2B markets in steel, plastics, and electronic
components.

The e-local, or regional strategic, approach is suited to consumer retailing and financial ser-
vices, for example. Amazon and eBay have started their regional approach in Western Europe.
Again, certain conditions would make this strategy more advisable.

[The e-local/regional approach] is preferable under three conditions: when production and
consumption are regional rather than global in scope; when customer behavior and market
structures differ across regions but are relatively similar within a region; and when supply-
chain management is very important to success.81

The selection of which region or regions to target depends on the same factors of local
market dynamics and industry variables as previously discussed in this chapter. However, for
e-businesses, additional variables must also be considered, such as the rate of Internet penetration
and the level of development of the local telecommunications infrastructure.

One company that learned the hard way how to localize its e-business is Handango, Inc.,
of Hurst, Texas—a maker of smartphone and wireless-network software. As Clint Patterson, the
company’s vice president of marketing, said while reflecting on its move into Asian markets sev-
eral years ago, “We didn’t understand what purchasing methods would be popular or even what
kinds of content. We didn’t have a local taste. We realized we needed someone on the street to
hold our hand.”82 For example, Handango found it needed a local bank account to do business in
Japan because Japanese consumers use a method called konbini to make online payments. This
means that when they place their order online, instead of paying with a credit card, they go to
a local convenience store and pay cash to a clerk, who then transfers the payment to the online
vendor’s account. To adapt to this system, Handango formed an alliance with @irBitway, a local
consumer-electronics web portal, which now acts as Handango’s agent in the konbini system and
has taken over Handango’s local marketing and translation.83 Handango ran into a similar problem
in Germany when it discovered that Germans do not like debt and prefer to pay for their online pur-
chases with wire transfers from their bank accounts. To get around this, the company found a local
partner to interface with local banks and then adapted its website to the new payment method.84

Step 5. Evaluate Entry Strategy Alternatives
For a multinational corporation (or a company considering entry into the international arena), a
more specific set of strategic alternatives, often varying by targeted country, focuses on different
ways to enter a foreign market. Managers need to consider how potential new markets may be
served best by their company in light of the risks and the critical environmental factors associ-
ated with their entry strategies. The following sections examine the various entry and ownership
strategies available to firms, including exporting, licensing, franchising, contract manufactur-
ing, offshoring, service-sector outsourcing, turnkey operations, management contracts, joint
ventures, fully owned subsidiaries set up by the firm, and e-business. These alternatives are not
mutually exclusive; several may be employed at the same time. They are addressed in order of
ascending risk (typically), although e-business is usually low-risk.

CHAPTER 6 • FORMULATING STRATEGY 211

EXPORTING
Exporting is a relatively low-risk way to begin international expansion or to test out an overseas
market. Little investment is involved, and fast withdrawal is relatively easy. Small firms seldom
go beyond this stage, and large firms use this avenue for many of their products. Because of
their comparative lack of capital resources and marketing clout, exporting is the primary entry
strategy small businesses use to compete on an international level. Many firms from emerging or
developing markets use exporting extensively to compete overseas in a narrow product category;
an example is the Hong Kong–based Johnson Electric (Johnson), which exports most of the
3 million tiny electric motors it produces per day.

An experienced firm may want to handle its exporting functions by appointing a manager or
establishing an export department. Alternatively, an export management company (EMC) may
be retained to take over some or all exporting functions, including dealing with host-country
regulations, tariffs, duties, documentation, letters of credit, currency conversion, and so forth.
Frequently, it pays to hire a specialist for a given host country.

Certain decisions need special care when managers are setting up an exporting system, par-
ticularly the choice of distributor. Many countries have regulations that make it very hard to
remove a distributor who proves inefficient. Other critical environmental factors include export–
import tariffs and quotas, freight costs, and distance from supplier countries.

LICENSING
An international licensing agreement grants the rights to a firm in the host country to either
produce or sell a product, or both. This agreement involves the transfer of rights to patents,
trademarks, or technology for a specified period in return for a fee the licensee pays. Many
food-manufacturing MNCs license their products overseas, often under the names of local firms,
and products like those of Adidas and Disney appear around the world under various licensing
agreements. Like exporting, licensing is also a relatively low-risk strategy because it requires
little investment, and it can be a useful option in countries where market entry by other means is
constrained by regulations or profit-repatriation restrictions.

Licensing is especially suitable for the mature phase of a product’s life cycle when competition
is intense, margins decline, and production is relatively standardized. It is also useful for firms with
rapidly changing technologies, for those with many diverse product lines, and for small firms with
few financial and managerial resources for direct investment abroad. A clear advantage of licensing
is that it avoids the tariffs and quotas usually imposed on exports. The most common disadvantage
is the licensor’s lack of control over the licensee’s activities and performance.

Critical environmental factors to consider in licensing are whether sufficient patent and
trademark protection is available in the host country, the track record and quality of the licensee,
the risk that the licensee may develop its competence to become a direct competitor, the licens-
ee’s market territory, and legal limits on the royalty rate structure in the host country.

FRANCHISING
Similar to licensing, franchising involves relatively little risk. The franchisor licenses its trademark,
products and services, and operating principles to the franchisee for an initial fee and ongoing
royalties. Franchises are well known in the domestic fast-food industry; Pizza Hut, for example,
operates primarily on this basis. For a large up-front fee and considerable royalty payments, the
franchisee gets the benefit of the firm’s reputation, existing clientele, marketing clout, and manage-
ment expertise. Pizza Hut is well recognized internationally, as are many other fast-food and hotel
franchises, such as Hampton Hotels, along with, for example, MyGym of Mexico, and other ser-
vices such as Supercuts and H&R Block. A critical consideration for the franchisor’s management
is quality control, which becomes more difficult with greater geographic dispersion. The choice of
entry mode for the largest Filipino fast food chain, Jollibee’s, tends to be franchising. With more
than 750 stores nationwide, Jollibee’s has been expanding abroad. As of March 2019, Jollibees’s
had 80 locations outside the Philippines with 26 locations in the United States, 32 locations in
Vietnam, and 11 locations in Brunei among others.85

Franchising can be an ideal strategy for small businesses because outlets require little invest-
ment in capital or human resources. Through franchising, an entrepreneur can use the resources
of franchisees to expand; most of today’s large franchises started out with this strategy. An entre-
preneur can also use franchisees to enter a new business. Higher costs in entry fees and royalties

212 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

are offset by the lower risk of an established product, trademark, and customer base as well as the
benefit of the franchisor’s experience and techniques.

Franchising in some countries can be complicated. In China, for example, franchising is a rather
new concept. Almost all firms that franchise in China “either manage the operations themselves with
Chinese partners (typically establishing a different partner in each major city or region), or sell to a mas-
ter franchisee, which then leases out and oversees several franchise areas within a territory.”86 There are
considerable problems, including finding suitable franchisees and collecting royalty payments.

CONTRACT MANUFACTURING
A common means of outsourcing cheaper labor overseas is contract manufacturing (also com-
monly called outsourcing), which involves contracting for the production of finished goods or
component parts. These goods or components are then imported to the home country, or to other
countries, for assembly or sale. Alternatively, they may be sold in the host country. If managers
can ensure the reliability and quality of the local contractor and work out adequate means of cap-
ital repatriation, this strategy can be a desirable means of quick entry into a country with a low
capital investment and none of the problems of local ownership. Firms such as Nike use contract
manufacturing around the world. However, the Boston Consulting Group warned about assum-
ing that this strategy would continue to deliver big cost reductions by itself and that it should be
considered just one part of a global sourcing strategy.87

OFFSHORING
Offshoring is when a company moves one or all of its factories from the home country to another
country, as is the case with some of Nissan’s factories in the United States. In fact, more than
40 percent of cars built in the United States are made by Japanese and other foreign companies.88
Offshoring provides the company with access to foreign markets while avoiding trade barriers as well
as, frequently, achieving an overall lower cost of production. According to a report by A. T. Kearney,
U.S. imports from offshoring countries (e.g., China, Malaysia, India, Vietnam, Thailand, Indonesia,
Bangladesh, and Pakistan) have steadily risen from 9.15 percent in 2008 to 12.44 percent in 2017.89

However, some companies attribute their global success to their local connections for part
or all of their manufacturing. An example is the BAG shoe company in Italy. Just over half the
upper shoe parts are made in low-cost countries such as Serbia and Tunisia. The rest of the up-
pers and the soles are made locally. Having such a large part of its shoes made by local suppliers
enables BAG’s CEO, Mr. Bracalente, to emphasize the “Made in Italy” label as a big marketing
advantage. Moreover, having suppliers close by means production problems are quickly solved.
“Our technicians can go and visit the suppliers, often in just half an hour,” says Mr. Bracalente.
He feels that splitting the assembly functions between BAG and many outside companies is a
strength, not a weakness.90 He argues that this mix of production locations gives the company a
vital source of flexibility and the capacity to make rapid changes in shoe style.91

One means of gaining increased efficiencies and therefore lower costs is through clustering,
used when contract manufacturing, offshoring, or service-sector outsourcing (explained below).
Sirkin et al. note that many companies from emerging market economies—companies that they
call challengers—have gained rapid success by clustering:

Challengers are particularly expert at keeping their costs low by clustering—operating in con-
centrations of related, interdependent companies within an industry that use the same suppli-
ers, specialized labor, and distribution channels.92

Examples of industry clusters are an appliance cluster in Monterey, Mexico, serving the
North American market and firms both global and local, and including around two hundred local
suppliers; the many manufacturing clusters in China; and service center clusters in India, as dis-
cussed elsewhere in this chapter.

RESHORING/NEARSHORING
More recently, a number of companies in developed economies have begun reconsidering some or
all of their outsourcing strategies and started to relocate some productive facilities to newly pre-
ferred locations, or to home—a process called reshoring—or at least closer to home and to major
markets, called nearshoring. Reasons for this include the increasing costs of labor as emerging
countries enter a new phase of development and rising consumer classes, currency fluctuations, the

CHAPTER 6 • FORMULATING STRATEGY 213

costs of transportation and length of time to market, the risks of long supply chains with multiple
stages and parties involved and the difficulty of retaining complete control over the production and
supply chains from a long distance, the pressure to consider social responsibility and sustainabil-
ity in distant and low-economic venues, and the pressure to bring jobs back home. For example,
Hasbro, Inc. added a manufacturing line in Massachusetts—rather than offshoring production—in
response to growing demand for its Play-Doh product. Some cases of reshoring suggest corporate
patriotism. In response to Walmart’s promise to purchase more U.S.-made products, California
Innovations moved overseas production of the Ozark Trail super coolers to Atlanta. Similarly,
Dorel Juvenile planned to move the overseas production of its car seats to an Ohio factory.

Add to these the scarcity of skilled labor, the risks of natural disasters and terrorism, and
moves by local governments to protect their own interests, and the result seems to have turned
the tables somewhat on the advantages of distant outsourcing, yet the trend lost momentum.
According to A. T. Kearney, reshoring cases in the United States peaked in 2013 and 2014.
However, reshoring declined steadily through 2017.93

SERVICE SECTOR OUTSOURCING
According to the 2017 A. T. Kearney Global Services Location Index, traditional offshoring industry—
information technology outsourcing (ITO) and business process outsourcing (BPO)—has reached
“the beginning of the end.” However, the global labor market for services is still in its infancy.94

Developing nations have long enjoyed the economic benefits of other countries’ offshoring.
Now this model is in danger as technology takes over much of business process outsourcing.95

The 2017 Global Services Location Index (GSLI) ranked countries based on three criteria:
financial attractiveness, people skills and availability, and business environment. The findings
confirm that Asia continues to dominate service sector outsourcing, especially in India, due to its
highly educated and English-language staff availability. Latin America as a region has done well,
and Central Europe offers mature industry and highly skilled workers.96 As shown in shown in
Exhibit 6-9, the top GSLI countries were India, China, Malaysia, Indonesia, Brazil, and Vietnam.

Rank 2017 Country
Change in
Rank since 2014

1 India
2 China
3 Malaysia
4 Indonesia
5 Brazil
6 Vietnam
7 Philippines
8 Thailand
9 Chile

10 Colombia
11 Sri Lanka
12 Poland
13 Mexico

0
0
0

+1
+3
+6

0
– 2
+4
+33
+5
–1
–9

14 Egypt–4
15 –6 Bulgaria
16 Czech Republic+17
17 0 Germany
18 Romania0
19 +8 UK
20 PeruN.R

ExHIBIT 6-9 A. T. Kearney 2017 Global Services Location Index Ranks

Source: Selections from the A. T. Kearney 2017 Global Services Location Index.

214 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

Colombia and Czech Republic made the most significant improvements relative to the 2014
ranking: Czech Republic (16th; +17) and Colombia (10th; +33).97

Firms that outsource services usually enter overseas markets by setting up local offices,
research laboratories, call centers, and so on to use the highly skilled but lower-wage human
capital, which is available in countries such as India, the Philippines, and China, as well as the
ability to offer global, round-the-clock service from different time zones.

Whether firms use offshoring, reshoring, nearshoring, or onshoring, they must consider the strate-
gic aspects of that decision beyond immediate cost savings. In addition to the lack of consideration for
factors other than production costs, sending jobs to a particular country is typically a short-term cost-
reduction strategy because, at some point, competitive pressures will increase costs there, necessitating
moving those jobs again to still lower-cost countries (a transition known as a race to the bottom).

Managers are in fact broadening their strategic view of sending skilled work abroad, now
using the term transformational outsourcing to refer to the growth opportunities provided by
making better use of skilled staff in the home office and brought about by gains in efficiency
and productivity through leveraging global talent.98 The risk of backlash from customers, com-
munity, and current employees necessitates careful consideration of the reasons for a company
to go offshore. Managers also must consider the risk of losing control of proprietary technology
and processes and decide whether to set up the company’s own subsidiary offshore (a captive
operation) instead of contracting with outside specialists. Bank of America, for example, split its
strategy by opening its own subsidiary in India but also allied with Infosys Technologies and Tata
Consultancy Services for 30 percent of its IT resources to be outsourced.99

TURNKEY OPERATIONS
In a so-called turnkey operation, a company designs and constructs a facility abroad (such as a
dam or chemical plant), trains local personnel, and then turns the key over to local management—
for a fee, of course. Critical factors for success are the availability of local supplies and labor, reli-
able infrastructure, and an acceptable means of repatriating profits. There may also be a critical risk
exposure if the turnkey contract is with the host government, which is often the case. This situation
exposes the company to risks such as contract revocation and the rescission of bank guarantees.

MANAGEMENT CONTRACTS
A management contract gives a foreign company the rights to manage the daily operations of a
business but not to make decisions regarding ownership, financing, or strategic and policy changes.
Usually, management contracts are enacted in combination with other agreements, such as joint
ventures. By itself, a management contract is a relatively low-risk entry strategy, but it is likely to be
short term and provide limited income unless it leads to a more permanent position in the market.

INTERNATIONAL JOINT VENTURES
At a much higher level of investment and risk (though usually less risky than a wholly owned
business), joint ventures present considerable opportunities unattainable through other strategies.
A joint venture involves an agreement by two or more companies to produce a product or service
together. In an international joint venture (IJV), ownership is shared, typically by an MNC and
a local partner, through agreed-upon proportions of equity. This strategy facilitates an MNC’s rapid
entry into new markets by means of an already established partner who has local contacts and fa-
miliarity with local operations. IJVs are a common strategy for corporate growth around the world.
They also are a means to overcome trade barriers, to achieve significant economies of scale for de-
velopment of a strong competitive position, to secure access to additional raw materials, to acquire
managerial and technological skills, and to spread the risk associated with operating in a foreign en-
vironment.100 For example, Amazon formed a joint venture in India that, in turn, owned Cloudtail
India, a new company that has generated the most sales on Amazon’s Indian marketplace.101 Also,
Saudi Aramco announced an agreement to set up a joint venture with Norinco Group and Panjin
Sincen (China) to develop a refinery and petrochemicals facility in Liaoning province.102

Not surprisingly, larger companies are more inclined to take a high-equity stake in an IJV to
engage in global industries and be less vulnerable to the risk conditions in the host country.103
The joint venture reduces the risks of expropriation and harassment by the host country. Indeed,
it may be the only feasible means of entry into certain countries, such as Mexico and Japan,
which stipulate proportions of local ownership and local participation.

CHAPTER 6 • FORMULATING STRATEGY 215

Many companies have set up joint ventures with European companies to gain the status
of an insider in the European Union. IJVs are quite common in India because the government
encourages foreign collaborations to facilitate capital investments, import of capital goods,
and transfer of technology.104 Most of these alliances are not just tools of convenience but are
important—perhaps critical—means to compete in the global arena, in particular to share in the
immense costs involved and to share the risk burden. In a joint venture, the partners must work
out the level of relative ownership and specific contributions. They must share management and
decision making for a successful alliance. The company seeking such a venture must maintain
sufficient control, however, because without adequate control, the company’s managers may be
unable to implement their desired strategies. Therefore, initial partner selection and the develop-
ment of a mutually beneficial working agreement are critical to the success of a joint venture.
In addition, managers must ascertain that there will be enough of a fit between the partners’
objectives, strategies, and resources—financial, human, and technological—to make the venture
work. Unfortunately, too often the need for preparation and cooperation is given insufficient at-
tention, resulting in many such strategic partnerships ending prematurely. About 60 percent of
IJVs fail, usually because of ineffective managerial decisions regarding the type of IJV, its scope,
duration, and administration as well as careless partner selection.105 IJVs, as well as the many
forms of strategic global alliances, are further discussed in Chapter 7.

For companies in emerging markets or developing economies, joint ventures, mergers, and
acquisition strategies provide opportunities to internationalize by gaining access to customers,
supply networks, technology, local brand image and knowledge, and natural resources. The local
alliances also typically provide to the new management a learning curve for manufacturing and
management skills and technologies. Further discussion of joint ventures appears in Chapter 7.

FULLY OWNED SUBSIDIARIES
In countries where a fully (i.e., wholly) owned subsidiary is permitted, an MNC wishing total
control of its operations can start its own product or service business from scratch, or it may ac-
quire an existing firm in the host country.

We acquire a company only if it gives us a new technology, new markets, new products, new
customer bases or a new product development capability.106

Praveen Kadle, Tata, www.tata.com

Some firms use acquisitions as a means to enter a new country or product market. In
2018, Walmart purchased India’s Flipkart (e-commerce platform) for $16 billion. Others use
acquisitions to expand their positions within a particular country or product category. In late
2018, Unilever, the Anglo-Dutch consumer products giant, entered negotiations to acquire
GlaxoSmithKline’s nutrition business, which includes its highly coveted Horlicks malted drink
brand that is popular in India. In early 2019, Denmark’s Maersk, the world’s largest container
shipping company, announced its intention to seek acquisition targets in order to strengthen its
logistics operations on land. Reflecting a change in its strategy, the Danish company plans to
enrich business unrelated to its oceanic activities, namely trucking and warehousing. According
to Soren Skou, CEO of Maersk, “The future will be very much about scaling the land side of
the equation… We for sure have to do some acquisitions in the logistics space, primarily to gain
capability and scale.”107

Often the decision to acquire foreign companies will reflect financial and economic situa-
tions at the time, as with companies that, for tax reasons, keep cash overseas. Microsoft said it
used $8.5 billion of offshore cash to acquire Luxembourg-based Internet–phone service Skype
Technologies. And in summer 2015 the strong dollar presented favorable exchange rates for
overseas acquisitions as well as the opportunities to purchase cheaper supplies.

Such acquisitions by MNCs allow rapid entry into a market with established products and dis-
tribution networks and provide a level of acceptability not likely to be given to a foreign firm. These
advantages somewhat offset the greater level of risk stemming from larger capital investments, com-
pared with other entry strategies. At the highest level of risk is the strategy of starting a business
from scratch in the host country—that is, establishing a new wholly owned foreign manufacturing
or service company or subsidiary with products aimed at the local market or targeted for export.
This strategy exposes the company to the full range of risk to the extent of its investment in the

http://www.tata.com

216 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

host country. As evidenced by events in the Middle East, political instability can be devastating to a
wholly owned foreign subsidiary. Add to this risk a number of other critical environmental factors—
local attitudes toward foreign ownership, currency stability and repatriation, the threat of expropria-
tion and nationalism—and you have a high-risk entry strategy that must be carefully evaluated and
monitored. There are advantages to this strategy, however, such as full control over decision making
and efficiency as well as the ability to integrate operations with overall company-wide strategy.

Exhibit 6-10 summarizes the advantages and critical success factors of these entry strategies
that must be taken into account when selecting one or a combination of strategies, depending on
the location, the environmental factors and competitive analysis, and the overall strategy with
which the company approaches world markets.

STRATEGIC PLANNING FOR EMERGING MARKETS
Complex situational factors face the international manager as she or he considers strategic ap-
proaches to world markets along with which entry strategies might be appropriate. Emerging
markets present particular complexity and unfamiliarity for managers to evaluate. The World

6-4. To understand the need
for strategic planning for
emerging markets

Strategy Advantages Critical Success Factors

Exporting Low risk Choice of distributor
No long-term assets Transportation costs
Easy market access and exit Tariffs and quotas

Licensing No asset ownership risk Quality and trustworthiness of licensee
Fast market access Appropriability of intellectual property

Avoids regulations and tariffs Host-country royalty limits

Franchising Little investment or risk Quality control of franchisee and franchise
Fast market access operations

Small business expansion

Contract manufacturing/Offshoring Limited cost and risk Reliability and quality of local contractor
Short-term commitment Operational control and human rights issues

Service-sector outsourcing Lower employment costs Quality control

Turnkey operations Access to high skills and markets Domestic client acceptance
Revenue from skills and technology Reliable infrastructure
where FDI restricted Sufficient local supplies and labor

Repatriability of profits
Reliability of any government partner

Management contracts Low-risk access to further strategies Opportunity to gain longer-term position

Joint ventures Insider access to markets Strategic fit and complementarity of partner,
markets, products

Share costs and risk Ability to protect technology
Leverage partner’s skill base, Competitive advantage
technology, local contacts Ability to share control

Cultural adaptability of partners

Wholly owned subsidiaries Realize all revenues and control Ability to assess and control economic,
political, and currency risk

Global economies of scale
Strategic coordination Ability to get local acceptance
Protect technology and skill base Repatriability of profits

E-business Rapid entry into (or exit from) Differences in business models, culture,
new markets (often through alliance language, and laws regarding intellectual
or purchase of local websites); property, consumer protection, and taxes.
relatively low-risk

ExHIBIT 6-10 International Entry Strategies: Advantages and Critical Success Factors

CHAPTER 6 • FORMULATING STRATEGY 217

MANAGEMENT IN ACTION
Strategic Planning for Emerging Markets

There continue to be many indicators of the increasing business opportunities available for com-
panies wanting to set up operations in or export to the emerging markets, in particular in light of
the slowdown in growth in many developed economies brought about by economic problems.

In planning for global opportunities for retail businesses, for example, an internationalizing
retail company can consider the A. T. Kearney Global Retail Development Index (GRDI); which ranks
30 emerging countries for retail investment based on market attractiveness, country risk, market satura-
tion, and time pressure.109 The study shows that overall, India, China, Malaysia, Turkey, and United
Arab Emirates rank as the five countries in terms of retail investment. In terms of time pressure for entry,
Vietnam ranks highest, followed by China, India, Algeria, and Indonesia. In terms of market attractive-
ness, China ranked highest followed by United Arab Emirates, Saudi Arabia, Russia, and Turkey.

The A. T. Kearney report revealed that mobile phones are changing the shopping behavior in de-
veloping markets. For example, mobile shopping in India increased by 121 percent from the prior year.
In addition, mobile phone shopping grew dramatically in China (192%), Vietnam (151%), and Nigeria
(87%).110 In fact, in most developing markets, mobile and online shopping are essentially the same. This
growth is forcing retailers to challenge their assumptions about market entry, their roles in the retail
value chain, and their influence on shopping behavior. The report further reveals that among the top
30 countries in the GRDI ranking, there are substantial differences in market saturation and country risk,
which require retailers to tailor their approaches accordingly and assemble a portfolio of markets to bal-
ance short-term risk with long-term growth aspirations.111

In jumping on the bandwagon, firms of all sizes, in particular small businesses, must realize that in-
vesting in developing economies usually entails considerably higher levels of risk than they are familiar
with—in particular the risks of political turmoil, corruption, and contract enforcement. However, avoiding
emerging markets will, over time, make firms less competitive than those who invest there in some form.
The question is then how to minimize the risks without losing out to the competition and losing growth
opportunities. After going through the steps of the strategic decision-making process as outlined in this
chapter, including those operational factors in the institutional context such as infrastructure, availability of
suppliers, labor markets, and capital markets (such as the effectiveness of banking and financial institutions),
CEOs must then decide whether to enter that market and, if so, decide what needs to be changed. As Harvard
Business Review authors Khanna, Palepu, and Sinha recommend, “[D]ecide whether to work around the
country’s institutional weaknesses, create new market infrastructures, or stay away because adapting your
business model would be impractical and uneconomical.”112 However, as Washburn and Hunsaker note:

Too many companies in mature markets assume that the only reason to enter emerging coun-
tries is to pursue new customers. They fail to perceive the potential for innovation in those
countries or to notice that a few visionary multinationals are successfully tapping that poten-
tial for much needed products and services.113

HaRvaRd business RevieW

In their research, Washburn and Hunsaker have found that forward-thinking global managers (they call
them bridgers) have identified and developed innovations in emerging markets (often with the insight
of the local managers) and been able to integrate those ideas and improvements into their companies’
product lines.114

In addition, when considering opportunities for firms within emerging markets, we can see that,
for example, firms such as Tata, HCL Technologies, and Infosys of India; Alibaba, Hauer, Lenovo and
Tencent Holdings of China; and Samsung Electronics of Korea have become prominent players in a
number of technology-intensive industries that have traditionally been the domain of firms from the
United States, Europe, and Japan.115

Economic Forum report cautions that emerging markets are not a single homogenous group: “They
develop differently, have different infrastructural, socio-economic and regulatory challenges, face
different environmental and geographical constraints, and, to a certain extent, afford different
opportunities for business.” The report further argues that the lack of adequate development in
the areas of trade facilitation and trade logistics can curtail the growth for these markets and the
world.108 The following “Management in Action” and “Under the Lens” features discuss these
challenges and how managers can address them.

218 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

UNDER THE LENS
Revolut’s Russian Founder Stirs Up Lithuania’s Fintech Debate116

British digital bank Revolut has been caught in the middle of a deepening political debate in
Lithuania over the country’s recent push to challenge the UK as Europe’s financial technology
hub.

Revolut secured a banking licence in Lithuania last year, a move that was celebrated as a sign of
Vilnius’s success in becoming a leading centre for innovative companies. The four-year-old company is
one of Europe’s fastest growing fintechs, and now processes more than $4bn in volumes for about 3m
customers each month. . . .

Mr Jakeliunas, a member of the ruling Farmers and Greens Union, said he was worried about
Revolut’s large size and rapid growth, its encouragement of cryptocurrency trading and comments from
its chief executive about local politics.

Companies are normally screened by a national security commission when applying for licences.
But Revolut was investigated a second time after concerns were raised about the source of some of its
shareholders’ money. Mr Jakeliunas said he now planned to hold a parliamentary vote for a third probe.

Revolut’s founder Nikolay Storonsky hit back against criticism in Lithuania last month, saying in
an open letter that while the country was “making a name for itself” as a fintech hub, “scaremongering
campaigns such as this will make foreign investors run in the opposite direction, potentially risking
thousands of jobs”.

The tension has been exacerbated by Revolut’s Russian links. Mr Storonsky, who set up Revolut
after working for Lehman Brothers, was born in Moscow and the company employs more than 80
engineers and product developers in Russia. Mr Storonsky’s father also works for a division of Russia’s
state-owned gas company Gazprom.

In last month’s letter, Revolut denied it had any links to the Kremlin or processed EU customers’
data in Russia. Mr Storonsky wrote that his personal background was “irrelevant”, and said the company
came to Lithuania because it had “an incredibly fintech-friendly environment”. . . .

The digital bank is among dozens of western companies that have flocked to Lithuania, which is
now Europe’s second-largest fintech centre measured by numbers of regulated companies. More than 80
fintechs are licensed in Lithuania, from start-ups to giants such as Google, which recently received an
e-money licence to cover its EU payments operations after Brexit. . . .

Vytautas Valvonis, director of the BoL’s supervision service, acknowledged that “we feel the
increasing demand”, but said “we will maintain the bar high: the doors. . . will be open only for innova-
tive, reliable and viable businesses”. He pointed to recent steps such as new divisions for supervising
payments groups and combating money laundering.

Mantas Katinas, general manager of Invest Lithuania, an agency for encouraging foreign invest-
ment, said “we welcome all serious investors in the financial sphere”, and “place trust in the work done
by all our government agencies to ensure that all required checks and balances remain in place”.

Fintech executives have previously questioned if Revolut’s systems are vulnerable to criminal
abuse. The company discovered a spate of suspected money laundering on its network last year, and lost
two heads of compliance in under 12 months. It has attempted to burnish its credentials since, launching
new anti-fraud systems and partnering with a specialist regulatory tech company.

A member of the BoL’s board admitted last week that it too had attracted interest from the “shadow
economy”. But Mr Valvonis said: “We are fast and effective at granting licences, but rest assured, in case
of infringement we might be even faster at taking reactive actions.”

Source: © The Financial Times Limited 2019.

Step 6. Decide on Strategy
The strategic choice of one or more of the entry strategies will depend on (1) a careful evaluation
of the advantages (and disadvantages) of each in relation to the firm’s capabilities and resources,
(2) the critical environmental factors, and (3) the contribution that each choice would make to the
overall mission and objectives of the company. Exhibit 6-10 summarized the advantages and the
critical success factors for each entry strategy discussed. However, when it comes down to a choice
of entry strategy or strategies for a particular company, more specific factors relating to that firm’s
situation must be taken into account. These include factors relating to the firm itself, the industry
in which it operates, location factors, and venture-specific factors, as summarized in Exhibit 6-11.

CHAPTER 6 • FORMULATING STRATEGY 219

After consideration of those factors for the firm as well as considering what is available and
legal in the desired location, some entry strategies will no doubt fall out of the feasibility zone.
With the options remaining, then, strategic planners need to decide which factors are more im-
portant to the firm than others. One method is to develop a weighted assessment to compare the
overall impact of factors such as those in Exhibit 6-11 relative to the industry, the location, and the
specific venture—on each entry strategy. Specific evaluation ratings, of course, would depend on
the country conditions at a given point in time, the nature of the industry, and the local company.

Based on a study of more than 10,000 foreign entry activities into China, Pan and Tse con-
cluded that managers tend to follow a hierarchy-of-decision sequence in choosing an entry mode.
They found that the location choice—specifically the level of country risk—was the primary in-
fluence factor at the level of deciding between equity and non-equity modes. Host-country gov-
ernment incentives also encouraged the choice of equity mode. Managers first decide between
non–equity based for high-risk locations and equity based where it is perceived there is lower risk.
Then, non-equity modes are divided into contractual agreements such as franchising, licensing,
outsourcing, e-business, and exporting; equity modes are split into wholly owned operations, ac-
quisitions, offshoring, and equity joint ventures (EJVs) with varying levels of equity investment.118

Gupta and Govindarajan also propose a hierarchy-of-decision factors sequence but consider
two initial choice levels. The first is the extent to which the firm will export or produce locally;
the second is the extent of ownership control over activities that will be performed locally in the
target market.119 There is an array of choice combinations within those two dimensions. Gupta
and Govindarajan point out that, among the many factors to take into account, alliance-based
entry modes are more suitable under the following conditions.

• Physical, linguistic, and cultural distance between the home and host countries is high.

• The subsidiary would have low operational integration with the rest of the multinational
operations.

• The risk of asymmetric learning by the partner is low.

Factor Category Examples

Internal factors Global experience of firm and managers
Distinctive competencies, patents, technology
Corporate culture and structure
Global objectives
Long-term strategy
Financial assets

External factors Industry globalization
Industry growth rate
Barriers to entry
Level of global competition
Opportunities and incentives
Extent of scale and location economies
Country risk—political, economic, legal
Cultural distance
Knowledge of local market
Potential of local market
Competition in local market

Venture-specific factors Value of firm—assets risked in foreign location
Ability to protect proprietary technology
Costs of making or enforcing contracts with local partners
Size of planned foreign venture
Intent to conduct research and development with local partners

ExHIBIT 6-11 Factors Affecting Choice of International Entry Mode117

Source: Based on A. V. Phatak, International Management Concepts and Cases, 1997, Cincinnati, OH,
Southwestern Publishing Company.

220 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

• The company is short of capital.

• Government regulations require local equity participation.120

Timing Entry and Scheduling Expansions
International strategic formulation requires a long-term perspective. Entry strategies, therefore,
need to be conceived as part of a well-designed, overall plan. In the past, many companies have
decided on a particular means of entry that seemed appropriate at the time, only to find later that
it was shortsighted. For instance, if a company initially chooses to license a host-country com-
pany to produce a product, then later decides that the market is large enough to warrant its own
production facility, this new strategy will no longer be feasible because the local host-country
company already owns the rights.

Foreign Direct Investment Decisions under High Uncertainty
Political and economic risk in a particular country introduces a high degree of uncertainty and, in turn,
raises concerns about the decision to enter by managers of multinational enterprises. In these circum-
stances, some managers may be concerned about exiting (i.e., reversing the investment) if local condi-
tions do not improve or worsen. The concerns are especially noteworthy when the investment by the
multinational enterprise is difficult and costly to reverse (e.g., building a refinery, offshore oil platform,
or fabrication plant). When MNE managers face these investment conditions in a particular country, it
may be advantageous to delay an investment decision or make the investment more reversible.121

There are two criteria that influence the delayability and reversibility of an investment in a
country with high uncertainty: the nature of a firm’s ownership advantages and importance of
early mover advantage. Ownership advantages refer to a firm’s ability to deploy its resources and
capabilities in order to achieve superior financial performance. Ownership advantages that are
deemed monopolistic can be achieved by few if any other firms. Alternatively, non-monopolistic
advantages are ones that are replicable by other firms. The importance of early mover advantage
describes the incentives to be among the first firms to enter a particular market. An example of
high importance is securing the best local suppliers before other entrants. An example of low
importance is strategic changes that promote less risky activities.

Figure 6-1 offers potential entry decisions for firms based on the nature of their ownership
advantages and the importance of early mover advantage into that particular country. When a

Assume Highly Irreversible Investment

Rivoli & Salorio’s Framework for Foreign Direct
Investment under Uncertainty

Importance of Country Early-Mover Advantage

Non-
Monopolistic

Monopolistic

Nature
of
Ownership
Advantages

Easy to Delay:
Wait for Information
to Arrive

Get Toes Wet or
Investigate Alternative
Mode

Wait for
Competitors’ Moves
and Follow If They
Invest

Cannot Delay:
Invest Now!

Low High

FIGURE 6-1

Source: Rivoli and Salorio (1996).

CHAPTER 6 • FORMULATING STRATEGY 221

firm has monopolistic advantages and low importance of early mover advantage, there is value in
waiting for more information, so the firm postpones its entry. If a firm has monopolistic advan-
tages and assigns high importance to early mover advantage, then there is less value in delaying
entry into the high-uncertainty country. However, the firm can still reduce its risk by increasing
reversibility, which is best achieved with a sequential investment—that is, a smaller investment
and, if successful, a larger subsequent investment. If a firm possesses non-monopolistic advan-
tages and it has low importance of early mover advantage, then there is some value to delaying
the investment; however, if other firms enter, then it is appropriate to enter the market with the
other firms. Lastly, if a firm possesses non-monopolistic advantages and high importance of
early mover advantage, then there is no value to waiting or to reducing reversibility.

The Influence of Culture on Strategic Choices
It is clear that cultural distance (CD), or at least the perception of it, affects strategic choice.
Potential partners and their host counterparts tend to feel more confident about their international
allies when they seem culturally attractive, in particular when new to international business. The
more similar the culture, the more likely managers are to select that region for investment—for
example, between the United States and England. However, often that assumption of similarity
leads to problems because preparation and allowance is not made for existing subtle differences.
Oded Shenkar gives the examples that the friction between dissimilar cultures is more likely
in a merger or acquisition than in an IJV—because there is more interaction among parties in
the former—whereas an IJV is set up as a separate entity with less interaction from the par-
ent firms.122 Managers armed with such insight might then choose an IJV over other strategic
options that necessitate more cross-cultural interaction.

In addition, strategic choices at various levels often are influenced by specific cultural fac-
tors, such as a long-term versus a short-term perspective. Hofstede found that most people in
such countries as China and Japan generally had a longer-term horizon than those in Canada
and the United States.123 Whereas Americans, then, might make strategic choices with a heavy
emphasis on short-term profits, the Japanese are known to be more patient in sacrificing short-
term results to build for the future with investment, research and development, and market share.

Risk orientation was also found to explain the choice between equity and nonequity
modes.124 Risk orientation relates to Hofstede’s uncertainty avoidance dimension.125 Firms
from countries where, generally speaking, people tend to avoid uncertainty (for example, Latin
American and African countries) tend to prefer nonequity entry modes to minimize exposure to
risk. Managers from firms from low–uncertainty avoidance countries are more willing to take
risks and are, therefore, more likely to adopt equity entry modes.126

The choice of the equity versus nonequity mode has been found to be related to the level of
power distance. According to Hofstede, a high power-distance country (such as Arab countries
and Japan) is one where people observe interpersonal inequality and hierarchy.127 Pan and Tse
found that firms from countries tending toward high power distance are more likely to use equity
modes of entry abroad.128

These are but a few of the examples of the relationships between culture and the choices that
are made in the strategic planning and implementation phase. They serve to remind us that it is
people who make those decisions and that the ways people think, feel, and act are based on their
ingrained societal culture. People bring that context to work, and it influences their propensity
toward or against certain types of decisions.

CONCLUSION
The process of strategic formulation for global competitiveness is a daunting task in the volatile
global arena and is further complicated by the difficulties involved in acquiring timely and cred-
ible information. However, early insight into global developments provides a critical advantage
in positioning a firm for future success.

When an entry strategy is selected, the international manager focuses on translating strategic
plans into actual operations. Often this involves strategic alliances; always it involves functional-
level activities for strategic implementation. These subjects are covered in Chapter 7.

222 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

■ Companies expand abroad for many reasons, both pro-
active and reactive. Companies that are proactive from
their outset in establishing a presence in many countries
are referred to as born globals. The Internet is facilitat-
ing companies of all sizes to expand around the world
within a short time frame—thus leveling the field for
small businesses relative to companies with greater
resources.

■ International expansion and the resulting realization
of a firm’s strategy are the products of both rational
planning and responding to emergent opportuni-
ties. For example, those opportunities may develop
because of economic, competitive, demographic,
or political changes in other countries. Firms are
increasingly taking advantage of opportunities for ex-
pansion into emerging markets such as the BRICs.

■ The steps in the strategic planning process for devel-
oping an international strategy comprise: Defining the
mission and objectives of the firm, scanning the envi-
ronment for threats and opportunities, assessing the
internal strengths and weaknesses of the firm, con-
sidering alternative international entry strategies, and
deciding on strategy. The strategic management process
is completed by putting into place the operational plans
necessary to implement the strategy and then setting up
control and evaluation procedures.

■ Competitive analysis is an assessment of how a firm’s
strengths and weaknesses vis-à-vis those of its com-
petitors affect the opportunities and threats in the in-
ternational environment. Such assessment allows the
firm to determine where the company has distinctive
competencies that will give it strategic advantage or
where problem areas exist.

■ Corporate-level strategic approaches to international
competitiveness include globalization and regional-
ization. Many MNCs have developed to the point of
using an integrative global strategy. Entry and own-
ership strategies are exporting, licensing, franchising,
contract manufacturing, offshoring and reshoring, out-
sourcing services, turnkey operations, management
contracts, joint ventures, and fully owned subsidiaries
as well as the local level of e-business. Critical envi-
ronmental and operational factors for implementation
must be taken into account.

■ Companies of all sizes are increasingly looking to the
Internet as a means of expanding their global opera-
tions, but localizing Internet operations is complex,
involving various logistical and cultural challenges.

■ The digital economy has provided growth opportuni-
ties and created new threats. Some emerging market
firms have had to develop the requisite capabilities in
order to compete in the global marketplace.

Summary of Key Points

Discussion Questions

6-1. Discuss why companies go international, giving specific reac-
tive and proactive reasons.

6-2. What effects on company strategy have you observed because
of the global economic downturn?

6-3. Give examples of the impact of the Internet on small
businesses.

6-4. Discuss the ways in which managers arrive at new strategic
directions—formal and informal. Which is the best?

6-5. Explain the process of environmental assessment. What are
the major international variables to consider in the scanning
process? Discuss the levels of environmental monitoring
that should be conducted. How well do you think managers
conduct environmental assessment?

6-6. Discuss the impact of the rise of emerging-market countries
on the strategic planning of firms around the world.

6-7. How can managers assess the potential relative competitive
position of their firm to decide on new strategic directions?

6-8. Discuss different international strategies: global, multidomes-
tic, and transnational.

6-9. Compare the merits of the entry strategies discussed in this
chapter. What is their role in an integrative global strategy?

6-10. Discuss the considerations in strategic choice, including the
typical stages of the company and the need for a long-term
global perspective.

Application Exercises

6-11. Choose a company in the social media industry or a chain
in the fast-food industry. In small groups, conduct a multi-
level environmental analysis, describing the major variables
involved, the relative impact of specific threats and opportuni-
ties, and the critical environmental factors to be considered.

The group findings can then be presented to the class, allow-
ing a specific time period for each group so that comparison
and debate of different group perspectives can follow. Be pre-
pared to state what regions or specific countries you are inter-
ested in and give your rationale.

CHAPTER 6 • FORMULATING STRATEGY 223

CASE STUDY

6-12. In small groups, discuss among yourselves and then debate
with the other groups the relative merits of the alternative
entry strategies for the company and countries you chose in
Exercise 6-11. You should be able to make a specific choice
and defend that decision.

6-13. For this exercise, research (individually or in small groups) a
company with international operations and find out the kinds

of entry strategies the firm has used. Present the informa-
tion you find, in writing or verbally, to the class, describ-
ing the nature of the company’s international operations, its
motivations, its entry strategies, the kinds of implementation
problems the firm has run into, and how those problems have
been dealt with.

Experiential Exercise

6-14. In groups of four, develop a strategic analysis for a type of
company that is considering entry into an emerging market

country. Which entry strategies seem most appropriate?
Share your results with the class.

How UK Businesses Are Planning—or Not—for a No-Deal Brexit129

Preparation is patchy and smaller companies face some of the biggest challenges.
Lynda and Phil Platts were hoping to move to Italy once they retired: they did not imagine

they might be moving their UK business there instead because of Brexit. But this is one of sev-
eral radical options they are having to consider for ACP Solutions, which produces insect repel-
lent and bedbug resistant bedding, if Britain crashes out of the EU without a deal. “One option
is to effectively pick [our business] up and move it into an EU territory,” said Phil Platts, adding
another would be to sell part of ACP to an EU customer, reflecting how the business exports
four-fifths of its insect repellent to the bloc.

Phil Platts at ACP Solutions’ factory in Nailsworth, Gloucestershire, is one of a minority of
UK companies that have made preparations for how to respond to a no-deal Brexit.

The CBI estimated that one in five British businesses had implemented plans for this out-
come, whether by relocating operations overseas, stockpiling goods, cutting jobs, or adjusting
supply chains outside the UK. Even though the risk of the UK crashing out of the EU has loomed
large ever since Britons voted to leave the bloc in 2016—because prime minister Theresa May
insisted for a long time that “no deal is better than a bad deal”—companies’ preparations for this
scenario are patchy at best. Many big groups have developed contingency plans to try to cope
with cross-border trade potentially being reduced to chaos, but most small companies have not.
And there are big differences between sectors: while financial services companies have made
extensive preparations, for example, manufacturing businesses have not. “For every company
that has done some sort of risk assessment on Brexit preparedness in general, there are two that
haven’t,” said Adam Marshall, director-general of the British Chambers of Commerce. “Of those
that have, very few will have done it on the basis of a no-deal.” One sector that started its no-
deal contingency plans early, straight after the 2016 Brexit referendum, was pharmaceuticals.
“We have an integrated European supply chain, so we’ve known from the beginning that any
challenges at the border could affect us,” said Mike Thompson, chief executive of the ABPI, the
pharma industry’s trade body. He added the sector was now engaged in a range of preparations
for a no-deal Brexit—not just stockpiling medicines, but increasing imports of key supplies by
aircraft and pushing the government to open up ports on the east coast of England to offset the
risk of problems at Dover. Miles Celic, head of the TheCityUK, the business lobby group for
financial services, said leaving the EU without an agreement would be “the worst of all out-
comes”. “The industry is taking every action to prepare for a no-deal Brexit,” he added, while
stressing the sector was reliant on steps being taken by lawmakers and regulators across the EU

224 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

in certain areas. This includes measures to ensure the validity of derivative and insurance con-
tracts should the UK leave the bloc without an agreement.

‘JUST IN TIME’ MANUFACTURING FEARS

But the situation is far more acute in relation to manufacturing. A survey commissioned by the
EEF, the sector’s trade body, found four out of five companies were not ready for a no-deal
Brexit. Two in five said they had no intention of starting preparations. Some of the large car-
makers have made contingency plans, according to the Society of Motor Manufacturers and
Traders, a trade body. However, overseas carmakers with factories in the UK have warned of the
dire consequences for them of a no-deal Brexit, reflecting how they have “just in time” manu-
facturing processes reliant on deliveries of components from continental Europe. Toyota said in
this scenario that its plants in Deeside and Derbyshire would be on “stop-start” production for
weeks or even months. But for many small companies, spending money on preparations for a
no-deal Brexit—something that may not happen—cannot be justified. The Federation of Small
Businesses estimated just one in seven small companies was making contingency plans for if the
UK crashes out of the EU. And calls by the CBI for the government to provide more support for
small businesses—by setting up a “one-stop shop” of Brexit advice, for example—have so far
been ignored. Allie Renison, head of trade policy at the Institute of Directors, said attempts to
prepare for a no-deal Brexit have been hindered by a lack of transparency from the government
about its contingency plans. Whitehall departments have shared information with some of the
companies most affected, including haulage and parcel delivery businesses, but those privy to it
have been made to sign non-disclosure agreements so that it has not been more widely diffused.
“For a lot of other businesses and trade associations we are left fumbling in the dark,” said
Ms Renison. “There is no clarity about what mitigating actions the government would take if
there is a no deal.”

Source: © The Financial Times Limited 2018.

Case Questions

6-15. At the time of this case writing Brexit was unresolved. What has happened since? How has
Brexit affected small companies like ACP Solutions?

6-16. What were the main concerns for ACP as Brexit approached? What preparations should the com-
pany have made?

Endnotes

1. T. Hancock, “Why Ford Is Stalling in China while Toyota
Succeeds,” Financial Times, March 4, 2019, www.ft.com
/content/6fd5a4c4-36c1-11e9-bd3a-8b2a211d90d5 (accessed
March 12, 2019).

2. www.bcg.com/publications/collections/2018-global-challengers
-digital-leapfrogs.aspx (accessed March 13, 2019); M. Meyer,
N. Lang, N. Baise, and K. Maggard, et al., 2018 BCG Global
Challengers: Digital Leapfrogs (Boston Consulting Group, Inc.).

3. Ibid.
4. Ibid.
5. M. Hitt, R. D. Ireland, and R. Hoskisson, Strategic Management:

Competitiveness and Globalization. p. 6.
6. D. Hambrick and J. Fredrickson, Are You Sure You Have

a Strategy? Academy of Management Executive, 15 (2001):
48–59.

7. A. MacDonald, A. Lucchetti, and E. Taylor, “Long City-Centric,
Financial Exchanges Are Going Global,” Wall Street Journal,
May 27, 2006.

8. K. Shubber, “Time Warner’s Bewkes Defends AT&T Deal in
Court,” Financial Times, April 18, 2018, www.ft.com/content
/ae263ea8-4330-11e8-803a-295c97e6fd0b (accessed March 13,
2019).

9. Nic Fildes, “Company Bidding to Revive Nokia Mobile Phone
Brand Raises $100m,” Financial Times, May 21, 2018, www
.ft.com/content/5190ddc2-5d09-11e8-ad91-e01af256df68
(accessed March 13, 2019).

10. R. Milne, “Ericsson Shares Slide on Restructuring Costs Concern.”
Financial Times, January 10, 2019, www.ft.com
/content/87befda6-14c0-11e9-a581-4ff78404524e (accessed
March 13, 2019).

http://www.ft.com/content/87befda6-14c0-11e9-a581-4ff78404524e

http://www.ft.com/content/5190ddc2-5d09-11e8-ad91-e01af256df68

http://www.ft.com/content/ae263ea8-4330-11e8-803a-295c97e6fd0b

http://www.bcg.com/publications/collections/2018-global-challengers-digital-leapfrogs.aspx

http://www.ft.com/content/6fd5a4c4-36c1-11e9-bd3a-8b2a211d90d5

CHAPTER 6 • FORMULATING STRATEGY 225

11. J. Surowiecki, “Where Nokia Went Wrong,” The New Yorker,
September 3, 2013, www.newyorker.com/business/currency
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12. Kathrin Hille, “ZTE: Telecoms Manufacturer Makes Move to
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13. N. Fildes, “5G: Can Europe Match the US and China on Mobile
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14. M. Pooler, P. Campbell, and S. Palma, “Why Dyson is
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15. E. Smith, “Expansion for OSI Group Continues Internationally,”
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16. Engardio.
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A Conceptual Framework. Business Horizons (March/April
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18. M. Garrahan and A. Nicolaou, “Spotify Expansion Hits Snag
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19. E. Dunkley, “Europe’s Fintechs Head East to Challenge Asia’s
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20. Ibid.
21. Chironga, M. G. Desvaux, and A. Leke. Rethinking Business

Opportunities in Africa (McKinsey & Company, 2018).
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N. Rustago and A. Lompo (Eds.), Entrepreneurship Growth
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23. Chironga, M., G. Desvaux, and A. Leke. Rethinking Business
Opportunities in Africa (McKinsey & Company, 2018).

24. 2018 Global Competitiveness Index, www.worldeconomicfo-
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25. A. Klasa, “Casablanca Finance City Offers Hub to Africa-Bound
Local and Foreign Business,” Financial Times, January 23, 2019,
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26. http://www.fdiintelligence.com/Special-Reports2019, accessed
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27. C. Fingar, “Kuwaiti Economy Needs Foreign Investment to
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28. Vivienne Walt, “Touch Times for a Favorite Tax Haven,” Fortune,
February 1, 2015, p. 14.

29. S. Zaheer, “Overcoming Liability of Foreignness,” Academy of
Management Journal, 38 (1995), pp. 341–363.

30. L. Eden and S. R. Miller, “Distance Matters: Liability of
Foreignness, Institutional Distance and Ownership Strategy,”
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31. Henry Mintzberg, Strategy Making in Three Modes. California
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32. http://panmore.com/sony-corporation-vision-statement-mission
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33. https://w5.siemens.com/belux/web/en/about/vision/pages
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34. Ibid.
35. This section contributed by Charles M. Byles, Professor, Virginia

Commonwealth University, March 11, 2009.
36. Mike W. Peng, Global Strategy, 2nd ed. (South-Western Cengage

Learning, 2009).
37. Douglass C. North, Institutions, Institutional Change, and

Economics Performance (New York: Cambridge University
Press, 1990); W. Richard Scott, Institutions and Organizations
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38. Peng, 2009; Mike W. Peng, Denis Y. L. Yang, and Yi Jiang,
“An Institution-Based View of International Business Strategy:
A Focus on Emerging Economies,” Journal of International
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39. Economist, 2008.
40. PEW, A look at drug spending in the U.S., February 27, 2018,

www.pewtrusts.org/en/research-and-analysis/fact-sheets
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2019).

41. Interview of Rackspace CEO, Joe Eazor, by Stewart Miller,
February 13, 2019.

42. Ibid.
43. Ibid.
44. www.mitsubishicorp.com/jp/en/about/global/, March 21, 2019.
45. Diane J. Garsombke, “International Competitor Analysis,”

Planning Review 17, No. 3 (1989), pp. 42–47.
46. C. K. Prahalad and Gary Hamel, The Core Competence of the

Corporation. Harvard Business Review (May–June 1990),
pp. 79–91.

47. Ibid.
48. www.honda.com/mobility (accessed March 15, 2019).
49. www.honda.com/about (accessed March 15, 2019).
50. M. E. Porter, “Changing Patterns of International Competition,”

in The Competitive Challenge, D. J. Teece, ed. (Boston:
Ballinger, 1987), pp. 29–30.

51. P. Ghemawat, Distance Still Matters. Harvard Business Review
79, No. 8 (2001), pp. 137–147.

52. T. Chen, “Network Resources for Internationalization,” Journal
of Management Studies 40, pp. 1107–1130.

53. D. Hambrick and J. Fredrickson. Are You Sure You Have a
Strategy? Academy of Management Executive, 15 (2001): 48–59.

54. Ibid.
55. Interview of Rackspace CEO, Joe Eazor, by Stewart Miller,

February 13, 2019.
56. Porter, 1987.
57. P. W. Beamish et al., International Management (Homewood,

IL: Irwin, 1991).
58. A. Palazzo, “B2B Markets—Industry Basics,” www.FT.com,

January 28, 2001.
59. H. Agnew and T. Hancock, “How Luxury Learned to Love

Chinese Ecommerce,” Financial Times, October 26, 2018,
www.ft.com/content/192bff30-d90e-11e8-ab8e-6be0dcf18713
(accessed March 15, 2019).

60. A. J. Morrison, D. A. Ricks, and K. Roth, Globalization ver-
sus Regionalization: Which Way for the Multinational?
Organizational Dynamics 19 (Winter 1991).

61. “Wal-Mart Selling Stores and Leaving South Korea,” www
. nytimes.com, March 23, 2006.

62. Beamish et al.

http://www.nytimes.com

http://www.ft.com

http://www.FT.com

http://www.honda.com/about

http://www.honda.com/mobility

http://www.mitsubishicorp.com/jp/en/about/global/

http://www.pewtrusts.org/en/research-and-analysis/fact-sheets/2018/02/a-look-at-drug-spending-in-the-us

https://w5.siemens.com/belux/web/en/about/vision/pages/vision-values-strategy.aspx

Sony’s Mission Statement, Vision Statement, Purpose (An Analysis)

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https://gazetteday.com/2017/09/expansion-for-osi-group-continues-internationally/

http://www.ft.com/content/02a636d8-1f2f-11e9-b2f7-97e4dbd3580d?shareType=nongift

http://www.ft.com/content/650d3bf8-1e32-11e9-b2f7-97e4dbd3580d

http://www.FT.com/Reports

http://www.newyorker.com/business/currency/where-nokia-went-wrong

226 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

63. Corning Incorporated, “Youngy Group and Corning Form Joint
Venture,” September 29, 2017, www.corning.com/worldwide/
en/about-us/news-events/news- releases/2017/09/youngy-group
-and-corning-form-joint- venture.html (accessed March 14, 2019).

64. Pankaj Ghemawat, Redefining Global Strategy (Boston: Harvard
Business School Publishing, 2007).

65. Thomas Friedman, The World Is Flat (New York: Farrar, Straus,
and Giroux, 2005).

66. Yoram Wind and Susan Douglas, International Portfolio
Analysis and Strategy: The Challenge of the 1980s. Journal of
International Business Studies (Fall 1991), pp. 69–82.

67. Daniel J. Isenberg, The Global Entrepreneur. Harvard Business
Review, December 2008.

68. Ibid.
69. Matt D’Angelo, “How to Successfully Expand Your E-commerce

Business Globally,” Business News Daily, May 30, 2018, www
.businessnewsdaily.com/5948-how-to-make-your-e-commerce
-business-an-overseas-success.html (accessed March 14, 2019).

70. www.internetworldstats.com/
71. “China’s E-commerce Market: The Logistics Challenges,”

research report, www.atkearney.com (accessed August 12, 2011).
72. Ibid.
73. Bob Tedeschi, “E-Commerce Report: Sensing Economic

Opportunities, Many Developing Nations Are Laying the
Groundwork for Online Commerce,” www.nytimes, November
20, 2008.

74. Sorid, 2008.
75. P. Greenberg, “It’s Not a Small eCommerce World, After All,”

www.ecommercetimes.com, February 23, 2001.
76. Ibid.
77. M. Porter, The Competitive Advantage of Nations (New York:

Free Press, 1990).
78. Bruce Einhorn, “How China’s Alibaba Is Surviving and

Thriving,” BusinessWeek, April 9, 2009.
79. Alibaba Group, “Alibaba Kicks off Japan Merchandising

Center to Help Local Brands Tap E-commerce Market in China
and Asia,” May 18, 2016, www.alibabagroup.com/en/news
/article?news=p160518 (accessed March 15, 2019).

80. M. Sawhney and S. Mandal, “Go Global,” Business 2.0, May
2000.

81. Ibid.
82. B. Bright, “E-Commerce: How Do You Say ‘Web?’ Planning to

Take Your Online Business International? Beware: E-Commerce
Can Get Lost in Translation,” Wall Street Journal, May 23,
2005.

83. Ibid.
84. Ibid.
85. www.jollibee.com.ph/about-us/ (accessed March 15, 2019).
86. U.S. Department of Commerce, “2011 Country Commercial

Guide for U.S. Companies: Doing Business in China,” www
.export.gov (accessed September 20, 2011).

87. J. Mangier and P. Mercier, “What Happens When Offshoring
Isn’t So Cheap?” www.bcgperspectives.com, January 12, 2011.

88. Bill Vlasic, Hiroko Tabuchi, and Charles Duhigg, “In Pursuit of
Nissan, a Jobs Lesson for the U.S. Tech Industry,” www.nytimes
.com, August 5, 2012.

89. US International Trade Commission; A. Abraham, B. Levering,
J. Gott, and P. Van den Bossche, “Reshoring in Reverse Again,”
August 31, 2018, www.atkearney.com/operations-performance
-transformation/us-reshoring-index (accessed March 15, 2019).

90. Peter Marsh, “Play the Home Advantage,” Financial Times,
November 26, 2008.

91. Ibid.
92. Harold L. Sirkin, James W. Hemerling, and Arindam K.

Bhattacharya, Globality: Competing with Everyone from
Everywhere for Everything (New York: Hachette Publishing
Company, 2008).

93. A. Abraham, B. Levering, J. Gott, and P. Van den Bossche,
“Reshoring in Reverse Again,” August 31, 2018, www.atkearney
.com/operations-performance-transformation/us-reshoring-index
(accessed March 15, 2019).

94. J. Gott and A. Sethi, “Global Services Location Index: The
Widening Impact of Automation,” 2017, www.atkearney.com
/digital-transformation/gsli/full-report (accessed March 14,
2019).

95. Ibid.
96. Ibid.
97. Ibid.
98. Manjeet Kripalani, “Call Center? That’s So 2004,” BusinessWeek,

August 7, 2006, pp. 40–42.
99. Manjeet Kripalani, “Five Offshore Practices That Pay Off,”

BusinessWeek, January 30, 2006, p. 60.
100. S. Zahra and G. Elhagrasey, Strategic Management of IJVs.

European Management Journal 12, No. 1 (1994), pp. 83–93.
101. S. Mundy, “India’s Ecommerce Crackdown Upends Big Foreign

Players,” Financial Times, January 14, 2019, www.ft.com
/content/6dd8188a-14c2-11e9-a581-4ff78404524e (accessed
March 14, 2019).

102. A. Al Omran and S. Kerr, “Saudi Crown Prince Turns to Asia to
Rebuild His Image,” Financial Times, February 22, 2019, www
.ft.com/content/76ce302c-35d9-11e9-bd3a-8b2a211d90d5 (ac-
cessed March 14, 2019).

103. Yigang Pan and Xiaolia Li, Joint Venture Formation of Very
Large Multinational Firms. Journal of International Business
Studies 31, No. 1 (2000), pp. 179–181.

104. U.S. Department of Commerce: “Doing Business in India,”
www.export.gov (accessed September 21, 2011).

105. Zahra and Elhagrasey.
106. C. Rodrigues, “On the Fast Track,” www.tata.com, April 2006.
107. R. Milne, “World’s Biggest Shipping Line Maersk Looks for

Deals on Land,” Financial Times, December 26, 2018, www.
ft.com/content/286edbf2-0532-11e9-99df-6183d3002ee1 (ac-
cessed March 14, 2019).

108. World Economic Forum, http://www3.weforum.org/docs
/WEF_GAC_LogisticsSupplyChain_Report_2010-11.

109. M. Warschun, G. Portell, and Osamu Goto, “The Age of Focus:
The 2017 Global Retail Development Index”; A. T. Kearney,
www.atkearney.com/global-retail-development-index/article?
/a/the-age-of-focus-2017-full-study (accessed March 14, 2019).

110. www.atkearney.com/global-retail-development-index/article?
/a/the-age-of-focus-2017-full-study

111. Ibid.
112. Tarun Khanna, K. Palepu, and J. Sinha, Strategies That Fit

Emerging Markets. Harvard Business Review, June 2005.
113. N. T. Washburn and B. T. Hunsaker, Finding Great Ideas in

Emerging Markets. Harvard Business Review, September 2011.
114. Ibid.
115. J. Li and R. K. Kozhikode, Organizational Learning of

Emerging Economy Firms. Organizational Dynamics (2011),
doi:10.1016/j.orgdyn.2011.04.009.

http://www.atkearney.com

http://www3.weforum.org/docs/WEF_GAC_LogisticsSupplyChain_Report_2010-11

http://www.ft.com

http://www.tata.com

http://www.export.gov

http://www.ft.com

http://www.atkearney.com

http://www.nytimes.com

http://www.bcgperspectives.com

http://www.export.gov

http://www.jollibee.com.ph/about-us/

http://www.alibabagroup.com/en/news/article?news=p160518

E-Commerce Times: E-Business Means Business

http://www.nytimes

http://www.atkearney.com

http://www.internetworldstats.com

http://www.businessnewsdaily.com/5948-how-to-make-your-e-commerce-business-an-overseas-success.html

http://www.corning.com/worldwide/en/about-us/news-events/news-releases/2017/09/youngy-group-and-corning-form-joint-venture.html

CHAPTER 6 • FORMULATING STRATEGY 227

116. N. Megaw, “Revolut’s Russian Founder Stirs up Lithuania’s
Fintech Debate,” Financial Times, February 19, 2019, www
.ft.com/content/b9ab06bc-32b0-11e9-bd3a-8b2a211d90d5 (accessed
March 15, 2019).

117. Based on A. V. Phatak, International Management—Concepts
and Cases (Cincinnati, OH: South-Western College Publishing,
1997), pp. 270–275.

118. Yigang Pan and David K. Tse, The Hierarchical Model of Market
Entry Modes. Journal of International Business Studies 31, No.
4 (2000), pp. 535–554.

119. Gupta and Govindarajan.
120. Ibid.
121. P. Rivoli and E. Salorio, “Foreign Direct Investment and under

Investment Uncertainty,” Journal of International Business
Studies, 27 (1996), pp. 335–357.

122. Ibid.
123. G. Hofstede, Cultures and Organizations: Software of the Mind

(London: McGraw-Hill, 1991).
124. Pan and Tse.
125. Hofstede.
126. Pan and Tse.
127. Hofstede.
128. Pan and Tse.
129. S. Gordon, “How UK Businesses Are Planning—or Not—for a

No-Deal Brexit,” Financial Times, December 17, 2018, www
.ft.com/content/1ef17fac-fd54-11e8-aebf-99e208d3e521 (accessed
March 5, 2019).

http://www.ft.com

228

Implementing Strategy
Strategic Alliances, Small Businesses,
Emerging Economy Firms 7

C H A P T E R

7-1. To become familiar with the types of strategic alliances for international business, the
challenges in implementing them, and guidelines for success in alliances

7-2. To understand what is involved in implementing strategies, including those for small
businesses and those involved in emerging economies

7-3. To consider how to manage the firm’s performance in international joint ventures, with
attention to knowledge management, government and cultural influence, and the role of
e-commerce

O B J E C T I V E S

A libaba, the Chinese ecommerce giant, will partner with Moscow’s sovereign wealth fund
and Kremlin-friendly oligarch Alisher Usmanov to set up a Russian branch of its retail site
AliExpress, the company said on Tuesday [September 11, 2018].

Russia’s second-largest mobile operator Megafon and internet company Mail.ru, which are both
controlled by Mr Usmanov, will take minority stakes in AliExpress Russia, along with the state-run
Russian Direct Investment Fund.

The deal, expected to close in the first quarter of 2019, is the first major joint venture between
Russian and Chinese companies and intensifies Alibaba’s global rivalry with Amazon. AliExpress
Russia will sell Chinese-made goods.

“Russia has never had a major local ecommerce player. We’ll be the number one player from day
one after the deal closes,” Boris Dobrodeev, chief executive of Mail.ru, told reporters.

Alibaba’s stake in the joint venture will be 48 per cent, with MegaFon taking 24 per cent, Mail.ru
15 per cent and RDIF 13 per cent. As part of the transaction MegaFon plans to swap its 10 per cent stake
in Mail.ru for its share in the joint venture, which would value the deal at roughly $2bn total, though the
companies did not provide a specific valuation.

The deal will allow AliExpress to leverage Mail.ru dominance of Russian social media
through its Facebook clone VK, which has 97m monthly active users, and MegaFon’s 80m mobile
subscribers.

“We’re going to do a number of experiments to find the best point of contact with the goods for
users,” Mr Dobrodeev said. “It might be video bloggers, might be groups, might be native advertising,
might be recommendations in the news feed, might be native apps on VK, and we’re going to person-
alise it for every user.”

More than half the 145m population of Russia uses the internet daily, making it one of the largest
markets Alibaba has yet to get a proper foothold in. Political and logistics challenges have seen Amazon
stay away.

Alibaba has been eyeing Russia for some time. It attempted to set up a similar venture with state-
run Sberbank, the country’s largest lender, before talks collapsed over squabbles who would run it.
Sberbank then set up a rival venture with search company Yandex, Mail.ru’s biggest rival.

Opening Profile: Alibaba to Set Up Online Retail
Service in Russia1

CHAPTER 7 • IMPLEMENTING STRATEGY 229

Under the deal, Alibaba will combine its existing AliExpress business in Russia—which is already
one of the most popular foreign destinations for its cross-border goods—and business-to-consumer
website Tmall to build a platform intended to surpass both.

The ambitious plans were disclosed shortly after Monday’s announcement that Alibaba founder
and chairman Jack Ma plans to retire next year.

Mr Ma attended a group discussion with Russian president Vladimir Putin at an economic confer-
ence in Vladivostok on Tuesday, but did not appear at the deal’s signing.

One challenge is how the joint venture will tackle the logistics of Russia’s vast distances and poor
infrastructure.

“How do you take social and combine it with commerce? [That’s] never been done before any-
where in the world,” said Michael Evans, president of Alibaba Group. “How do you get a Chinese
company and get them to integrate really well with a Russian company? That’s never been done
either.”

The deal comes with implicit Russian government backing and targets solving a major bugbear for
the Kremlin, which has spent years demanding western internet companies store user data in Russia to
little avail.

Kirill Dmitriev, head of the RDIF, said the joint venture would store user data in Russia and use
Russian technology, including local payment processing systems.

Internet freedom advocates—including VK founder Pavel Durov, developer of messenger
Telegram—have criticised Mr Usmanov over Mail.ru censoring posts on VK and providing data that
have been used to jail more than 600 users since buying it in 2014. Mail.ru says the moves are legally
required, but recently introduced new privacy settings after a campaign to delete VK accounts saw a dip
in users.

Source: © The Financial Times Limited 2019.

STRATEGIC ALLIANCES
As illustrated in the opening profile, sometimes it takes global strategic alliances to compete
effectively in particular host countries. Strategic alliances are partnerships between two or more
firms that decide they can pursue their mutual goals better by combining their resources—financial,
managerial, and technological—as well as their existing distinctive competitive advantages.
Alliances—often called cooperative agreements—are vehicles that propel the partners’ strategies
forward in a turbulent environment faster than would be possible for each company alone.2 The
explosion of international strategic alliances (ISAs) in the past has been caused by the need for
organizations to respond to the globalization of markets and the opportunities presented by tech-
nological advances. However, the rush to take advantage of those opportunities has resulted in an
estimated half of ISAs experiencing poor results or failing.3 (These problems will be discussed
later in this chapter.)

Alliances typically fall under one of two categories: equity strategic alliances (or joint
ventures) and non-equity strategic alliances. Firms establish them for various purposes such as
sharing technology, marketing, or production joint ventures. Cross-border alliances frequently
necessitate partnering with a local partner to counteract political risk factors and to take advan-
tage of local knowledge and contacts. Strategic alliances also offer firms an element of flexibility
while leveraging core competencies and building new ones.

To adapt to the challenging environment, it is of utmost importance to gain flexibility
through alliances.

Thomas Sedran, head of strategy for the 12-brand VW Group

Strategic alliances can be beneficial to rivals in a traditional manufacturing sector to neutralize
a global threat (declining auto sales) and create a global opportunity in the service sector. The
notion of shared driverless “robotaxis” is a new high potential market that, at present, is nonexis-
tent. Bain Consulting expects this market to become the norm in some large cities over the next
decade.4 For example, BMW and Daimler joined forces with respect to mobility services—ride-
hailing, car-sharing, and electric vehicle sharing. BMW and Daimler have sought to deal with

7-1. To become familiar with
the types of strategic
alliances for international
business, the challenges in
implementing them, and
guidelines for success in
alliances

230 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

urban mobility dilemma by creating a portfolio of mobility services with a fleet of self-driving
vehicles that “charge and park autonomously and interconnect with the other modes of transport.”5

We are creating a leading global game changer.6

Harald Krueger, BMW CEO

Joint Ventures
As discussed in Chapter 6, a joint venture (JV) is a new independent entity jointly created and
owned by two or more parent companies. The equity-based alliance may entail a majority JV (in
which a firm has more than 50 percent equity), a minority JV in which a firm has (less than 50
percent equity), or a 50-50 JV (when two firms have equal equity). An international joint venture
(IJV) is an equity-based alliance among companies in different countries. In that case, the firm
shares the profits, costs, and risks with a local partner (or a global partner) and benefits from
the local partner’s local contacts and markets. (Advantages and disadvantages of IJVs were dis-
cussed in Chapter 6). For example, in 2017, Central Group (a Thailand-based retailer) announced
a $500m joint venture with JD.com (Chinese ecommerce provider). In January 2019, the partners
announced the launch of a digital wallet platform to start cashless payments in Thailand. The JD.
com agreement shows the benefits of leveraging a partner’s capabilities. Second only to Alibaba
Group in Chinese e-retailing, JD.com seeks to expand its presence in Southeast Asia by provid-
ing the basic system technology while Central Group seeks to strengthen its digital operations.7

An example of a 50-50 equity IJV is that between France’s PSA Peugeot-Citroen Group
and Japan’s Toyota at Kolin in the Czech Republic. As noted by Fujio Cho, president of Toyota
Motors, the world’s richest carmaker:

Each company has brought its own style, culture and way of thinking to this partnership—but
our different approaches have benefited our joint venture enormously.8

Among the benefits noted by the two companies are that Toyota “gains an insight into the
mindset of one of Europe’s biggest indigenous carmakers and knowledge of its suppliers and their
capabilities.”9 And Peugeot-Citroen can gain experience from Toyota’s lean manufacturing system.
The companies acknowledge that the IJV has resulted in faster development and increased produc-
tion capacity and that costs are shared without either company renouncing its independence.10

Most global manufacturers have equity alliances with suppliers, sub-assemblers, and dis-
tributors, forming a network of internal family and financial links.

For example, in 2019 General Motors Chairman and CEO, Mary Barra, announced a $2.3
billion joint venture with the Korean battery maker LG Chem for battery-cells for electric ve-
hicles saying that:

When we bring together the strength and capability and competence that LG Chem has, and do
this in a joint fashion, it’s going to accelerate our ability to win in the EV space.11

Mary Barra, Chairman and CEO, General Motors, Forbes, December 5, 2019

In this highliy competitive field, other battery manufacturers are expanding capacity to meet
growing demand from carmakers. In an attempt to strengthen buyer—supplier ties and avoid
supply chain disruptions, Toyota and Panasonic announced in January 2019 that they would
establish a joint venture to produce batteries for electric cars. Toyota and Panasonic executives
underscore how the joint venture will help them execute their respective strategies.

Together with Panasonic, we want to hone our competitiveness in batteries, which represent
one of the core technologies of electrified vehicles.12

Shigeki Terashi, Executive Vice President, Toyota

Uniting with Toyota’s battery and production-engineering technologies provides us an excel-
lent opportunity for being able to evolve our automotive prismatic batteries, which have an
established track record of performance and safety, faster than ever. Through the electrification
of vehicles, we want to accelerate our contribution to the realization of a society of mobility that
is kind to the environment.13

Masahisa Shibata, Senior Managing Executive Officer, Panasonic

http://JD.com

CHAPTER 7 • IMPLEMENTING STRATEGY 231

Risk-sharing is often a motive behind equity alliances. Sometimes an international joint venture
can be an effective mode of entry when 100 percent ownership has been restricted in a particular
country. For example, Chubb Group, a Swiss-based insurance company, maintained a minority
equity stake in China’s Huatai Insurance Group since 2005. But in March 2019, Chubb increased
its stake from 20 to 26 percent with plans to obtain a majority ownership stake. With the Chinese
government relaxing its laws on foreign ownership, Chubb Group—and others—are poised to
take advantage of the ownership opportunity in order to execute their respective strategies.14

This increased ownership is an important milestone towards our goal of majority and beyond
ownership.

Evan Greenberg, Chubb Group CEO

Some joint ventures may serve a different purpose. For example, in 2019, GlaxoSmithKline
(GSK) and Pfizer finalized a joint venture that combines their respective consumer healthcare busi-
nesses. The new joint venture establishes the largest over-the-counter business with strong brands
and enables GSK to implement a part of its global strategy as the joint venture will be spun-off.
That is, GSK plans to demerge the joint venture from the company within a three-year period and
then list the spun-off Consumer Healthcare business on the UK equity market.

The completion of the joint venture with Pfizer marks the beginning of the next phase of our
transformation of GSK. This is an important moment for the Group, laying the foundation for
two great companies, one in Pharmaceuticals and Vaccines and one in Consumer Health.15

Emma Walmsley, Chief Executive Officer, GSK and Chair of the Joint Venture

Non-equity Strategic Alliances
Non-equity strategic alliances contracts are often with a firm’s suppliers, distributors, or manu-
facturers, or they may be for purposes of marketing and information sharing, or perhaps reducing
costs throughout a multinational company’s value chain and across the globe. UPS, for example,
is a global supply-chain manager for many companies around the world, such as Nike, that es-
sentially do not touch their own products but contract with UPS to arrange the entire delivery
process from factory to warehouse to customer to repair, even collecting the money.16

Another example involves Royal Dutch Shell (integrated oil company) and C3 (US-based
digital transformation provider).

Royal Dutch Shell and C3 IoT today announced that Shell has selected C3 IoT as its artificial
intelligence (AI) platform to enable and accelerate digital transformation on a global scale. By
deploying the C3 IoT Platform globally on Microsoft Azure, Shell expects to realize substantial
economic value by rapidly scaling and replicating AI and machine learning applications across
its upstream and downstream businesses.17

C3 press announcement, September 20, 2018

Global Strategic Alliances
Working partnerships between companies (often more than two) across national boundaries and
increasingly across industries are referred to as global strategic alliances. A glance at the global
airline industry, for example, tells us that global alliances have become a mainstay of competitive
strategy. Not one airline is competing alone; each major U.S. carrier has established strategic links
with non-U.S. companies. The Star Alliance, which was first established in 1997 by five airlines,
currently consists of 28 member airlines around the world. The Star Alliance has a Germany-based
organization that coordinates Star Alliance activities such as co-locations at airports, infrastructure,
communication initiatives, and other services in order to reduce airline costs and enhance customer
service with a seamless travel experience. As such, the Star Alliance members—such as Austrian
Airlines, EgyptAir, Asiana Airlines, Air Canada, Air China, SAS, United Airlines, and others—
derive consortium benefits while preserving their own organizational cultures and identities.18

Alliances are also sometimes formed between a company and a foreign government or among
companies and governments. In addition, changing regulations and policies by governments and in-
stitutions lead to new opportunities for alliances with national industries abroad. Alliances may com-
prise full global partnerships, which are often joint ventures in which two or more companies, while
retaining their national identities, develop a common, long-term strategy aimed at world leadership.

232 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

Some alliances between MNCs and government-controlled organizations may help facilitate
market access or government mandates. Others may reveal mutually beneficial strategic goals —
government-controlled organizations that seek to expand abroad amid added scrutiny from host-
country governments and MNCs seeking to penetrate high-growth markets with strong government
forces in the economy. For example, Chinese state-controlled companies have faced increasing
scrutiny over foreign investments during the past year, particularly in the United States, which re-
cently passed new laws aimed at screening foreign acquisitions for national security risks.

Partnering with a local organization may alleviate some of the national security concerns as
demonstrated in CICC’s (a state-backed Chinese investment bank) announcement to collaborate
with TPG (a U.S. private equity group) to establish a joint platform for investing overseas and in
China. In a joint announcement from both organizations, the global strategic alliance is intended
to “assist non-Chinese companies to expand into the China market and to assist Chinese compa-
nies to grow with global support.”19

Whereas such alliances have a broad agenda, others are formed for a narrow and specific
function such as production, marketing, research and development, or financing. More recently,
these have included electronic alliances, such as Covisint, which is redefining the entire system
of car production and distribution through a common electronic marketplace, as well as linking
partners in other major industries involved in Business-to-Partner (B2P), Business-to-Customer
(B2C), and Business-to-Enterprise (B2E) relationships.

Our customers have deployed our B2B Cloud Platform to connect to over 212,000 of their
business partners and customers—transacting in excess of $1 trillion per year.20

www.covisint.com

Global and Cross-Border Alliances: Motivations and Benefits
We create value by inventing category-defining products, developing scalable manufacturing
platforms, and building strong, trust-based relationships with customers who are leaders in
their industries.21

Wendell Weeks, Chairman and CEO, Corning, 2019

Corning has long been recognized for the role that strategic alliances play in the execution of its
international strategy. Corning leverages its capabilities in technology and innovation with the
market power and reputational capital of its global partners who tend to be market leaders in
their respective industries.

Some of the typical reasons behind cross-border alliances are as follows.

• To avoid import barriers, licensing requirements, and other protectionist legislation:
Japanese automotive manufacturers, for example, have used alliances such as the GM—
Toyota venture, or subsidiaries, to produce cars in the United States to avoid import
quotas.

• To share the costs and risks of the research and development of new products and
processes: Such is the case as many European companies seek to learn more about artifi-
cial intelligence in order to catch up to U.S. and Chinese rivals. Through the leadership of
Mr. Marcus Wallenburg, who is chairman of Bank SEB and Saab, an organization called
Combient was created. Combient has brought together 24 Swedish and Finnish compa-
nies in order to collaborate on AI and other subjects related to “deep learning, big data
and automation.”22

It is a community for large enterprises to focus on digital transformation. If we here in
Nordics could combine our ability to collaborate with our innovation power and our global
industry, we could have a winning recipe.23

Mats Agervi, CEO, Combient

• To gain access to specific markets, where regulations favor domestic companies: Firms
often find that the only way—or, at least, the best way—to enter markets such as China
and Russia is through alliances, as discussed elsewhere. As noted before, Rackspace
established a joint venture in China in order to secure permits that were awarded to
domestic firms.24

http://www.covisint.com

CHAPTER 7 • IMPLEMENTING STRATEGY 233

• To reduce political risk while making inroads in a new market:

Carefully orchestrated partnerships with governments and other business groups are cru-
cial to the [Disney] entertainment group’s thrust into China and the rest of southeast Asia.25

Bob Iger, Chairman and CEO, Walt Disney

Disney established Hong Kong Disneyland, which is jointly owned by the Chinese
government with a 57 percent stake. Beijing is especially interested in promoting tourism
through the venture and in facilitating employment for the 5,000 workers Disney employs
directly as well as the estimated 18,000 workers in related services.26 Then in June 2016
Disney opened Shanghai Disney Resort, which is its first theme park located in mainland
China. Disney owns 43 percent of the resort. The remaining 57 percent of the joint venture
is owned by the Shanghai government.

• To gain rapid entry into a new or consolidating industry and to take advantage of
synergies: Technology is rapidly providing the means and products for the overlap-
ping and merging of traditional industries such as entertainment, computers, and
telecommunications in new digital-based systems. Corning has used joint ventures to
enter particular markets as well as to serve markets worldwide. For instance, its joint
venture with Saint-Gobain will produce lightweight glazing for the automotive market
worldwide whereas its joint venture with Youngy Group is intended to focus on the
Chinese market.27

In many cases, technological developments are necessitating strategic alliances across industries
for companies to gain rapid entry into areas in which they have no expertise or manufacturing
capabilities. As such, learning—about product markets, country markets, or technologies—is a
key motivation for establishing many strategic alliances.

Challenges in Implementing Global Alliances
Effective global alliances are usually tediously slow in the making but can be among the best
mechanisms to implement strategies in global markets. In a highly competitive environment,
alliances present a faster and less risky route to global expansion and efficiency. It is extremely
complex to fashion such linkages, however, especially when many interconnecting systems are
involved, forming intricate networks. Many alliances fail for complex reasons. Many also end
up in a takeover in which one partner acquires the other. According to a McKinsey & Company
survey, of 150 companies that had been in alliances, 75 percent of them had been taken over by
Japanese partners. Problems with shared ownership, differences in national cultures, the integra-
tion of vastly different structures and systems, the distribution of power between the companies
involved, and conflicts in their relative locus of decision making and control are but a few of the
organizational issues that must be worked out. The Financial Times observed that “joint ventures
start with smiles, but often end in tears.”28

Often, the form of governance chosen for multinational firm alliances greatly influences
their success, particularly in technologically intense fields such as pharmaceuticals, computers,
and semiconductors. Thus, joint ventures are often the chosen form for such alliances because
they provide greater control of proprietary technology as well as increased coordination in high-
technology industries.

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. In fact, according to researcher David Lei,

Perhaps the single greatest impediment managers face when seeking to learn or renew
sources of competitive advantage is to realize that co-operation can represent another
form of unintended competition, particularly to shape and apply new skills to future prod-
ucts and businesses.29

All too often, cross-border allies have difficulty collaborating effectively, especially in com-
petitively sensitive areas; this creates 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

234 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

their knowledge and technological skills about their mutual product or the manufacturing pro-
cess. Managers may fear that they will lose the competitive advantage of the firm’s proprietary
technology or the specific skills that their personnel possess. For example, some international
joint ventures in China have faced internal conflicts between the foreign and domestic partners.
Indeed, some global financial institutions have even terminated their JVs in China. In 2016,
JPMorgan sold out of its domestic securities company, stating that it would re-enter if it found
the right domestic partner.

The cumulative learning that a partner attains through the alliance could be applied to other
products or even other industries that are beyond the scope of the alliance and, therefore, would
hold no benefit to the partner holding the original knowledge.30 Some of the trade-offs of the
duality of international joint ventures are shown in Exhibit 7-1.

The alliance shows the tricky risk-and-reward calculations U.S. corporations must increas-
ingly make in their pursuit of the lucrative markets in China. One such risk involves forced tech-
nology transfer from foreign companies Chinese partners.31 For example, COMAC, the Chinese
state-owned aircraft manufacturer, has used strategic alliances with U.S. companies—namely
GE, Honeywell, and Rockwell Collins—to supply engines, wheels, avionics and other key parts

• Control market access and distribution
to thwart current and potential rivalry

• Create learning constellations that
attenuate foreign dependency on key
inputs and skills
• Provide opportunity to acquire strategic
resources and tacit knowledge

• Enhance diffusion of industry standards
that create entry barriers

• Prevent technological and learning by
partners vis-à-vis outsourcing
agreements

• Provide a platform to transform
mature industries

• Create new growth opportunities

• Enhance learning opportunities to
co-develop new technologies

• Achieve economies of scale
(e.g., in mfg. plants)

• Optimize division of labor

• Increase product and geographic
diversification

• Reduce investment risk in new product
and/or geographic markets

• Leverage complementary skills of each
partner

• Acquire local/international regulatory
and market knowledge

• Develop linkages with major
buyers/suppliers

• Develop international experience with
other MNEs in order to “springboard”
onto the global stage

• Compensate for competitive and
latecomer disadvantages

• Facilitate corporate restructurings by
reducing exit barriers in non-growth
sectors

Motivations to Cooperate Motivations to Compete

ExHIBIT 7-1 The Dual Role of Strategic Alliances

Source: From David Lei, “Offensive and Defensive Uses of Alliances” in Heidi Vernon-Wortzel and L. H.
Wortzel, “Strategic Management in Global Economy,”3rd ed., © 1997 John Wiley & Sons. Reproduced
with permission of Wiley Publishing, Inc.; Li Dong & Keith Glaister (2006) Motives and partner selection
criteria in international strategic alliances: Perspectives of Chinese firms. International Business Review,
15: 577–600. Yadong Luo & Rosalie Tung (2007) International expansion of emerging market enterprise:
A springboard perspective. Journal of International Business Studies, 38: 481–498.

CHAPTER 7 • IMPLEMENTING STRATEGY 235

for the C919, which is the Chinese rival to the Boeing 737 and Airbus 320. Additional risks are
that such technology sharing could advance not only China’s commercial aircraft competitive-
ness but also its military status.32

But doing business in China often requires Western multinationals like G.E. to share technology
and trade secrets that might eventually enable Chinese companies to beat them at their own
game—by making the same products cheaper, if not better.33

The enticing benefits of cross-border alliances often mask the many pitfalls involved. In
addition to potential loss of a company’s technology and knowledge or skills base, other areas
of incompatibility often arise such as conflicting strategic goals and objectives, cultural clashes,
and disputes over management and control systems. Sometimes it takes a while for such prob-
lems to present themselves, particularly if insufficient homework has been done in meetings
between the two sides to work out the implementation details.

Implementing Alliances between SMEs and MNCs
All countries have a large proportion of business enterprises that are small or medium-sized
enterprises (SMEs). But, increasingly, MNCs are dominating the markets in which SMEs op-
erate, often crowding them out of business altogether. However, astute managers of SMEs can
often find opportunities for alliances with those multinationals, providing “complementary
resources and capabilities that can lead to, for instance, an innovative product offering being
rolled out on a global scale, or a worldwide licensing agreement.”34 For example, MNCs often
partner with local small enterprises to capture new ideas and innovations. Sun Microsystems,
for instance, engaged with a number of small enterprises in Scotland on radio frequency iden-
tification (RFID) projects to bolster its competitiveness in this emerging area.35 SMEs should
seek out those opportunities to offer MNCs complementary technologies as well as local mar-
ket networks. SABMiller, for example, helps the many small shop owners in Latin America
with training and financing, which boosts beer sales for both the company and the tiendas.

Guidelines for Successful Alliances
As discussed earlier, many global companies, such as IBM, the Tata Group, and Toyota, build ex-
tensive alliance portfolios that involve multiple concurrent alliances. Oracle’s Partner Network,
for example, includes 19,500 partners. Alliance partners can provide synergies and value to cor-
porate performance by providing access to new resources and markets, generating economies
of scale and scope, reducing costs, sharing risks, and enhancing flexibility.36 Unfortunately, the
complexities involved in managing many alliances often mean that many—around half by most
estimates—are unsuccessful, often because of poor partner selections initially and then also be-
cause of poor management to ensure that the expected competencies and synergies are realized.
Research by Dovev Lavie on 20,000 alliances involving about 8,800 unique partners provides
some insight into how managers can manage their alliances in ways that will increase the likeli-
hood of success. The results enabled the identification of “value-creation and value-capture strat-
egies that can guide partner selection decisions, and developed alliance portfolio management
practices to help managers extract more value from their alliance portfolios.”37 Value creation
strategies include, for example, the importance of assimilating network resources to acquire new
skills and capabilities. Value capture strategies caution that it is important to “avoid partners that
compete in your industry if they enjoy superior bargaining power.”38 One key factor in managing
alliance portfolios is to consider not only what each alliance partner will bring to the company
but also how that partner will affect other partners in the portfolio.

It is clear that many difficulties arise in cross-border alliances in melding the national and
corporate cultures of the parties, in overcoming language and communication barriers, and in
building trust between the parties over how to share proprietary assets and management pro-
cesses. Some basic guidelines, as follows, will help to minimize potential problems. However,
nothing is as important as having a long courtship with a potential partner to establish compat-
ibility strategically and interpersonally and set up a plan with the prospective partner. Even set-
ting up some pilot programs on a short-term basis for some of the planned collaborative activities
can highlight areas that may become problematic.

236 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

• Choose a partner with compatible strategic goals and objectives and with whom the alliance
will result in synergies through the combined markets, technologies, and management cadre.

• 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.39

• Work out with the partner how you will each deal with proprietary technology or com-
petitively sensitive information—what will be shared, and what will not, and how shared
technology will be handled.

• Trust is an essential ingredient of an alliance. In some countries, trust is strength-
ened by complying with the contractual agreement. In other countries, trust is
achieved by showing f lexibility in the relationship—that is, adapting to changing
environmental opportunities and threats. For example, Corning and Samsung
worked through early delays in production and demonstrated skill in recognizing
emerging opportunities for specialty glass, resulting in one of the most successful
international joint ventures. That said, executives at both companies work hard to
further reinforce a decades-long relationship.40

• Recognize that most alliances last only a few years and will probably break up once a
partner feels it has incorporated the skills and information it needs to go it alone. With
this in mind, managers need to “learn thoroughly and rapidly about a partner technology
and management: transfer valuable ideas and practices promptly into one’s own opera-
tions.”41 Relatedly, partners’ strategies and capabilities evolve over time, thus calling into
question the sustainability of the joint venture. For instance, some joint venture partners
such as Eli Lilly and Ranbaxy recognized the evolving strategies and capabilities of the
other partner and skillfully managed a buyout, which averted unnecessary conflict and
preserved relational capital in the event of future joint venture opportunities between the
U.S. and Indian multinational pharmaceutical companies.

Some of the opportunities and complexities in cross-border alliances are illustrated in the fol-
lowing “Comparative Management in Focus” on joint ventures in the Russian Federation. Such
alliances are further complicated by the different history of the two parties’ economic systems
and the resulting business practices, as well as political issues.

IMPLEMENTING STRATEGY
Implementing Strategy McDonald’s Style

• Form paradigm-busting arrangements with suppliers.

• Know a country’s culture before you hit the beach.

• Hire locals whenever possible.

• Maximize autonomy.

• Tweak the standard menu only slightly from place to place.

• Keep pricing low to build market share. Profits will follow when economies of scale
kick in.42

Decisions regarding global alliances and entry strategies must now be put into motion with
the next stage of planning: strategic implementation—also known as functional level strat-
egies. Implementation plans are detailed and pervade the entire organization because they
entail setting up overall policies, administrative responsibilities, and schedules throughout
the organization to enact the selected strategy and to make sure it works. In the case of a
merger or IJV, this process requires compromising and blending procedures among two or
more companies and is extremely complex. The importance of the implementation phase of
the strategic management process cannot be overemphasized. Until strategic plans are put
into operation, they remain abstract ideas: verbal or printed proposals that have no effect on
the organization.

7-2. To understand what is
involved in implementing
strategies, including those
for small businesses and
those involved in emerg-
ing economies

CHAPTER 7 • IMPLEMENTING STRATEGY 237

Comparative Management in Focus
Joint Ventures in the Russian Federation

We are doing everything we can to continue development despite the slowdown of the Russian
economy. We are still confident in Russia’s long-term prospects.

Maurizio Patarnello, NestlÉ Russia CEO

Judging by the preceding quote, it seems that Russia poses a number of contradictions to would-
be investors. In 2011, as Disney pushed into Russia with a new Disney television channel, its
CEO Bob Iger said “we really believe in Russia as a growth market.”43 However, as of 2018,

both potential investors and those firms already in Russia were very concerned about Russia’s econ-
omy and its continuing involvement in Ukraine and the negative impact on the economy of the strin-
gent western sanctions.44 It has been clear for some time that foreign companies have started to think
twice about investing in international joint ventures (IJVs) in Russia since President Putin’s moves to
take control of key industries, including banks, newspapers, and oil assets. In May 2008, President
Putin signed the Strategic Industries Bill, which regulates foreign investment. The new law identifies
42 strategic sectors (compared to 16 in 2005) in which foreign investors have to seek special permis-
sion before investing.

In September 2014, the U.S. private equity investment group Blackstone gave up on Russia,
citing a lack of investors’ interest and limited investment opportunities after the widespread impact
of the sanctions.45 In spite of the recent negative climate, Russia—the world’s largest country (see
Map 7-1), spanning 11 time zones, clearly offers substantial opportunity for companies willing to
go for the risk–return trade-off. However, its significant growth over the past decade has slowed
considerably since the global economic downturn, making it less competitive than the other BRIC
countries. According to the 2011 World Economic Forum Russia report, the most important single
element explaining a country’s medium-term growth performance is productivity; labor productivity
in Russia is less than half the value achieved by workers in the OECD member states. The decline in
manufacturing competitiveness in Russia “is due to the combination of an increase in real wages and
shortcomings of the business climate, which puts Russia at a disadvantage in international compari-
son.”46 In addition, there is concern that the long-term business climate will remain for some time as

Tallinn

Vilnius

Riga

St. Petersburg

Moscow

Voronezh
Samara

Kazan
Ufa

YekaterinburgMinsk

L’viv Kiev

Odesa

Dnipropetrovs’k

Donets’k

Rostov

Tbilisi

Yerevan
Baku

Ashgabat

Dushanbe

Tashkent

Bishkek

Alma-Ata

Astana

Volgograd

Kharkiv
Saratov

Tolyatti

Perm

Nizhny
Novgorod

Kryvyi
Rih

ZaporizhzhyaChisina

ESTONIA

LATVIA

SLOVAKIA

SERBIA

LITHUANIA

BELARUS

TURKMENISTAN

UZBEKISTAN

I R A N
AFGHANISTAN

C H I N A

TAJIKISTAN

KYRGYZ
REPUBLIC

R U S S I A

K A Z A K H S T A N

POLAND

HUNGARY

ROMANIA

BULGARIA

GEORGIA

ARMENIA AZERBAIJAN

AZER.

UKRAINE

RUS.

MOLDOVA

B l a c k S e a

C
a

s
p

i
a

S
e

Aegean
Sea

Aral
Sea

B a l t i c

S e a

Baltic republics

Caucasus republics

Central Asian republics

Cities of 650,000 to 1 million

Cities over 1 million

Capitals

Capitals over 1 million

R U S S I A

MAP 7-1 Russia

(Continued)

238 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

an unbalanced, corruption-ridden, natural resource–based economy because of the persistent lack of
formal institutions.47

The foreign investment uncertainty continues and perhaps has taken a turn for the worse as the head
of Baring Vostok, Michael Calvey, was arrested in early 2019 on questionable fraud charges linked to a
business dispute involving a Russian official connected to President Vladimir Putin. Mr. Calvey’s private
equity company has focused on Russia. He was “Russia’s last big foreign investment champion.”48

“The signal it sends to any foreign capital is horrid,” a former senior private equity executive in
Russia said. “It shows the country doesn’t want that kind of capital or doesn’t care.”49

Reflecting on the geopolitical tensions and economic uncertainty, the health of the UK’s re-
lationship with Russia has been described as being linked to “Russian domestic conditions, which
swing from secretive, autocratic truculence to relatively liberal openness and back again.”50 The ten-
sions and uncertainties have dissuaded some firms, but others such as Alibaba (opening profile) see
the rewards as outweighing the risks.

Russian managers have relied excessively on informal institutions, including personal net-
works, to conduct business due to the void created by the weak legitimacy of the country’s
formal institutions.

In addition to the potential for corruption and the constant uncertainty in the business environ-
ment, firms doing business in Russia find that implementing a joint venture is very frustrating and
time-consuming due to the all-consuming regulations and bureaucracy there. For these reasons, many
foreign firms pick a local partner to help them navigate the myriad negotiations to obtain permissions,
get visas, acquire property, and so on. Other firms hire a security firm (Krisha), which smooths the
way through the bureaucracy, often with payments.

Until recently Moscow and other major cities have been experiencing a consumer boom, spurred
on by rising incomes in the middle class, making Russia one of the fastest growing markets for global
consumer giants such as Coca-Cola, Procter & Gamble, and Nestlé. Indeed, the Swiss food giant
Nestlé confirmed its faith in the long-term prospects in Russia and that it would try to use more local
content and ingredients to try to offset the currency problems, reinforcing the importance of local sup-
pliers. Nestlé owns eight manufacturing facilities in Russia and announced opened a new factory for
infant formula that will be operational in 2019.51

Many, like Bell Labs, have been involved in research and development, taking advantage of the
Russians’ high-level education and technical capabilities. Nevertheless, Western managers need to rec-
ognize that cultural factors affect cross-border business, in particular, that Russians are distrustful of
outsiders; managers attempting to develop joint ventures must understand that they will need to spend
considerable time communicating and developing a trusting relationship. Reliance on their own net-
works and the use of favors (blat) present obstacles to business relations between Russians and outsiders.

Overall, managers of foreign companies who are looking past the current economic problems in
Russia and hoping to set up business in the future should carefully consider the following.

• Investigate whether a joint venture is the best entry mode. If a lot of real estate is needed, it may
be better to acquire a Russian business because of the difficulties involved in acquiring land.

• Set up meetings with the appropriate ministry and regional authorities well in advance. Have
good communication about your business needs and build local relationships.

• 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 to establish the corporate
image with authorities and consumers.52

Foreign managers’ alliance strategy must also take into account the goals of potential Russian
partners. An awareness and acceptance of the motivations of Russian firms for alliances with foreign
companies will aid in finding and achieving a cooperative joint venture.

Researchers for the Wall Street Journal reported their findings about what local Russian firms
want from an alliance with a foreign firm; they made it clear that they expect assistance with market
entry through forming an alliance and that they need assistance in solving bribes, kickbacks, and other
under-the-table transactions.53

CHAPTER 7 • IMPLEMENTING STRATEGY 239

Successful implementation requires the orchestration of many variables into a cohesive
system that complements the desired strategy—that is, a system of fits that will facilitate
the actual working of the strategic plan. In this way, the structure, systems, and processes
of the firm are coordinated and set into motion by a system of management by objectives
(MBO) whose primary objective is the fulfillment of strategy. Managers must review the
organizational structure and, if necessary, change it to facilitate the administration of the
strategy and coordinate activities in a particular location with headquarters (as discussed
further in Chapter 8). In addition to ensuring the strategy-structure fit, managers must al-
locate resources to make the strategy work, budgeting money, facilities, equipment, people,
and other support. Increasingly, that support necessitates a unified technology infrastructure
to coordinate diverse businesses around the world and satisfy the need for current and reli-
able information. An efficient technology infrastructure can provide a strategic advantage in
a globally competitive environment.

An overarching factor affecting all the other variables necessary for successful imple-
mentation is that of leadership; it is people, after all, who make things happen. The firm’s
leaders must skillfully guide employees and processes in the desired direction. Managers
with different combinations of experience, education, abilities, and personality tend to be
more suited to implementing certain strategies. In an equity-sharing alliance, sorting out
which top managers in each company will be in which position is a sensitive matter. Who
in which company will be CEO is usually worked out as part of the initial deal in alliance
agreements. This problem seems to be frequently settled these days by setting up joint CEOs,
one from each company. Setting monitoring systems in place to control activities and ensure
success completes, but does not end, the strategic management process. Rather, it is a con-
tinuous process, using feedback to reevaluate strategy for needed modifications and updating
and recycling plans.

Of particular note here, we should consider what is involved in implementing strategies
for SMEs and the issues involved in the effective management of the global sourcing strategy.
Then we will review what is involved in managing performance in international joint ventures
because they are such a common form of global alliance, and yet they are fraught with imple-
mentation challenges.

Implementing Strategies for SMEs
For small businesses venturing abroad, however, the first step is often that of exporting. This can
be a daunting task. However, many sources are available to help small-business managers with
exporting, as discussed in the feature “Under the Lens: Breaking Down Barriers for Small or
Medium-Sized Enterprises (SMEs).” Of particular note, China offers substantial opportunities
for exports for SMEs (businesses with fewer than 500 employees), which have accounted for an
estimated one-third of exports to China in recent years. Most exports to China include agricul-
tural products, electrical equipment, machinery, nuclear reactors and boilers, China also imports
a range of commodities.54 As of 2018, China is the largest e-trading partner for the United States,
passing both Canada and Mexico.

SME firms wishing to expand beyond their domestic markets and exporting typically
need to find a market niche in the chosen countries between the MNCs and the local firms
where they know they can compete. While they do not have the economies of scale and fi-
nancial and marketing resources of the MNCs, they also do not have the local connections,
suppliers, and consumer knowledge of the small, local companies. If those SMEs can find
an opportunity, or niche, that the MNCs find too minor to bother with, and also that is not
being targeted by local firms, they may be able to gain a foothold and establish their own
reputation as leaders. Then, too, a later opportunity may arise with an MNC wanting to use
that firm to gain inroads or to use the acquired knowledge or technology, as discussed earlier.
Alternatively, seeking an alliance with a local partner would provide early access to hiring
local talent, to local connections and suppliers, and so on. In their research of successful
Israeli small firms going global, Jonathan Friedrich and colleagues concluded that SMEs can
take care not to awaken the gorillas, first by targeting a sufficiently minor opportunity that the
MNCs decide is not worth their while, but which can be leveraged profitably across several
international regions; and secondly, by bringing in superior technology and processing capa-
bilities to keep out local players.55

240 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

UNDER THE LENS
Breaking Down Barriers for Small or Medium-Sized Enterprises (SMEs)

Approximately 280,000 small or medium-sized businesses in the United States export goods
or services abroad. Small businesses make up 98 percent of the American companies that ex-
ported US$29.3 billion in goods and services in 2016.56 According to the U.S. International

Trade Administration, the top export markets for SMEs are Mexico (US$76.2 billion), Canada (US$51.2
billion), China (US$34 billion), UK (US$20.4 billion), and Japan (US$20.0 billion). But there is still
room for growth in China. Successful exporters to China emphasize the complexity and that it is essen-
tial to meet your clients face-to-face at the beginning.

U.S. EXPORT ASSISTANCE CENTERS

Of the 20 U.S. government agencies involved in export assistance, SBA specifically aims to increase the
number of small business exporters through programs delivered through U.S. Export Assistance Centers.
Senior SBA trade and finance specialists—along with employees from the U.S. Commercial Service and
the U.S. Export-Import (Ex-Im) Bank—staff 20 of more than 100 U.S. Export Assistance Centers in met-
ropolitan areas around the country. The centers help “export-ready” companies begin to export or expand
to new markets abroad by providing counseling, training, export insurance, and loans to these businesses;
conducting market research; and facilitating contracts between U.S. exporters and foreign buyers.

Richard Ginsburg, an international trade specialist with the U.S. Small Business Administration
(SBA), says small business owners usually approach an Export Assistance Center when they want to
make a deal with a foreign buyer or when they receive an order from a foreign buyer and have never
exported before. The centers can help companies understand payment terms and conditions, help them
handle logistics such as shipping, and refer them to translators. These transactions are often simple
when doing business in the United States, but they can be complicated when crossing international
borders.

Counseling, outreach, and loan programs help break down what Ginsburg calls the “psychological
trade barriers” that prevent small businesses from exporting. “There are people who feel they can lose
their business if they export,” Ginsburg says. “The risks are so much more than shipping across town or
across the state or across the country.” For example, small-business owners sometimes fear that they will
not be able to collect payments from overseas buyers.

Companies that want to export face barriers such as language and lack of knowledge of the foreign
regulatory environment, and—specifically for businesses exporting to China—fear of intellectual prop-
erty rights infringement, Ginsburg says.

EXPORT LOANS FOR SMALL BUSINESSES

In addition to counseling and training, SBA guarantees loans of up to $5 million, and the Ex-Im Bank
provides export financing for amounts over $5 million. “It’s a success story for SBA when we’re
working with a small-business exporter and they outgrow the small loan amount and need more than
the $5 million SBA threshold,” Ginsburg says.

SBA runs four loan programs for small-business exporters: the Export Express Program, the
Export Working Capital Program, International Trade Loan Program, and SBA and Ex-Im Bank Co-
Guarantee Program. The Export Express Program, formerly a pilot program, was made permanent
in 2010 with the passage of the Small Business Jobs Act of 2010 to support the NEI goal of increas-
ing small business exports. The program aims to streamline the export loan process for small busi-
nesses. SMEs that have been operating for at least 12 months can receive up to $500,000 to finance
export activities, such as participating in foreign trade shows, purchasing equipment, and translating
product literature. The law also permanently increased loan limits on export working capital and
international trade loans.

Companies can obtain more information on export loans from the nearest Export Assistance
Center and apply directly for loans through SBA lenders. Visit www.export.gov/eac to contact the
nearest center or www.sba.gov/content/us-export-assistance-centers for a list of centers with SBA
representatives.57

GLOBAL ALLIANCE OF SMES 58

The U.S. government authorized the GLOBAL ALLIANCE OF SMES (GASME), which is a non-
profit multinational organization that seeks to serve SMEs worldwide. GASME has established

http://www.sba.gov/content/us-export-assistance-centers

http://www.export.gov/eac

CHAPTER 7 • IMPLEMENTING STRATEGY 241

regional offices in New Jersey (USA), Shanghai, Paris, Seoul, New Delhi, and Buenos Aires. It strives
to build a premier SME collaboration platform based on joint consultation, joint construction, and
benefits sharing and to facilitate trade and investment.

GASME has become a leading organization with respect to cooperation among global SMEs. In
2012, GASME was awarded Consultative Status with UNIDO (United Nations Industrial Development
Organization). GASME has organized high-level forums, including Global SMEs Summit, China’s
SMEs Global Development Forum, World Manufacturing Convention, and Global Forum for Fortune
500 and SME Cooperation.

GASME advocates for bilateral and multilateral cooperation among SMEs worldwide. For ex-
ample, GASME played an instrumental role in facilitating cooperation between Chinese and overseas
SMEs. In fact, it has implemented several SME alliance initiatives, notably “1000 China-America
SMEs Partnership Program,” “1000 China-EU SMEs Partnership Program,” “1000 China-Africa SMEs
Partnership Program,” as well as the “SME Global EZPath Program.”

At present, GASME is developing interconnected platforms for business organizations worldwide
such as a big data platform, a socialization platform for business leaders, a cross-border matchmak-
ing platform, a surplus capacity platform, a resource sharing platform, and a government promotion
platform. As for its current international expansion, GASME Shanghai Office was set up in 2017 with
approval from the Chinese government, thus becoming the first global SME organization to plant a flag
in China.

EUROPEAN DIGITAL SME ALLIANCE 59

Although small business—based alliances have facilitated international expansion for U.S. SMEs,
other regions—for example, Europe—have begun to offer small-business support. For example,
the European DIGITAL SME Alliance is the largest network of Information and Communication
Technology (ICT) small and medium-sized enterprises in Europe. The alliance represents about
20,000 digital SMEs throughout the EU. The alliance promotes collaborative efforts of 28 national
and regional SME associations from EU member countries and neighboring countries. The European
Digital SME Alliance has several salient goals that include promoting meetings and exchanges of
experience and know-how amongst its members; carrying out actions—such as training programs,
organizing conferences and seminars, and even conducting research; diffusing information to its
members; representing the interests and stances of the Association’s members in the European
Union; and carrying out actions and advocating in third countries, especially in matters relating to
local ICT SMEs.60

Implementing a Global Sourcing Strategy: From Offshoring
to Next-Shoring?
The entry strategy of global sourcing was discussed in Chapter 6. Outsourcing abroad—
alliances with firms in other countries to perform specific functions for the firm (offshoring)—
is often in the news because of the politically charged issue of domestic jobs apparently being
lost to others overseas. Beyond finding lower-paid workers, however, the strategic view of
global sourcing is to develop into transformational outsourcing—the view that, properly imple-
mented, global sourcing can produce gains in efficiency, productivity, quality, and profitability
by fully leveraging talent around the world.61 Procter & Gamble, for example, having out-
sourced everything from IT infrastructure and Human Resource Department functions, such as
staffing, training, compensation, and so on, around the world, announced that then-CEO Alan
Lafley wanted 50 percent of all new P&G products to come from other countries.62 However,
implementing such a strategy is more difficult than it is made to seem in the press because
many companies have encountered unexpected problems when outsourcing.

However, P&G executives have conceded that the company may have outsourced too much of
its value-added activities. For example, Marc Pritchard, Procter & Gamble’s (P&G) Chief Marketing
Officer, publicly expressed his discontent with transparency and excessive fees from strategic partners.

Marketers have outsourced too much work. There were too many touch points between mes-
sage and consumers.

Marc Pritchard, Procter & Gamble’s (P&G) Chief Marketing Officer, 2018

242 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

According to Mr. Pritchard, the consumer products giant needs “brand people closer to consum-
ers.” In an outsourcing reversal, P&G brought its media planning activities in house. Mr. Pritchard
pondered, “If start-ups can buy their own media, why can’t Tide?”

A common problem, when dealing with many strategic alliance partners, is global supply
chain disruptions. Some alliance partners, for example, can be low cost-producers, yet inflexible,
thus making the outsourcing firm susceptible to sudden changes in demand. For instance, as re-
ported in the Financial Times, German sportswear maker Adidas revealed supply chain problems
in the first six months of 2019 that have impaired its ability to meet customer demand, resulting
in weaker sales growth. Adidas CEO Kasper Rorsted stated that the company incurred “a capac-
ity problem in manufacturing plants,” with demand for mid-priced products in North America
exceeding expectations. He further noted, “We are not capable of building the infrastructure to
supply market demand” and forecasted a “substantial slowdown” in North America sales over
the first half of 2019.63

Advice on implementation from companies such as Dell, IBM, and Reuters Group PLC
leads us to the following guidelines:

• Examine your reasons for outsourcing: Make sure that the advantages of efficiency and
competitiveness will outweigh the disadvantages from your employees, customers, and
community; don’t outsource just because your competitors are doing it.

• Evaluate the best outsourcing model: Opening your own subsidiary in the host country
(a captive operation) may be better than contracting with an outside firm if it is crucial for
you to keep control of proprietary technology and processes.

• Gain the cooperation of your management and staff: Open communication and training
are essential to get your domestic managers on board; uncertainty, fear, and disagreement
from them can jeopardize your plans.

• Consult your alliance partners: Consult with your partners and treat them with the re-
spect that made you decide to do business with them.

• Invest in the alliance: Plan to invest time and money in training in the firm’s business
practices, in particular the ones that deal with quality control and customer relations.64

Further advice comes from Josh Green, CEO of Panjiva, which is an information resource for
companies doing business across borders. Green asks, “How healthy is your global partner?”
because he noted that an increasing number of firms in developed economies were finding
that their suppliers in Asia had gone out of business following the protracted global eco-
nomic downturn that caused firms to reduce their demand from their suppliers. He notes that
both buyers and suppliers have learned the hard way that in the future they need to investi-
gate and evaluate their potential partners carefully. He suggests, for example, that both sides
should do a background check on the financial health and future viability of the company;
get references from other partners of the firm; be prepared to give those assurances and data
about their own companies; and have alternate partners ready to fill in.65

Another important aspect of managing global supply partnerships pertains to transparency
with respect to environmental (pollution issues) and human rights (child labor, work condi-
tions) concerns. As we noted in Chapter 2, MNCs are often held accountable not only for their
own behaviors, but also for the behavior of global supply chain partners. An MNC that moni-
tors its global supply chain can incur substantial costs and, arguably, not 100 percent prevent
malfeasance by supply chain partners. However, some MNCs are using digital “blockchain”
technology—that is, “an incorruptible digital ledger of economic transactions”—to increase
transparency between an MNC and global supply chain partners as shown in the “Under the
Lens” feature on Ford.66

THE NEXT WAVE
Elsewhere we pointed out that many companies are moving from a single strategy of outsourcing—
or offshoring—manufacturing or service operations, toward nearshoring to closer geographic re-
gions and markets, or to reshoring to the “home” country. Increasing labor costs overseas, as well
as the distance and risks of supply chains and transportation, have made offshoring less competitive
overall. Two trends are converging toward this next strategy of global sourcing—which McKinsey

CHAPTER 7 • IMPLEMENTING STRATEGY 243

UNDER THE LENS
Ford to Use Blockchain in Pilot to Trace Cobalt Mined in Congo

Carmaker to Use Platform in Attempt to Improve Supply Chain Transparency67

Ford will use a blockchain-based platform to trace supplies of cobalt from a Chinese-owned mine
in the Congo for the batteries in its electric cars, in an attempt to ensure they are not linked to
human rights abuses.

The US carmaker will work with Korean battery company LG Chem and China’s largest cobalt
producer Huayou Cobalt to create “an immutable audit trail” for supplies of cobalt on blockchain, the
technology behind cryptocurrency bitcoin.

The project is the latest effort to use blockchain to improve the transparency of global supply
chains, especially in commodities. The Democratic Republic of Congo [DRC] produces more than
60 per cent of the world’s cobalt, but much of it is sent to China to be processed by multiple companies
before it is used in batteries.

In addition, up to 20 per cent of the DRC’s cobalt is mined by hand, often by children with picks
and shovels.

We remain committed to transparency across our global supply chain . . . By collaborating
with other leading industries in this network, our intent is to use state-of-the-art technology
to ensure materials produced for our vehicles will help meet our commitment to protecting
human rights and the environment.

Lisa Drake, Vice-president of global purchasing and
power-train operations, Ford, 2019

Zhejiang-based Huayou Cobalt is one of the biggest producers of cobalt for batteries and is listed on
the Shanghai stock exchange. In 2016 the company was accused of buying cobalt mined from children
working in “hazardous conditions” by Amnesty International.

Since then the company says it has undergone an audit on its supply chain and made efforts to im-
prove the condition of communities in the DRC, one of the poorest countries in the world.

“This is central to our proactive approach to delivering ethical cobalt,” Chen Hongliang, chief ex-
ecutive of Huayou, said about the pilot. “We also want to have strong, reliable information channels to
prove and demonstrate this action to our customers.”

The consortium said it wanted to open up the platform to other car producers and companies in the
supply chain, and expand it to include different battery metals and raw materials.

The project will use the IBM Blockchain Platform and be powered by Linux Foundation’s
Hyperledger Fabric. It is being overseen by RCS Global, a UK supply-chain audit company.

Source: © The Financial Times Limited 2019.

Consultants call “next-shoring”—the trend away from labor cost arbitrage, and the trend toward ro-
botics as technological advances provide the opportunity to digitize operations through the Internet of
Things.68 In this way, companies can use the advantages of production facilities that are geographi-
cally closer to their markets so as to adapt products locally, while at the same time using innovation
and technology to offset the previous advantages of economies of scale through distant outsourcing.

Nextshoring strategies encompass elements such as a diverse and agile set of production
locations, a rich network of innovation-oriented partnerships, and a strong focus on tech-
nical skills.69

mCKinsey QuaRTeRly

Implementing Strategies for Emerging Economy Firms
Firms from emerging economies, out of necessity, have expanded globally through differ-
ent paths and strategies than the traditional paths followed by firms in the developed world.
Their motives for expansion into developed countries often include the need to acquire spe-
cific resources, such as technological know-how, R&D capability, managerial skills, and
global brands to make them competitive with established firms. It is interesting to observe

244 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

how those firms are coping with strategic implementation. Rather than the gradual, staged
internationalization process typical of traditional firms from the developed world, emerging
firms—of all sizes—are finding that they have to move quickly or skip various stages to expand
into both developed as well as developing markets.70 As a result, firms such as Brazil’s Natura
Cosmeticos, China’s Lenovo, and Argentina’s Tenaris—now significant global players—have
tended to expand globally through acquisitions and alliances and have had to be more flexible
organizationally.

Mauro F. Guillén and Estaban García-Canal point out from their research that firms from
emerging and developing countries “face a significant dilemma when it comes to international
expansion because they need to balance the desire for global reach with the need to upgrade their
capabilities. They can readily use their home-grown competitive advantages in other emerging
or developing countries, but they must also enter more advanced countries in order to expose
themselves to sophisticated, cutting-edge demand and develop their capabilities.”71 As Guillén
and García-Canal demonstrate in Exhibit 7-2, those firms must decide how to balance their geo-
graphic expansion with their ability to upgrade their capabilities in the market because they lack
the resources and capabilities of established MNEs; they must realize that “prioritizing global
reach without improving firm competencies jeopardizes the capability upgrading process.”72
(This puts them in the Unsustainable region in the exhibit.) Huei-Ting Tsai and Eisingerich also
note “the dual challenge faced by emerging market firms, namely, market creation and/or R&D
knowledge creation.”73 They note that firms with less technological and selling capabilities tend
to enter new markets one at a time. In addition, firms with strong technological capabilities often
expand to overseas markets shortly after the firm is established, as with Infosys (featured in the
“Management in Action” feature). They found from the firms in their sample that those that
were stronger technologically and had more financial resources would compete in the developed
markets, whereas those with a smaller stable of competitive resources pursued less-competitive
markets during the early stages of their internationalization.

Challenges in Implementing Strategies in Emerging Markets
Firms expanding into emerging or developing market countries are often unaware of the consider-
able differences from their home markets and the challenges they face in getting started. Because of
their lack of familiarity and preparation for those challenges, foreign firms are often surprised that
they cannot compete successfully with local firms. They may be operating under assumptions that

Expansion path
into developed

countries

Expansion path
into developing
countries

Geographic reach

Ex
te

nt
o

f
ca

pa
bi

lit
y

up
gr

ad
in

g
Unsustainable

region

Capability building
region

100%

45°

Balanced
growth path

ExHIBIT 7-2 Expansion Paths for Emerging Economy Firms

Source: Based on Mauro F. Guillén and Estaban García-Canal, “The American Model of the Multinational
Firm and the ‘New’ Multinationals from Emerging Economies,” Academy of Management Perspectives,
May, 2009, pp. 23–35.

CHAPTER 7 • IMPLEMENTING STRATEGY 245

MANAGEMENT IN ACTION
Infosys’s Path from Emerging Start-up to Emerging MNC 74

Infosys is one of the most fascinating success stories to come out of India—one of a start-up valued
at $250 in 1981 that grew to become a highly competitive emerging market MNC with revenue over
US$11 billion and market capitalization of approximately US$40 billion in 2019.75 Its path from a

“born global” IT-services company and establishment of strategic alliances around the world are widely
admired and reported.

Infosys was established by N. R. Narayana Murthy and six engineers in Pune, India, with an initial
capital of $250. A central goal of Narayana Murthy’s global strategy was the “global delivery model
(GDM),” which focused on producing where it is most cost effective to produce and selling where it
is most profitable to sell. As such, most of the software development work was done in India and the
sales focused on the United States and other foreign markets. However, this model competed with both
foreign and Indian software companies such as Accenture, IBM Global Services, EDS, and TCS. From
the beginning, Infosys focused the company on positioning itself as a truly global company—global
clients, global operations, global staff, and a global brand image. In 1987 the company opened its first
international office in Boston, and in 1995 moved into the United Kingdom and Toronto, Canada. From
there, global expansion happened rapidly as the company opened offices in Germany, Sweden, Belgium,
Australia, and two development centers in the United States. The company has been a leader in estab-
lishing the Indian Business Process Outsourcing (BPO) industry, now a global business. The company’s
website emphasizes that its mission is based on “nurturing relationships that reflect our culture of un-
wavering ethics and mutual respect.” In addition, Infosys is well recognized as a leader in sustainability
efforts. Much of the company’s success is attributed to its hybrid business models that include the best of
Indian culture and expectations, along with adapting to local business practices, and to the alliances and
trust in developing new models with partners around the world.

In February 2015, Infosys bought U.S.-based Panaya in a $200 million deal in an effort to diver-
sify away from its traditional outsourcing business into more lucrative opportunities in big data, cloud
computing, and artificial intelligence. March 2019 marked another step in its remarkable journey from
start-up to world-class provider of IT solutions, as Infosys has been selected by Rolls-Royce (UK) as a
strategic partner to provide digital and engineering services.

We are pleased to be selected as a long-term strategic partner by Rolls-Royce. Through our
engineering and digital services, we will support Rolls-Royce to become more productive,
agile and innovative. We continue to invest in this exciting industry and in this partnership
[and] to support Rolls-Royce [as it] navigates the next [step] in its transformation journey.76

Jasmeet Singh, Executive Vice President and
Global Head of Manufacturing, Infosys

As a leading industrial technology company, our ongoing commitment to innovation is es-
sential to meeting customer and society’s needs for sustainable power. Our association with
Infosys is a step in this direction as it enables us to increase our technical differentiation in
the engineering and digital domain while accelerating cost optimization and competitiveness.
Given the successful track record of Infosys in turbo machinery and propulsion engineering
services, they are the right partner to support our goals set out in the coming years.77

Kishore Jayaraman, President for India & South Asia, Rolls-Royce

At the heart of this success story is its network of partners; however, the goals of objectives of these
strategic partnerships have evolved over time. Infosys has established itself as a global market leader with
the help of strategic alliances with other world-class technology companies. Now, the Infosys network of
alliance relationships seeks to create value, temper implementation risk, and accelerate market entry for its
partners. With each strategic partner, Infosys has been effective at developing “solutions that incorporate
the intellectual property (IP) of Infosys as well as technology and services from the alliance partners.”78

firms from more developed countries have better experience, management knowledge, technology,
and other resources than those in the target regions. Unfortunately, that mindset might lead foreign
firms to enter those new markets without sufficient research and preparation for the differences and
difficulties they may face. However, that is not the case with IKEA, the Swedish home furnishings
giant. The company is absolutely committed to not expanding too rapidly; instead, it does extensive

246 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

research on new locations. For example, it took six years before it opened its first store in South
Korea.79 Similarly, IKEA began planning to open stores in India in 2012. In 2018—six years later—
it opened the doors of its first store in Hyderabad. (IKEA’s challenges in India are discussed in the
end of chapter case.) The care the company takes to get familiar with the local area and the needs of
the people there has certainly paid off; the company has 422 stores in more than 50 markets around
the world and is one of the most profitable in the retail industry.80

The initial challenge is likely to be how to navigate poor infrastructures, supply chains, and
distribution networks—problems that local firms know how to navigate through experience and
contacts. The same edge is enjoyed by local firms when dealing with the myriad regulations and
bureaucracies prevalent in some developing economies.

Expansion into emerging markets also brings personnel challenges, especially at manage-
ment levels. Here too, often the domestic companies have the advantage of knowing how to
source, attract, and train local talent; those employees also tend to prefer to work for local com-
panies that are perceived to be more invested in their future.81 On the other hand, those employ-
ees often do not have the experience or familiarity with cross-border business compared with the
foreign firms that may bring in their own talent.

Clearly, firms going into developing markets need to explore thoroughly how to navigate
the infrastructure and institutions, evaluate the area for their personnel needs, and make local
contacts to assess the feasibility of operating there and competing with local firms.

One firm, the global English-language social network LinkedIn, has found that it can make
inroads in China through compromising on China’s free-expression rules and developing local
alliances with two Chinese venture-capital firms. Having local partners placates Chinese authori-
ties and provides an incentive for the partners to make the venture a success. LinkedIn added a
Chinese-language version, thereby adding about a million new members to the over four million
it already had there.82 However, LinkedIn faced considerable backlash in the West for bowing
to Chinese demands to take down content connected with the anniversary of the Tiananmen
Square uprising.83 Other technology firms, such as Facebook and Twitter, have been blocked
from China. Google’s website was blocked temporarily then blocked completely before it exited
China. However, the company has been developing a highly censored version for China in order
to re-enter the Chinese market (see Chapter 2, Ethics in Uses of Technology).84

MANAGING THE FIRM’S PERFORMANCE IN
INTERNATIONAL JOINT VENTURES
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 use its resources efficiently, coordinate its activities, and implement its strategy.

The term IJV control refers to the processes that management puts in place to direct the
success of the firm’s goals. 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 estab-
lishment of a strategic fit, and the design of the IJV organization. Howard Schultz, CEO of
Starbucks, attributes its success in India to its joint venture with Tata Group, the largest coffee
producer in Asia. This process followed a complicated six-year journey. Schultz acknowledged
that Tata helped with finding highly desired locations, and the complex logistics and supply in-
frastructure, as well as the menus. Schultz admits there was much to learn, and that the key was
finding a partner he could trust and with whom the firm could collaborate.85

Clearly the most important single factor determining IJV success or failure is the choice
of a partner. Most problems with IJVs involve the local partner, especially in less-developed
countries. In spite of this fact, many firms rush the process of partner selection because they are
anxious to get on the bandwagon in an attractive market. In this process, it is vital to establish
whether the partners’ strategic goals are compatible (see Chapter 6). 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.86 IJV performance is also a function of the
general fit between the international strategies of the parents, the IJV strategy, and the specific

7-3. To consider how to
manage the firm’s per-
formance in international
joint ventures, with
attention to knowledge
management, government
and cultural influence, and
the role of e-commerce

CHAPTER 7 • IMPLEMENTING STRATEGY 247

performance goals that the parents adopt.87 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.88 To do this, managers must analyze
their own firms and pinpoint any areas of weakness in task-related skills and resources that can
be overcome with the help of the IJV partner.

Partnerships with companies in India present both positive and negative examples of IJV
performance, although, overall, IJVs there run into considerable problems. McDonald’s has had
both experiences so far there. The company has experienced legal battles with its joint venture
partner in the north and east of the country, Mr. Bakshi, due to a clash of business cultures and
expectations that could take years to play out. However, its relationship with its 50-50 joint ven-
ture partner in the south and west, Amit Jatia, has been positive. In fact, Mr. Jatia’s Hardcastle
Restaurants have now become a full franchisee through a friendly buyout of McDonald’s share
in the venture. As of year-end 2016, Hardcastle operated McDonald’s through 252 restaurants
in 34 cities in west and south India.89 Of course, both ventures were plagued in the early years
by difficulty in adapting the menu to local tastes. Although India still insists on joint ventures
in sectors such as telecommunications, agriculture, and insurance, it has lifted restrictions for
other industries, allowing wholly owned operations in them. However, a number of recent IJVs
have done poorly, especially for the Indian partner. On the other hand, an IJV between Indian
engineering group Kirloskar and Japan’s Toyota, for vehicle production, has had more positive
results, with Mr. Kirloskar acknowledging that Toyota has been open in sharing ideas and im-
proving the productivity of his firm.

Organizational design is another major mechanism for factoring in a means of control when
an IJV is started. Beamish et al. discuss the important issue of the strategic freedom of an IJV.
This refers to the relative amount of decision-making power that a joint venture will have, com-
pared with the parents, in choosing suppliers, product lines, customers, and so on.90 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. An IJV is usually
easier to manage if one parent plays a dominant role and has more decision-making responsi-
bility than the other in daily operations. Alternatively, it is easier to manage an IJV if the local
general manager has considerable management control, keeping both parents out of most of the
daily operations.

International joint ventures are like a marriage: the more issues that can be settled before the
IJV starts, the less likely it will be to break up. Control over the stability and success of the IJV
can be largely built into the initial agreement between the partners. The contract can specify who
has what responsibilities and rights in a variety of circumstances, such as the contractual links of
the IJV with the parents, the capitalization, and the rights and obligations regarding intellectual
property. Of course, we cannot assume equal ownership of the IJV partners; where ownership
is unequal, the partners will claim control and staffing choices proportionate to the ownership
share. 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 relation-
ships with each of the parents.91

If ownership is divided among several partners, then the parents are more likely to del-
egate 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 or-
ganizational culture, to name a few, which all result from the conflicting goals and working
practices of the parent companies.92 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. The extent of control exercised over an IJV by its parent com-
panies seems to be primarily determined by the decision-making autonomy that the parents
delegate to the IJV management—which largely depends on staffing choices for the top IJV
positions and thus on how much confidence the partners have in these managers. In addition,
if top managers of the IJV are from the headquarters of each party, the compatibility of the
managers will depend on how similar their national cultures are. This is because there are
many areas of control decisions where agreement will be more likely between those of similar
cultural backgrounds.93

248 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

Knowledge Management in IJVs
The most effective strategic leadership practices in the 21st century will be ones through which
strategic leaders find ways for knowledge to breed still more knowledge.94

Managing the performance of an IJV for the long term, as well as adding value to the parent
companies, necessitates managing the knowledge flows within the IJV network. When managed
correctly, “alliances serve as a source of new knowledge for the firm.”95 Sirmon et al. contend
that if firms can access and absorb this new knowledge, it can be used to alter existing capa-
bilities or create new ones.96 Yet, as found by Hitt et al., “cultural differences and institutional
deficits can serve as barriers to the transfer of knowledge in alliance partnerships.”97 Clearly,
then, managers need to recognize that it is critical to overcome cultural and system differences in
managing knowledge flows to the advantage of the alliance.

Knowledge management, then, is “the conscious and active management of creating, dis-
seminating, evolving, and applying knowledge to strategic ends.”98 Research on eight IJVs by
Berdrow and Lane led them to define these processes as follows.

• Transfer: Managing the flow of existing knowledge between parents and from the par-
ents to the IJV

• Transformation: Managing the transformation and creation of knowledge within the IJV
through its independent activities

• Harvest: Managing the flow of transformed and newly created knowledge from the IJV
back to the parents99

In particular, the sharing and development of technology among IJV partners provides the
opportunity for knowledge transfer among individuals who have internalized that information,
beyond any tangible assets; the challenge is to develop and harvest that information to ben-
efit the parents through complementary synergies. IJVs that were successful in meeting that
challenge were found to have personal involvement by the principals of the parent company
in shared goals, in the activities and decisions being made, and in encouraging joint learning
and coaching.100

The many operational activities and issues involved in strategic implementation—such as
negotiating, organizing, staffing, leading, communicating, and controlling—are the subjects of
other chapters in this book. Elsewhere, we include discussion of the many variables involved in
strategic implementation that are specific to a particular country or region, such as goals, infra-
structure, laws, technology, ways of doing business, people, and culture. In the following sec-
tions, the focus is on three pervasive influences on strategy implementation: government policy,
societal culture, and the Internet.

Government Influences on Strategic Implementation
Host governments influence, in many areas, the strategic choices and implementations of foreign
firms. The family-run Vermeer Company, for example, with its equipment-manufacturing factory
in Pella, Iowa, earns about a third of its revenues from exports. However, the company realized
its share of the market was falling rapidly due to competition from China, so it decided to open a
plant in Beijing, taking a Chinese partner and drawing help for the venture from the Chinese. The
chief executive, Ms. Mary Vermeer Andringa, noted that:

If we wanted to stay in the Chinese market, we needed to be there. That was the reality.101

The profitability of firms that set up operations abroad is greatly influenced, for example, by the
level of taxation in the host country and by any restrictions on profit repatriation. Other impor-
tant 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. For the most
part, however, if the corporation’s managers have done the groundwork, all these factors are
known beforehand and are part of the location and entry strategy decisions. However, what hurts
managers is to set up shop in a host country and then have major economic or governmental
policy changes after they have made a considerable investment.

Unpredictable changes in governmental regulations can be a death knell to businesses op-
erating abroad. Recent changes in Russia causing uncertainty for foreign investors were already

CHAPTER 7 • IMPLEMENTING STRATEGY 249

discussed. Another country that is often the subject of concern for foreign firms is China. Already
one of the toughest countries for mergers and acquisitions, China recently added new restrictions
on foreign investors, thus prolonging the time that a number of firms have to continue to wait
to find out whether their deals will go through. “Acquisitions that will require the ministry’s
approval include companies with a well-known brand or those that could have an impact on
‘China’s economic security.’”102 Although China contends it is more committed to a market
economy since it joined the World Trade Organization (WTO) in November 2001, history shows
that foreign firms need to be cautious about entering China.

Pushing the boundaries of both governmental and cultural traditions is getting common
among new-age companies, as exemplified by Uber, the car-ride service operating in over
600 cities in 65 countries.103

Uber Collides With France—Company’s growth snarled by entrenched business culture; “a
mockery of the French Republic.”104

Sam Schechner, Wall sTReeT JouRnal

Uber has created conflicts by rapidly entering markets and asking questions later, and, in
the case of France, trying to overturn laws. After taxi drivers in Paris burned tires and stopped
traffic, Uber managers realized the strength of the French business culture that favors govern-
ment and local companies, when two of their executives were arrested for providing illegal taxi
services.105 Despite these challenges for Uber, it was still named the second most disruptive
company in the world in 2018, trailing only SpaceX.106

Cultural Influences on Strategic Implementation
When managers are responsible for implementing alliances among partners from diverse in-
stitutional environments, such as transition- and established-market economies, they are faced
with the critical challenge of reconciling conflicting values, practices, and systems. Research by
Wade Danis shows how those important differences among Hungarian managers and Western
expatriates can affect implementation. When considering key differences in practices, for exam-
ple, Danis found that the Western expatriates evinced a team orientation, a consensual manage-
ment style, and a future-planning mentality. This compared with the findings for the Hungarian
managers, who showed an individual orientation, an autocratic management style, and a survival
mentality.107 Such advance knowledge can provide expatriate managers with valuable informa-
tion to help them in successful local operations. In other situations, the culture variable is often
overlooked when deciding on and implementing entry strategies and alliances, particularly when
we perceive the target country to be familiar to us and similar to our own. However, cultural dif-
ferences can have a subtle and often negative effect.

CULTURAL DIFFERENCES IN U.K.–EUROPEAN ALLIANCES
• Organizational formality

• The extent of participation in decision making

• Attitude toward risk

• Systemization of decision making

• Managerial self-reliance

• Attitudes toward funding and gearing (financial leveraging)108

Among these dimensions, risk orientation was the key factor that affected the performance of
the combined firm because risk-taking propensity affects managers’ approach toward strategic
options. Overall, risk-taking firms are likely to pursue aggressive strategies and deal well with
change, whereas risk-averse companies are likely to tread more carefully and employ incremen-
tal strategies. Clearly, for companies entering into an IJV, successful implementation will depend
largely on careful planning to take account of such differences, in particular that of risk orienta-
tion, to improve organizational compatibility. The greater the cultural distance between the allied
firms, the more likely problems will emerge such as conflict regarding the level of innovation
and the kinds of investments each firm is willing to pursue.

250 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

Because many of Europe’s largest MNCs—including Nestlé, Electrolux, Grand Metropolitan,
and Rhone-Poulenc—experience increasing proportions of their revenues from their positions in
the United States, they have decided to shift the headquarters of some product lines to the United
States. As they have done so, however, there is growing evidence that managing in the United
States is not as easy as they anticipated, which may have implications for European-U.S. strategic
alliances. Rosenzweig documented some reflections of European managers on their experiences
at U.S. affiliates. Generally, he has found that European managers appreciate that Americans
are pragmatic, open, forthright, and innovative. However, they also say that the tendency of
Americans to be informal and individualistic means that their need for independence and auton-
omy on the job causes problems in their relationship with the head office Europeans. Americans
simply do not take well to directives from a foreign-based headquarters.109 Rosenzweig presents
some comments from French managers on their activities in the United States.

FRENCH MANAGERS COMMENT ON THEIR ACTIVITIES IN THE UNITED
STATES

• Americans see themselves as the world’s leading country, and it’s not easy for them to ac-
cept having a European in charge.

• It is difficult for Americans to develop a world perspective. It’s hard for them to see that
what may optimize the worldwide position may not optimize the U.S. activities.

• The horizon of Americans often goes only as far as the U.S. border. As a result,
Americans often don’t give equal importance to a foreign customer. If a foreign customer
has a special need, the response is sometimes: It works here, why do they need it to be
different?

• It might be said that Americans are the least international of all people because their
home market is so big.110

Other European firms have had more successful strategic implementation in their U.S. plants by
adapting to U.S. culture and management styles. When Mercedes-Benz of Germany launched its
plant in Tuscaloosa, Alabama, U.S. workers and German trainers had doubts. Lynn Snow, who
works on the car-door line of the Alabama plant, was skeptical of whether the Germans and the
Americans would mesh well. Now, she proudly asserts that they work together, determined to
build a quality vehicle. As Jürgen Schrempp, then CEO of Mercedes’s parent, Daimler-Benz,
observed, “‘Made in Germany’—we have to change that to ‘Made by Mercedes,’ and never mind
where they are assembled.”111

The German trainers recognized that the whole concept of building a Mercedes quality car
had to be taught to the U.S. workers in a way that would appeal to them. They abandoned the
typically German strict hierarchy and instead designed a plant in which any worker could stop
the assembly line to correct manufacturing problems. In addition, taking their cue from Japanese
rivals, they formed the workers into teams that met every day with the trainers to problem solve.
Out the window went formal offices and uniforms, replaced by casual shirts with personal names
on the pocket. To add to the collegiality, get-togethers for a beer after work became common.
“The most important thing is to bring together the two cultures,” says Andreas Renschler, who
has guided the M-Class since it began back in 1993. “You have to generate a kind of ownership
of the plant.”112 The local community has also embraced the mutual goals, often having beer
fests and including German-language stations on local cable TV.

The impact of cultural differences in management style and expectations is perhaps most no-
ticeable and important when implementing international joint ventures, mergers, or acquisitions.
The complexity of such alliances requires managers from each party to learn to compromise to cre-
ate a compatible and productive working environment, particularly when operations are integrated.

In China, too, strategic implementation necessitates an understanding of the pervasive cul-
tural practice of guanxi in business dealings. Discussed in previous chapters, guanxi refers to the
relationship networks that “bind millions of Chinese firms into social and business webs, largely
dictating their success.”113 Tapping into this system of reciprocal social obligation is essential to get
permits, information, assistance to access material and financial resources, and tax considerations.
Nothing gets done without these direct or indirect connections. In fact, a new term has arisen—
guanxihu—which refers to a bond between specially connected firms that generates preferential

CHAPTER 7 • IMPLEMENTING STRATEGY 251

treatment for members of the network. Without guanxi, even implementing a strategy of with-
drawal is difficult. Joint ventures can become hard to dissolve and as bitter as an acrimonious
divorce. Problems include the forfeiture of assets and the inability to gain market access through
future joint venture partners—all experienced by Audi, Chrysler, and Daimler-Benz. For example:

Audi’s decision to terminate its joint venture prompted its Chinese partner, First Automobile
Works, to expropriate its car design and manufacturing processes. The result was an enor-
mously successful, unauthorized Audi clone, with a Chrysler engine and a First Automobile
Works nameplate.114

E-Commerce Impact on Strategy Implementation
With subsidiaries, suppliers, distributors, manufacturing facilities, carriers, brokers, and cus-
tomers all over the globe, global trade is complicated and fragmented. Shipments cross borders
multiple times a day. Are they compliant with all the latest trade regulations? Are they consis-
tently classified for each country? Can you give your buyers, customers, and service providers
the latest information, on demand?115

As indicated in this quote, global trade is extremely complicated. Deciding on a global strategy is
one thing; implementing it through all the necessary parties and intermediaries around the world
presents a whole new level of complexity. Because of that complexity, many firms decide to
implement their global e-commerce strategy by outsourcing the necessary tasks to e-commerce
enablers, companies that specialize in providing the technology to organize transactions and fol-
low through with the regulatory requirements. These specialists can help companies sort through
the maze of different taxes, duties, language translations, and so on specific to each country. Such
services allow small and medium-sized companies to go global without the internal capabilities
to carry out global e-commerce functions. These kinds of web-based services allow a company to
manage an entire global trade operation, including automation of imports and exports by screen-
ing orders and generating the appropriate documentation, paying customs charges, complying
with trade agreements, and so on.116

CONCLUSION
Cross-border strategic alliances are becoming increasingly common as innovative companies seek
rapid entry into foreign markets and as they try to reduce the risks of going it alone in complex
environments. Companies that do well are those that do their groundwork and pick complemen-
tary strategic partners. Too many, however, divorce because the devil is in the details—which is
what happens when a marriage made in heaven runs into unanticipated problems, such as cultural
clashes and government restrictions, during actual strategic implementation. Alliances in various
forms are particularly important for emerging market firms to expand to developed economies.
For SMEs, they too can work to ally with MNCs in the target locations to internationalize quickly.

Summary of Key Points

■ Strategic alliances are partnerships with other companies
for specific reasons. Cross-border, or global, strategic
alliances are working partnerships between companies
(often more than two) across national boundaries and,
increasingly, across industries.

■ Cross-border alliances are formed for many reasons,
including market expansion, cost- and technology-
sharing, avoiding protectionist legislation, and taking
advantage of synergies.

■ SMEs can overcome their resource constraints and ac-
celerate their internationalization process by leveraging
their network relationships with other companies—such
as key clients or strategic partners. Strategies include

forming MNC relationships, consolidating those rela-
tionships with MNCs, and then extending the relation-
ships to other endeavors.

■ Alliances may be short or long term; they may be full
global partnerships, or they may be for more narrow
and specific functions such as research and develop-
ment sharing.

■ Alliances often run into trouble in the strategic im-
plementation phase. Problems include loss of tech-
nology and knowledge skill-base to the other partner,
conflicting strategic goals and objectives, cultural
clashes, and disputes over management and control
systems.

252 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

■ Emerging economy firms are finding that they have
to move quickly or skip various stages to expand into
both developed as well as developing markets. They
tend to expand globally through acquisitions and al-
liances and have had to be more flexible organiza-
tionally. Their motives in developing alliances often
include the need to access specific resources such as
technology or management skills to compete globally.

■ Successful alliances require compatible partners
with complementary skills, products, and markets.
Extensive preparation is necessary to work out how
to share management control and technology and to
understand each other’s culture.

■ Strategic implementation—also called functional
level strategies—is the process of setting up overall
policies, administrative responsibilities, and sched-
ules throughout the organization. Successful im-
plementation results from setting up the structure,

systems, and processes of the firm as well as the func-
tional activities that create a system of fits with the
desired strategy.

■ Differences in national culture and changes in the po-
litical arena or in government regulations often have
unanticipated effects on strategic implementation.

■ Strategic implementation of global trade is increas-
ingly being facilitated by e-commerce enablers—
companies that specialize in providing the software
and Internet technology for complying with the spe-
cific regulations, taxes, shipping logistics, transla-
tions, and so on for each country with which their
clients do business.

■ Many multinational companies have developed non-
equity strategic alliances as a means to outsource cer-
tain activities. However, outsourcing dilemmas have
urged companies to reassess this aspect of their strate-
gies by considering not just the benefits but the costs.

Discussion Questions

7-1. Discuss the reasons that companies embark on cross-border
strategic alliances. What other motivations may prompt such
alliances? What are the driving forces for firms in emerging
economies to embark on strategic alliances? How can SMEs
expand abroad through relationships with MNCs?

7-2. Why are there an increasing number of mergers with compa-
nies in different industries? Give some examples. What in-
dustry do you think will be the next for global consolidation?

7-3. Discuss the problems inherent in developing a cooperative al-
liance to enhance competitive advantage, which also incurs
the risk of developing a new competitor.

7-4. What are the common sources of incompatibility in cross-
border alliances? What can be done to minimize them?

7-5. Explain what is necessary for companies to successfully
implement a global sourcing strategy.

7-6. Discuss the political and economic situation in the Russian
Federation with your class. What has changed since this
writing? What are the implications for foreign companies to
start a joint venture there now?

7-7. What is involved in strategic implementation? What is meant
by creating a system of fits with the strategic plan?

7-8. Explain how the host government may affect strategic
implementation—in an alliance or another form of entry strategy.

7-9. How might the variable of national culture affect strategic
implementation? Consider the earlier comments by French
and British managers regarding Americans as examples to
highlight some of these factors.

7-10. Discuss the importance of knowledge management in IJVs
and what can be done to enhance the effectiveness of that
process.

Application Exercise

7-11. Research some recent joint ventures with foreign companies
situated in India or Russia. How are they doing? Bring your
information to class for discussion. What is the climate for

foreign investors in developing economies at the time of
your reading this chapter?

CASE STUDY
IKEA Finally Opens in India, Minus the Meatballs

The furniture retailer is tailoring its offerings to local tastes
In 1996, McDonald’s, the US hamburger chain, opened its first store in India, an event seemingly
imbued with symbolic import. Five years earlier, the government had begun to relax its tight con-
trols over the Indian market, from which large western brands had long been excluded.

The opening of McDonald’s in New Delhi was a metaphor for a country opening to the
outside world. In deference to the Hindu taboo on eating beef, McDonald’s replaced its core

CHAPTER 7 • IMPLEMENTING STRATEGY 253

product—the hamburger—with alternatives like mutton pat-
ties and veggie burgers. Yet Indian consumers were expected
to embrace a global brand they had been long denied. I at-
tended that milestone launch, and the hours after I ate an in-
augural veggie burger was one of the few times I’ve ever had
food poisoning in India. As it turned out, India hasn’t treated
McDonald’s too kindly either. The brand has struggled to ap-
peal to Indian tastes. The company also ended up in a bitter
legal battle with one of its erstwhile Indian partners, trigger-
ing the collapse of its north Indian business, and severe brand
damage. I recalled McDonald’s misadventures last week as
Ikea finally opened its long-awaited first store in India, in the
southern city of Hyderabad, a dozen years after it first applied
for permission to enter a market that still tantalises foreign
companies with its promise.

As Ikea executives and their 950-strong Indian team
cheered and enthusiastic customers thronged the store, I
wondered whether India would end up as a success story for
the company founded in Sweden, or if it will be a cause of
perpetual heartburn. Ikea has done one thing right. It refused
to compromise on its determination to have 100 per cent ownership of its Indian retail busi-
ness. In 2009, as the government dawdled on a promise to relax its curbs on foreign owner-
ship in retail, Ikea abandoned plans to enter the market rather than be railroaded into a joint
venture. It only re-applied to set up shop in India in late 2012, after the government agreed to
permit full foreign ownership—and relaxed a requirement that foreign retailers source 30 per
cent of what they sell in India from local small and medium-sized enterprises.

Like McDonald’s, Ikea has also tweaked its offerings to appeal to local sensibilities. Instead of
Swedish meatballs, diners at the new store’s 1,000-seat restaurant can partake of chicken or veggie
balls, dal and rice, or biriyani. Textiles on sale have brighter colours and busier patterns than in Ikeas
elsewhere. But the company’s core proposition—value-for-money furniture and home accessories—
seems likely to resonate with cost-conscious Indian consumers. Around 1,000 items in the Hyderabad
store are priced below Rs200 ($2.86) each, which Ikea hopes will mean something for everyone.
Their cheapest item is a set of four, brightly-coloured reusable plastic spoons for just Rs15.

And, for those intimidated by self-assembly of the famous flat-pack designs, Ikea in India
has tied up with local carpenters and delivery services. Customers on the first day seemed
pleased. “This is a game changer,” said Narendranath Reddy, a 62-year-old renovating his home.
“We have been on the lookout for good quality furniture at reasonable prices, which is hard to
come by.” Others spoke of how long they had waited for the store’s arrival.

And, back in New Delhi, a friend of mine confessed she had once bought an entire girls’
bedroom set from Ikea overseas and lugged it back for her daughter. But, as companies like
Cairn, Vodafone and others can attest, creating a successful business is still no guarantee of a
happy ending for foreign companies in India, where unpredictable policy changes have caused
major headaches. Ikea has an additional potential vulnerability in India: its heavy dependence on
imported goods. In the last year, the government has reversed two decades of steady tariff-cutting
and raised import duties on a wide range of items. Ikea and its Indian fans must hope the com-
pany’s promise to provide attractive, affordable home furnishings isn’t hit by rising tariff walls.

Source: © The Financial Times Limited 2018.

Case Questions

7-12. The IKEA company has waited a long time to get into India. Trace the events and challenges that
have led up to this point.

7-13. What are the core values and strategy that IKEA wanted to implement in India?
7-14. How has IKEA been able to localize its strategic implementation in India?

In India, IKEA sells brightly coloured textiles and thousands of low-
cost products in a bid to appeal to the local market

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254 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

Endnotes

1. Max Seddon, “Alibaba to Set up Online Retail Service in
Russia,” Financial Times, September 11, 2018, www.ft.com
/content/453b58ac-b5a8-11e8-bbc3-ccd7de085ffe (accessed
March 15, 2019).

2. D. Lei and J. W. Slocum, Jr., Global Strategic Alliances: Payoffs
and Pitfalls. Organizational Dynamics (Winter 1991).

3. Jung-Ho Lai, Shao-Chi Chang, and Sheng-Syan Chen, Is
Experience Valuable in International Strategic Alliances?
Journal of International Management 16 (2010), pp. 247–261;
J. Walter, C. Lechner, and F. W. Kellermanns, Disentangling
Alliance Management Processes: Decision Making, Politicality,
and Alliance Performance. Journal of Management Studies 45,
No. 3 (2008), p. 530.

4. P. McGee, “Robotaxis: Can Automakers Catch up with Google
in Driverless Cars?” Financial Times, January 30, 2019,
www.ft.com/content/dc111194-2313-11e9-b329-c7e6ceb5ffdf
(accessed March 18, 2019).

5. P. McGee, “BMW and Daimler to Invest €1bn in Mobility Joint-
Venture,” Financial Times, February 22, 2019, www.ft.com
/content/b6fb32b6-3689-11e9-bd3a-8b2a211d90d5 (accessed
March 18, 2019).

6. Ibid.
7. J. Reed, “Grab Vies for ‘Super App’ Status in Deal with

Thailand’s Central,” Financial Times, January 31, 2019, www.
ft.com/content/3bc93e5c-251e-11e9-8ce6-5db4543da632;
M. Kishimoto, “D.com Partners with Thailand’s Central Group
to Launch E-Wallet,” January 30, 2019, https://asia.nikkei.com
/Business/Companies/JD.com-partners-with-Thailand-s
-Central-Group-to-launch-e-wallet (accessed March 21, 2019).

8. J. Griffiths, “A Marriage of Two Mindsets,” Financial Times,
March 16, 2005.

9. Ibid.
10. Ibid.
11. Dale Buss, “General Motors Teams with LG Chem to build EV-

battery plant in Lordstown, Ohio,” December 5, 2019.
12. “Toyota and Panasonic Agree to Establish Joint Venture Related

to Automotive Prismatic Batteries,” January 22, 2019, https://
global.toyota/en/newsroom/corporate/26302587.html (accessed
March 24, 2019).

13. Ibid.
14. O. Ralph, D. Weinland, and R. Armstrong, “China Paves Way for

Chubb to Acquire Majority of Local Venture,” Financial Times,
March 4, 2019, www.ft.com/content/a553078e-3e89-11e9-9bee-
efab61506f44 (accessed March 23, 2019).

15. https://www.gsk.com/en-gb/media/press-releases/gsk-
completes-transaction-with-pfizer-to-form-new-world-leading-
consumer-healthcare-joint-venture/. Accessed August 12, 2020.

16. Thomas Friedman, The World Is Flat (New York: Farrar, Straus
and Giroux, 2005), p. 144.

17. https://c3.ai/shell-selects-c3-iot-as-strategic-ai-software
– platform/ (accessed March 24, 2019).

18. www.staralliance.com/en/about (accessed March 24, 2019).
19. D. Weinland, “TPG Launches Investment Platform with China’s

State-Owned CICC,” Financial Times, January 10, 2019,
www.ft.com/content/ea3351da-149d-11e9-a581-4ff78404524e
(accessed March 24, 2019).

20. www.covisint.com (accessed March 24, 2015).
21. www.corning.com/worldwide/en/about-us/company-profile

/our-strategy.html (accessed March 24, 2019).

22. R. Milne, “Europe Left Playing Catch-up in Artificial
Intelligence,” Financial Times, June 6, 2018, www.ft.com
/content/a23a2426-6976-11e8-8cf3-0c230fa67aec (accessed
March 24, 2019).

23. Ibid.
24. Interview with Rackspace CEO by Stewart Miller, 2019.
25. Tim Burt, “Disney’s Asian Adventure,” Financial Times, October

30, 2003.
26. Ibid.
27. www.corning.com/worldwide/en/about-us/news-events

/news-releases/2016/01/saint-gobain-and-corning-announce
-new-joint-venture-to-produce-lightweight-glazing-for-the
– automotive-market.html. www.corning.com/worldwide/en
/about-us/news-events/news-releases/2017/09/youngy-group
-and-corning-form-joint-venture.html (accessed March 24, 2019).

28. Andres Parker and Gerrit Wiesmann, “Cross-border Sensitivities
Give Grounds for Pessimism,” Financial Times, September 9, 2009.

29. David Lei, “Offensive and Defensive Uses of Alliances,” in
Heidi Vernon-Wortzel and L. H. Wortzel, Strategic Management
in Global Economy, 3rd ed. (New York: John Wiley & Sons,
1997).

30. Lei, 1997.
31. T. Mitchell, Y. Yang, and J. Politi, “US Turns Down China Offer

of Preparatory Trade Talks,” Financial Times, January 22, 2019,
www.ft.com/content/466cc9e2-1e4c-11e9-b126-46fc3ad87c65
(accessed March 25, 2019).

32. D. Weinland and B. Bland, “US Tariffs Look to Torpedo China
World Leadership Hopes,” Financial Times, March 27, 2018,
www.ft.com/content/cd3f286e-315f-11e8-b5bf-23cb17fd1498
(accessed March 25, 2019).

33. New York Times, January 17, 2011.
34. Shameen Prashantham and Julian Birkinshaw, “Dancing with

Gorillas: How Small Companies Can Partner Effectively with
MNCs,” California Management Review 51, No. 1 (2008),
pp. 6–23.

35. Ibid.
36. Dovev Lavie, Capturing Value from Alliance Portfolios.

Organizational Dynamics 38, No. 1 (2009), pp. 26–36.
37. Ibid.
38. Ibid.
39. Lei, 1997.
40. www.corning.com/worldwide/en/about-us/news-events/news

-re leases/2013/10/news_center_news_releases_2013
_2013102201.html (accessed March 23, 2019).

41. Wheelen and Hunger.
42. A. E. Serwer, “McDonald’s Conquers the World,” Fortune,

October 17, 1994.
43. Ferguson, D.,“Disney Expands Free TV Channel to Russia,”

Financial Times, October 11, 2011.
44. http://www3.weforum.org/docs/WEF_Regional_Risks_Doing

_Business_report_2018 (accessed March 25, 2019).
45. Sender, H. & Chasssany, A-S., “Blackstone to Pull Out of

Russia,” Financial Times, September 21, 2014.
46. “The Russia Competitiveness Report 2011,” World Economic

Forum.
47. “The Russia Competitiveness Report 2011,” World Economic

Forum.
48. M. Seddon, “Committed Russia Investor Michael Calvey

Tripped up by Politics,” Financial Times, February 22, 2019,

http://www3.weforum.org/docs/WEF_Regional_Risks_Doing_Business_report_2018

http://www.corning.com/worldwide/en/about-us/news-events/news-releases/2013/10/news_center_news_releases_2013_2013102201.html

http://www.ft.com/content/cd3f286e-315f-11e8-b5bf-23cb17fd1498

http://www.ft.com/content/466cc9e2-1e4c-11e9-b126-46fc3ad87c65

http://www.corning.com/worldwide/en/about-us/news-events/news-releases/2017/09/youngy-group-and-corning-form-joint-venture.html

http://www.corning.com/worldwide/en/about-us/news-events/news-releases/2016/01/saint-gobain-and-corning-announce-new-joint-venture-to-produce-lightweight-glazing-for-the-automotive-market.html

http://www.ft.com/content/a23a2426-6976-11e8-8cf3-0c230fa67aec

http://www.corning.com/worldwide/en/about-us/company-profile/our-strategy.html

http://www.covisint.com

http://www.ft.com/content/ea3351da-149d-11e9-a581-4ff78404524e

http://www.staralliance.com/en/about

https://c3.ai/shell-selects-c3-iot-as-strategic-ai-software-platform/

https://www.gsk.com/en-gb/media/press-releases/gsk-completes-transaction-with-pfizer-to-form-new-world-leading-consumer-healthcare-joint-venture/

http://www.ft.com/content/a553078e-3e89-11e9-9bee-efab61506f44

https://global.toyota/en/newsroom/corporate/26302587.html

https://asia.nikkei.com/Business/Companies/JD.com-partners-with-Thailand-s-Central-Group-to-launch-e-wallet

http://www.ft.com/content/3bc93e5c-251e-11e9-8ce6-5db4543da632

http://www.ft.com/content/b6fb32b6-3689-11e9-bd3a-8b2a211d90d5

http://www.ft.com/content/dc111194-2313-11e9-b329-c7e6ceb5ffdf

http://www.ft.com/content/453b58ac-b5a8-11e8-bbc3-ccd7de085ffe

CHAPTER 7 • IMPLEMENTING STRATEGY 255

www.ft.com/content/aabd47a2-369b-11e9-bd3a-8b2a211d90d5;
the editorial board, “Russia’s Investment Image Suffers Yet
Another Blow,” Financial Times, March 4, 2019, www.ft.com
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March 25, 2019).

49. Ibid.
50. B. Masters, “Opinion Today: A High-Stakes Russian Retaliation

Game,” Financial Times, March 17, 2018, www.ft.com
/content/8b9a3e32-2979-11e8-b27e-cc62a39d57a0 (accessed
March 25, 2019).

51. www.nestle.com/media/news/nestle-investment-infant-formula
-plant-russia (accessed March 25, 2019).

52. N. Buckley, “Huge gains but also a lot of pain,” Financial Times,
October 11, 2005.

53. Garry Bruton, Daid Ahistrom, Michael Young, and Yuri Rubanik,
“In Emerging Markets, Know What Your Partners Expect,”
December 15, 2008.

54. https://tradingeconomics.com/china/imports (accessed March
25, 2019).

55. Jonathan Friedrich, Amit Noam, and Elie Nofek, Right Up the
Middle: How Israeli Firms Go Global. Harvard Business Review,
May 2014.

56. International Trade Administration. www.trade.gov/mas
/ian/build/groups/public/@tg_ian/documents/webcontent/tg
_ian_005538 (accessed March 27, 2019).

57. “U.S. Exports in China Rebound in 2010.” This article first ap-
peared in the July–September 2011 China Business Review.
Used with the permission of the China Business Review. Updated
from Christina Nelson, “Exporting to China is Not for the Faint
of Heart,” China Business Review, November 19, 2015.

58. www.globalsmes.org/html/index.php?func=about_v2&lan=en
(accessed March 27, 2019).

59. www.digitalsme.eu/about/european-digital-sme-alliance/
(accessed March 26, 2019).

60. Ibid.
61. P. Engardio, “The Future of Outsourcing,” BusinessWeek,

January 30, 2006, p. 50.
62. Ibid.
63. O. Storbeck, “Adidas Warns Supply Chain Problems Will Hurt

Sales Growth,” Financial Times, March 13, 2019, www.ft.com
/content/29f36a7e-4565-11e9-b168-96a37d002cd3 (accessed
March 15, 2019).

64. Based on M. Kripalani, D. Foust, S. Holmes, and P. Enga, “Five
Offshore Practices That Pay Off,” BusinessWeek, January 30,
2006, p. 60.

65. Josh Green, Harvard Business Review 87, No. 7/8 (2009), p. 19.
66. D. Tapscott and A. Tapscott, Blockchain Revolution: How

the Technology behind Bitcoin and other Cryptocurrencies Is
Changing the World (New York: Portfolio/Penguin, 2016).

67. H. Sanderson, “Ford to Use Blockchain in Pilot to Trace Cobalt
Mined in Congo,” Financial Times, January 16, 2019, www
.ft.com/content/d5ba0434-1979-11e9-9e64-d150b3105d21
(accessed March 29, 2019).

68. Katy George, Sree Ramaswamy, and Lou Rassey, Next-Shoring:
A CEO’s Guide. McKinsey Quarterly, January 2014.

69. Ibid.
70. Huei-Ting Tsai and Andreas B. Eisingerich, Internationalization

Strategies of Emerging Market Firms. California Management
Review, 53, No. 1 (Fall 2010).

71. Mauro F. Guillén and Estaban García-Canal, The American
Model of the Multinational Firm and the ‘New’ Multinationals
from Emerging Economies. Academy of Management
Perspectives, May 2009, pp. 23–35.

72. Ibid.
73. Huei-Ting Tsai, 2010.
74. www.infosys.com (accessed March 24, 2015); Sudheer Gupta

and Daniel Shapiro, “Building and Transforming an Emerging
Market Global Enterprise: Lessons from the Infosys Journey,”
Business Horizons, 57 (2014), 169–179; James Crabtree,
“Infosys Buys U.S. Technology Group Panaya,” FT.com,
February 17, 2015; www.icmrindia.org/free%20resources
/casestudies/Narayana (accessed March 24, 2015).

75. Financial estimates based on Q3 fiscal year 2019 according to its
company website. www.infosys.com/about/Pages/history.aspx
(accessed March 24, 2019).

76. Ibid.
77. www.infosys.com/newsroom/press-releases/Pages/partners-deliver

-digital-engineering-services.aspx (accessed March 24, 2019).
78. www.infosys.com/about/alliances/Pages/index.aspx (accessed

March 24, 2019).
79. Beth Kowitt, “It’s Ikea’s World,” Fortune, March 15, 2015,

166–175.
80. https://highlights.ikea.com/2018/facts-and-figures/home/

(accessed March 25, 2019).
81. “Mahindra and Mahindra (B): An Emerging Global Giant?”

Case study from IBSCDC India.
82. Paul Mozur and Vindu Goel, “To Reach China LinkedIn Plays by

Local Rules,” www.nytimes.com, October 5, 2014.
83. LinkedIn Faces Flak for Censoring on Behalf of China. Asia

News Monitor [Bangkok] June 6, 2014.
84. R. Faroonhar, “Don’t be Evil—Google at War with Itself,”

Financial Times, August 20, 2018, www.ft.com/content/
2b7cdc2a-a3e6-11e8-8ecf-a7ae1beff35b (accessed February 5,
2019).

85 Howard Schultz, “The Power of Partnership,” in Reimagining
India: Unlocking the Potential of Asia’s Next Superpower
(Simon & Schuster, 2013).

86. J. M. Geringer, Strategic Determinants of Partner Selection
Criteria in International Joint Ventures. Journal of International
Business Studies (First Quarter 1991), pp. 41–62.

87. J. M. Geringer and L. Hebert, Control and Performance of
International Joint Ventures. Journal of International Business
Studies 20, No. 2 (1989).

88. Geringer, 1991.
89. Hardcastle Restaurants Pvt. Ltd. (HRPL) became a direct subsid-

iary of Westlife Development Limited (WDL), a company listed
on the Bombay Stock Exchange; www.mcdonaldsindia.com
/our_story.html?v=2 (accessed March 25, 2019).

90. P. W. Beamish et al., International Management (Homewood,
IL: Irwin, 1991).

91. J. L. Schaan and P. W. Beamish, “Joint Venture General Managers
in Less Developed Countries,” in Cooperative Strategies in
International Business, F. Contractor and P. Lorange, eds.
(Toronto: Lexington Books, 1988), pp. 279–299.

92. Oded Shenkar and Yoram Zeira, “International Joint Ventures: A
Tough Test for HR,” Personnel (January 1990), pp. 26–31.

93. R. Mead, International Management (Cambridge, MA:
Blackwell Publishers, 1994).

94. R. Duane Ireland and M. A. Hitt, Achieving and Maintaining
Strategic Competitiveness in the 21st Century: The Role of
Strategic Leadership. Academy of Management Executive 19,
No. 4 (2005): p. 63.

95. R. S. Bhagat, B. L. Kedia, P. D. Harveston, and H. C.
Triandis, “Cultural Variations in the Cross-Border Transfer
of Organizational Knowledge: An Integrative Framework,”
Academy of Management Review 27, No. 2 (2002), pp. 204–221.

http://www.mcdonaldsindia.com/our_story.html?v=2

http://www.ft.com/content/2b7cdc2a-a3e6-11e8-8ecf-a7ae1beff35b

http://www.nytimes.com

https://highlights.ikea.com/2018/facts-and-figures/home/

http://www.infosys.com

http://Ibid.

http://www.infosys.com

http://www.icmrindia.org/free%20resources/casestudies/Narayana

http://www.infosys.com

http://www.ft.com/content/d5ba0434-1979-11e9-9e64-d150b3105d21

http://www.ft.com/content/29f36a7e-4565-11e9-b168-96a37d002cd3

http://www.digitalsme.eu/about/european-digital-sme-alliance/

http://www.globalsmes.org/html/index.php?func=about_v2&lan=en

www.trade.gov/mas/ian/build/groups/public/@tg_ian/documents/webcontent/tg_ian_005538

https://tradingeconomics.com/china/imports

http://www.nestle.com/media/news/nestle-investment-infant-formula-plant-russia

http://www.ft.com/content/8b9a3e32-2979-11e8-b27e-cc62a39d57a0

http://www.ft.com/content/1e593a18-3c3c-11e9-b72b-2c7f526ca5d0

http://www.ft.com/content/aabd47a2-369b-11e9-bd3a-8b2a211d90d5

256 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

96. D. G. Sirmon, M. A. Hitt, and R. D. Ireland, in press, Managing
Firm Resources in Dynamic Environments to Create Value:
Looking Inside the Black Box. Academy of Management Review
32, No. 1 (January 2007), pp. 273–292.

97. M. H. Hitt, V. Franklin, and Hong Zhu, Culture, Institutions and
International Strategy. Journal of International Management 12,
No. 2 (2002), pp. 222–234.

98. I. Berdrow and H. W. Lane, International Joint Ventures: Creating
Value through Successful Knowledge Management. Journal of
World Business 38, No. 1 (2003), pp. 15–30.

99. Ibid.
100. Ibid.
101. Louis Uchitelle, “Is Manufacturing Falling off the Radar?” New

York Times, September 10, 2011.
102. “China’s New Restrictions on Deals,” Financial Times, August

10, 2006.
103. www.businessofapps.com/data/uber-statistics/. www.cnbc.com

/2018/05/22/uber-2018-disruptor-50.html (accessed March 25,
2019).

104. Sam Schechner, “Uber Collides With France—Company’s Growth
Snarled by Entrenched Business Culture; ‘A Mockery of the
French Republic,’” Wall Street Journal, September 19, 2015: A.1.

105. Patti Waldmeir, “Beijing Joins Ranks of Car-Hailing Apps,” FT.
com, September 19, 2015.

106. www.cnbc.com/2018/05/22/uber-2018-disruptor-50.html
(accessed on March 25, 2019).

107. W. M. Danis, Differences in Values, Practices, and Systems
among Hungarian Managers and Western Expatriates: An
Organizing Framework and Typology. Journal of World Business
(August 2003), pp. 224–244.

108. Ibid.
109. P. Rosenzweig, Why Is Managing in the United States So

Difficult for European Firms? European Management Journal
12, No. 1 (1994), pp. 31–38.

110. Ibid.
111. “In Alabama, the Soul of a New Mercedes?” BusinessWeek,

March 31, 1997.
112. Ibid.
113. J. A. Pearce II and R. B. Robinson Jr., Cultivating Guanxi as a

Foreign Investor Strategy. Business Horizons 43, No. 1 (2000),
pp. 31.

114. Ibid.
115. www.NextLinx.com, September 10, 2001.
116. Ibid.

http://www.NextLinx.com

http://www.cnbc.com/2018/05/22/uber-2018-disruptor-50.html

http://FT.com

http://www.cnbc.com/2018/05/22/uber-2018-disruptor-50.html

Uber Revenue and Usage Statistics (2025)

257

8-1. To understand the importance of appropriate organizational structures to effective
strategy implementation

8-2. To understand the structural changes necessary as the firm develops and changes
strategies over time

8-3. To become familiar with the types of organizational designs suitable for the level
and scope of internationalization of the firm

8-4. To understand emergent structural forms in the global economy

8-5. To understand the role of technology in the evolution of the networked structure
and to appreciate the role of teams in achieving business goals

8-6. To realize how organizational design affects the manager’s job, for example,
on the level and location of decision making

8-7. To emphasize the role of control and monitoring systems suitable for specific
situations and locations in the firm’s international operations

Organization Structure
and Control Systems

O B J E C T I V E S

8
C H A P T E R

C itigroup’s new broker-dealer in Frankfurt is now fully operational as the US bank finalises its
Brexit contingency plans with political negotiations stuck in limbo less than two weeks before
the UK’s official leaving date (as of this writing).

Citi’s German investment firm has begun trading on the main European exchanges and issuing in
capital markets on behalf of institutional and corporate clients that can no longer be served through its
British entities, the lender said. It has also begun clearing on the Eurex exchange.

Unable to wait any longer, in recent months banks have put the finishing touches to their structural
changes as the UK heads into more Brexit uncertainty after parliament rejected the deal on offer.

Financial companies have been leasing offices, moving hundreds of staff and transferring billions
of assets to ensure international clients can trade without disruption across the EU after the UK’s exit,
when it will lose its passport to sell services across the bloc.

“Since well before the Brexit vote in 2016, all our businesses have been focused on making sure we
can continue to serve our clients in the UK and EEA, irrespective of the political outcome,” said David
Livingstone, who was named Citi’s head of Europe, Middle East and Africa in January, taking over from
veteran Jim Cowles.

Citi had a better starting position than many foreign banks that used London as a hub for access
to the rest of Europe. Mike Corbat, chief executive, told the Financial Times last month the lender had
spent in the low hundreds of millions on Brexit because it “went into Brexit operating in 20 out of 27 EU
countries” and 60 per cent of its EU staff were already outside the UK.

In 2016 Citi consolidated its 22 European Economic Area branches under its unit in Ireland,
where it offers investment banking services such as loan underwriting, syndication and trading; foreign
exchange; credit and interest rate derivatives; transaction banking and cash management.

Despite the structural changes, the bank decided to keep its Emea headquarters in London,
where it still has about 6,000 staff.

Opening Profile: Citi Sets Post-Brexit Frankfurt
Trading Hub in Motion1

(Continued)

258 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

Citi is also searching for a bigger office in Paris after boosting the number of trading jobs it plans to
relocate to the city after staff lobbied to move to the French capital rather than Germany, the FT has reported.

Executives initially said they planned to add up to 150 roles in Frankfurt and as many as 100 more
spread across Paris, Milan, Madrid, Dublin and Amsterdam. Now more may be going to France.

Source: © The Financial Times Limited 2019.

Strategic plans are abstract sets of decisions that cannot affect a company’s competitive position or
bottom line until they are implemented. Having decided on the strategic direction for the company,
international managers must then consider two of the key variables for implementing strategy: the
organizational structure and the control and monitoring mechanisms. One of the challenges of the
strategic planning process is dealing with the level of organizational complexity that tends to arise
with firms that operate across national borders. The necessity of adapting organizational structures
to facilitate changes in strategy and competitive moves, and changes in the environment—most no-
tably the uncertainty surrounding Brexit—is illustrated in this opening profile describing Citigroup’s
reorganization of its overseas operations to accommodate new strategic initiatives in the face of EU
uncertainty. As we proceed through this chapter, we need to keep in mind the effects of strategic
change and the environment (e.g., the evolution of the digital economy and uncertainty surrounding
Brexit) and how firms are structured and how that affects responsibilities. We will discuss various
structures that have been effective and structural challenges caused by the digital economy.

ORGANIZATIONAL STRUCTURE
There is no permanent organization chart for the world. . . . It is of supreme importance to be
ready at all times to take advantage of new opportunities.2

Roberto C. Goizueta, (Former) Chairman and CEO, Coca-Cola Company

Organizational structures must change to accommodate a firm’s evolving internationalization
in response to worldwide competition. Considerable research has shown that a firm’s structure
must be conducive to the implementation of its strategy.3 In other words, the structure must fit
the strategy, or it will not work. Managers are faced with how best to attain that fit in organizing
the company’s systems and tasks. The failure to adapt to changing market conditions both stra-
tegically and structurally is demonstrated by the short life span of even large companies. This is
particularly apparent in times of radical change such as when new technologies appear and dur-
ing the economic relapse that started in 2008 and resulted in many firms, such as Eastman Kodak
Inc. and Borders Bookstores, going out of business or filing for Chapter 11 bankruptcy. Even
General Motors, one of the largest global companies, was tipped over the edge into bankruptcy
after decades of poor management, surviving only with radical downsizing and government aid.

The design of an organization, as with any other management function, should be contin-
gency based, taking into account the variables of that particular system at that specific point in
time. Major variables include the firm’s strategy, size, and appropriate technology as well as the
environment where the firm operates. Given the increased complexity of the variables involved
in the international context, it is no easy task to design the most suitable organizational structure
and subsystems. In fact, research shows that most international managers find it easier to deter-
mine what to do to compete globally (strategy) than to decide how to develop the organizational
capability (structure) to do it.4 Additional variables affecting structural choices—geographic
dispersion as well as differences in time, language, cultural attitudes, technology, and business
practices—introduce further layers of complication. We will show how organizational structures
need to, and typically do, change to accommodate strategies of increasing internationalization.

EVOLUTION AND CHANGE IN MNC
ORGANIZATIONAL STRUCTURES
Historically, a firm reorganizes as it internationalizes to accommodate new strategies. The
structure typically continues to change over time with growth and with increasing levels of
investment or diversity and as a result of the types of entry strategy chosen. Internationalization

8-1. To understand the
importance of appropriate
organizational structures
to effective strategy
implementation

8-2. To understand the struc-
tural changes necessary
as the firm develops and
changes strategies over
time

CHAPTER 8 • ORGANIZATION STRUCTURE AND CONTROL SYSTEMS 259

is the process by which a firm gradually changes in response to international competition, do-
mestic market saturation, and the desire for expansion, new markets, cost effectiveness, and
diversification. As discussed in Chapter 6, a firm’s managers weigh alternatives and decide
on appropriate entry strategies. Perhaps the firm starts by exporting or by acting as a licen-
sor or licensee and then, over time, continues to internationalize by engaging in joint ventures
or by establishing service, production, or assembly facilities or alliances abroad, moving into
a global strategy. At each stage, the firm’s managers redesign the organizational structure to
optimize the strategy’s chances to work, making changes in the firm’s tasks and relationships
and designating authority, responsibility, lines of communication, geographic dispersal of units,
and so forth. This model of structural evolution has become known as the stages model, re-
sulting from Stopford’s research on 187 U.S. multinational corporations (MNCs).5 Of course,
many firms do not follow the stages model because they may start their internationalization at
a higher level of involvement—perhaps a full-blown global joint venture without ever having
exported, for example, or a born global e-company.

Even a mature MNC must make structural changes from time to time to facilitate
changes in strategy—perhaps a change in strategy from globalization to regionalization
(see Chapter 6) or an effort to improve efficiency or effectiveness. The reorganization of
Aluminum Company of America (Alcoa), for example, split the company into smaller, more
autonomous units, thereby giving more focus to growing businesses, such as automotive
products, where the market for aluminum is strong. It also enabled Alcoa to link businesses
with similar functions that are geographically divided—that is, to improve previously insuf-
ficient communication between Alcoa’s aluminum operations in Brazil and its Australian
counterparts. Alcoa, as with most MNCs, has found the need to adapt its structure continu-
ously to accommodate global expansion and new ventures. Alcoa had a presence in 30 coun-
tries, employing 59,000 people worldwide. Indeed, in September 2015, Alcoa announced
that it would split in two so as to separate its more profitable parts—making units from its
raw aluminum operations. The move was a strategic response to greatly reduced demand for
commodities from China.6

In March 2017, Alcoa restructured again. This time, the company combined several of its
businesses—primarily, aluminum smelting, cast products and rolled products—into a new Alcoa
Aluminum business unit. As a result, the company’s three business units are Alcoa Bauxite,
Alcoa Alumina, and Alcoa Aluminum.7

Our strategic goals include reducing complexity. . . Streamlining our number of busi-
ness units is aligned with those goals, and will increase our operational agility, lower
costs, and promote more efficient internal coordination. We will continue to review our
company structure and processes to ensure that Alcoa remains resilient through all
market cycles.8

Roy Harvey, CEO, Alcoa

Samsung Electronics also reorganized to become more efficient to deal with the economic
downturn in 2009. The company integrated four business units—semiconductors, LCDs, mo-
bile phones, and consumer electronics—into two divisions, regarded as parts and sets. This ne-
cessitated reassigning two-thirds of its executives and relocating 1,200 staff members.9 As of
March 2015, Samsung has a new generation of smartphones, the Galaxy 5 and 6. In early 2017,
Samsung embarked on further changes to its bureaucratic, top-down, hierarchical structure by
reducing the number of positions under the executive level. Samsung’s subsidiaries are expected
to adopt the structural changes of the parent. Moreover, leadership positions will no longer be
accorded based on seniority, but rather on job performance. The structural changes are intended
to simplify job classifications, create an entrepreneurial culture, enhance communication, and
facilitate tasks.10

Alcoa’s and Samsung’s structural changes seem to capture the organizational structure
imperative—the ongoing need to reduce complexity, enhance f lexibility, and achieve su-
perior efficiency—that many MNCs face in traditional industrial sectors as well as in the
digital economy.

260 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

The typical ways in which firms organize their international activities are shown in the
following list. (Larger companies often use several of these structures in different regions or
parts of their organization.) After the presentation of some of these structural forms, the focus
will turn to transitional organizational arrangements.

• Domestic structure plus export department

• Domestic structure plus foreign subsidiary

• International division

• Global functional structure

• Global product structure

• Matrix structure

As previously stated, many firms—especially smaller ones—start their international in-
volvement by exporting. They may simply use the services of an export management company
for this, or they may reorganize into a simple domestic structure plus export department.

To facilitate access to and development of specific foreign markets, the firm can take a further
step toward worldwide operations by reorganizing into a domestic structure plus foreign subsidiary
in one or more countries (see Exhibit 8-1). To be effective, subsidiary managers should have a great
deal of autonomy and be able to adapt and respond quickly to serve local markets. This structure
works well for companies with one or a few subsidiaries located relatively close to headquarters.

With further market expansion, the firm may then decide to specialize by creating an
international division organized along functional, product, or geographic lines. With this struc-
ture, the various foreign subsidiaries are organized under the international division, and the sub-
sidiary managers report to its head, who is typically given the title of Vice President, International
Division. This vice president, in turn, reports directly to the CEO of the corporation. The creation
of an international division facilitates the beginning of a global strategy. It permits managers to
allocate and coordinate resources for foreign activities under one roof and, thus, enhances the
firm’s ability to respond, both reactively and proactively, to market opportunities. Some conflicts
may arise among the divisions of the firm because more resources and management attention
tend to be channeled toward the international division than toward the domestic divisions and
because of the different orientations of various division managers.

Integrated Global Structures
To respond to increased product diversification and maximize benefits from both domestic and
foreign operations, a firm may choose to replace its international division with an integrated global
structure. This structure can be organized along functional, product, geographic, or matrix lines.

Chief
Executive
Officer

MarketingProduction HRMFinance

MexicoGermanyJapan

VP International
Operations

Headquarters
departments

Overseas
subsidiaries

ExHIBIT 8-1 Domestic Structure Plus Foreign Subsidiary

CHAPTER 8 • ORGANIZATION STRUCTURE AND CONTROL SYSTEMS 261

The global functional structure is designed on the basis of the company’s functions—
production, marketing, finance, and so forth. Foreign operations are integrated into the activities
and responsibilities of each department to gain functional specialization and economies of scale.
This form of organization is used primarily by small firms with highly centralized systems. It
is particularly appropriate for product lines using similar technology and for businesses with a
narrow spectrum of customers. This structure results in plants that are highly integrated across
products and serve single or similar markets.

Much of the advantage resulting from economies of scale and functional specialization may
be lost if the managers and the work systems become too narrowly defined to have the necessary
flexibility to respond to local environments. An alternative structure can be based on product lines.

For firms with diversified product lines (or services) that have different technological bases
and are aimed at dissimilar or dispersed markets, a global product (divisional) structure may
be more strategically advantageous than a functional structure. In this structure, a single product
(or product line) is represented by a separate division. Each division is headed by its own gen-
eral manager, and each is responsible for its own production and sales functions. Usually, each
division is a strategic business unit (SBU)—a self-contained business with its own functional
departments and accounting systems. The advantages of this organizational form are market con-
centration, innovation, and responsiveness to new opportunities in a particular environment. It
also facilitates diversification and rapid growth, sometimes at the expense of scale economies
and functional specialization. H. J. Heinz Company CEO William R. Johnson came on board in
April 1998 and decided that the company should restructure to implement a global strategy. He
changed the focus of the company from a multidomestic international strategy using the global
geographic area structure to a global strategy using the global product divisional structure. His
goal was further growth overseas by building international operations; this structure also read-
ily incorporated Heinz’s Specialty Pet Food Division for marketing those products around the
world.11 In 2015, Heinz merged with Kraft Foods to form the Kraft Heinz Company. As of 2019,
however, Kraft Heinz is structured according to geographic areas.12

Particularly appropriate in a dynamic and diverse environment, the global product structure
is illustrated in Exhibit 8-2.

With the global product (divisional) grouping, however, ongoing difficulties in the coordina-
tion of widely dispersed operations may result. One answer to this problem, particularly for large
MNCs, is to reorganize into a global geographic structure.

One well-known company, Volkswagen, has sought to make major structural changes
following its highly publicized diesel emission scandal, as described in the accompanying
“Management in Action” feature.

CEO

MarketingProductionFinance

Country A

Product 1
Division

Product 3
Division

Product 2
Division

Country B

Corporate
Functional Staff

Area Specialists:
North America
Latin America
Europe
Far East

ExHIBIT 8-2 Global Product (Divisional) Structure

262 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

MANAGEMENT IN ACTION
Volkswagen Makes Sweeping Changes to Management and Structure 13

V olkswagen enacted the most sweeping changes to its management board since the diesel
emissions scandal of late 2015, appointing a new chief executive and establishing a corporate
structure designed to speed up decision making across its sprawling portfolio of brands.

The world’s largest carmaker confirmed late on Thursday that Matthias Müller, the former head of
Porsche who took over the 12-brand VW Group in the wake of the diesel emissions scandal in late 2015,
would step down immediately. He will be succeeded by Herbert Diess, a former BMW executive who
became head of the core VW brand in the summer of 2015.

The company’s supervisory board, which oversees management, voted in favour of the changes
two days after a cryptic statement on Tuesday suggested the group was exploring significant changes
that could include new leadership.

Chairman Hans Dieter Pötsch thanked Mr Müller, saying he was leaving the company in robust
shape following the worst crisis in its eight-decade history. “Not only did he safely navigate Volkswagen
through that time . . . he also fundamentally realigned the group’s strategy [and] initiated cultural change,”
Mr Pötsch said.

Volkswagen’s multi-brand empire will now be bundled into three groups labelled volume, premium
and super-premium, while its trucks and buses unit is to be separated as part of a “planned preparation
for capital market readiness”.

Mr Diess will retain his role as head of the VW brand. Under the new structure, he will lead the
volume segment, which will take on group-wide responsibilities for research and development. Rupert
Stadler, the head of Audi and the new premium division, will also lead group-wide sales; Oliver Blume,
head of Porsche and the super-premium division, will take on group production and is also appointed to
the management board.

“The new structure streamlines group management, systematically leverages synergies in the
individual operating units, and speeds up decision-making,” the company said.

Mr Diess will also lead vehicle connectivity, while company IT will be led by Frank Witter, finance
chief.

One person with knowledge of the new structure said it would promote the “divide and conquer”
style of management seen at BMW, rather than the “control and command” structure that Mr Müller had
already been trying to change.

The group has not clarified whether VW’s commercial vehicles division will be bundled with the
mass-volume unit or be split—with lighter vehicles joining volume cars and heavier vehicles moving in
with trucks and buses.

The shake-up comes amid widespread shareholder pressure for German conglomerates to simplify
their operations. VW’s carmaking rival Daimler and conglomerate ThyssenKrupp are exploring similar
moves, while Europe’s biggest industrial group Siemens has already listed minority stakes in its health-
care, renewable energy and rail units.

VW’s powerful unions had been expected to vote in favour of Mr Diess’s promotion, as the deal
included the appointment of Gunnar Kilian, general secretary of the works council, to the management
board. Mr Kilian’s move is a rare appointment for a labour representative but a worthwhile compromise
in order to install Mr Diess in the top job, according to two people close to VW management.

Two others besides Mr Müller stepped down: Karlheinz Blessing left his role as head of human
resources, and Francisco Garcia Sanz departed as head of purchasing.

Separately, VW’s and Toyota’s truck divisions said on Thursday they had struck an alliance and
would work together on electric vehicles and self-driving technology, in an unusual partnership between
two of the world’s largest motor groups.

Source: © The Financial Times Limited 2018.

In the global geographic (area) structure—the most common form of organizing foreign
operations—divisions are created to cover geographic regions (see Exhibit 8-3). Each regional
manager is responsible for the operations and performance of the countries within a given region.
In this way, country and regional needs and relative market knowledge take precedence over
product expertise. Local managers are familiar with the cultural environment, government regu-
lations, and business transactions. In addition, their language skills and local contacts facilitate

CHAPTER 8 • ORGANIZATION STRUCTURE AND CONTROL SYSTEMS 263

daily transactions and responsiveness to the market and the customer. Although this is a good
structure for consolidating regional expertise, problems of coordination across regions may arise.

With the geographic structure, the focus is on marketing because products can be adapted
to local requirements. Therefore, marketing-oriented companies, such as Nestlé and Unilever,
which produce a range of products that can be marketed through similar (or common) channels
of distribution to similar customers, will usually opt for this structure. Nestlé SA, for example,
uses this decentralized structure, which is more typical of European companies, because it is
Nestlé’s policy to generate most of its sales outside of Switzerland. The company strives to be an
insider in every country in which it operates.14 Back in 2005, Nestlé reinforced its global busi-
ness strategy of emphasizing its brands by making its head of marketing responsible for Nestlé’s
seven strategic business units (SBUs)—dairy, confectionery, beverages, ice cream, food, pet
care, and food services. Those SBUs helped determine the company’s regional business strategy,
which then shaped the local market business strategies.15 Still, Peter Brabeck-Letmathe, who
was Nestlé’s marketing manager, and later chairman, insisted that:

There is no such thing as a global consumer, especially in a sector as psychologically and
culturally loaded as food. . . . This means having a local character.16

Nestlé has a presence in almost every country in the world, including emerging markets, and
it has various partnerships around the world. In 2018, Nestle sought to simplify its organizational
structure in order to accelerate decision-making and responsiveness to trends with consumers
around the world. Reflecting this strategic imperative, the Nestlé company website describes
the organization of the food and beverage business, with some product exceptions, as being
managed by geographies in three zones—Europe/Middle East/North Africa, the Americas, and
Asia/Oceania/sub-Saharan Africa. However, products such as Nestlé Health Science, Nespresso,
Nestlé Waters, and Nestlé Skin Health are managed on a global basis; which the company refers
to as Globally Managed Businesses. Its infant nutrition business was shifted from a globally
managed to a regionally managed business reported within the three zones.17

A matrix structure is a hybrid organization of overlapping responsibilities. The structure is
developed to combine geographic support for both global integration and local responsiveness,
and it can be used to take advantage of personnel skills and experience shared across both func-
tional and divisional structures. In the matrix structure, the lines of responsibility are drawn both
vertically and horizontally as illustrated in Exhibit 8-4. Although this method of management

Board of Directors

Chair

CEO

VP
Finance Group VP VP North

America
VP South
America

VP
Europe

VP
Pacific

VP
Plastics

VP
Agriculture

France United
Kingdom

Finance Production Marketing

ExHIBIT 8-3 Global Geographic Structure

264 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

and organization maximizes the focus of skills and experience in the company brought to bear
on a particular product as well as a particular region, it often brings confusion, communication
problems, and conflict over having more than one boss to whom to report as well as stress over
prioritizing time among overlapping and conflicting responsibilities. Indeed, in their research
of 36 Dutch organizations, including subsidiaries of global firms, Strikwerda and Stoelhorst
concluded from the majority of interviewees that:

[E]xecutives associate the matrix organization with unclear responsibilities, a lack of account-
ability, and political battles over resources, resulting in risk-averse behavior and loss of market
share.18

ORGANIZING FOR GLOBALIZATION
No matter what the stage of internationalization, a firm’s structural choices always involve two
opposing forces: the need for differentiation (focusing on and specializing in specific mar-
kets) and the need for integration (coordinating those same markets). The way the firm is orga-
nized along the differentiation–integration continuum determines how well strategies—along a
localization–globalization continuum—are implemented. This is why the structural imperatives
of various strategies such as globalization must be understood to organize appropriate worldwide
systems and connections.

As previously presented, global trends and competitive forces have put increasing pressure
on multinational corporations to adopt a strategy of globalization, a specific strategy that treats
the world as one market by using a standardized approach to products and markets. The follow-
ing are two examples of companies reorganizing to achieve globalization. IBM, for example,
reorganized to achieve globalization by moving away from its traditional geographic structure
to a global structure based on its 14 worldwide industry groups, such as banking, retail, and
insurance, shifting power from country managers to centralized industry expert teams. Further
restructuring to reduce overlapping functional responsibilities within Asia led IBM to develop
its globally integrated enterprise model. In this way, previously country-based functions are now
globalized. As examples, now “IBM’s growth market operations are served by HR specialists in
Manila, accounts receivable are processed in Shanghai, accounting is done in Kuala Lumpur,
procurement in Shenzhen.”19 IBM’s structure continues to evolve. Now, it uses the organizational
structure as a means to simplify its products development and delivery to customers in the IT sec-
tor. For example, IBM has adopted a structure based on product division—cognitive solutions,
global business services, technology and cloud platforms, and systems and global financing.20

And, in 2013, Microsoft, in a reversal of its divisional structure, disbanded its eight product
divisions and created four new ones arranged around broader functional themes to streamline its
technologies and compete better with Apple and Google in the global mobile and Internet mar-
kets. In 2018, Microsoft modified its organization to emphasize divisions—engineering groups
and business functions. Specifically, Microsoft’s structure included three engineering groups:
Cloud and AI Group, Experiences and Devices, and Artificial Intelligence and Research.

8-3. To become familiar with
the types of organiza-
tional designs suitable
for the level and scope of
internationalization of the
firm

VP Asia

VP Europe

Management

Research Produc-
tion Sales Finance

VP North America

ExHIBIT 8-4 Matrix Geographic Structure

CHAPTER 8 • ORGANIZATION STRUCTURE AND CONTROL SYSTEMS 265

Today, I’m announcing the formation of two new engineering teams to accelerate our innovation
and better serve the needs of our customers and partners long into the future.

Satya Nadella, CEO, Microsoft, March 29, 2019

Organizing to facilitate a globalization strategy typically involves rationalization and the de-
velopment of strategic alliances. To achieve rationalization, managers choose the manufacturing
location for each product based on where the best combination of overall cost (for example, labor,
transportation, utilities, taxes), quality of products or services, technology, proximity to markets,
and so on, can be attained. It often involves producing different products or component parts in
different countries. Typically, it also means that the product design and marketing programs are
essentially the same for all end markets around the world to achieve optimal economies of scale.
The downside of this strategy is a lack of differentiation and specialization for local markets.

Organizing for global product standardization necessitates close coordination among the
various countries involved. It also requires centralized global product responsibility (one man-
ager at headquarters responsible for a specific product around the world), an especially difficult
task for multiproduct companies. Henzler and Rall suggest that structural solutions to this prob-
lem can be found if companies rethink the roles of their headquarters and their national subsid-
iaries. Managers should center the overall control of the business at headquarters while treating
national subsidiaries as partners in managing the business—perhaps as holding companies re-
sponsible for the administration and coordination of cross-divisional activities.21

When I am there at our global product development centers, I am meeting with the design team and
reviewing design work being done there and meeting with engineers responsible for work being
done specific to that region . . .

Mary Barra, Chairman and CEO of General Motors Company

A problem many companies face in the future is that their structurally sophisticated global
networks, built to secure cost advantages, leave them exposed to the risk of environmental vola-
tility from all corners of the world. Such companies must restructure their global operations to
reduce the environmental risk that results from multicountry sourcing and supply networks.22 In
other words, the more links in the chain, the more chances for things to go wrong.

Dual Headquarters
Some MNCs have chosen dual headquarters within the home country, such as Amazon, which
announced in 2019 that it would have its new headquarters (i.e., “HQ2”) in New York City and
Northern Virginia (as of this writing, NYC had subsequently rejected the deal). Similarly, U.S.
based Sprint and T-Mobile adopted a dual headquarters structure following their merger.23 Some
multinational companies have dual headquarters—that is, corporate headquarters in two different
countries. For instance, a number of multinationals have recently opted to split their legal, fiscal,
and other personalities between various countries.

There are several strategic incentives for having a dual headquarters structure. The two most
prominent motivations for dual headquarters are tax incentives and access to a broader pool of
talent. A third motivation is related to the first motivation—strategic locations. The latter was the
principal driver in Amazon’s decision to create another headquarters.24 Some companies opt for
dual headquarters because their businesses and work forces were transformed following cross-
border mergers or acquisitions. Still other companies adopted the dual headquarters approach
in order to deal with a broader customer base in more distant countries. For example, Lenovo
Group was a Chinese computer maker until its acquisition of IBM’s personal-computer business.
Although the company identifies nine operational hubs, a company spokesperson asserted, “If you
have to nail it down,” Lenovo’s main corporate functions are split between Beijing, Singapore, and
Raleigh, North Carolina (USA).25 After completing the acquisition, the Lenovo executive team
planned to move the corporate headquarters from Beijing to New York. However, Lenovo execu-
tives soon realized that having one home base slowed the company down, and thus they instituted
the multi-headquarters approach to enhance responsiveness.26 As of 2019, Lenovo lists Hong Kong
at the corporate headquarters with key operations centers in Beijing, China and North Carolina.27

Strategic location offers some advantages with respect to economic groups—member
country advantages; however, the advantages need to be carefully balanced with organizational
complexity as is the case with Unilever in the following “Under the Lens” feature.

266 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

UNDER THE LENS
Unilever Backs Down on Plan to Move Headquarters from UK 28

Group Faced Share Pressure Against Decision to Switch to Single Netherlands Base

Unilever has scrapped plans to abandon Britain after 133 years for the Netherlands after a share-
holder rebellion handed chief executive Paul Polman a major defeat in his effort to transform
the company’s structure.

Mr Polman, who is nearing the end of his near decade-long tenure, angered some of the consumer
goods group’s most powerful UK shareholders by attempting to ditch its dual Anglo-Dutch stock market
listing and consolidate its headquarters in Rotterdam.

Unilever executives had expressed confidence they would be able to overcome the objections,
which focused on the company falling out of the FTSE 100 once it dropped its London listing. But on
Friday, the board said extensive consultations showed it was “appropriate to withdraw”.

Chairman Marijn Dekkers said the board continued to believe overhauling the company’s dual-
listing structure, with headquarters in London and Rotterdam, was in the “best long-term interests of
shareholders” and it would now “consider its next steps”.

Both Mr Polman and Mr Dekkers had promoted the move, which was announced in March, as part
of Unilever’s strategy to respond to what Mr Polman privately called the “near-death experience” of an
aborted takeover attempt last year by Kraft Heinz.

It is rather embarrassing for management who had lobbied hard for simplification.

James Targett, Berenberg

It could also accelerate Mr Polman’s departure, said Société Générale analyst Sriram Gurijala,
because the simplification was one of the last big items on his agenda.

“This is clearly a win for UK plc but frustrating for Unilever,” Berenberg analyst James Targett
wrote in a note. “It is rather embarrassing for management who had lobbied hard for simplification.”

The dual structure is a legacy of Unilever’s formation from the merger of a Dutch margarine com-
pany and British soap maker Lever Brothers 89 years ago. The company became convinced the two
headquarters were unwieldy, and billed the changes as a much-needed simplification that would make
disposals and acquisitions easier.

But the plan became fraught with symbolism as Brexit approaches, given that Unilever is a big
British employer and makes products well known in the UK, such as Marmite.

Three-quarters of Unilever’s UK share capital were required to vote in favour for the proposal to
pass. The company also needed a majority of UK shareholders present or represented to vote in favour
of the move at a meeting scheduled for October 25.

Among the leading UK institutional shareholders that expressed objections to the plan were
Columbia Threadneedle, Legal & General Investment Management, Schroders, Aviva Investors and
M&G Investments.

If Unilever dropped out of the FTSE 100, funds that track the UK index, as well as many active
funds, would have been forced to sell their Unilever stock. UK shareholders had complained they
would have to liquidate without the premium that would normally be generated in a takeover, and
with potential tax costs.

Rupert Krefting, head of corporate governance and stewardship at M&G, which says it owns
1.11 per cent of Unilever shares, welcomed the decision. “We’re very pleased that Unilever has lis-
tened to its shareholders . . . This demonstrates the value of asset managers actively engaging with
their investee companies,” he said.

The decision was hailed by Greg Clark, the UK’s business secretary, as a vote of confidence in
Britain. “A welcome decision by Unilever board having listened to shareholders,” he said. “Our indus-
trial strategy commits us to always being an open and competitive economy and a great place to locate
global headquarters.”

The Dutch government, however, was forced into an embarrassing reversal, with Mark Rutte, prime
minister, announcing he would “reconsider” a controversial decision to abolish a dividend tax, which
was seen as an effort to convince Unilever to choose Rotterdam.

If shareholders had approved the move, Unilever would have become one holding company incor-
porated in the Netherlands, with shares listed in Amsterdam, London and New York.

Many UK shareholders were convinced that Unilever was seeking cover in the more protective
jurisdiction of the Netherlands to prevent another hostile takeover attempt or the arrival of an activist
investor like those that have taken aim at rivals Nestlé and Procter & Gamble.

CHAPTER 8 • ORGANIZATION STRUCTURE AND CONTROL SYSTEMS 267

Organizing to Be Global, Act Local
In their rush to get on the globalization bandwagon, too many firms have sacrificed the ability
to respond to local market structures and consumer preferences. Managers are now realizing
that—depending on the type of products, markets, and so forth—a compromise must be made
along the globalization–regionalization continuum, and they are experimenting with various
structural configurations to be global and act local. One such company is Yum China, which is
a Shanghai-headquartered, U.S.-listed company as described in the accompanying “Under the
Lens” feature.

UNDER THE LENS
Yum China Battles McDonald’s in China 29

Y um China was split off from Yum Brands, which controls the Pizza Hut, Taco Bell and KFC fast-
food chains elsewhere in the world, in 2016. Yum China has more than 8,100 outlets in more
than 1,200 cities across the country. Its biggest local competitor is McDonald’s.

The chains represent a study in the merits of global versus local, in every aspect of the business
from management to menus. They are vying to find the formula for success across a country where nei-
ther existed until about 30 years ago.30

The Chinese golden arches have just celebrated their first anniversary under the majority owner-
ship of local investment firm Citic Capital, Citic group and Carlyle. The three paid just over $2bn for
their combined 80 per cent stake in the mainland and Hong Kong operations of McDonald’s. “When
they first opened, being western mattered. Going there was about the experience,” said Jeff Walters, a
Shanghai-based consultant with BCG. “They were seen as light and modern.”31

There are no purely Chinese equivalents on the scale that the two chains have built on the
mainland. “Operationally, to achieve that scale and consistency is difficult,” Mr Walters added. The
two rivals are still experimenting to get the mix of foreign and local right. Many customers, for
example, come to McDonald’s for the three flavours of congee for breakfast, the meal when con-
sumers are least likely to experiment. They also drink mango bubble tea after finishing their burg-
ers. Indeed, in new restaurants in fourth and fifth-tier cities, customers sometimes try to use straws
as chopsticks when consuming french fries, said Phyllis Cheung, chief executive of McDonald’s
China.

Since Yum China was spun off from its global parent, it has already done much of the heavy lifting.
KFC has expanded aggressively across the mainland and today has 6,000 stores. It has reduced costs at
a time when it is difficult to raise prices. Moreover, the macroeconomic cycle is not the most propitious:
in the first half of the year, consumer spending softened.32

Source: © The Financial Times Limited 2018.

But Unilever denied the ulterior motives, and promised to do away with two mechanisms it would
have had recourse to under its Dutch rules to thwart an unwanted takeover. Those are preference shares
with outsized voting rights and its Dutch Trust Office, or the Stichting foundation, which can issue new
shares if the board deems it to be in the company’s interest.

Unilever said it would proceed with the plan to cancel the Dutch preference shares although it de-
clined to comment on whether the trust office would remain in place.

Source: © The Financial Times Limited 2019.

A further example of localizing operational structure is Flipkart, an e-commerce com-
pany registered in Singapore and operating in India. Recently acquired by Walmart, it is
often called the Amazon of India but uses a locally designed and operated complex pyramid
structure to go local for its deliveries in India in a time-tested and accepted organization.33
While Amazon ponders whisking parcels to customers by drones, India’s leading online
retailer launched a low-tech approach to deliveries—by joining forces with 5,000 dabbawal-
las, who ferry roughly 130,000 lunch boxes up and down India’s financial capital each day;

268 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

now they begin a new stage in their 120-
year history by dropping into Flipkart’s
distribution centers to pick up everything
from books to toys, for just-in-time deliv-
ery where they also collect lunches. “It is
so hard to find reliable people who under-
stand the local geographies,” says Neeraj
Aggarwal, an executive at Flipkart, who
runs the dabbawalla partnership. “But for
people in Mumbai, these guys are trusted,
they are almost like family.”34

Levi Strauss is another example of
a company attempting to maximize the
advantages of different structural configura-
tions. The company has 655 company-owned
stores in 31 countries, and sells its products
in approximately 50,000 retail locations in
110 countries, approximately 15,000 em-
ployees, of which 5,700 are located in the
Americas, 3,700 in Europe and 3,100 in
Asia.35 Approximately half of the compa-
ny’s revenues come from outside the United
States. The company is organized into three
geographic divisions:

• Levi Strauss Americas (LSA), based in the San Francisco headquarters

• Levi Strauss Europe, Middle East, and North Africa (LSEMA), based in Brussels

• Asia Pacific Division (APD), based in Singapore

In the LSEMA division, there is a network of nine sales offices, six distribution centers, and
three production facilities. The headquarters are located in Brussels, Belgium. The company’s
European franchise partners bring the products to consumers throughout the region.36

Levi Strauss & Co.’s Asia Pacific Division comprises subsidiary businesses, licensees, and
distributors throughout the Asia Pacific region, the Middle East, and Africa.

Thus, through these various structural global–local formats, the company has ensured its
ability to respond to local needs by allowing its managers to act independently; Levi’s success
turns on its ability to fashion a global strategy that doesn’t snuff out local initiative. It’s a delicate
balancing act, one that often means giving foreign managers the freedom needed to adjust their
tactics to meet the changing tastes of their home markets. The company’s website in 2015 states
that “our goal is to expand the Levi Strauss & Co. brands in India, China, Russia, Brazil and
other emerging markets.”37 Independent contractors manufacture Levi’s products in 30 countries
and are required to adhere to the company’s code of conduct.38

Although strategy may be the primary means to a company’s competitive advantage, the bur-
den of realizing that advantage rests on the organizational structure and design; that structure, in
turn, establishes the responsibilities and guides the decisions, actions, and communications of its
employees. Because of the difficulties companies experience with trying to be glocal companies
(global and local), researchers are suggesting new, more flexible organizational designs involving
interorganizational networks and transnational design.

EMERGENT STRUCTURAL FORMS
Companies are increasingly abandoning rigid structures in an attempt to be more flexible and
responsive to the dynamic global environment. Some of the ways they are adapting are by
transitioning to formats known as interorganizational networks, global e-corporation network
structures, and transnational corporation network structures, described below. In addition, many
firms are finding that specific team configurations can provide the flexibility and responsiveness
they need to be competitive.

8-4. To understand emergent
structural forms in the
global economy

D
m

itr
y

K
al

in
ov

sk
y/

12
3R

F
G

B
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CHAPTER 8 • ORGANIZATION STRUCTURE AND CONTROL SYSTEMS 269

Teams as a Global–Local Structure
Similar to a matrix structure, but more fluid, flexible, independent, and often short-term, are the
now common global teams that crisscross functional and geographic lines on any of the formal-
ized structures described in this chapter. Discussed further in later chapters, global teams allow
for flat, self-leading structural forms within otherwise hierarchical structures and provide for
integrating local knowledge, contacts, and creativity with the firm’s overall strategy. Often the
teams are responsible for specific projects or troubleshooting, but they also may be in place long-
term for ongoing operations in multiple countries; as such, teams then create a depository of
shared knowledge and experience of benefit to them and the firm. Most of their communication
is virtual because of the time and costs involved in travel. Team leadership may move around to
different countries, depending on the project or task involved.

An increasing number of companies, such as Cisco Systems and IBM, create customized
structures according to the client needs. By selectively moving their skilled employees into
cross-company teams, they can move rapidly and flexibly to take advantage of their portfolios of
opportunities. To do this,

They assemble and disassemble teams of hundreds of people from across the company who
move from opportunity to opportunity. Their reconfigurable organizations consist of a stable
part and a variable part. The stable structure is usually the functional and/or geographical
home for nurturing talent.39

J. R. Galbraith

Other new structural formats are evolving as emerging market companies make their rapid entrée
onto the global scene, as discussed in the following “Comparative Management in Focus” section.

Comparative Management in Focus
Changing Organizational Structures of Emerging Market Companies

R apidly changing competition and global business activities demand companies to run their world-
wide operations efficiently and effectively, based on the right business models and organizational
structures. Stable organizational structures and control systems are necessary to seek timely in-

ternationalization. The major variables involved in choosing the right organizational structure depend on
a company’s global involvement and degree of localization. Fast-growing companies from emerging mar-
kets (EMs), BRIC countries (Brazil, Russia, India, and China), and rapidly developing economies (RDEs)
continue to internationalize their operations. Examples are CNOOC (China), Dr. Reddy’s Laboratories
(India), Embraer (Brazil), Gazprom (Russia), Haier Company (China), Infosys Technologies (India), Koc
Holdings (Turkey), Lenovo Group (China), Tata Motors (India), and Wipro (India).40 These companies
are the first wave of highly successful firms benefiting from the globalization phenomenon.41

Interestingly, the expansion models these emerging or developing market companies seek from
Asia, Latin America, and Eastern Europe are unique and may not fit with today’s mainstream multina-
tional corporation (MNC) model because of the following three reasons. First, many emerging market
companies are avoiding the traditional roadmap to internationalization and are instead capitalizing on
the born-global phenomenon, which means running their operations and opening subsidiaries world-
wide from the beginning. Second, they are finding niche businesses where competition is limited.
Third, they are thriving in old-economy industries that have been abandoned by established MNCs
from developed countries.

A new breed of companies in those geographic areas have excelled in global business because of
their unique organizational structures and design. Like Korean chaebols (industrial conglomerates),
most emerging market companies were started as family businesses and entrepreneurial entities in
which ownership and control of the firms resided with the families. Therefore, the control mechanism
is somewhat bureaucratic and headquarters-centered. Currently, a multitude of changes are in the
pipeline that will force emerging market companies to redefine their family-based governance struc-
tures and rigid control systems.

Major structural changes include simplifying hierarchies, reducing family ownerships, providing
more powers to subsidiaries, and seeking organizational structures based on either the traditional MNC

(Continued)

270 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

Brazil is typical of emerging markets for which both local and global firms must plan
their strategy and organizational structures while considering the vast differences in macro-
and micro-regions and infrastructures within the country. Sao Jose Dos Campos is home to
Embraer, the world’s third largest commercial aircraft manufacturing company, and Thales
Alinear Space, the European telecommunications and space company; the city is one of the
ten competitive micro-regions for doing business in Brazil, five of which are in the greater
Sao Paolo metropolitan area. However, the farther one travels outside that region, the less one
sees the infrastructure and pockets of competitive regions to attract businesses. Logistics and
infrastructure are better in the south, but road quality is very substandard outside of the south
and southeast. Firms therefore must realize that, although there are huge untapped markets in
Brazil, they must recognize the nature of the emerging market needs for logistical and control
systems.42

Business Groups
The business group is an organizational form that is common in developed economies (e.g.,
Italy and Sweden) and emerging economies (e.g., Brazil, Chile, China, India, Indonesia,
South Korea, Mexico, and Thailand), but is especially prevalent in many emerging markets.43
They tend to be comprised of legally separate firms and operate in many—often unrelated—
industrial sectors. Moreover, these separate firms tend to be held together by both formal
relationships (e.g., cross-holding of equity) and informal ones (e.g., family). For example, Tata
Group, which has over 700,000 employees, consists of 28 publicly listed Tata enterprises with
a combined market capitalization of roughly U.S.$145 billion (2018). Each Tata company op-
erates independently with guidance and oversight provided by its own board of directors. Tata
continues to operate in a broad range of industrial sectors including IT consulting, auto and
truck manufacturing, steel, chemicals, beverages, financial capital, power, advances systems,
hotels, and communications.44 In countries with weak institutional environments, business
groups help to overcome the institutional voids by creating their own internal markets for
capital, labor, and products.45

In South Korea, there are very large family-run conglomerates, known as chaebol, which
have a strong influence on South Korea’s economy and very strong political influence. The word
chaebol comes from the Korean words chae, which means wealth, and bol, which means clan or
clique. In the typical chaebol, founding family members are inserted in ownership or key man-
agement positions, allowing the family to maintain control over all of the businesses. Chaebol
have relied on strong government ties in order to obtain government subsidies, loans, and tax
incentives so that they can be global competitors.46

Organizational Structure in the Digital Economy
As multinational companies simultaneously manage the evolving geopolitical environment and
pressures to be local, the upsurge in digital technologies has facilitated the global integration of
processes and strategic changes in multinational companies. As a result, organizational leaders
have been required to rethink using organizational models that have been effective over the past
50 years and consider new ways in which to structure their organizations in order to achieve
worldwide competitive advantage.

model or company-specific hybrid structures. Interestingly, many emerging market companies have
been following the model of “be global, act local” in becoming responsible citizens and adapting their
products and services. Embraer, Haier Group, Lenovo, Mittal Steel, Orsacom, and others fit in this
category. In addition, overseas Chinese business networks (OCBNs) are also changing to become part
of the globalization phenomenon. Increasingly, emerging market companies from Asia, Latin America,
Africa, and Eastern Europe will seek internationalization in their own unique ways, leading to hybrid
structures and fast-growth entities. Of course, these newly emerging MNCs will become globally in-
tegrated, using multidomestic synergies and international/global/transnational strategies. Their future
goals and scope of operations will determine organizational structures and global initiatives.

Source: Syed Tariq Anwar, Professor, West Texas A&M University, used with permission.

CHAPTER 8 • ORGANIZATION STRUCTURE AND CONTROL SYSTEMS 271

The Boston Consulting Group has observed three salient organizational transformations: the
emergence of platform-based teaming, synchronization of centralization and decentralization,
and shifting role of the headquarters.47

Platform-based Teaming
Over the years, multinational companies have tended to establish vertically based teams within
business units or geographic areas. Horizontally based teams—across business units, functions,
or geographic areas—tended to be time-consuming and increase complexity. A migration toward
strategies that underscore customer-oriented solutions and outcomes coupled with digital plat-
forms that have drastically reduced internal communication and collaborative costs has created a
strategic imperative for organizations to be more nimble, flexible, and customer-oriented. In these
situations, the structuring of organizational teams will need to transcend business units, functions,
and geographic boundaries. As such, global collaborative platforms will pave the way for team
members to communicate effectively and exploit sophisticated digital devices. For example, Rolls
Royce has cross-functional expert teams that use “real-time communication and remote robotics”
to interact with engineers and maintenance crews to service airplanes around the globe.48

Multinational companies need to move from “vertical” teams in a business unit or region to
“horizontal” teams that cross businesses, functions, and locations.

Centralization and Decentralization
The second trend entails simultaneously managing centralization and decentralization of
processes, functions, and decision-making authority. In an attempt to balance organizational
complexity that arises with the pressures to be close to customers and without compromis-
ing control, companies such as Hindustan Unilever are allocating more decision making
to its teams in local markets within India. As such, its local managers with depth of local
knowledge are given the opportunity to share their information and experiences with corpo-
rate strategists with respect to product launches and positioning and customer engagement.
Digital technology has enabled companies to centralize some key functions and processes.

Changing Role of the Headquarters
In many traditional MNCs, headquarters have played a leading role in organizational decision
making. However, MNCs have been evolving—as noted in the examples throughout this
chapter. Some MNCs are seeking to balance local and global imperatives with more auton-
omous country-level and regional customer-centric operations. As such, the headquarters of
many MNCs is becoming smaller or perhaps shared with regional headquarters. Moreover,
companies are centralizing certain functions in centers of excellence instead of headquarters to
control and achieve scale efficiencies, to access local talent, or both. A Scandinavian executive
asserted that digital technologies need to serve as a “spinal cord” that connects the regional
operations, center of excellence, and headquarters in order to facilitate internal communication

Processes,
Controls,

and Technologies

Organization,
Talent,

and Culture

Strategy,
Leadership,

and
Communication

Customer
Engagement

Products
and

Services

processes and ensure control, which is consistent with the notion of a net-
work structure that embodies a transnational strategy.49

Digital Organizational Readiness
As company leaders contemplate strategic and structural changes in the digital
economy, they need to understand the gaps between the current and desired
levels of readiness. A Deloitte Consulting study recommends examining the
gaps along five dimensions.50

1. The proper vision, leadership, and communications for a digital
strategy

2. Desired customer engagement

3. Desired products and services and ability to develop and sell them
(i.e., the right strategy)

4. Desired organization, talent, and culture

5. Desired processes, control mechanisms, and technologies

272 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

The Global E-Corporation Network Structure
The organizational structure for global e-businesses, in particular for physical products, typically
involves a network of virtual e-exchanges and bricks-and-mortar services, whether those services
are in-house or outsourced. This structure of functions and alliances makes up a combination of
electronic and physical stages of the supply chain network, as illustrated in Exhibit 8-5.

As such, the network comprises some global and some local functions. The centralized
e-exchanges for logistics, supplies, and customers could be housed anywhere; suppliers, manu-
facturers, and distributors may be in various countries, separately or together, wherever efficien-
cies of scale and cost may be realized. The final distribution system and the customer interaction
must be tailored to the customer-location physical infrastructure and payment infrastructure as
well as to local regulations and languages.51

The result is a global e-network of suppliers, subcontractors, manufacturers, distributors,
buyers, and sellers, communicating in real time through cyberspace. This spreads efficiency
throughout the chain, providing cost-effectiveness for all parties.52 Dell Computer is an example
of a company that uses the Internet to streamline its global supply systems. It has a number of
factories around the world that supply custom-built PCs to customers in that region. Customers’
orders are received through call centers or Dell’s own website. The order for components then
goes to its suppliers, which have to be within a 15-minute drive of its factory. The component
parts are delivered to the factory, and the completed customers’ orders are collected within a few
hours. Dell maintains Internet connections with its suppliers and connects them with its customer
database so that they have direct and real-time information about orders. Customers also can use
Dell’s Internet system to track their orders as they go through the chain.53

Dell’s organizational structure to implement its business model has evolved to what is known
as a virtual company, or value web. Dell’s strategy is to conduct critical activities in-house and
outsource nonstrategic activities.

The Transnational Corporation (TNC) Network Structure
To address the globalization–localization dilemma, firms that have evolved through the multi-
national form and the global company seek the advantages of horizontal organization in the
pursuit of transnational capability—that is, the ability to manage across national boundaries,
retaining local flexibility while achieving global integration.54 This capability involves linking
foreign operations to each other and to headquarters in a flexible way, thereby leveraging local

PayPal
or OtherCustomer

Order

Firm 3
Assembly
(Virtual)

Component
Parts

Supply Chain
Distributors

Transportation
Fed-Ex/UPS

Contract
Manufacturer

B2B Supplier
Exchange

Logistics
B2B

Exchange

Firm 3
B2C

Customer
Exchange

Firm 3
Customer
Support

Product

Customer

Helen

Bricks & Mortar

Key:

Physical processes

Virtual transactions Information flow

ExHIBIT 8-5 A Global E-Corporation Network Structure

CHAPTER 8 • ORGANIZATION STRUCTURE AND CONTROL SYSTEMS 273

and central capabilities. ABB (a global leader in power and information technologies, based in
Zurich, Switzerland) is an example of such a decentralized horizontal organization. ABB oper-
ates in 100 countries with about 147,000 employees with four divisional presidents and three
regional presidents. ABB prides itself on being a truly global company, with 11 board members
representing ten countries—two board members have multiple citizenships.55 Thus, this struc-
ture is less a matter of boxes on an organizational chart and more a matter of a network of the
company’s units and their system of horizontal communication. This involves lateral communi-
cation across networks of units and alliances rather than in a hierarchy. The system requires the
dispersal of responsibility and decision making to local subsidiaries and alliances. The effective-
ness of that localized decision making depends a great deal on the ability and willingness to
share current and new learning and technology across the network of units. The matrix structure
typical of the transnational company creates a complex coordination and control system as it at-
tempts to combine:

• The capabilities and resources of a multinational corporation.

• The economies of scale of a global corporation.

• The local responsiveness of a domestic company.

• The ability to transfer technology efficiently, typical of the international structure.56

Whatever the names given to the organizational forms emerging to deal with global competi-
tion and logistics, the MNC organizational structure as we know it, with its hierarchical pyramid,
subsidiaries, and world headquarters, is gradually evolving into a more fluid form to adapt to stra-
tegic and competitive imperatives. As is now well known, these more flexible forms are facilitated
by the ever-developing technologies that enable various forms of electronic instant communica-
tion to connect elaborate networks of people and information around the world, regardless of their
locations. In this new global web, the location of a firm’s headquarters is unimportant. Various
alliances tie together units and subunits in the web. Corning Incorporated, for instance, changed
from its national pyramid-like organization to a global web, enabling it to make optical cable
through its European partner, Siemens AG, and medical equipment with Ciba-Geigy.

In yet another structural variation, Intel, in adapting to changes in the semiconductor indus-
try, embarked on a wholesale reorganization of its businesses. Intel’s executives decided that they
wanted the company to focus more on what was going on outside the business and developed a
structural focus they call Platformisation—that is, customizing a range of chips in a combination
suitable for a particular target market, as a response to the increasing need for speedy adaptation to
the market.57 As the world’s biggest semiconductor maker, with a global workforce of over 107,000
employees worldwide, the company’s general description of its approach to organizing is as follows:

A corporation is a living organism; it has to continue to shed its skin. Methods have to change.
Focus has to change. Values have to change. The sum total of those changes is transformation.58

Andy Grove, former Chairman and CEO, Intel

The network structure makes clear that the company’s operating units link vastly different
environmental and operational contexts based on varied economic, social, and cultural milieus.
This complex linkage highlights the intricate task of a giant MNC to rationalize and coordinate
its activities globally to achieve an advantageous cost position while tailoring itself to local mar-
ket conditions (to achieve benefits from differentiation).59

CHOICE OF ORGANIZATIONAL FORM
Two major variables in choosing the structure and design of an organization are the opportuni-
ties and need for (1) globalization and (2) localization. Exhibit 8-6 depicts alternative structural
forms appropriate to each of these variables and the strategic choices regarding the level and type
of international involvement the firm desires.

This figure thereby updates the evolutionary stages model to reflect alternative organiza-
tional responses to more recent environments and to the anticipated competitive environments
ahead. The updated model shows that, as the firm progresses from a domestic to an international
company—and perhaps later to a multinational and then a global company—its managers adapt

8-5. To understand the role
of technology in the
evolution of the networked
structure and to appreciate
the role of teams in
achieving business goals

274 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

the organizational structure to accommodate their relative strategic focus on globalization versus
localization, choosing a global product structure, a geographic area structure, or perhaps a ma-
trix form. The model proposes that, as the company becomes larger, more complex, and more
sophisticated in its approach to world markets (no matter which structural route it has taken), it
may evolve into a transnational corporation (TNC). The TNC strategy is to maximize opportu-
nities for both efficiency and local responsiveness by adopting a transnational structure that uses
alliances, networks, and horizontal design formats. The relationships between choice of global
strategy and the appropriate structural variations necessary to implement each strategic choice
are further illustrated in Exhibit 8-7.

Organizational Change and Design Variables
When a company makes drastic changes in its goals, strategy, or scope of operations, it will usu-
ally also need a change in organizational structure. However, other, less obvious indications of
organizational inefficiency also signal a need for structural changes; conflicts among divisions and
subsidiaries over territories or customers, conflicts between overseas units and headquarters staff,
complaints regarding overseas customer service, and overlapping responsibilities are some of these
warning signals. Exhibit 8-8 lists some indications of the need for change in organizational design.

O
pp

or
tu

ni
tie

s a
nd

N
ee

d
fo

r G
lo

ba
liz

at
io

Opportunities and Need for Localization

Horizontal organization,
alliances, and networks

Transnational
structure

Geographic
area

structure

Domestic functional
with international

division

Global
product
structure

TNC

Matrix structure

MNC

Global company

International
company

ExHIBIT 8-6 Organizational Alternatives and Development for Global Companies

Sources: Based on models by R. E. White and T. A. Poynter, “Organizing for Worldwide Advantage,”
Business Quarterly 54 (Summer 1989); John M. Stopford and Louis T. Wells Jr., Managing the
Multinational Enterprise (New York: Basic Books, 1972); C. A. Bartlett, “Organizing and Controlling
MNCs,” Harvard Business School Case Study, No. 9 (March 1987), pp. 365, 375.

Strategy
Organizational
Structure Delegation

Need to
Coordinate

Organizational
Culture

Multidomestic

International

Global

ransnational

Global area

Intl. Division

Product Group

Global Matrix

To national unit

Centralize core; rest to units

Locate where globally optimum

Centralized and decentralized

Low

Medium

High

Very High

Low impact

Medium

Important

Crucial

ExHIBIT 8-7 Structural Variables to Implement Global Strategies

Source: Based on C. W. L. Hill and E. R. Jones, Strategic Management: An Integrated Approach, 3rd ed. (Boston, MA: Houghton Mifflin
Company 1995), p. 390.

CHAPTER 8 • ORGANIZATION STRUCTURE AND CONTROL SYSTEMS 275

At persistent signs of ineffective work, a company should analyze its organizational design,
systems, and work flow for the possible causes of those problems. The nature and extent of any
design changes must reflect the magnitude of the problem. In choosing a new organizational de-
sign or modifying an existing structure, managers must establish a system of communication and
control that will provide for effective decision making. At such times, managers need to localize
decision making and integrate widely dispersed and disparate global operations.

Besides determining the behavior of the organization on a macro level (in terms of what the
different divisions, subsidiaries, departments, and units are responsible for), the organizational
design must determine behavior on a micro level. For example, the organizational design affects
the level at which certain types of decisions will be made. Determining how many and what
types of decisions can be made and by whom can have drastic consequences; both the locus
and the scope of authority must be carefully considered. This centralization– decentralization
variable actually represents a continuum. In the real world, companies are neither totally cen-
tralized nor totally decentralized. The level of centralization imposed is a matter of degree.
Exhibit 8-9 illustrates this centralization–decentralization continuum and the different ways that
decision making can be shared between headquarters and local units or subsidiaries. In general,

Local managers
make decision

and inform
HQ

Subsidiary/Local Unit
Authority

Headquarters
Authority

Ce
nt

ra
liz

Decentralized

HQ
management

makes decision
and informs

local managers

HQ management
makes decision
and “sells” to

subsidiary
managers

HQ
management

makes decision
and recommends
to local managers

HQ and local
managers
consult on
decisions

Local managers
present problem
and solution to
HQ for decision

Local managers
make decision
and “sell” to

Area of control
at local level

Area of control
by headquarters

ExHIBIT 8-9 Locus of Decision Making in an International Organization

•
•
• Lack of competitiveness; failure to meet goals or capitalize on opportunities
• Poor management, leadership, communication, delegation, or morale
•

directing export activities to controlling overseas manufacturing and marketing units;
a change in the size of operations on a country, regional, or worldwide basis; or failure
of foreign operations to grow in accordance with plans and expectations

• Clashes among divisions, subsidiaries, or individuals over territories or customers in
the field

• Divisive conflicts between overseas units and domestic division staff or corporate staff
• Underutilization of overseas manufacturing or distribution facilities
• Duplication of sales offices or geographic operational units within an area
• An increase in overseas customer service complaints
• Breakdowns in communications within and among organizations
• Bottlenecks, too many reporting layers, and ill-defined executive responsibilities
• Lack of innovation

Downturn in profitability or finances
New management with different goals and strategies

New strategic directions: growth, alliances, retrenchment; expanding globally from

ExHIBIT 8-8 Changes That May Necessitate New Structural Designs

Source: Based on Business International Corporation, New Directions in Multinational Corporate
Organization (New York: Business International Corporation, 1981).

276 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

centralized decision making is common for some functions (finance, research and development)
that are organized for the entire corporation, whereas other functions (production, marketing,
sales) are more appropriately decentralized. Two key issues are the speed with which the deci-
sions have to be made and whether they primarily affect only a certain subsidiary or other parts
of the company as well.

As noted, culture is another factor that complicates decisions on how much to decentralize
and how to organize the work flow and the various relationships of authority and responsibil-
ity. Part 4 of this book more fully presents how cultural variables affect people’s attitudes about
working relationships and about who should have authority over whom. At this point, it is im-
portant merely to note that cultural variables must be taken into account when designing an or-
ganization. Delegating a high level of authority to employees in a country where workers usually
regard the boss as the rightful person to make all the decisions is not likely to work well. Clearly,
managers must think through the interactions of organizational, staffing, and cultural issues be-
fore making final decisions.

In summary, no one way to organize is best. Contingency theory applies to organizational
design as much as to any other aspect of management. The best organizational structure is
the one that facilitates the firm’s goals and is appropriate to its industry, size, technology, and
competitive environment. Structure should be fluid and dynamic and highly adaptable to the
changing needs of the company. The structure should not be allowed to be bogged down in
the administrative heritage of the organization (that is, “the way we do things around here” or
“what we’ve always done”) to the point that it undermines the very processes that will enable
the firm to take advantage of new opportunities.

Most likely, however, the future for the MNC structure, as well as for small businesses and
born globals, lies in a global web of networked companies. Ideally, a company tries to organize
in a way that will allow it to carry out its strategic goals; the staffing is then done to mesh with
those strategic goals and the way the organizational structure has been set up. In reality, however,
the existing structural factors often affect strategic decisions, so the result may be a trade-off of
desired strategy with existing constraints. So, too, with staffing. Ideal staffing plans have to be ad-
justed to reflect the realities of assigning managers from various sources and the local regulations
or cultural variables that make some organizing and staffing decisions more workable than others.

What may at first seem a linear management process of deciding on strategy, then on struc-
ture, and finally on staffing is actually an interdependent set of factors that must be taken into
consideration and worked out as a set of decisions. Chapter 9 explores how staffing decisions
are—or should be—intricately intertwined with other decisions regarding strategy, structure, and
so forth. A unique set of management cadre and skills in a particular location can be a competi-
tive advantage in itself, so it may be a smart move to build strategic and organizational decisions
around that resource rather than risk losing that advantage. The following sections present some
other processes that are involved in implementing strategy and are interconnected with coordi-
nating functions through organizational structure.

CONTROL SYSTEMS FOR GLOBAL OPERATIONS
To complement the organizational structure, the international manager must design efficient
coordinating and reporting systems to ensure that actual performance conforms to expected
organizational standards and goals. The challenge is to coordinate far-flung operations in vastly
different environments with various work processes; rules; and economic, political, legal, and
cultural norms. The feedback from the control process and the information systems should
signal any necessary change in strategy, structure, or operations in a timely manner. Often the
strategy, the coordinating processes, or both, need to be changed to reflect conditions in other
countries. Organizations may also restructure and set up reporting systems to avoid problems
preemptively that would negatively affect its processes and image.

The design and application of coordinating and reporting systems for foreign subsidiaries and
activities can take any form that management wishes. MNCs usually employ a variety of direct
and indirect coordinating and control mechanisms suitable for their organization structure. For
example, in the transnational network structure, decision-making control is centralized to key
network nodes, greatly reducing emphasis on bureaucratic control. Other specific mechanisms are
summarized in the next sections.60

8-6. To realize how
organizational design
affects the manager’s
job, for example, on
the level and location
of decision making

CHAPTER 8 • ORGANIZATION STRUCTURE AND CONTROL SYSTEMS 277

Direct Coordinating Mechanisms
Direct mechanisms that provide the basis for the overall guidance and management of foreign
operations include the design of appropriate structures (discussed previously in this chapter) and
the use of effective staffing practices (discussed in Chapters 9 and 10). Such decisions proactively
set the stage for operations to meet goals rather than troubleshooting deviations or problems after
they have occurred.

Staffing is not only a means of control, but also a venue through which groups and individuals
bring their cultural properties into a system.61

Oded Shenkar, JouRnal of inTeRnaTional business sTudies, 2012

Expatriates from headquarters exert control over the foreign affiliate through the expectations
of the national and corporate culture of the parent company; whereas, if the staffing assignment
is through third-country nationals, it is likely that somewhat less of the corporate culture might
be brought to bear locally and certainly less of the national culture of the parent.62 In situations
where parent control might be considered less important, local managers would be considered,
thus delegating the control to the local level.

When McDonald’s first opened its doors in Moscow in 1990, the biggest control problem
was quality control for its food products. McDonald’s anticipated that challenge and adopted a
strategy of vertical integration for its sourcing of raw materials.63 To control the quality, distribu-
tion, and reliability of its ingredients, McDonald’s built a $40 million, 110,000-square-foot plant
in a Moscow suburb to process the required beef, milk, buns, vegetables, sauces, and potatoes. In
addition, the company brought the managers to Toronto, Canada, for five months of training.64
Top management at McDonald’s anticipated difficulties with the setup and daily operations of
this IJV and, indeed, had been working toward the opening day for 13 years. Through careful
planning for the control of crucial operational factors, they solved the sourcing, distribution, and
employment problems inherent in the former Soviet Union.65

As of 2018, McDonald’s has been successful in Russia by “going local.” It has increased
the number of Russian McDonald’s restaurants by 6 percent year-over-year, versus 1.5 percent
growth in the rest of the world. A McDonald’s spokesperson said,66 “People are only now starting
to understand: We’re one of the most Russian companies there is.”67 Indeed, a plant near Moscow
provides fries to over 650 McDonald’s restaurants in Russia.68 By doing so, McDonald’s has lo-
cally sourced 98 percent of its products in Russia, a statistic that it shares in local advertisements.

Other direct mechanisms are visits by head-office personnel and regular meetings to allow
employees around the world to consult and troubleshoot. Increasingly, those meetings comprise
videoconferences to allow face-to-face, if not physical, interaction among managers around the
world to enable faster and less-expensive frequent meetings. Top executives from headquarters
may use periodic visits to subsidiaries to check performance and help anticipate future problems.
The meetings allow each general manager to keep in touch with her or his associates, with the
overall mission and strategy of the organization, and with comparative performance data and
new problem-solving techniques. Increasingly, the tools of technology are being applied as direct
mechanisms to ensure up front that operations will be carried out as planned, in particular in
countries where processes such as efficient infrastructure and goods forwarding cannot be taken
for granted. An example of this is the logistics monitoring system Air Express International set
up in Latin America to minimize its many problems there.

Indirect Coordinating Mechanisms
Indirect coordinating mechanisms typically include sales quotas, budgets, and other financial
tools as well as feedback reports, which give information about the sales and financial perfor-
mance of the subsidiary for the last quarter or year.

Domestic companies invariably rely on budgets and financial statement analyses, but for foreign
subsidiaries, financial statements and performance evaluations are complicated by financial variables
in MNC reports, such as exchange rates, inflation levels, transfer prices, and accounting standards.

To reconcile accounting statements, MNCs usually require three sets of financial statements
from subsidiaries. One set must meet the national accounting standards and procedures prescribed
by law in the host country. This set also aids management in comparing subsidiaries in the same
country. A second set must be prepared according to the accounting principles and standards the

278 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

home country requires. This set allows some comparison with other MNC subsidiaries. The third set
of statements translates the second set of statements (with certain adjustments) into the currency of
the home country for consolidation purposes, in accordance with FASB Ruling Number 52 of 1982.
A foreign subsidiary’s financial statements must be consolidated line by line with those of the parent
company, according to International Accounting Standard Number 3, adopted in the United States.69

Researchers have noted comparative differences between the use of direct versus indirect
controls among companies headquartered in different countries. One study by Egelhoff examined
the practices of 50 U.S., U.K., and European MNCs over their foreign subsidiaries. It compared
the use of two mechanisms—the assignment of parent-company managers to foreign subsidiar-
ies and the use of performance reporting systems (that is, comparing behavior mechanisms with
output reporting systems).70 The results of this study show that considerable differences exist in
practices across MNC nationalities. For example, U.S. MNCs monitor subsidiary outputs and rely
more on frequently reported performance data than do European MNCs. The latter tend to assign
more parent-company nationals to key positions in foreign subsidiaries and can count on a higher
level of behavior control than their U.S. counterparts.71

These findings imply that the U.S. system, which measures more quantifiable aspects of
a foreign subsidiary, provides the means to compare performance among subsidiaries. The
European system, on the other hand, measures more qualitative aspects of a subsidiary and its
environment, which vary among subsidiaries—allowing a focus on the unique situation of the
subsidiary but making it difficult to compare its performance to other subsidiaries.72

MANAGING EFFECTIVE MONITORING SYSTEMS
Management practices, local constraints, and expectations regarding authority, time, and com-
munication are but a few of the variables likely to affect the appropriateness of monitoring
(or control) systems. The degree to which headquarters’ practices and goals are transferable
probably depends on whether top managers are from the head office, the host country, or a third
country. In addition, information systems and evaluation variables must all be considered when
deciding on appropriate systems.

The Appropriateness of Monitoring and Reporting Systems
One example of differences in the expectations regarding monitoring practices, and therefore in
the need for coordination systems, is indicated by a study of Japanese and U.S. firms. Ueno and
Sekaran state that their research shows that “the U.S. companies, compared to the Japanese compa-
nies, tend to use communication and coordination more extensively, build budget slack to a greater
extent, and use long-term performance evaluations to a lesser extent.”73 Furthermore, Ueno and
Sekaran conclude that those differences in reporting systems are attributable to the cultural vari-
able of individualism in U.S. society, compared to collectivism in Japanese society. For example,
U.S. managers are more likely to use formal communication and coordination processes, whereas
Japanese managers use informal and implicit processes. In addition, U.S. managers, who are evalu-
ated on individual performance, are more likely to build slack into budget calculations for a safety
net than their Japanese counterparts, who are evaluated on group performance. The implications of
this study are that managers around the world who understand the cultural differences in control
practices will be more flexible in working with those systems in other countries.

The Role of Information Systems
Reporting systems, such as those described in this chapter, require sophisticated information sys-
tems to enable them to work properly—not only for competitive purposes but also for purposes of
performance evaluation. Top management must receive accurate and timely information regarding
sales, production, and financial results to be able to compare actual performance with goals and to
take corrective action where necessary. Most international reporting systems require information
feedback at one level or another for financial, personnel, production, and marketing variables.

The specific types of functional reports, their frequency, and the amount of detail required
from subsidiaries by headquarters will vary. Neghandi and Welge surveyed the types of func-
tional reports submitted by 117 MNCs in Germany, Japan, and the United States.74 They found
that U.S. MNCs typically submit about double the number of reports as do German and Japanese

8-7. To emphasize the
role of control and
monitoring systems
suitable for specific
situations and locations
in the firm’s international
operations

CHAPTER 8 • ORGANIZATION STRUCTURE AND CONTROL SYSTEMS 279

MNCs, with the exception of performance reviews. The Japanese MNCs put far less emphasis on
personnel performance reviews than do the U.S. and German MNCs—a finding consistent with
the Japanese culture of group decision making, consensus, and responsibility.

Unfortunately, the accuracy and timeliness of information systems are often less than perfect, es-
pecially in less-developed countries, where managers typically operate under conditions of extreme
uncertainty. Government information, for example, is often filtered or fabricated; other sources of
data for decision making are usually limited. Employees are not used to the kinds of sophisticated
information generation, analysis, and reporting systems common in developed countries. Their work
norms and sense of necessity and urgency may also confound the problem. In addition, their avail-
able technology and ability to manipulate and transmit data are usually limited. Management infor-
mation system (MIS) adequacy in foreign affiliates is a sticky problem for headquarters managers
in their attempt to maintain efficient coordination of activities and consolidation of results. Another
problem is the noncomparability of performance data across countries—the control problem
caused by the difficulty of comparing performance data across various countries because of the vari-
ables that make that information appear different—which hinders the evaluation process.

The Internet has made the availability and use of information attainable instantaneously. Many
companies are starting to employ Internet MIS systems for supply-chain management. European
partners Nestlé S.A. and the Danone Group, world leaders in the food industry, set up Europe’s
first Internet marketplace for e-procurement in the consumer goods sector, called CPGmarket.com.

In the food sector, for example, suppliers, retailers, and farmers are becoming more depen-
dent on Internet-based information systems for end-to-end supply chain management (e.g., pro-
duction, purchasing, delivery, and sales). However, any online disruption could be catastrophic.

We live in a just-in-time world. It provides a greater degree of efficiency in logistical activity,
but if the whole thing falls over, it goes bad very quickly. 75

Richard Seymour, co-founder of Seymourpowell,
a design and innovation company

Evaluation Variables across Countries
A major problem that arises when evaluating the performance of foreign affiliates is the tendency by
headquarters managers to judge subsidiary managers as if all of the evaluation data were comparable
across countries. Unfortunately, many variables can make the evaluation of information from one
country look very different from that of another country, owing to circumstances beyond the control
of a subsidiary manager. For example, one country may experience considerable inflation, significant
fluctuations in the price of raw materials, political uprisings, or governmental actions. These factors
are beyond the manager’s control and are likely to have a downward effect on profitability—and yet,
that manager may, in fact, have maximized the opportunity for long-term stability and profitability
compared with a manager of another subsidiary who was not faced with such adverse conditions.
Other variables influencing profitability patterns include transfer pricing, currency devaluation,
exchange-rate fluctuations, taxes, and expectations of contributions to local economies.

One way to ensure more meaningful performance measures is to adjust the financial
statements to reflect the uncontrollable variables peculiar to each country where a subsidiary
is located. This provides a basis for the true evaluation of the comparative return on investment
(ROI), which is an overall control measure. Another way to provide meaningful, long-term
performance standards is to take into account other nonfinancial measures. These measures
include market share, productivity, sales, relations with the host-country government, public
image, employee morale, union relations, and community involvement.76

CONCLUSION
The structure, control, and coordination processes are the same whether they take place in a do-
mestic company, a multinational company with a network of foreign affiliates, or a specific IJV.
It is the extent, the focus, and the mechanisms used to organize those activities that differ. More
coordination is needed in global companies and MNEs because of uncertain working environments
and information systems and because of the variable loci of decision making. Headquarters manag-
ers must design appropriate systems to take into account those variables and evaluate performance.

http://CPGmarket.com

280 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

Summary of Key Points

■ An organization must be designed to facilitate the imple-
mentation of strategic goals. Other variables to consider
when designing an organization’s structure include envi-
ronmental conditions, the size of the organization, and
the appropriate technology. The geographic dispersion of
operations as well as differences in time, language, and
culture affect structure in the international context.

■ The design of a firm’s structure reflects its interna-
tional entry strategy and tends to change over time with
growth and increasing levels of investment, diversity,
or both.

■ Global trends are exerting increasing pressure on MNCs
to achieve economies of scale through globalization.
This involves rationalization and the coordination of
strategic alliances.

■ MNCs can be regarded as interorganizational net-
works of their own dispersed operations and other
strategic alliances. Such relational networks may
adopt unique structures for their particular environ-
ment while also requiring centralized coordination.

■ The transnational structure allows a company to be
global and act local by using networks of decentralized
units with horizontal communication. This permits
local flexibility while achieving global integration.

■ Indications of the need for structural changes include
inefficiency, conflicts among units, poor communica-
tion, and overlapping responsibilities.

■ Coordinating and monitoring systems are necessary to
regulate organizational activities so that actual perfor-
mance conforms to expected organizational standards and
goals. MNCs use a variety of direct and indirect controls.

■ Financial monitoring and evaluation of foreign affiliates
are complicated by variables such as exchange rates,
levels of inflation, transfer prices, and accounting
standards.

■ The design of appropriate monitoring systems must
take into account local constraints, management prac-
tices and expectations, uncertain information systems,
and variables in the evaluation process.

■ Two major problems in reporting for subsidiaries must
be considered: (1) inadequate management information
systems and (2) the noncomparability across countries
of the performance data needed for evaluation purposes.

■ Multinational companies face changing environments
and changing customer preferences. As such, their
strategies evolve, and as a result the structure needs to
evolve in order to fit that strategy.

Application Exercises

8-7. If you have personal access to a company with international
operations, try to conduct some interviews and find out about
the personal interactions involved in working with the orga-
nization’s counterparts abroad. In particular, ask questions
about the nature and level of authority and decision making
in overseas units compared with headquarters. What kinds of
conflicts are experienced? What changes would your inter-
viewees recommend?

8-8. Do some research on monitoring and reporting issues facing
an MNC with subsidiaries in (1) a country in Asia, and (2) a
country in South America. Discuss problem areas and your

recommendations to the MNC management as to how to
control potential problems.

8-9. Find out about a foreign company with an IJV in the United
States. Google some articles, email the company for infor-
mation, and if possible visit the company and ask questions.
Present your findings on the company’s major control issues
to the class—both at the beginning of the venture and now.
What is the company doing differently in its control process
compared to a typical domestic operation? Are the control
procedures having the desired results? What recommenda-
tions do you have?

Discussion Questions

8-1. What variables have to be considered in designing the organi-
zational structure for international operations? How do these
variables interact, and which do you think are most important?

8-2. Explain the need for a firm to be global and act local. How
can a firm design its organization to enable this?

8-3. What is a transnational organization? Because many large
MNCs are moving toward this format, it is likely that you
could at some point be working within this structure. How
do you feel about that?

8-4. Discuss the implications of the relative centralization of author-
ity and decision making at headquarters versus local units or

subsidiaries. How would you feel about this variable if you
were a subsidiary manager?

8-5. As an international manager, what would make you suggest re-
structuring your firm? What other means of direct and indirect
monitoring systems do you suggest?

8-6. What is the role of information systems in the reporting
process? Discuss the statement, “Inadequate MIS systems
in some foreign affiliates are a control problem for MNCs.”

CHAPTER 8 • ORGANIZATION STRUCTURE AND CONTROL SYSTEMS 281

Experiential Exercise

In groups of four, consider a fast-food chain going into Brazil.
Decide on your initial level of desired involvement in Brazil
and your entry strategy. Draw up an appropriate organizational
design, taking into account strategic goals, relevant variables

in Brazil, technology used, size of the firm, and so on. At the
next class, present PowerPoints of your organization chart and
describe the operations and rationale. What are some of the
major control issues to be considered?

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

David Keohane in Paris and Kana Inagaki in Tokyo
March 11, 2019

Renault, Nissan and Mitsubishi are to set up a new joint board in an attempt to ease tensions and
strengthen integration within the world’s largest car partnership following the arrest and ousting
of its architect Carlos Ghosn.

The three-way car alliance is expected to announce recently appointed Renault chairman
Jean-Dominique Senard as head of the new body at a joint press conference in Yokohama on
Tuesday, according to people briefed on the matter. It was first reported by Nikkei in Japan.

The announcement of the new board comes at a pivotal time for the alliance, which makes
more than 10m new vehicles a year, as Mr Ghosn, the ousted Nissan chairman, prepares to step
up his defence after his arrest in Tokyo for alleged financial misconduct in November.

The new body with decision-making powers over operations and governance would in effect
replace and integrate the existing joint ventures and other committees between the three carmak-
ers under a single entity.

The replacement of Renault-Nissan BV and Nissan-Mitsubishi BV also comes amid inves-
tigations by the companies on whether these Amsterdam-based joint ventures were potentially
used as vehicles for Mr Ghosn’s alleged financial misconduct.

The complicated cross-holding arrangement between the groups would not change, Renault
said on Monday as it confirmed talks on the new alliance structure. The French group owns
43 per cent of Nissan, while the Japanese group holds 15 per cent of Renault. Nissan owns 34 per
cent of Mitsubishi.

Nissan and Mitsubishi declined to comment.
The tension between Renault and Nissan, the main partners, has increased in the wake of the

arrest of Mr Ghosn, who was released on $9m bail last week after 108 days behind bars.
Mr Ghosn, the architect and former head of the alliance, pushed for a full merger between

Renault and Nissan ahead of his arrest in November. He blames his arrest on a “plot and treason”
by Nissan executives opposed to his integration plan.

Nissan has said that its internal investigation on Mr Ghosn, which it launched before his
arrest, was not related to merger talks with Renault.

There are also tensions at state level as the French government, which has a 15 per cent stake
in Renault, wants Mr Senard to be appointed chairman of Nissan.

The Japanese company is wary of having the same chairman as Renault to avoid recreating
the role Mr Ghosn held before his arrest. It fears this would concentrate too much power under
a single individual.

Meanwhile, the Tokyo District Court on Monday denied a request from Mr Ghosn’s lawyers
for him to attend the carmaker’s meeting on Tuesday, where the decision on the joint board is
expected to be made.

Mr Ghosn, who remains a director at Nissan, was released under tight bail conditions that
include a ban on his having any contact with people linked to the investigations.

The former Nissan boss, who recently resigned as chief executive of Renault, has denied
charges of falsification in Nissan pay and aggravated breach of trust, calling them “meritless.”

282 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

Mr Senard, the respected outgoing boss of tyremaker Michelin, was appointed chairman
of Renault in January and given the task of restoring trust and shoring up relations between the
French company and Nissan.

Source: © The Financial Times Limited 2019.

Endnotes

1. S. Morris, “Citi sets post-Brexit Frankfurt trading hub in
motion,” Financial Times, March 19, 2019, https://www.ft.com
/content/8e4a7ec0-49c7-11e9-8b7f-d49067e0f50d (accessed April
3, 2019).

2. Roberto C. Goizueta, (Former) Chairman and CEO, Coca-Cola
Company.

3. A. D. Chandler, Strategy and Structure: Chapters in the History of
the American Industrial Enterprise (Cambridge, MA: MIT Press,
1962); R. E. Miles et al., “Organizational Strategy, Structure,
and Process,” Academy of Management Review 3, No. 3 (1978),
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4. C. A. Bartlett and S. Ghoshal, Managing across Borders (Boston:
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5. J. M. Stopford and L. T. Wells Jr., Managing the Multinational
Enterprise (New York: Basic Books, 1972).

6. John W. Miller, “Alcoa Will Divide in Two,” Wall Street Journal,
September 29, 2015, B1.

7. https://investors.alcoa.com/news-releases/2017/03-02-2017
-140814205 (accessed April 3, 2019).

8. Ibid.
9. Kelly Olsen, “Samsung Electronics Reorganizes to Fight Slump,”

www.nytimes, January 16, 2009.
10. E. Andrada, “Samsung Electronics to Implement New Organizational

Structure in March,” JKDaily, February 10, 2017, http://www
.jkdaily.com/articles/4188/20170210/samsung-electronics
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11. “Heinz’s Johnson to Divest Operations, Scrap Management of
Firm by Regions,” Wall Street Journal, December 8, 1997.

12. http://ir.kraftheinzcompany.com/company-profile/management
(accessed April 8, 2019).

13. P. McGee, “Volkswagen Makes Sweeping Changes to
Management and Structure,” Financial Times, April 12,
2018, https://www.ft.com/content/9a0b092c-3e48-11e8-b7e0
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14. www.Nestle.com, December 7, 2000.
15. Financial Times, February 22, 2005.

16. Ibid.
17. https://www.nestle.com/aboutus/management; https://www.nestle

.com/asset-library/documents/library/documents/annual_reports
/2018-annual-review-en , April 3, 2019.

18. J. Strikwerda and J. W. Stoelhorst, The Emergence and Evolution
of the Multidimensional Organization. California Management
Review 51, No. 4 (2009), pp. 11–31.

19. Toby Gibbs, Suzanne Heywood, and Leigh Weiss, Organizing
for an Emerging World. McKinsey Quarterly, June 2012.

20. www.IBM.com (accessed April 3, 2019).
21. H. Henzler and W. Rall, Facing Up to the Globalization

Challenge. McKinsey Quarterly (Fall 1986), pp. 52–68.
22. T. Levitt, The Globalization of Markets. Harvard Business

Review (May–June 1983), pp. 92–102; and S. P. Douglas and
Yoram Wind, The Myth of Globalization. Columbia Journal of
World Business (Winter 1987), pp. 19–29.

23. C. Kane and A. Kempa-Kane, https://thehill.com/opinion
/finance/415717-amazon-hq2-splits-in-two-for-good-reason,
November 8, 2018; A. Sraders, “Amazon Announces Dual
Headquarters—One in New York City,” Empire State Tribune,
November 13, 2018, https://www.empirestatetribune.com
/est/11/13/2018/amazon-announces-dual-headquarters-one-in
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24. George H. Pretty, Partner, Parker Poe, “Accessing Talent through
a Dual Headquarters Move,” http://www.areadevelopment.com
/business-climate/Q1-2019/accessing-talent-through-dual
– headquarters-move.shtml.

25. https://www.wsj.com/articles/SB119543170674797387?share
Token=st65d6e1dd8be94ebdbea0f46e90c35270, (accessed April
4, 2019).

26. P. Dvorak, “Why Multiple Headquarters Multiply as Firms
Expand Globally, More Feel the Need to Call More than One
City Home.” Wall Street Journal, updated November 19, 2007,
https://www.wsj.com/articles/SB119543170674797387?share
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4, 2019).

27. https://investor.lenovo.com/en/global/home.php (accessed April 4,
2019).

Case Questions

8-10. What has Mr. Ghosn’s role been in the Renault-Nissan alliance, and what was the reason
for his recent arrest? What has happened to him since then?

8-11. How was the alliance structured, and what was the proposed new alliance structure?
8-12. What is the relationship between board structure and power in organizations?

https://investor.lenovo.com/en/global/home.php

https://www.wsj.com/articles/SB119543170674797387?shareToken=st65d6e1dd8be94ebdbea0f46e90c35270

http://www.areadevelopment.com/business-climate/Q1-2019/accessing-talent-through-dual-headquarters-move.shtml

https://www.empirestatetribune.com/est/11/13/2018/amazon-announces-dual-headquarters-one-in-new-york-city

https://thehill.com/opinion/finance/415717-amazon-hq2-splits-in-two-for-good-reason

http://www.IBM.com

https://www.nestle.com

http://www.Nestle.com

https://www.ft.com/content/9a0b092c-3e48-11e8-b7e0-52972418fec4

http://ir.kraftheinzcompany.com/company-profile/management

http://www.jkdaily.com/articles/4188/20170210/samsung-electronics-implement-new-organizational-structure-march.htm

http://www.nytimes

https://investors.alcoa.com/news-releases/2017/03-02-2017-140814205

https://www.ft.com/content/8e4a7ec0-49c7-11e9-8b7f-d49067e0f50d

CHAPTER 8 • ORGANIZATION STRUCTURE AND CONTROL SYSTEMS 283

28. L. Abboud, A. Mooney, and A. Massoudi, “Unilever Backs
Down on Plan to Move Headquarters from UK,” Financial
Times, October 5, 2018, https://www.ft.com/content/7c1cabf4
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29. H. Sender, “Plan to Buy Out Yum China Sets Up Fast-Food Fight
with McDonald’s,” Financial Times, August 29, 2018, https://
www.ft.com/content/3cbb86de-a784-11e8-926a-7342fe5e173f
(accessed April 8, 2019).

30. Ibid.
31. J. Dye, J. Fontanella-Khan, and A. Massoudi, “Yum China

Rejects $17bn Buyout Offer,” Financial Times, August 28,
2018, https://www.ft.com/content/715ff300-aaf6-11e8-94bd
-cba20d67390c (accessed April 8, 2019).

32. H. Sender, “Plan to Buy Out Yum China Sets Up Fast-Food Fight
with McDonald’s,” Financial Times, August 29, 2018, https://
www.ft.com/content/3cbb86de-a784-11e8-926a-7342fe5e173f
(accessed April 8, 2019).

33. https://news.walmart.com/2018/08/18/walmart-and-f lipkart
-announce-completion-of-walmart-investment-in-f lipkart
-indias-leading-marketplace-ecommerce-platform (accessed
April 16, 2019).

34 James Crabtree, “Amazon of India Uses Curry-Carrying
Dabawallas to Spice up Parcel Delivery,” Mumbai Avantika
Chilkoti – London, FT.com, April 10, 2015.

35. ht tp : / / l ev i s t rauss .com/wp-conten t /up loads /2016/05
/LeviStraussCo2016-Fact-Sheet (accessed April 1, 2019).

36. www.levistrauss.com (accessed April 18, 2015).
37. http://www.levistrauss.com/about/global-workplaces (accessed April

18, 2015).
38. Ibid.
39. J. R. Galbraith, The Multidimensional and Reconfigurable

Organization. Organizational Dynamics 39, No. 2 (2010),
pp. 115–125.

40. For more detail, see The New Global Challengers: How 100
Top Companies from Rapidly Developing Economies Are
Changing the World (Boston, MA: The Boston Consulting
Group, 2006); Organizing for Global Advantage in China, India,
and Other Rapidly Developing Economies (Boston, MA: The
Boston Consulting Group, 2006); Tarun Khanna and Krishna
Palepu, Emerging Giants: Building World-Class Companies
in Developing Countries. Harvard Business Review (October
2006), pp. 60–69.

41. See Syed T. Anwar, “Global Business and Globalization,”
Journal of International Management 71 (2007); “Emerging
Giants,” BusinessWeek, July 31, 2006, pp. 40–49.

42. Joe Leahy, “Brazil Competitive Profile: Investors Urged to
Spread Net,” FT.com, March 26, 2015.

43. P. Ghemawat and T. Khanna, The Nature of Diversified Business
Groups: a Research Design and Two Case Studies. Journal
of Industrial Economics, 46(1998): 35–61; T. Khanna and K.
Palepu, “The Future of Business Groups in Emerging Markets:
Long-Run Evidence from Chile,” Academy of Management
Journal, 43(2000): 268–285; T. Khanna and J. Rivkin,
Estimating the Performance Effects of Business Groups in
Emerging Markets. Strategic Management Journal, 22(2001):
45–74.

44. https://www.tata.com/business/overview (accessed April 4, 2019).
45. T. Khanna and K. Palepu, Is Group Affiliation Profitable in

Emerging Markets? An Analysis of Diversified Indian Business
Groups. Journal of Finance, 55(2000): 867–891.

46. E. Albert, “South Korea’s Chaebol Challenge. Council on Foreign
Relations,” May 4, 2018, https://www.cfr.org/backgrounder
/south-koreas-chaebol-challenge (accessed April 4, 2019).

47. Boston Consulting Group. Henderson Institute, “Building the
New Global Enterprise,” https://www.bcg.com/publications/2018
/building-new-global-enterprsei.aspx (accessed April 8, 2019).

48. Bhattacharya,A., Lang, N., Reeves, M., & Augustinraj. R. October
24, 2018. Building the New Global Enterprise. https://www.bcg.
com/publications/2018/building-new-global-enterprise.aspx.

49. Ibid.
50. B. Sommerfeld and R. Moise-Cheung, https://www2.deloitte.com

/content/dam/Deloitte/lu/Documents/technology/lu_digitally
-fit-organization (accessed April 16, 2019).

51. Mohanbir Sawhney and Sumant Mandal, “Go Global,” Business
2.0, May 5, 2001, pp. 178–213.

52. J. Daniels, L. Radebaugh, and D. Sullivan, Globalization and
Business (Upper Saddle River, NJ: Prentice Hall, 2002).

53. Deloitte & Touche, Energizing the Supply Chain. The Review,
January 17, 2000, p. 1.

54. C. Bartlett and S. Ghoshal, Organizing for Worldwide Effectiveness:
The Transnational Solution. California Management Review (Fall
1988), pp. 54–74.

55. https://new.abb.com/about/board-of-directors (accessed April 7,
2019).

56. C. Bartlett and S. Ghoshal, Organizing for Worldwide Effectiveness:
The Transnational Solution. California Management Review (Fall
1988), pp. 54–74.

57. Financial Times, February 9, 2005.
58. 2018 Intel Corporation annual report (accessed April 8, 2019).
59. S. Ghoshal and C. Bartlett, The Multinational Corporation as an

Interorganizational Network. Academy of Management Review
15 (1990), pp. 603–625.

60. J. B. Cullen and K. P. Parboteeah, Multinational Management: A
Strategic Approach, 3rd ed. (Cincinnati: South-Western, 2005), p. 281.

61. O. Shenkar, Cultural Distance Revisited: Towards a More Rigorous
Conceptualization and Measurement of Cultural Differences.
Journal of International Business Studies, 43, No. 1 (January 2012).

62. Ibid.
63. www.McDonalds.com, February 20, 2001.
64. Andrew Jack, “Russians Wake up to Consumer Capitalism,”

www.FT.com, January 30, 2001.
65. Ibid.
66. B. Miller, “McDonald’s is succeeding in Russia by going local,”

November 9, 2018, https://www.bizjournals.com/chicago/news
/2018/11/09/mcdonalds-is-succeeding-in-russia-by-going-local.
html (accessed April 10, 2019).

67. T. Grove, “In Russia, McDonald’s Serves Local Fries and a Side
of Realpolitik,” Wall Street Journal, November 8, 2018, https://
www.wsj.com/articles/in-russia-mcdonalds-serves-local-fries
-and-a-side-of-realpolitik-1541678402?mod=searchresults&pag
e=1&pos=3 (accessed April 10, 2019).

68. M. Kiselyova, “Volatile Ruble Encourages McDonald’s to Cook
up Russian Fries,” April 25, 2018, https://www.reuters.com/article
/us-mcdonalds-russia/volatile-ruble-encourages-mcdonalds-to-cook
-up-russian-fries-idUSKBN1HW1XY (accessed April 10, 2019).

69. More information about the reporting and disclosure require-
ments for MNCs and their subsidiaries can be found in the
Accounting Standards Codification (ASC) Topic 830, Subtopic
10, Section 10 (ASC 830-10-10) and in ASC Topic 830, Subtopic
10, Section 55 (ASC 830-10-55).

https://www.reuters.com/article/us-mcdonalds-russia/volatile-ruble-encourages-mcdonalds-to-cook-up-russian-fries-idUSKBN1HW1XY

https://www.wsj.com/articles/in-russia-mcdonalds-serves-local-fries-and-a-side-of-realpolitik-1541678402?mod=searchresults&page=1&pos=3

https://www.bizjournals.com/chicago/news/2018/11/09/mcdonalds-is-succeeding-in-russia-by-going-local.html

http://www.FT.com

http://www.McDonalds.com

https://new.abb.com/about/board-of-directors

https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/technology/lu_digitally-fit-organization

https://www.bcg.com/publications/2018/building-new-global-enterprise.aspx

https://www.bcg.com/publications/2018/building-new-global-enterprsei.aspx

https://www.cfr.org/backgrounder/south-koreas-chaebol-challenge

https://www.tata.com/business/overview

http://FT.com

Levi Strauss Home

http://levistrauss.com/wp-content/uploads/2016/05/LeviStraussCo2016-Fact-Sheet

http://FT.com

https://news.walmart.com/2018/08/18/walmart-and-flipkart-announce-completion-of-walmart-investment-in-flipkart-indias-leading-marketplace-ecommerce-platform

https://www.ft.com/content/3cbb86de-a784-11e8-926a-7342fe5e173f

https://www.ft.com/content/715ff300-aaf6-11e8-94bd-cba20d67390c

https://www.ft.com/content/3cbb86de-a784-11e8-926a-7342fe5e173f

https://www.ft.com/content/7c1cabf4-c864-11e8-ba8f-ee390057b8c9

284 PART 3 • FORMULATING AND IMPLEMENTING STRATEGY FOR INTERNATIONAL AND GLOBAL OPERATIONS

70. W. G. Egelhoff, Patterns of Control in U.S., U.K., and European
Multinational Corporations. Journal of International Business
Studies (Fall 1984), pp. 73–83.

71. Ibid.
72. Ibid.
73. S. Ueno and U. Sekaran, The Influence of Culture on Budget Control

Practices in the U.S.A. and Japan: An Empirical Study. Journal of
International Business Studies 23 (Winter 1992), pp. 659–674.

74. A. R. Neghandi and M. Welge, Beyond Theory Z (Greenwich,
CT: J.A.I. Publishers, 1984), p. 18.

75. S. Murray, “Calamity Warning over Systems That Make the World
Go Round,” Financial Times, May 31, 2016, https://www.ft.com
/content/cc233094-dc9b-11e5-8541-00fb33bdf038 (accessed April
10, 2019).

76. Dossi, A., & Patelli, L. 2010. You Learn From What You
Measure: Financial and Non-financial Performance Measures in
Multinational Companies. Long Range Planning 43, 498–526.

https://www.ft.com/content/cc233094-dc9b-11e5-8541-00fb33bdf038

prices, a wide selection, and a great customer experience,
Amazon was able to drive traffic (customers) and increase
sales, which in turn attracted third-party sellers and accelerated
the wheel. In 2002, Amazon identified a new arena of growth
by launching Amazon Web Services11 (AWS), a platform of
computing services offered online for other websites or client-
side applications by Amazon. These web services provided
developers access to Amazon’s technology infrastructure that
they could use to run virtually any type of business. The move
was largely successful and within five years of its launch, AWS
had grown into one of the largest computing services platforms
in the world.

In 2003, Amazon expanded its overseas business by
launching international websites in Asia-Pacific and European
countries. To deliver goods to end consumers at a reasonable
price, Amazon employed a business model called the ‘Online
Retailers of Physical Goods’ wherein it obtained products di-
rectly from the distributors rather than stocking all the goods
in its warehouse. In 2005, it launched a free shipping program
for its customers called Amazon Prime,12 wherein customers
received free two-day shipping on their purchases for a fee of
US$79 per year.

In 2006, Amazon developed a new business model aimed
at serving an entirely different customer—the third-party seller.
The company offered fulfilment services to sellers through
the Fulfilment by Amazon (FBA) program where merchants
sent cartons of their products to Amazon’s warehouses while
Amazon took the orders online, shipped the products, answered
queries, and processed returns. In late 2007, it released the
Kindle e-book reader for which it had to partner with indepen-
dent publishers to generate content for the Kindle.

In July 2009, Amazon acquired US-based online shoe re-
tailer Zappos.13 In 2012, it forayed into the world of designer
fashion, selling high-end clothing, shoes, handbags, and acces-
sories through its website, Amazon Fashion.

Amazon had individual retail websites for the US, the
UK and Ireland, France, Canada, Germany, Italy, Spain,
the Netherlands, Australia, Brazil, Japan, China, India, and
Mexico. As of 2015, the e-retailer reported more than 304 mil-
lion active customer accounts worldwide. Due to Amazon’s
global scope and reach, it was also considered one of the most
valuable brands worldwide.14 However, Amazon’s interna-
tional segment was much less compared to North American
market by size as Amazon got a major portion of its income
from its US market (Refer to Exhibit I). Its growth rate was
also less than that in its home market. The company posted
a total operating loss abroad of more than US$2.6 billion.

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

“The demand for international brands is rising rapidly,
thanks to cross-border online shopping, which is prob-
ably one of the fastest rising trends in e-commerce.”2

—Elaine Chang, Vice-President of Amazon and
President of Amazon China, in 2017

“Amazon is a prime example of a company which thought
it could succeed in an entirely different market just by
continuing to do business as usual [. . .], This method
of going about globalizing a product will almost never
result in good success and analysts are actually calling
for Amazon to pull out of China.”3

—Clayton Jacobs, an Entrepreneur-in-Residence
with and the Head of Cross-Cultural Design, at

ReadWrite, in 2017

Amazon.com, Inc. (Amazon) entered China in 2004, taking
over Joyo.com4 (Joyo) for US$75 million. But as of mid-2018,
Amazon held less than a 1% e-commerce market share in Chi-
na, according to research firm eMarketer.5 Analysts pointed
out that despite its global growth, Amazon had not been able
to make a mark in China. Amazon was facing stiff competition
from local companies such as Jingdong Mall6 (JD), Tencent
Holdings Limited7 (Tencent), Taobao Mall87 (Tmall) owned
by Alibaba Group Holding Limited9 (Alibaba), etc., despite the
scorching growth of e-commerce in China.

Apart from stiff local competition, factors such as censor-
ship by Chinese regulators over the internet, restrictions on for-
eign investment, and counterfeit sellers, were posing big chal-
lenges for the company in China. Analysts were left wondering
whether Amazon had localized its innovations enough to ap-
peal to the Chinese consumers and whether Amazon had really
understood the Chinese-commerce market. While speculations
were on about Amazon merging a certain portion of its overseas
purchase business with Kaola10 in 2019, Elaine Chang (Elaine),
VP of Amazon and Amazon China president, had the big re-
sponsibility of streamlining Amazon’s operations in the country
and overcoming the challenges.

About Amazon

P A R T 3 : Comprehensive Cases

Case 5 Amazon.com in China: Can Elaine Chang Crack the Chinese Market?
This case was written by Koti Vinod Babu, under the direction of Debapratim Purkayastha, IBS Hyderabad.1

PC3-1

http://Amazon.com

http://Joyo.com

http://Amazon.com

PC3-2 PART 3 • COMPREHENSIVE CASES

US$ 65.866 billion as international sales income for the year
2018. (Refer to Exhibit III).

E-Commerce Market in China

The e-commerce market in China started developing in the
1990s and experienced quick growth. According to the World
Bank Development report, by January 1999, there were only
0.14 internet hosts for 10,000 people in China as compared
to 1,132 per 10,000 people in the US. Most Internet Service
Providers16 (ISPs) offered connections at 33.6 kilobytes per
second. Thus, logging into any site with even the simplest
graphics involved a considerable waiting time. Moreover,
secure pay channels for online payments were not available in
China. Shoppers chose their own mode of payment – online,
cash-on-delivery (COD), postal remittance, or telegraphic
money order.

Half of that was incurred in 2016.15 Amazon’s net revenue
was US$135.99 billion, up from US$107.01 billion in 2015.
For the year 2018, Amazon announced net sales of US$
232.887 billion (Refer toExhibit II). It posted an amount of

EXHIBIT I Net Sales Generated from Internationally Focused
Websites of Amazon.com, Inc.

Source: Adapted from www.statista.com and Amazon’s annual reports.

(In US$ Billions) 2016 2017 2018

United States 90.34 120.49 160.15

Germany 14.15 16.95 19.88

United Kingdom 9.55 11.37 14.52

Japan 10.8 11.91 13.83

Rest of world 11.15 17.15 24.51

EXHIBIT II Selected Consolidated Financial Data of Amazon.com, Inc. Year Ended December 31

Source: *Amazon’s financial year ends on December 31. Adapted from Amazon 10k Report and other sources.

(In US$ millions, except per share data) 2016 2017 2018

Net product sales 94,665 118,573 141,915

Net service sales 41,322 59,293 90,972

Total net sales 135,987 177,866 232,887

Operating expenses:

Cost of sales 88,265 111,934 139,156

Fulfillment 17,619 25,249 34,027

Marketing 7,233 10,069 13,814

Technology and content 16,085 22,620 28,837

General and administrative 2,432 3,674 4,336

Other operating expense, net 167 214 296

Total operating expenses 131,801 173,760 220,466

Operating income 4,186 4,106 12,421

Interest income 100 202 440

Interest expense (484) (848) (1,417)

Other income (expense), net 90 346 (183)

Total non-operating income (expense) (294) (300) (1,160)

Income before income taxes 3,892 3,806 11,261

Provision for income taxes (1,425) (769) (1,197)

Equity-method investment activity, net of tax (96) (4) 9

Net income $2,371 $3,033 $10,073

Basic earnings per share $5.01 $6.32 $20.68

Diluted earnings per share $4.9 $6.15 $20.14

Weighted-average shares used in computation of earnings per share:

Basic 474 480 487

Diluted 484 493 500

M08A_DERE7874_10_SE_CASE5.indd 2 15/10/20 12:36 AM

http://Amazon.com

http://www.statista.com

http://Amazon.com

CASE 5 • AMAZON.COM IN CHINA: CAN ELAINE CHANG CRACK THE CHINESE MARKET? PC3-3

Source: Adapted from Amazon 10k Reports and other sources.

EXHIBIT III Segment-Wise Consolidated Net Income of Amazon.com, Inc. Year Ended December 31

(Amount in US$ Millions) 2016 2017 2018

Net Sales:

North America 79,785 106,110 141,366

International 43,983 54,297 65,866

AWS 12,219 17,459 25,655

Consolidated 135,987 177,866 232,887

Year-over-year Percentage Growth:

North America 25% 33% 33%

International 24 23 21

AWS 55 43 47

Consolidated 27 31 31

Year-over-year Percentage Growth, excluding
the effect of foreign exchange rates:

North America 25% 33% 33%

International 26 23 19

AWS 55 43 47

Consolidated 28 31 30

Net sales mix:

North America 59% 60% 61%

International 32 30 28

AWS 9 10 11

Consolidated 100% 100% 100%

According to Chinese government figures, the number of
internet users in China reached 210 million in 2007, a growth
of 50% compared to 2006, making China the world’s second-
largest internet market after the US. According to the China
Internet Network Information Center17 (CNNIC), the num-
ber of internet users in China reached 162 million by the end
of July 2007. Of these, 122 million surfed the internet using
a broadband connection. In fact, Morgan Stanley said that
China was well poised to unseat the US as the country with
the largest number of internet users in the first few months
of 2008. Moreover, there was tremendous scope for future
growth as the penetration levels were still low, with only
16% of the population using the internet. However, where on-
line shopping was concerned, COD remained the most pre-
ferred option, and the logistics required for mailing the goods
bought online were still not in place. There was no nation-
wide express delivery service like FedEx or UPS as in the US.
Analysts felt that the postal service in China was compara-
tively slow and unreliable.

However, China’s imports through cross-border e-commerce
started to grow considerably in 2011, mainly due to the in-
creasing awareness among Chinese consumers about online

shopping. Through e-commerce platforms, they were able to
discover new products that were not formerly accessible in
the Chinese market. The Government of China also supported
e-commerce through certain policies. In 2014, the General
Administration of Customs issued a State Council Notice which
acknowledged the importance of imports through e-commerce.

There was a growing demand among the Chinese middle
class for foreign goods. Alibaba reported that 33% of Chinese
consumers bought items from international brands during the
24-hour Singles’ Day event on November 11, 2015, with US
goods making it to the top spot.18 Despite the global financial
crisis and the sluggish growth in international trade, China’s
cross-border e-commerce maintained a growth rate of about
30%. By 2015, China’s cross-border e-commerce turnover
grew from RMB19 800 billion (around US$123 billion) to
RMB 5.2 trillion (around US$0.8 trillion), and was expected
to reach RMB 6.5 trillion (around US$1 trillion) in 2016.20
China’s e-commerce retail sales were expected to increase by
42.1% to US$672.01 billion, accounting for over 40% of the
global e-commerce retail sales in 2015, as estimated by eMar-
keter. Online retail sales amounted to US$581.61 billion in
2015, growing 33.3% compared to 2015.21

M08A_DERE7874_10_SE_CASE5.indd 3 15/10/20 12:36 AM

http://Amazon.com

PC3-4 PART 3 • COMPREHENSIVE CASES

in China. As a consequence, e-commerce was replacing brick
and mortar shopping, and leading global hypermarkets such
as Carrefour and Wal-Mart had had to close down a number
of stores in China. Besides, online shopping made it easier
for consumers to access products that were not available in
brick and mortar stores, like organic foods and some luxury
products from other countries. Analysts opined that there was
a large potential for online sales predominantly in small cities,
as most of the consumers in big cities like Beijing, Shanghai,
Chongqing, and Chengdu had gradually shifted to online
shopping.

The online shopper base in Tier 3 and 4 cities was 257 mil-
lion by 2016, which was larger than that of almost all countries
in the world (except India, China as a whole, and the US).23
The e-commerce market was expected to reach US$1.57 tril-
lion in 2018 in China, according to eMarketer.24 Online retail-
ers were looking to expand logistics networks and services to
leverage the growing demand for e-commerce from urban and
rural areas in China. This was the effect of the growth in num-
ber of internet users in China which had reached 801.66 million
by June 2018 (Refer to Exhibit IV).

Analysts opined that the unique factor about Chinese e-
commerce was its degree of centralization. This centralization
had led to several benefits. Most particularly, e-commerce was
promoted through ads and different social media. As a result,
a purchase could be made via text, image, or video in China.
Consequently, the retailers could generate sales without con-
sumers visiting their devoted website or apps. Unlike in the US,
where all major retailers managed their e-commerce sites au-
tonomously, most of the Chinese big and small retailers oper-
ated as storefronts on Tmall. In fact, more than 75% of Chinese
e-commerce was transacted through Alibaba, which included

Analysts opined that China had become the world’s largest
e-commerce market by 2015. In China, rural people who used
the internet were major prospective consumers for e-commerce
companies. Alibaba was planning to invest RMB1 billion
(US$0.16 billion) in logistics and delivery services to better aid
rural shoppers. The number of internet users in China increased
from 590 million in 2013 to 710 million in 2016, leading to the
growth of cross-border e-commerce in China.

The Chinese Government had permitted the formation
of cross-border e-commerce comprehensive ‘pilot’ cities. By
2016, there were 13 such cities: Hangzhou, Tianjin, Shanghai,
Chongqing, Hefei, Zhengzhou, Guangzhou, Chengdu, Dalian,
Ningbo, Qingdao, Shenzhen, and Suzhou. Analysts felt that the
prospects for Chinese sellers working in a global market were
developing quickly and the stigma of ‘made in China’ had rap-
idly changed to ‘branded in China’. Even small-scale sellers
could distribute their goods to a large number of buyers.

E-commerce penetration amounted to 89% in Tier 1 and 2
cities like Beijing and Shanghai, but only amounted to 62% in
Tier 3 and 4 cities, as per the McKinsey iConsumer China 2016
Survey.22 The age of the average internet user in China was 25
years and e-commerce spending was US$562.66 billion as of
2016. According to analysts, China’s e-commerce market had
grown with massive sales and was projected to be double the
US numbers by 2018. Online shoppers who were young, urban,
and highly educated along with rural customers were expected
to spur China’s e-commerce growth. These people had a dif-
ferent approach toward shopping than older people, who were
considered as savers in view of the political and economic con-
ditions in China.

E-commerce websites had fewer licensing requirements
and got faster customs clearance than brick-and-mortar trade

EXHIBIT IV China’s Internet Users and Penetration – (2013–2018)

Source: Adapted from Rocky Fu, “Quick Look: Marketing in China 2019,” www.chinainternet
watch.com, January 8, 2019.

Month/Year
Number of Internet

Users (Millions) Internet Penetration (%)

June/2013 590.6 44.1

December/2013 617.58 45.8

June/2014 632.00 46.9

December/2014 648.75 47.9

June/2015 667.69 48.8

December/2015 688.26 50.3

June/2016 709.58 51.7

December/2016 731.25 53.2

June/2017 751.16 54.3

December/2017 771.98 55.8

June/2018 801.66 57.7

M08A_DERE7874_10_SE_CASE5.indd 4 15/10/20 12:36 AM

http://www.chinainternetwatch.com

CASE 5 • AMAZON.COM IN CHINA: CAN ELAINE CHANG CRACK THE CHINESE MARKET? PC3-5

an IT information service and download website. At that time,
Joyo functioned as a subsidiary of Kingsoft27 and had only
five employees. But, by the latter part of the year 2000, it had
grown to become the 33rd largest Chinese website.

Joyo Amazon became the seventh regional website of
Amazon.com after the US, Canada, France, Germany, Japan,
and the UK. As part of the deal, Amazon gained ownership of
a number of Chinese subsidiaries and associates controlled by
Joyo. This acquisition marked Amazon’s second entry into the
Asia-Pacific region. Initially, Joyo’s former president, Wang
Han-hua (Wang), acted as Amazon’s country manager. In 2006,
Amazon started adding more lines of products in China such as
health and beauty products.

Initially, Amazon had only a few nationwide distribu-
tors and it concentrated on customers’ preference for making
COD payments while credit card payment was the transaction
method preferred by most of the company’s customers in the
US and other regions. Amazon leveraged Joyo’s network of dis-
tribution partners. Joyo’s President after Wang, Lin Shuixing,
said in a statement, “Becoming a part of the Amazon family is
great news for our customers.”28 By the time Amazon entered
China by collaborating with Joyo, many Chinese websites were
offering e-books for free and local e-readers with hundreds of
preloaded books. This made people reluctant to buy the Kindle,
which was priced higher. As a result, Amazon Joyo slowly
shifted to other sectors like clothing and electronics. The com-
pany initially offered direct sales but also offered a stage for
independent sellers and buyers. The name Amazon Joyo was
changed to “Amazon.cn” in 2011.

Tmall. China’s e-commerce B2C market share was dominated
by Tmall as of 2018. (Refer to Exhibit V). In the US and other
major markets, the customers had to use different accounts with
different log-ins and passwords along with different checkout
procedures for different e-commerce sites. In China, on the
other hand, a customer would have one account and a uniform
checkout procedure for shopping at different retailers.

Besides these domestic companies, social media played a
vital role in the Chinese e-commerce market. There was also
a higher inclination to use digital devices and marketing in
China. Analysts felt that Tencent’s innovative businesses such
as WeChat25 or Sina Weibo26 were driving the Chinese e-com-
merce movement. Another encouraging factor for Chinese e-
commerce was that online shopping was making it easier for
Chinese customers to buy non-Chinese branded products. For
instance, US customers could easily get Levi’s jeans or organic
baby food irrespective of their location. But for Chinese shop-
pers in Tier 2 and Tier 3 cities, this was not the case. Online
shopping was the only way for them to buy such international
brands.

Amazon’s Foray into China

Amazon was one of the first overseas e-commerce firms per-
mitted to do business in China. By purchasing Joyo in 2004 for
about US$75 million in cash and stock, it had become “Joyo
Amazon.” Joyo, founded by Chinese entrepreneur Lei Jun
in 2000 and headquartered in the British Virgin Islands, sold
items like books, music, and videos. Before 2000, it had been

JD
24.2%

Suning
6.70%

Vipshop
3.7%

Gome
0.7%

Amazon
0.6%

Dangdang
0.5%

YHD
0.1%

Jumei
0.1%

Other
2%

Tmall
61.5%

EXHIBIT V Market Shares of Online Retail B2C E-Commerce Platforms
by Gross Merchandise Volume (GMV) for Q4 2018 in China

Source: Adapted from “Tmall and JD had a combined market share of over
85% in China’s B2C e-commerce market in Q4 2018,” www.chinainternet
watch.com, February 13, 2019.

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PC3-6 PART 3 • COMPREHENSIVE CASES

warehousing centers in FTZ. As a result, the product selected
on Amazon.cn would enter the Chinese foreign trade zone
through the cross-border e-commerce platform, while domestic
high-quality products from small and medium-sized enterprises
(SMEs) would be exported to overseas markets.

Amazon launched the Amazon Global Store (AGS) in
November 2014 to meet the robust demands of Chinese con-
sumers for imported products. Globally, this was the first AGS
that had a local website and offered a localized shopping expe-
rience. AGS worked on bringing in genuine and high-quality
products to Chinese consumers through direct imports. Doug
Gurr (Gurr), then president of Amazon China, said, “Around
5 million international orders have been placed since last
November through the AGS on Z.cn36 and direct shipments
through Amazon global sites in the US and European Union.
The statistics have shown that sales through the AGS on Z.cn
tripled in the first five months of 2015. According to AC Nelson,
over 50% of Chinese consumers who shopped on overseas web-
sites have visited AGS on Z.cn since its launch. We take China
as a strategically important locale from a global perspective
and will continue to invest in China.”37

Amazon increased its logistics operations in China to control
the increasing cost of shipping billions of packages. Its plans in
China included managing cargo and customs for goods directed
to ports in Japan, Europe, and the US. This service was started
to serve Amazon’s own retail operations and also hosted data for
other companies. Michael Yeo, analyst at market research firm
IDC said, “The licenses that Amazon have received not only
strengthens its own position as a fulfilment channel for its own
cross border trade, but also allows it to act as a potential competi-
tor to the likes of DHL, FedEx and UPS in delivery services.”38

In addition to this, Amazon had submitted its expansion
plans in documents filed with the Chinese regulators in 2015.
Amazon registered its Chinese subsidiary, Beijing Century Joyo
Courier Service,39 as a freight forwarder which did not ship but
looked after customs and other documentation with China’s
transport ministry in 2015, allowing it to export cargo out of
China. Beijing Century Joyo Courier Service also made a par-
allel application with the US Federal Maritime Commission40
(FMC) in November 2015. Amazon also filed an application
with the Shanghai Shipping Exchange41 to assist as a shipping
broker for 12 trade routes, including Shanghai to Los Angeles
and Shanghai to Hamburg.

In 2015, Amazon launched a virtual store on Alibaba’s
Tmall to attract the Chinese shoppers. Items like imported
food, shoes, toys, and kitchenware sourced directly from over-
seas suppliers were listed on Amazon’s store on Tmall. Candice
Huang, a spokeswoman for Hangzhou, Alibaba, commented,
“We welcome Amazon to the Alibaba ecosystem, and their
presence will further broaden the selection of international
products and elevate the shopping experience for Chinese con-
sumers on Tmall.”42 This partnership resulted in Amazon get-
ting access to 334 million active buyers on Tmall, and increas-
ing awareness of its brand in China. Forrester Research analyst
Sucharita Mulpuru commented, “Everyone knows that Chinese
e-commerce is dominated by Alibaba and at some point you go
fish where the fish are.”43

As of 2017, Elaine was the president of Amazon China,
responsible for the strategy, business development, and overall
management of Amazon’s e-commerce business and the Kindle
business in the country. Elaine joined Amazon as vice president
and general manager of Kindle China in May 2013. She led the
team to develop the Kindle and digital publishing ecosystem by
successfully bringing Kindle’s full product portfolio to China,
growing Kindle’s selection to 420,000 e-books, and building
partnerships with more than 660 publishers and importers.29
Elaine was a Bachelor of Science in Electrical Engineering
from the University of Washington and a Fellow of the fifth
class of the China Fellowship Program and a member of the
Aspen Global Leadership Network. Prior to joining Amazon,
she had worked for Intel Corporation for around 20 years, hold-
ing several management positions in the US, the Asia Pacific,
and China.30 In December 2016, Elaine was also recognized
as one of the top 25 influential businesswomen by Fortune
China.31

Amazon’s Expansion in China

In China, Amazon had ten operations centers and 400,000 square
meters of logistics-based floor space by 2011. It had signed a
memorandum of understanding (MOU) with the Beijing and
Ningxia governments to develop cloud computing services in
2013. As a result, it expanded AWS to China in 2014. As part
of that move, AWS China developed an incubator in partner-
ship with the Shanghai Jiading Industrial Zone Development
(Group) Co. Ltd.32 It associated with local players to provide
groundwork to support AWS, and also started a program to nur-
ture more localized services to run in the AWS cloud. The local
players included ChinaNetCenter33 and SINNET, which would
be providing data centers and ISP services such as infrastruc-
ture, bandwidth, and network capabilities. Analysts felt that this
was an intensive effort by Amazon to get more business from
larger corporations but also to leverage a growing community
of smaller and medium-sized businesses in China.

Andy Jassy, senior vice president, AWS, commented,
“Current and prospective AWS customers have asked us to
build a local AWS Region in China. China represents an im-
portant long-term market segment for AWS. We are looking
forward to working with Chinese customers, partners, and
government institutions to help small and large organizations
use cloud computing to innovate and deploy faster, save money,
expand their geographic reach, and do so without sacrificing
security, availability, data durability, and reliability.”34

Amazon entered into a tripartite memorandum of under-
standing (MOU) with China (Shanghai) Free Trade Zone (FTZ)
and Shanghai Information Investment Inc.35 in 2014. According
to this MOU, the three parties would undertake cross-border
e-commerce business and construct an online cross-border e-
commerce platform, using which Chinese consumers could
easily buy products that were offered in other countries by
Amazon Global. Under the MOU, Amazon would capitalize
and construct Amazon China International Trade headquarters
in the FTZ, endorsing Shanghai as a global hub for cross-border
trade. In the meantime, Amazon intended to build logistics and

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CASE 5 • AMAZON.COM IN CHINA: CAN ELAINE CHANG CRACK THE CHINESE MARKET? PC3-7

account. According to Wang, 70% of Chinese buyers chose to
pay when the goods were delivered. To make it convenient for
Chinese customers, Amazon introduced portable Point of Sale
(POS) so that the customers could pay the delivery man via a
credit card at their doorstep. Wang said, “Localizing your ser-
vice isn’t about what you and I think, it’s about how the market
thinks.”47

Amazon also created a Chinese domain name Z.cn, which
was re-directed to Amazon’s Chinese official website Amazon.cn.
The modification was done because Amazon being an English
word, it was tough for Chinese consumers to remember it. In
addition, China was the only country in the world in which
Amazon delivered goods on its own. Amazon customers could
receive their procurements usually within 2.5 days. This was
possible because of the 160,000 square-meter warehouse lo-
cated in Tianjin, north-eastern China. The Amazon delivery
service functioned not only in major cities like Beijing and
Shanghai but also covered many second-tier cities as Amazon
was not subcontracting delivery in China.

Amazon first started to allow Chinese merchants to sell
on Amazon’s global sites in 2007. It expanded its app store to
China in 2013 as mobile apps users in China had a strong liking
for their local language (simplified Chinese) and close to 70%
of free downloads in China were from apps that supported sim-
plified Chinese. With the Amazon Prime membership, Amazon
was focussing on enhancing Amazon’s mark in China by mak-
ing it more reasonable to buy foreign products from its site.
Amazon launched a project called Amazon Launchpad48 in
2014, which provided a platform for exceptional products and
start-ups in China. The project could successfully help start-ups
reach most Amazon consumers globally and consumers to get
different products of their choice. Amazon also introduced its
Fire tablet49 in China in 2015. The tablet came installed with
the feature of an English learning task to offer a personalized
reading experience for the different English levels of users.

Amazon launched a Chinese language version of its man-
agement system in 2015 for its US and UK websites in 2015.
Through this, Chinese merchants could get the benefit of a
global product listing service that would enable them to upload
product listings and sell them. Fulfilment by Amazon (FBA)
was introduced for Chinese sellers which would enable them to
ship to only one warehouse in Europe, which would deliver to
26 European countries with after-sales service.50

To help Chinese merchants sell more overseas through
Amazon.com, Amazon held different events in Shenzhen and
other areas in China. Sebastian Gunningham, global senior
vice president at Amazon, commented, “Amazon has an edge
to help Chinese companies expand out of China. We operate
109 fulfillment centers and serve 285 million active users all
over the world. We plan to increase our [ability] to facilitate
Chinese manufactures creating their own brands for global
consumers.”51

Amazon was also offering a wide range of products
to Chinese customers by localizing the products according
to the preferences of Chinese customers (Refer to Exhibit
VI). According to a survey conducted among 900 Chinese
e-commerce sellers by US-based Business2Business online

In 2015, Amazon acquired Twitch,44 a platform to watch
e-sports or organized video-gaming competitions, for US$970
million. The acquisition was made to leverage the fame of
Twitch, which had a market of approximatelyUS$612 million
per year and134 million viewers.45

In another effort to gain a share in the Chinese e-commerce
market, Amazon launched its Prime service in China in October
2016, expecting to repeat the success it had had with the service
in the US and other markets in the West. Chinese Prime users
would be able to get free shipping on orders for overseas prod-
ucts with a minimum purchase for RMB 200 (US$29.50) and
goods sold within China would be delivered for free. The Prime
membership cost RMB 388 a year (US$57) in China. Amazon
Prime members could also avail of unlimited free shipping with
no minimum purchase on more than 9 million domestic prod-
ucts. To appeal to Chinese consumers, Amazon had reduced
the annual membership fee to RMB188 (about US$28) for the
first four months after Amazon Prime’s introduction in China.
However, JD and Alibaba also had membership programs
which were priced lower than Amazon Prime.

Amazon opened a showroom in Sanlitun Square in Beijing
in November 2016, presenting imported goods from the e-re-
tailers of the US and UK e-commerce sites. Customers could
explore different product categories such as kitchenware,
children’s products, apparel, and electronics. They could get
demos of the products and purchase them from Amazon.cn,
by scanning the product’s bar code using their mobile devices.
The merchandise comprised some of the 10 million products
Amazon sold in China through the imported products section
of Amazon.cn called Haiwaigou, which meant ‘buy from over-
seas’ in Chinese.

Amazon planned to hire a Chinese content development
team in 2017 to entice studio heads and discuss deals for local
movies and TV shows, including original content. However,
experts felt that launching a domestic video service would be
a bold step in a country where the media was severely cen-
sored by regulators. Russ Grandinetti, Senior Vice President
of Amazon, in a statement about the launch, said, “Launching
a unique program designed for our Chinese customers shows
our obsession with Chinese customer needs, and demonstrates
our long-term commitment to growing our business in China.
We will continue to innovate for customers in China to deliver
more value over time.”46

Localization

According to experts, many successful multinational compa-
nies had failed in the Chinese markets because they could not
design an effective localization strategy. China’s language,
culture, and politics offered distinctive challenges for inter-
national companies. Amazon had been trying hard to hit the
sweet spot in this regard in China. For instance, non-Chinese
customers typically clicked and hit the back button when they
were looking back and choosing products. But the Chinese cus-
tomers preferred to open different windows in their browsers/
tabs to explore and choose products, and the composition of
the Amazon.cn website had to take this browsing behavior into

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PC3-8 PART 3 • COMPREHENSIVE CASES

EXHIBIT VI Selected Product Categories Offered by Amazon in China

Kindle Store, Fire Tablet,
Amazon Purchased Overseas Books

Phone, Photography,
Digital

Electronic Accessories,
Intelligent Life

E-book reader Chinese Books Mobile Communications Smart Life

Kindle eBook Teaching materials Intelligent living museum Computer Accessories

Free reading software Humanities and Social
Sciences

Mobile phone accessories Headphones, speakers and
accessories

Manage content and devices Science and technology Digital audio and video TV audio accessories

Kindle Help Import books Intelligent digital Photography camera accessories

Fire Tablet Kindle eBook Photography Office equipment and supplies

Kindle eBook Children Camera Accessories TV audio accessories

Free reading software Literature and Art Musical instruments Musical instrument accessories

Kindle Unlimited Economic management

Inspirational and successful

Science and technology

Life

Home, Kitchen, Home
Improvement

Computer, Office Household Appliances Beauty & Health

Kitchenware Computer TV and stereo High-end cosmetics shop

Furniture Computer peripherals Large household appliances Hair care

Home Decoration Network supplies Kitchen appliances Men’s skin care

Pet Shop Office and student supplies Household appliances Eye care

Home Textiles Computer brand Large household appliances Facial skin care

Daily life Storage and computer
components

A protection of electrical
appliances

Body Care

Home renovation Office equipment and supplies Perfume, essential oils

Electronic education Daily cleaning

Fashion make-up

Healthcare Supplies

Source: Adapted from https://www.amazon.cn/gp/site-directory/ref=nav_fullstore.

payments company Payoneer,52 it was found that 62% of re-
spondents sold goods on Amazon, compared to 45% on Wish,53
40% on the Alibaba-backed Aliexpress,54 and 28% on eBay
Inc.55 (eBay).56 According to a survey by Payoneer in 2016,
online merchants in China said they favored Amazon because
of its “simple and fair rules”57 (Refer to Exhibit VII). However,
the survey noted that 59% of Chinese online retailers also
tended to sell on more than one marketplace, and 33% sold on
more than two marketplaces.

Amazon announced in November 2016 that it would add
more than one million international products from Amazon
UK to the AGS. This move would enable Chinese customers
to buy products from the Amazon UK website directly and get
the same quality of products as UK customers at value added
tax (VAT) free prices. The products from Amazon UK included

12 categories including toys, shoes, personal care, baby prod-
ucts, apparel, luggage, and watches. The purchases by Chinese
customers would be shipped directly from Amazon fulfilment
centers in Europe and delivered to Chinese customers within 7
to 12 working days. Elaine said, “Since the launch of Amazon
Global Store, we keep enhancing selection, delivery and cus-
tomer experience. The data shows that Amazon UK ranks as
the top destination by shipped units among 5 Amazon European
marketplaces for Chinese cross-border online shoppers.”58

Challenges in China

Robust Competition

According to analysts, Amazon’s investment in China had not
paid off. They pointed out that the release of the Kindle had

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CASE 5 • AMAZON.COM IN CHINA: CAN ELAINE CHANG CRACK THE CHINESE MARKET? PC3-9

not been successful and wondered why Amazon had not added
a Kindle store on its Chinese website till December 2012. By
that time, its competitor sites had four times the number of
Chinese language books as Amazon’s Kindle Store. Moreover,
Amazon had moved ahead with the launch of its Kindle store
in China without offering a Kindle Fire or Kindle e-reader.
As a result, Chinese customers could only read Amazon’s e-
books using a Kindle app on their iPhones, iPads, or Android
devices. However, Amazon’s model of making money from
selling e-books appeared unfeasible in China, where online
content piracy was rampant. Some analysts felt that the first
strategic move by Amazon to buy Joyo did not appear to really
benefit it.

Amazon attributed this situation to regulatory problems
in launching its cloud service, which was essential for users
to store and access the books they purchased. As Amazon was
struggling to launch its cloud service in China, local competi-
tors like Alibaba’s Aliyun59 (Ali Cloud) and Western brands like
Drop Box60 were contending fiercely for cloud market shares
in China. Eventually, Amazon’s cloud service was released in
China in 2013.

Some analysts contended that Amazon’s strategy of oper-
ating as an autonomous online store was not fruitful in China as
Alibaba’s market supremacy prevented any new player from en-
tering the e-commerce customer space. Therefore, Amazon de-
cided to open a store on Tmall to gain more exposure to China’s
huge customer base. Analysts opined that Amazon, had, how-
ever, failed to recognize the requirements of the Chinese online
buyers. For instance, it provided product criticisms for each
listed item, whereas Tmall had an additional chat feature along
with criticisms which permitted Chinese customers to interact
directly with the seller. Analysts opined that Chinese consum-
ers preferred Tmall to Amazon for this reason as Tmall per-
mitted the customers to bargain over the price with the seller
before purchasing a product.

Apart from Alibaba, the major competitor for Amazon
in China was JD, which worked on a direct sales model like
Amazon while also having an open market platform like
Tmall. eMarketer forecasting director Monica Peart com-
mented, “Alibaba, Tmall and JD positioned themselves well
to capitalize on growing consumer demand by creating their
own payment systems (e.g., Alibaba’s Alipay61) and logistical
services (e.g., JD operates a self-owned logistics network). In
addition, with rising incomes and increased internet access
in rural areas the cultural appetite to shop digitally will con-
tinue . . .”62

Amazon and Alibaba functioned on different business
models. Alibaba operated on Tmall where it directly sold
goods and services to the customers online. In contrast,
Amazon bought goods and services from different suppliers
in wholesale and sold them to customers online. Analysts
pointed out that Amazon had moved into the Chinese mar-
ket with the same strategy and attitude intended for American
customers. For instance, while Amazon’s competitors in
China offered different online payment options for custom-
ers, Amazon opted for some of those options only much later.
Further, customers found products priced lower on other sites
than on Amazon.

Analysts pointed out that Amazon’s competitors like Tmall
in China had gained deep insights into the Chinese customers’
needs and preferences. For instance, as Tmall had poor online
support for international credit cards, it offered a wide selection
of alternative money payment options. Most Chinese consum-
ers did not have a credit card. The average income of Chinese
customers was low when compared to Japanese or American
customers and even if a Chinese customer had a steady income,
he was issued a pre-paid debit card with VISA or MasterCard.
Moreover, Alipay was one of the most prevalent on-line pay-
ment methods, and Amazon had not joined this payment
gateway.

EXHIBIT VII Top Online Marketplaces among Chinese Sellers as of 2016

62%

45%
40%

28%

19%

8%
5% 4% 3% 3% 2%

Amaz
on

W
ish

Aliex
pre

ss
E-B

Laz
ad

a
Othe

JD
.co

Cdis
cou

nt Est
y

Lin
io

Jum
ia

New
eg

Source: Adapted from www.businessinsider.com.

M08A_DERE7874_10_SE_CASE5.indd 9 15/10/20 12:36 AM

http://www.businessinsider.com.

PC3-10 PART 3 • COMPREHENSIVE CASES

inferior-quality products. Consumers had trouble differentiat-
ing between genuine products and fake products because the
‘Fulfilment by Amazon’ program authorized the purchases.
This situation had left consumers in a dilemma as they tried to
figure out which products were legitimate. Amazon, however,
contended that it maintained a strict policy against counterfeit-
ers: “Amazon does not allow the sale of counterfeit items on its
Marketplace and occurrences of counterfeit products are very
rare. Every customer who orders on Amazon is covered by our
A-Z guarantee and if they do receive counterfeit goods from a
marketplace seller, we will refund or replace that item.”68

Elaine rolled out a new policy in 2017 in China to support
the listed brands on Amazon by trying to shut down counterfeit
sellers. Many of these counterfeit sellers were based in China,
and it was a challenge for Elaine to stop them from entering
Amazon’s supply chain. Amazon also filed lawsuits against
both counterfeit sellers and fake product reviewers. The com-
pany spent a lot of money and employed experts to watch out
for fakes.

Chinese Government Regulations

China was particular about regulating the internet. Access to
the internet was possible only through state-owned telecom-
munication operators under the administrative control and reg-
ulatory supervision of the Ministry of Industry and Information
Technology of China. Added to that, the national networks in
China were connected to the internet through state-owned in-
ternational gateways, which were the only networks through
which a national user could connect to the internet outside
China. Amazon could not access substitute networks during
occasions of disturbances, failures, or other problems with
China’s internet infrastructure. Besides, consistent bandwidth
speed could be a problem for Amazon in China.

Amazon had to follow the regulations of the host govern-
ment in the form of enforcement of contractual relationships
with respect to the management and control of international
businesses and licence requirements. These regulations would
control foreign investment in and operation of the internet, IT
retail, data centers, delivery, infrastructure, internet content, and
the sale of media and other products and services. As a result,
the Amazon website was operated by local companies owned by
Chinese nationals in keeping with the licensing requirements in
China. Amazon said in a regulatory filing to the US Securities
and Exchange Commission (SEC), “Our Chinese and Indian
businesses and operations may be unable to continue to oper-
ate if we or our affiliates are unable to access sufficient funding
or if China enforces contractual relationships with respect to
the management and control of such businesses.”69

China’s market regulator, the State Administration for
Industry and Commerce70 (SAIC), announced in 2015 that it
would work on reducing e-commerce problems in the country,
especially counterfeit products and poor customer service, ac-
cording to Tech in Asia.71

The National People’s Congress72 (NPC) issued its first
draft of the Electronic Commerce Law on January 26, 2017,
among various laws and regulations being passed by differ-
ent authorities that affected the Chinese e-commerce market.

Another problem that Amazon faced in China was that its
shipping speed was relatively slow. Amazon could not run its
own parcel delivery system as JD did since it did not possess
sufficient knowledge of Chinese locations, nor could it associ-
ate with delivery companies as diligently as its rivals such as
Alibaba. Amazon’s main transport source was SF Express63
(Shunfeng). In addition, Amazon operated its own Amazon
Prime delivery service called yuanpei which served only cen-
tral areas of major cities in China.

Amazon’s acquisition of Twitch also proved a disaster as
Wang Sicong (Sicong), a Chinese billionaire, announced the
unveiling of his Panda TV64 to compete with Amazon. Sicong
employed Chinese as well as overseas gaming talent and imple-
mented strategies to leverage the synergy of e-sports and enter-
tainment. Sicong, who was flush with funds and familiar with
the local Chinese gaming culture, was well positioned to take
on Amazon.

Fraudulent and Counterfeit Sellers

Another problem for Amazon in China was fraudulent third-
party sellers, based mostly in China, who usually failed to de-
liver the orders. According to the media reports, a seller would
open a new account on Amazon.cn and start choosing prevalent
items to ‘sell,’ which they could simply select with a few clicks
using Amazon’s seller’s platform. The seller would then exhibit
these items for prices that were usually lower than other ven-
dors. When the orders started rolling in, the so-called ‘seller’
would instantly claim that the items had been shipped from its
facility to the customer and the customer would make the pay-
ment to the seller’s account. In fact, the ‘seller’ would not even
have the items in the first place and the customers were duped.
Amazon, in general, waited for customer complaints to catch
the sellers, but by then, the real criminals would have disap-
peared with the money.

As a result of such frauds, trusted sellers such as
Birkenstock65 decided to leave the Amazon sellers’ platform.
According to Birkenstock USA’s CEO David Kahan, “The
Amazon marketplace, which operates as an ‘open market,’ cre-
ates an environment where we experience unacceptable business
practices which we believe jeopardize our brand . . . Policing
this activity internally and in partnership with Amazon.com has
proven impossible.”66

Some industry observers felt that the Chinese consumers
were not so knowledgeable as to inspect all the details regard-
ing a product, and so many sellers were getting away with
selling counterfeits. Though there was a feedback system in
Amazon, it proved incapable of solving this problem. However,
genuine sellers protested that Amazon was not being proactive
enough in keeping counterfeiters off its site, and opined that
counterfeiting did not seem to be a high-priority problem for
Amazon. Companies like Bed Band Store LLC, which sold pat-
ented locks and clamps to keep fitted sheets from sliding off a
bed, claimed that its business went from making US$700,000
annually in 2013 to half as much revenue in 2015 due to
counterfeiting.67

Besides this, Amazon sellers alleged in 2016 that Chinese
manufacturers were copying their designs and selling low-cost,

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CASE 5 • AMAZON.COM IN CHINA: CAN ELAINE CHANG CRACK THE CHINESE MARKET? PC3-11

Analysts opined that Chinese competitors were in a bet-
ter position to understand and navigate the regulations in
the country. For instance, Alibaba relied on a legal structure
known as variable interest entity77 (VIE), which enabled it to
bypass the Chinese government’s restrictions on foreign own-
ership of businesses in certain sectors, including information
technology.78

The Road Ahead

The cross-border shopping via AGS had shown significant
growth in China. In the first quarter of 2017, total sales from
China were 11 times as much as in 2015. Chinese consum-
ers had purchased nearly 17 million pieces of cross-border
directly-delivered merchandise from Amazon China since the
official opening of the cross-border direct-delivery service in
October 2014.79 However, by mid-2018, Amazon’s e-com-
merce market share in China was less than 1%.

While some analysts felt that Amazon should pull out of
China, others felt that Amazon had underinvested in China, and
that it was not failing, but having less success than its com-
petitors. However, Amazon was partially successful in weaning
away some of the cross-border e-commerce market share from
JD and Alibaba. But in light of the other limitations, analysts
opined that there might be tough times ahead for Amazon in
China. However, Amazon had global traction and the support
of optimistic shareholders to back up its efforts in China. Gurr
said, “If you’re not the biggest player in the market, you need
to stand out from the rest by having something only you can
deliver.”80

Can Amazon retaliate from its position and create a sig-
nificant imprint in China? Can Elaine sell a foreign online mar-
ketplace to Chinese consumers who were used to buying ev-
erything from home-grown e-commerce giants such as Tmall,
Taobao, and JD, and other local niche players? How?

Case Questions

1. Critically analyze Amazon’s strategy in China.
2. How could Amazon face up to the fierce competition

from e-commerce retailers in China?
3. Discuss the possible challenges Amazon could face

in China going forward. What should it do in such a
scenario?

The NPC had circulated the draft for debate to further regu-
late China’s e-commerce market. After the draft was passed,
e-commerce companies had to rigorously check and modify
their operations to ensure compliance with the law. The NPC
had announced, on November 7, 2017, that the NPC Standing
Committee had issued a second draft of the Electronic
Commerce Law. The Draft was applicable to e-commerce
undertakings that included local and cross-border trade over
the internet and it spoke about the deployment and security
of e-commerce data and information, customer and privacy
protection, and fair competition. Specifically, it considerably
extended the compulsions of e-commerce operators by refer-
encing the Cybersecurity Law of 2016 in the context of collect-
ing and using the personal information of e-commerce users.

Michael Tan and Lynn Zhao, Partner and Associate respec-
tively at Taylor Wessing LLP, commented, “It will require e-
commerce operators to provide users with clear methods and
procedures for accessing, correcting and deleting users’ in-
formation or closing user accounts, and prohibits them from
imposing unreasonable conditions on users for these actions.
Through this provision, the Draft will provide a more strength-
ened protection of the personal information of e-commerce users
than the first draft [. . .] we would expect that, after it has been
passed, e-commerce operators will need to strictly inspect and
adjust their operations to ensure compliance with the law.”73

There were limitations on web content in China.
Sometimes, a company could be held accountable for the illegal
actions of its customers or users. China also had certain restric-
tions on foreign ownership of businesses. For instance, foreign
investors could not own more than half of the equity in value
added domestic telecom. In November 2017, Amazon agreed
to sell parts of its cloud business to Beijing Sinnet Technology
Co. Ltd.74 (Sinnet) for up to RMB 2 billion (US$301 million)
though it said that it was committed to the Chinese for internet-
based computing that could be worth US$30 billion.75

An Amazon spokesperson clarified that Amazon would
continue its operations in China but had been forced to divest
‘certain physical infrastructure assets’ in order to conform to
Chinese law. Amazon said in a statement, “Chinese law forbids
non-Chinese companies from owning or operating certain tech-
nology for the provision of cloud services. As a result, in order
to comply with Chinese law, AWS sold certain physical infra-
structure assets to Sinnet, its long time Chinese partner and
AWS seller-of-record for its AWS China (Beijing) Region.”76

Endnotes
1. This case was compiled from published sources, and is intended to be

used as a basis for class discussion rather than to illustrate either effective
or ineffective handling of a management situation. © 2018, IBS Center
for Management Research. All rights reserved. To order copies, call +91
9640901313 or write to IBS Center for Management Research (ICMR),
IFHE Campus, Donthanapally, Sankarapally Road, Hyderabad 501 203,
Telangana, India or email: casehelpdesk@ibsindia.org www.icmrindia.org

2. Fan Feifei, “A-Z in Cross-border e-shopping,” http://www.chinadaily
com.cn, June 26, 2017.

3. Clayton Jacobs, “Why Many Major American Companies have Struggled
in China: Amazon,” https://readwrite.com, March 10, 2017.

4. Joyo was a Chinese online bookstore service founded by Kingsoft in
August 1998 which expanded to selling general merchandise in 2003.

M08A_DERE7874_10_SE_CASE5.indd 11 15/10/20 12:36 AM

mailto:casehelpdesk@ibsindia.org

https://readwrite.com

http://www.chinadailycom.cn

http://www.icmrindia.org

PC3-12 PART 3 • COMPREHENSIVE CASES

5. Brian Deagon, “Amazon China Unit Looks to Merge with NetEase
E-Commerce Business,” www.investors.com, February 19, 2019.

6. Jd.com is a Chinese electronic commerce company headquartered in Beijing.
7. Tencent is a Chinese investment holding company whose subsidiaries

provide media, entertainment, internet, and mobile phone value-added
services and operate online advertising services in China.

8. Tmall.com is a Chinese-language website for business-to-consumer
(B2C) online retail, operated in China by Alibaba Group.

9. Alibaba is a Chinese e-commerce company that provides consumer-to-
consumer, business-to-consumer, and business-to-business sales services
via web portals.

10. Kaola is a cross-border import retail e-commerce platform in China
owned by NetEase Inc.

11. These services operated from 16 geographical regions across the world as
of 2017.

12. In 2014, Amazon raised the annual fee for the Amazon Prime member-
ship to US$99, attributing the hike to an increase in fuel and shipping
costs.

13. Zappos.com is an online shoe and clothing shop based in Las Vegas,
Nevada.

14. www.statista.com/topics/846/amazon/
15. Jeremy Bowman, “After Souq.com Purchase, Will Amazon Ever Be Prof-

itable Abroad?” www.foxbusiness.com, April 2, 2017.
16. An Internet service provider (ISP) is a company that provides services

related to accessing and using the Internet.
17. The China Internet Network Information Center is the administrative

agency responsible for Internet affairs under the Ministry of Information
Industry of the People’s Republic of China.

18. Frank Tong, “China’s E-Commerce Boom,” www.internetretailer.com,
April 1, 2016.

19. 1 US dollar was equal to 6.61 RMB (Chinese Yuan Renminbi) as of De-
cember 6, 2017.

20. “E-Commerce in China,” www.intracen.org, 2016.
21. Muhammad Talha, “Have You Seen the 5 Largest eCommerce Markets?”

www.commercify.org, March 15, 2016.
22. McKinsey iconsumer China 2016 survey researched on how savvy, social

shoppers are transforming e-commerce in China.
23. Sara Hsu, “China’s E-Commerce Addiction Has Serious Market Poten-

tial,” www.forbes.com, July 16, 2016.
24. CIW Team, “China to Become Largest E-commerce Market in 2015,”

www.chinainternetwatch.com, November 3, 2015.
25. WeChat is a mobile text and voice messaging communication service

developed by Tencent in China, first released in January 2011. It is one of
the largest standalone messaging apps by monthly active users.

26. Sina Weibo is a Chinese microblogging website. Similar to the hybrid
of Twitter and Facebook, it is one of the most popular blogging sites in
China.

27. Kingsoft is a Chinese software company.
28. Matt Hines, “Amazon Buys into Chinese Market,” www.cnet.com, Au-

gust 19, 2004.
29. http://agln.aspeninstitute.org/profile/4233
30. Fan Feifei, “A-Z in Cross-border e-shopping,” http://www.chinadaily

.com.cn, June 26, 2017.
31. Huang Tianchen, “Fortune China Unveils 25 Most Influential Business-

women,” www.chinadaily.com.cn, December 23, 2016.
32. Shanghai Jiading Industrial Zone, located in the northwest of Shanghai

and on the development axis of Shanghai and Nanjing, is a municipal-
level pilot industrial zone.

33. ChinaNetCenter is a leading internet service platform provider in China.
34. Ingrid Lunden, “Amazon Raises Its Game against Alibaba, Will Expand

AWS Cloud Services to China in 2014,” www.techcrunch.com, December
18, 2013.

35. Shanghai Information Investment Inc. is a state-owned investment com-
pany focusing on information and communications technology and re-
lated industries.

36. Z.cn refers to Amazon.cn.
37. Zhang Yuanan, “Amazon Doubling Down on China Market, Executive

Says,” www.english.caixin.co, September 10, 2015.
38. Zen Soo, “Amazon Is Gunning for Alibaba’s Stake of Chinese E-Com-

merce,” www.businessinsider.com, February 11, 2016.
39. Beijing Century Joyo Courier Service is a freight forwarder company in

China.
40. The United States Federal Maritime Commission (FMC) is an indepen-

dent federal agency responsible for the regulation of oceanborne interna-
tional transportation of the US.

41. Shanghai Shipping Exchange is the only national-level shipping ex-
change that was established in China to cultivate and develop China’s
shipping market.

41. Spencer Soper, “Amazon Opens Store on Alibaba’s Tmall for Chinese
Shoppers,” www.bloomberg.com, March 6, 2015.

43. Yue Wang, “To Boost China Sales, Amazon Tries Alibaba Partnership,”
www.forbes.com, March 5, 2015.

44. Twitch was a live streaming video platform owned by Twitch Interactive. It
primarily focused on video gaming, including broadcasts of eSports com-
petitions, creative content, and more recently, music broadcasts. In 2015,
Twitch announced it had more than 1.5 million broadcasters and 100 million
visitors per month.

45. Ameen Khwaja, “How Amazon Failed in China?” www.linkedin.com,
April 29, 2016.

46. Sarah Perez, “Amazon Prime Launches in China,” www.techcrunch.com,
October 28, 2016.

47. Willis Wee, “How Amazon Localized for China,” www.techinasia.com,
September 12, 2012.

48. Amazon Launchpad provides resources, expertise, and global infrastruc-
ture to sell and deliver innovative products to Amazon customers.

49. The Fire Tablet, formerly called the Kindle Fire, is a tablet computer
developed by Amazon.

50. James Huang, “Chinese Merchants Seeing Success on Amazon,” www
.channeladvisor.com, January 19, 2016.

51. David Bryant, “The Chinese Are Coming: More and More Suppliers Are
Selling Directly to Consumers,” www.chineseimporting.com, May 7, 2016.

52. Payoneer is a financial services business that provides online money
transfer and e-commerce payment services.

53. Wish is a leading online shopping mall in Europe and North America.
54. AliExpress is an online retail service made up of mostly small Chinese

businesses offering products to international online buyers.
55. eBay Inc. is an American multinational corporation and e-commerce

company providing consumer-to-consumer and business-to-consumer
sales services via the internet.

56. Liu Zheng, “Chinese Sellers Turning to Amazon to Go Global,” www
.telegraph.co.uk, August 2, 2016.

57. “Chinese Online Retailers Prefer to Sell on Amazon,” www.businessinsider
.com, August 3, 2016.

58. Fan Feifei, “Amazon China adds UK Selections to its Overseas Store,”
www.chinadaily.com.cn, November 5, 2016.

59. Aliyun operating system is a Linux distribution designed for smartphones
based on the Android Open Source Project.

60. Dropbox is a file hosting service operated by American company Dropbox,
Inc.

61. Alipay is a third-party mobile and online payment platform.
62. “China Eclipses the US to Become the World’s Largest Retail Market,”

www.emarketer.com, August 18, 2016.
63. SF Express, based in Shenzhen, is the second largest Chinese delivery

services company.
64. Panda TV is a Chinese online entertainment company focused on broad-

casting live e-sports events.
65. Birkenstock is a shoe manufacturing company headquartered in Neus-

tadt, Germany.
66. “China Problem: Amazon Third Party Sellers Cannot Be Trusted to

Deliver Goods,” www.smobserved.com, January 9, 2017.

M08A_DERE7874_10_SE_CASE5.indd 12 15/10/20 12:36 AM

http://www.smobserved.com

http://www.emarketer.com

http://www.chinadaily.com.cn

http://www.businessinsider.com

http://www.telegraph.co.uk

http://www.chineseimporting.com

http://www.channeladvisor.com

http://www.techinasia.com

http://www.techcrunch.com

http://www.linkedin.com

http://www.forbes.com

http://www.bloomberg.com

http://www.businessinsider.com

http://www.english.caixin.co

http://www.techcrunch.com

http://www.chinadaily.com.cn

http://agln.aspeninstitute.org/profile/4233

http://www.cnet.com

http://www.chinainternetwatch.com

http://www.forbes.com

http://www.commercify.org

http://www.intracen.org

http://www.internetretailer.com

http://www.foxbusiness.com

http://Souq.com

http://www.statista.com

http://www.investors.com

CASE 5 • AMAZON.COM IN CHINA: CAN ELAINE CHANG CRACK THE CHINESE MARKET? PC3-13

75. Arjun Kharpal, “Amazon Is Selling Parts of Its Cloud Business in China
for up to $301 Million,” www.cnbc.com, November 14, 2017.

76. Jon Russell, “AWS Isn’t Exiting China, But Amazon Did Sell Physical
Assets to Comply with Chinese Law,” www.techcrunch.com, November
13, 2017.

77. Variable interest entity (VIE) is a term used by the US Financial Account-
ing Standards Board (FASB) in FIN 46 to refer to an entity (the investee)
in which the investor holds a controlling interest that is not based on the
majority of voting rights.

78. Han Qi, “Alibaba IPO a Caveat for Regulators,” www.chinadaily.com.cn,
September 18, 2014.

79. “Amazon’s Re-Entry into the China Market,” www.skubana.com, July 3,
2017.

80. Wang Qionghui, “In Tough China Market, Amazon Sells the World,”
www.english.caixin.com, February 11, 2015.

67. Tracy Moore, “Chinese Counterfeiters Cause Major Problems for Ama-
zon Merchants,” www.vocativ.com, July 17, 2016.

68. Jeremy Bowman, “Amazon.com’s Latest Challenges Come to Light:
Counterfeit Goods and Angry Brand Owners,” www.fool.com, July 27,
2016.

69. Jerin Mathew, “Amazon Warns of Ending India and China Operations
Due to Complicated Laws,” www.ibtimes.co.uk, November 3, 2014.

70. The State Administration for Industry and Commerce is the authority in
the People’s Republic of China responsible for advancing legislation con-
cerning the administration of industry and commerce in the country.

71. “China Pushes toward More E-Commerce Regulation,” www.pymnts
.com, March 10, 2015.

72. The National People’s Congress is China’s national legislative body.
73. Claudia Strugnell, “China: Second Draft Electronic Commerce Law

Aims to “Trigger Attention and Discussion” on Consumer Protection,”
November 16, 2017.

74. Beijing Sinnet Technology Co., Ltd. is a China-based company princi-
pally engaged in the provision of integrated Internet services. It is the
partner of Amazon that operates Amazon Web Services in China.

M08A_DERE7874_10_SE_CASE5.indd 13 15/10/20 12:36 AM

Home Page

http://www.ibtimes.co.uk

http://www.fool.com

http://www.vocativ.com

http://www.english.caixin.co

http://www.skubana.com

http://www.chinadaily.com.cn

http://www.techcrunch.com

http://www.cnbc.com

This page is intentionally left blank

Case 6 Souq.com and the Battle for the Future of E-Commerce in the MENA Region
This case was written by Koti Vinod Babu, under the direction of Debapratim Purkayastha, IBS Hyderabad.1

The ball was in Souq’s court, and Mouchawar had to quickly
decide how it would chase its growth target–by shaking hands
with Amazon or with Emaar.

Background Note

About Souq

Mouchawar was a Syria-based engineering graduate who had
worked in different technology companies in the US in the late
1990s. He came to the UAE in 2000, and found that there was
potential for the e-commerce business in the MENA region.
He first launched a consulting company handling web and e-
commerce projects for the local Arab market. In 2005, he joined
Maktoob, an online services company founded in Jordan. It
was at that time that he hit on the idea of founding Souq along
with other co-founders Samih Toukan and Hussam Khoury.
Souq, started in 2005 in Dubai, began initially as an auction
site linked to Maktoob. The word ‘Souq’ meant ‘marketplace’
in Arabic. The inspiration for the website’s name originated
from a town called ‘Aleppo’ in Syria where Mouchawar was
born. Aleppo was considered one of the world’s oldest busi-
ness centers by analysts, and it had a number of marketplaces
spread around the town.

Souq’s offerings comprised online auctions, real estate
classifieds, etc. The company started to grow due to the increas-
ing number of orders from youths with high disposable incomes
and the high internet penetration in MENA which facilitated
online shopping. Eventually, Maktoob was acquired by Yahoo!6
in 2009. As a result, Souq became an independent entity, and
began to change its original model of auctioning. At that point
of time, the founders of Souq decided to design an e-commerce
website which would cater to MENA by focusing on transform-
ing Souq into an e-commerce website. Mouchawar said, “The
beginnings were humble and not very easy until 2009, when
Maktoob was acquired by Yahoo. The minute Maktoob was sold
it was very clear that the next big thing in the region would be
commerce.”7 Souq was renovated and became an e-commerce
website in 2011.

Souq initially concentrated on the sale of electronic de-
vices in the UAE, tapping the huge demand from a young
population with high disposal incomes. It also leveraged the
smartphone boom and the development of tablets at that point
of time. Mouchawar applied advanced technology in Souq’s
operations. He observed the working style of other e-tailers in
the international market and modified his own model accord-
ingly to enrich the buyers’ experience in terms of fulfilment,
delivery, and payment.

Souq featured more than 400,000 products from interna-
tional and local brands as of 2014 and established itself as one

“The walls are being knocked down. We still have work to do,
but we’re getting there.”2

—Ronaldo Mouchawar, Souq’s CEO, in 2017

“There is a good old-fashioned bid battle going on
in the Arabian Gulf, and the way it turns out will

set the stage for the future development of
e-commerce in the region.”3

—Frank Kane, an award-winning business
journalist based in Dubai, in 2017

In September 2016, Middle Eastern e-commerce company
Souq.com (Souq) appointed Goldman Sachs Group Inc.4
(Goldman Sachs) to find a buyer for it. Souq was an English-
Arabic language e-commerce platform, often described as the
“Amazon of the Middle East.” It had established itself as a lead-
ing player in the Middle East and North Africa (MENA) region
and was looking for a buyer as Souq’s co-founder and CEO,
Ronaldo Mouchawar (Mouchawar), wanted to take it to the
next phase of growth in the region.

Global e-commerce giant Amazon.com, Inc. (Amazon) ap-
proached Souq with an acquisition offer in November 2016 in
an effort to expand its reach in the MENA and to exploit the un-
tapped e-commerce market potential. However, Amazon failed
in its attempt due to a disagreement with Souq over the price.
In March 2017, Amazon again approached Souq and offered
US$650 million for the acquisition. At the same time, leading
real estate company in the Middle East, Emaar Properties PJSC
(Emaar), entered the scene, making a counter bid of US$800
million.

Analysts felt that Amazon wanted to leverage Souq’s well-
established infrastructure in terms of order fulfilment and logis-
tics in MENA through the acquisition while Emaar wanted to
get synergetic benefits of physical as well as online shopping
as it owned the biggest malls in Dubai like The Dubai Mall.5
Notwithstanding Amazon’s core competency in technology
infrastructure and logistics, analysts contended that if the deal
with Souq succeeded, Amazon would still have to face certain
challenges in MENA, such as customers’ preference for cash
on delivery (COD), customers’ lack of trust in online platforms,
the issues with local logistics, complexity in understanding the
local culture which differed vastly from Western culture, and
government regulations. In the case of Emaar, analysts felt that
it had local advantages like logistics flexibility, government
support, knowledge of the local culture and traditions, etc.
However, it lacked the advantage of global brand awareness
that Amazon had. They also opined that Emaar was a strong
contender in terms of financial resources and pointed out that it
had offered a much more lucrative deal to Souq than Amazon.

PC3-15

http://Amazon.com

http://Souq.com

PC3-16 PART 3 • COMPREHENSIVE CASES

Ebay
13%

Extra Stores
11%

Markha VIP
9%

Namshi
6%

sukar
4%

Ali Express
8%

Amazon
2%

Alibaba
9%

Shop ans Ship
8%

Souq
30%

ExHIBIT I Traffic Split and Market Share of Top E-Commerce Sites in MENA (2013)

* Data courtesy: Similarwebtool, ArabNet Riyadh
Source: Adapted from “Online Retail Gold Rush in Middle East and North Africa, 2014–Statistics and Insights.”

of the leading e-commerce players in the MENA region both
in terms of site traffic and market share (Refer to Exhibit I). It
raised US$150 million in funding, with US$75 million received
from Naspers8 in 2014. In addition, the investors of Souq in-
cluded Ballie Gifford,9 IFC Venture Capital Group,10 Jabbar
Internet Group11 (Jabbar), Middle East and North Africa region
(MENA) Venture Investments,12 Standard Chartered PLC,13
and Tiger Global Management, LLC.14

According to Ingrid Lunden of TechCrunch: “Souq had
announced in 2016 that it had closed a funding round of over
US$275 million (AED 1 billion) to continue building out its
business in the region. We have confirmed with sources that
Souq’s post-money valuation is US$1 billion.”15

About Amazon

Amazon was founded in June 1994 by Jeff Bezos (Bezos). At
that time, the internet was gaining popularity and was being
considered as a potential business medium. To cash in on this
trend, Bezos came up with the idea of selling books to a mass
audience through the internet. In June 1995, he launched his
online bookstore, Amazon.com, named after the river Amazon.
Amazon officially opened for business on July 6, 1995. At the
beginning, Amazon’s business model was based on the “sell
all, carry few” strategy wherein the retailer offered more than
a million books online though it actually stocked only about
2,000. The remaining titles were sourced predominantly
through drop-shipping wherein Amazon forwarded customer
orders to book publishers, who then shipped the products
directly to the consumers. By the end of 1996, Amazon was
offering about 2.5 million book titles.

Amazon expanded its overseas business by launching in-
ternational websites in the Asia-Pacific and European countries

in 2003. To deliver goods to end consumers at a reasonable
price, Amazon employed a business model called the ‘Online
Retailers of Physical Goods’ wherein it obtained products
directly from the distributors rather than stocking all the goods
in its warehouse. In 2005, Amazon launched a free shipping
program for its customers called Amazon Prime,16 wherein
customers received free two-day shipping on their purchases
for a fee of US $79 per year. According to industry observers,
the program disrupted the retail industry by enveloping more
customers into its fold and enhancing customer loyalty.

Amazon had its presence in MENA through a partnership with
Jamalon.com17 (Jamalon), an online bookseller based in Amman,
Jordan, that had been in business since 2010 and offered around 10
million titles in English and Arabic. Amazon directed Jamalon on
logistics, while Jamalon provided Arabic titles to Amazon.

Amazon had individual retail websites for the US, the UK and
Ireland, France, Canada, Germany, Italy, Spain, the Netherlands,
Australia, Brazil, Japan, China, India, and Mexico. As of the fourth
quarter of 2015, the e-retailer reported more than 304 million ac-
tive customer accounts worldwide. Due to Amazon’s global scope
and reach, it was also considered one of the most valuable brands
worldwide.18 However, Amazon’s international segment at US$44
billion in 2016 still remained about half of its North American
market by size. Growth rate was also less compared to its home
market. Amazon posted a total operating loss abroad of more than
US$2.6 billion, half of which was incurred in 2016.19

Amazon had spent US$103 million on acquisitions in 2016,
according to its annual 10K filing of 2016. Analysts felt that this
was a huge amount compared to many companies, but it was
down from Amazon’s annual acquisition totals of US$862 million
in 2014 and US$690 million in 2015.20 (Refer to Exhibit II).
Analysts felt that Amazon had a lot of cash to spare for

http://Jamalon.com

http://Amazon.com

CASE 6 • SOUQ.COM AND THE BATTLE FOR THE FUTURE OF E-COMMERCE IN THE MENA REGION PC3-17

with most of the people having large disposable incomes.
Average mobile penetration stood at more than 170% and
smartphone penetration was at more than 65%. In addition,
more than two-thirds of the population used the internet,
with penetration in the UAE and Qatar exceeding 90% (in-
cluding fixed and mobile). But the e-commerce market was
limited. Despite its young, tech savvy population, shoppers
in the Middle East still preferred to shop at stores. Online
retail sales accounted for less than 1% of total sales in the
Middle East, according to market researcher Euromonitor
International. With an estimated market size of US$5.3 bil-
lion in 2015, e-commerce contributed only about 0.4% to the
region’s GDP–a tiny amount compared with more mature
markets that had similar levels of GDP per capita and inter-
net penetration.25

Analysts felt that while e-commerce was growing in
emerging markets like Southeast Asia, India, and China, the
e-commerce sector in the Middle East was showing more
promise of growth and there was an exceptionally productive
platform for it. The growth in e-commerce was not exclusively
driven by the private sector in a country like the UAE. The
UAE had taken several initiatives to develop e-commerce. For
instance, it had integrated traditional offline services such as
Visa services, Traffic services, and Utilities services into on-
line platforms to provide citizens quicker and more effective
public services online. In addition, the UAE government had
set up the world’s first purpose-built duty-free e-commerce
hub ‘Matajircom’26 in 2014.

Though many countries had moderately low internet pen-
etration rates, the information technology setup was evolving
quickly across the Middle East region. For instance, in some
places like Bahrain, Qatar, and the UAE, 90% of the population
had access to the internet. In the case of Qatar, the country with
the third highest per capita GDP worldwide, less than 20% of
internet users made purchases online in 2015. Analysts opined
that there was huge potential for growth of e-commerce in the
Middle East region. The Middle East’s e-commerce market was

acquisitions. As of 2017, it had over US$13 billion in cash and
cash equivalents, more than double the amount it had in July
2014. The company had become a cash machine generating
US$9.7 billion in free cash flow in the 12 months ending June
30, 2017–a significant improvement from 2014 when it had only
US$1.04 billion in trailing twelve months free cash flow.21

About Emaar

Emaar was a real estate development company founded by
Mohammed Ali Alabbar (Alabbar) in 1997 in the United Arab
Emirates (UAE). It was a public joint stock company22 (PJSC)
and operated globally, offering property development and
management services. The UAE Government held a 32% stake
in Emaar.23 It operated in three business segments, namely real
estate, leasing and related activities, and hospitality. The real
estate segment was engaged in the development and sale of
apartments, villas, commercial complexes, and plots of land.
The leasing and related activities segment developed leases
and managed malls, retail, commercial and residential spaces,
while the hospitality segment developed and managed hotels,
serviced apartments, and leisure activities.

Emaar’s subsidiaries included Emaar Malls Group LLC
and Emaar Hospitality Group LLC. Emaar had its presence in 36
markets across MENA, Pan-Asia, Europe, and North America
as of 2016. Emaar was one of the largest real estate develop-
ers in the UAE and the developer of Burj Khalifa, the tallest
building in the world at 2,500 feet. It was also the developer of
The Burj Dubai which was the centerpiece of ‘Downtown Burj
Dubai’, an urban project spread over two square kilometres.
‘Downtown Burj Dubai’ included The Dubai Mall, the largest
shopping mall in the world.

E-commerce in Mena

Experts felt that the Gulf Cooperation Council24 (GCC)
was one of the world’s most mystifying platforms for e-
commerce. GCC had the highest levels of GDP per capita,

319

400

416

545

650

775

900

970

1200

13700

LoveFilm (Video Provider)

Whole Foods (Grocery)

Zappos (Shoes)

Twitch (Streaming Video)

Grail (Clothing)

Kiva Systems (Robotics)

Quidsi (E-Commerce)

Souq (E-Commerce)

Egghead.com (Software)

Living Social (Online Retail)

ExHIBIT II Amazon’s Top 10 Acquisitions (Amount in US$ Millions)

Source: Adapted from dialogic George Petras USA Today.

PC3-18 PART 3 • COMPREHENSIVE CASES

MENA region had crossed US$14 billion by the end of 2015
(Refer to Exhibit IV). The Asia Pacific region topped the total
e-commerce sales by region (Refer to Exhibit V).

Among all the GCC countries, around 43% of internet users
reported making an online purchase at least once a month. The
UAE had the highest percentage of internet users who shopped
online, compared to other countries in the Middle East. B2C
2010 e-commerce sales growth in the UAE was US $2 billion,
55% to 60% of the total GCC e-commerce sales, according to
Visa. Saudi Arabia had the second largest e-commerce market
in the GCC with an estimated US$520 million, followed by
Qatar (US$375 million), Kuwait (US$280 million), Bahrain

expected to reach US$ 10 billion by 2018 (Refer to Exhibit III).
According to a study published by yStats.com in 2016, the share
of B2C e-commerce in total retail sales of goods in the UAE
alone was forecast to triple between 2014 and 2019.27

By the middle of 2017, the Middle East e-commerce mar-
ket was being controlled by local players like Souq and Wadi
.com28 (Wadi) and international businesses such as eBay Inc.29
(eBay), Amazon, and Ali Express.30 The quick development
in the sector attracted huge investments. While most of the e-
commerce companies had a presence in Saudi Arabia, Qatar,
and the UAE, Egypt was also rising in e-commerce with over
30 million active online shoppers. E-commerce spending in the

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

2015 2018E

ExHIBIT III Middle East E-Commerce Market (Amount in US$ Billions)

Source: http://marketrealist.com/2017/04/what-does-the-souq-acquisition-mean-for-amazon/.

11.2

12.8

2011 2012 2013 2014 2015

ExHIBIT Iv E-Commerce Spending in MENA Region (Amount in US$ Billions)

Source: PayPal Insights: e-Commerce in the Middle East 2012–2015.

http://marketrealist.com/2017/04/what-does-the-souq-acquisition-mean-for-amazon/.

http://Wadi.com

CASE 6 • SOUQ.COM AND THE BATTLE FOR THE FUTURE OF E-COMMERCE IN THE MENA REGION PC3-19

Asia-Pacific North
America

1,053

661

433

75 73 51

Western
Europe

Latin
America

Central and
Estern
Europe

Middle East
and Africa

ExHIBIT v E-Commerce Sales by Region (Amount in US$ Billions)

Source: Adapted from www.l2inc.com/daily-insights/ask-l2-how-much-of-amazons-growth-is-international.

(US$175 million), and Oman (US$70 million).31 According to
market estimates by MyUS, the leading facilitator for MENA
consumers who wanted to purchase US merchandise online, the
regional market’s total value was forecast to hit the US$6.7 bil-
lion mark in 2017, up from US$4.8 billion in 2016.32

Hosam Arab, Cofounder and Managing Director at Namshi, 33
said, “With over 90 million internet users in the Middle East, we
are seeing incredible growth within the e-commerce space due to
the convenience factor and wider product ranges online. However
in a region where mall culture is so prevalent and the experience
customers received from e-commerce players in the past was not
on par with global standards, there is a lack of trust in online
shopping as a whole compared to Europe and the US.”34

Smartphones had become prevalent in the Middle East which
allowed transacting and making payments online. Broadband
penetration was more than 50% in the MENA region, which was
one of the highest rates of penetration in the world. The highest
number of internet users in the MENA region was from Egypt,
followed by Morocco and Saudi Arabia. Nevertheless, internet
penetration was the highest in Qatar and the United Arab Emirates.

However, logistics was the main challenge for e-commerce
in the Middle East. The existing delivery system was based on
giving delivery vehicle drivers packages and phone numbers
and the packages being delivered after multiple phone calls be-
tween the driver and the customer. The way the packages were
delivered in the Middle East, Brazil, South America, and Russia
had not changed since 1987. Analysts felt that this would lead
to higher levels of product returns and high transport fees. Most
of the e-commerce companies were developing in-house logis-
tics solutions to minimize their delivery times as the Middle
East market was fragmented.

Souq’s Business Model

In 2011, Souq altered its model to an online shopping site akin
to Amazon with a marketplace and retail items for sale on its
platform. Analysts felt that Souq facilitated the feasibility of

e-commerce in the Middle East region. The company sold a
range of goods like diapers, shoes, and smartwatches to con-
sumers in countries including Bahrain, Oman, Kuwait, and
Egypt. Souq had acquired sukar.com35 (sukar) in 2012 to
benefit from Sukar’s fashion expertise and customer service
experience. Analysts felt that this acquisition could boost
Souq’s capacity to attract more women shoppers. Mouchawar
expected the number of women shoppers to grow in the near
future in MENA. He commented, “While women are not yet
a majority in e-commerce purchasing, or on the internet in
general, things are changing quickly. Increased internet
penetration has helped bridge that gap, as families have more
internet access at home, and mobile platforms neutralize the
access issue as well.”36

As most of the customers in MENA preferred cash on
delivery (COD), Souq offered substitute payment options for
the convenience of customers in areas where credit card use
was uncommon. The company generated prepaid cards that
were sold in physical stores and could then be used to make
purchases on the website. In GCC, Souq created two effective
payment platforms. One of them was CashU,37 which was a
payment gateway that was incorporated into merchants’ web-
sites and offered online prepaid coupons for customers to use
on participating retail websites. To alleviate customer security
apprehensions, the CashU system used advanced anti–money
laundering and fraud protection technology. Another one was
PayFort, which Souq owned and developed as a byproduct of
CashU. PayFort allowed Souq and other traders to accept se-
cure, encrypted credit card payments. It also offered the cus-
tomers the option to pay bills in installments to enable online
purchases.

Souq developed logistic solutions to deliver goods to cus-
tomers in populations with no postal addresses. In 2016, it
launched its logistics platform subsidiary, Q Express,38 which
owned trucks and vehicles and hired its own employees, and
had complete control over end-to-end logistics solutions for

http://sukar.com

http://www.l2inc.com/daily-insights/ask-l2-how-much-of-amazons-growth-is-international.

PC3-20 PART 3 • COMPREHENSIVE CASES

Awards Customer Delight Secretariat selected Souq for the
award after assessing the performance of companies and col-
lecting opinions from selected customers from 25 countries
in the MENA region, after which a prominent panel of judges
made the evaluation. Mouchawar commented, “We are thrilled
with this recognition, and the fact that we were selected from
across a region comprising 25 countries and by such an emi-
nent panel just makes this award even more special. Of course,
the very basis of this award–and our continued success – is
our customer, and it is to each one of them that we dedicate
this award. Souq.com looks forward to being a part of people’s
lives across the region for many more years to come.”47

Souq did not reveal its financials, but reports suggested that
its turnover hit AED500 million (US$136 million) in 2014.48
Souq launched its first mobile app in 2014, which was listed by
Apple Inc.49 as one of 2014’s top five mobile apps on the App
Store for the MENA region.

According to analysts, Souq’s competitive advantage lay
in the fact that it had the highest local traffic and largest buyer
base in the MENA region. In addition, top strategic internet
investors like Jabbar and Naspers supported it to become the
largest marketplace in the region in terms of number of sell-
ers and items. Souq featured more than 400,000 products from
international and local brands as of 2014. It had localized op-
erations in the United Arab Emirates, Saudi Arabia, Kuwait,
and Egypt, and shipped products to Bahrain, Oman, and Qatar.
Souq claimed to command 78% of all e-commerce traffic in
the MENA region.50 It provided extensive Arabic content in
markets such as Egypt, where only 10% of the consumers used
credit and debit cards to purchase online.

Souq implemented many successful marketing strategies to
attract the Middle Eastern shoppers. For instance, it launched a
four-day online shopping festival known as ‘White Friday’ in
2014. The idea of White Friday was inspired by the American
tradition of ‘Black Friday’.51 The White Friday strategy at-
tempted to reflect the culture of the Middle East as Friday was
a weekend day and was reserved for worship by Muslims.
Mouchawar explained, “We wanted to own an event that was not
really tied to thanksgiving as much but more tied to our Friday,
our White, which is kind of positive and happy. We launched it
in 2014 and it was a massive success. Last year, we did about
600,000 units, and hopefully this year we go over a million.”52

The top selling items during White Friday sales were per-
fumes, mobiles, watches, make-up, and handbags, as 35% of
all sales were made via Souq’s mobile app.53 Comparing White
Friday visits to the annual average, Souq was able to increase
its traffic during the 2015 shopping holiday by 31% over the
annual average, and further increase over annual average by an-
other 29% in 2016.54 According to Arabian Business, 600,000
items were sold across the UAE, Saudi Arabia, Kuwait, and
Egypt in the White Friday event in 2016.

Souq had become the largest e-commerce vendor in the re-
gion as of 2016, featuring about 1 million products across 31
categories such as consumer electronics, fashion, health and
beauty, household goods, baby clothes, watches, and perfumes.
It had over 45 million visits per month and operated both as a
retail site and as a marketplace for third-party sellers and had a

purchases made on Souq. Q Express offered same-day delivery
as well as next-day delivery options. The delivery vehicles were
armed with personal digital assistants for order tracking and
status updates. Souq also owned warehouses across the UAE,
Saudi Arabia, and Kuwait where customers could pick up their
purchases. It had established a fulfilment center in Al Quoz39 in
which color-coded tape was attached to the floor to demarcate
specific areas for products. Items that had arrived from sup-
pliers were wrapped to safeguard them from dust. Products
were required to stay for less than 24 hours in the warehouse,
and were shipped out to customers either via Q Express or
Aramex.40 Mouchawar commented, “Today, we’re a courier
company, a warehousing company, a payment company, a cus-
tomer service company, a content company, and a commerce
company all together.”41

Souq partnered with Nestlé S.A.42 to sell its food and bev-
erage products in Egypt in 2016. Omar El-Sahy, general man-
ager of Souq in Egypt, said, “We believe that e-commerce is
the future for Egypt and we promise to provide our products to
our clients nationwide now including foods and beverages too.
Partnering with Nestlé will provide us with the opportunity to
enter a market where 35.6% of household budgets are spent on
groceries.”43 Analysts felt that this strategic alliance would give
Souq a good opportunity to excel in online ordering of grocery
products in the MENA region.

In January 2017, Souq launched the automotive category
to provide a huge selection of car accessories online with at-
tractive deals. Analysts opined that the MENA region was ob-
serving a trend for car customization which had pushed the
demand for interior car accessories and Souq could leverage
this to expand its reach to millennials in the region. Saleem
Hammad, General Manager at Souq, commented, “Our
endeavour is to always put our customers at the heart of our
business. Constantly adding new categories is part of our drive
to deliver a world-class online shopping experience to our
customers and complete their purchase cart on SOUQ.com. In
line with the digitalisation of automotive business in the region,
this exciting category caters to our digitally savvy consumers
that are leading the online shopping trend.”44

In March 2017, Souq announced the launch of its first cus-
tomer experience center in Dubai, assisting customers as well
as sellers across the UAE. Customers could visit the center and
check the products before buying them online and even collect
them from the nearest Souq center. The customers could also
return or service goods previously purchased from Souq. As
of March 2017, it was offering more than 8.4 million products
across 31 categories including consumer electronics, fashion,
health and beauty, household goods, and baby products.45

Souq’s Successful Run

Souq eventually rose to success by introducing different cat-
egories of products on its website according to the trends in the
MENA region. For these efforts, it won the MENA ‘Customer
Delight Award for 2013’ in Dubai on November 7, 2013.
This award was given after broad research about Souq by the
MENA Awards Customer Delight Secretariat.46 The MENA

http://SOUQ.com

http://Souq.com

CASE 6 • SOUQ.COM AND THE BATTLE FOR THE FUTURE OF E-COMMERCE IN THE MENA REGION PC3-21

for Souq to look for a buyer was that the e-commerce industry
was dynamic in nature and it had to compete with both smaller
local e-tailers as well as multinational companies like Amazon
and Aliexpress. Mouchawar felt that associating with a strong
contender would reduce the competitive pressure for Souq.

Some industry observers opined that though Souq had suc-
ceeded in giving a tough fight to its competitors in MENA, it had
witnessed a substantial increase in Amazon’s presence across
MENA, and even lost its major share in Saudi Arabia. For this
reason, Souq was likely to look for a strong buyer so that it could
win over the local competitors like noon.com60 (Noon) and global
competitors like Aliexpress. Souq appointed Goldman Sachs to
find buyers with existing investors Tiger Global Management
and Naspers open to selling part of their holdings in September
2016. According to Bloomberg, at least a 30% stake in Souq had
attracted interest from Amazon as well as private equity firms
and family-owned companies. Advisors to Souq were said to
have reached out to a large number of potential bidders for the
stake, which might value the firm at at least US$1.2 billon.61

Amazon Bids for Souq

Bezos visited Dubai Mall in November 2016 and this was per-
ceived as a hint of Amazon’s plans to enter the Middle East’s
emerging e-commerce market. Amazon approached Souq for
acquisition in November 2016 offering an amount of US$700
million. However, Souq was believed to be seeking US$1 billion,
which was much more than Amazon’s offer.62 Indian company
Flipkart Online Services Pvt. Ltd.63 (Flipkart) also approached
Souq for acquisition in November 2016. But, Souq walked away
from this deal too after a disagreement on the price. Amazon ap-
proached Souq again for acquisition in March 2017 with a bid of
about US$650 million, which was less than its first bid.

According to analysts, Amazon had certain motives for
buying Souq. For instance, Souq had fulfilment centers located

network of over 75,000 traders.55 Commenting on the success
of Souq, Mouchawar said, “I think what’s more important is
that we become a household brand, that when everyone is think-
ing of buying a product through their mobile, they would check
Souq and see if they get the best value and the best selection.
I’d also like to think of us as a destination where young Arabs
can come and find great jobs, innovate, and build teams.”56

Fadi Ghandour, Executive Chairman of Wamda Capital,57
a leading venture-capital fund, felt that Souq’s success was a
testimony to the capability of start-ups to drive society-altering
change and on how to create new industries from scratch. He
said, “Big companies aren’t innovating anymore. Innovation
happens at the start-up level. [If you support entrepreneurs],
they’re going to create wealth and they’re going to create jobs.
Suddenly, you will have a 21st century economy.”58

Souq was the most popular shopping site in two of its top
three countries (i.e. Egypt and the UAE) except Saudi Arabia,
which was dominated by Amazon. By 2016, Souq was receiv-
ing an average of 39 million global monthly visitors, 68% of
them through desktops. This figure represented an increase of
21% since February 2015. Egypt provided the greatest amount
of traffic to Souq at 47% over the previous year, followed by the
UAE and Saudi Arabia, with 22% each.59 (Refer to Exhibit VI).

Souq Looking for a Buyer

Souq was striving to excel in the e-commerce space in MENA,
and experts felt that it had become a successful shopping des-
tination in the MENA region. However, Souq started exploring
different options to fuel its growth in 2016. It also considered
the option of going public, but Mouchawar felt that going pub-
lic was risky as Souq, being a privately owned company, could
otherwise experiment with different strategies, some of which
could fail., He felt the better option would be to join hands
with other big players from the same industry. Another reason

Other
9%

Egypt
47%

Saudi Arabia
22%

UAE
22%

ExHIBIT vI Souq’s Traffic Share on Desktop from March 2016 to February 2017

Source: Adapted from www.similarweb.com/blog/amazon-acquisition-of-souq-com-digital-strategy.

http://www.similarweb.com/blog/amazon-acquisition-of-souq-com-digital-strategy.

http://noon.com

PC3-22 PART 3 • COMPREHENSIVE CASES

internal rate of return for Souq shareholders.66 Analysts felt
that Emaar’s entry into the fray raised the stakes in the battle
to buy Souq. Alabbar already had plans to start Noon, which
was slated as an US$1 billion project that would have an ini-
tial focus on fashion and luxury products, but which would be
changed into a full-fledged e-commerce portal. In fact, Noon
was funded by the Saudi Arabian government and 65 private
Arabian Gulf investors to the tune of US$1billion.67 It offered
20 million products through its platform.

Emaar’s acquisition proposal for Souq happened when
there were speculations in the media that Souq had accepted
Amazon’s bid. “Emaar Malls has submitted a bid of $800m
for Souq.com in line with the strategy to align e-commerce
with physical shopping,”68 said the statement signed by Ahmad
Thani Al Matrooshi, vice chairman of Emaar Malls. Analysts
opined that Emaar had made a bid for Souq challenging
Amazon. They also opined that the Emaar bid offered a tempt-
ing premium for Souq in such a way that even if Souq had for-
merly made a deal with Amazon, it would have to re-evaluate
the deal in light of the new bid by Emaar.

According to some industry observers, Emaar wanted to
maintain its foothold in online shopping too as it was in the
physical shopping space via malls in the UAE. As a local
player, Emaar enjoyed certain benefits compared to Amazon.
It had a major stake in local logistics company Aramex, which
would also be a major source for logistics for Amazon in case
it succeeded in the bid. Aramex would support Emaar due to its
stake in it. Apart from that, Emaar would face less regulatory
hurdles and it had funding support from the local governments.
It was also well-versed in the local culture and traditions.

Analysts felt that by adding Souq to its belt, Emaar
could command the e-commerce business in MENA. David
Macadam, the chief executive at the Middle East Council of
Shopping Centres, commented, “Bricks and mortar growth is
slowing whereas online has huge growth potential. Dubai Mall
and Marina Mall are fantastic but they cannot offer the growth
that online can. Online sales make up about 3 per cent of the
region’s sales against 12–15 per cent in more mature geogra-
phies. The bricks and mortar business with the online business
would have some great synergies.”69 However, overexposure to
Dubai, operations and funding strategy, dependence on local
government, labor problems, and quality issues were consid-
ered to be hurdles for Emaar.

The Road Ahead

Analysts opined that Souq could leverage the global brand
value of Amazon in MENA for its further growth if the deal
with Amazon succeeded but they were sceptical about the
deal’s success. The reason for this was the advantageous po-
sition of Emaar with its strong presence in MENA and local
government’s backing. Some analysts opined that Noon plus
Souq versus Amazon would be a fair fight. Some of the big
corporates in the Middle East had their fingers crossed over the
result of the Souq auction. Aramex was counting on Alabbar
as a potential investor and was expecting to benefit from more
money-spinning fulfilment contracts from Noon plus Souq.

in Egypt, Kuwait, Saudi Arabia, and the UAE. These fulfilment
centers were supported by a set of operations like customer ser-
vice, engineering, and retail and had 2,500 employees. By ac-
quiring Souq, Amazon could leverage those fulfilment centers
and kick-start selling with nominal changes in the operations.
Apart from this, if the deal with Souq was successful, Amazon
would have direct access to Souq’s 75,000 merchants, includ-
ing two million products across 30 categories which would
take care of the demand and supply factors in MENA. Amazon
could also leverage Payfort, which was an online payment gate-
way popular in MENA.

Another advantage for Amazon was that it could leverage its
global popularity in MENA. Andrew Kitson (Kitson), a senior
analyst with London-based BMI Research, opined that Amazon’s
decision to acquire Souq indicated its intention to move quickly
into the Middle East market rather than building up its pres-
ence from scratch.64 Analysts also opined that Amazon could be
earning more in MENA than it was earning at the moment if it
operated in a full-fledged manner. Experts opined that Amazon,
instead of starting from scratch–a costly and time-consuming
affair–could start its operations quickly by acquiring Souq. They
also felt that Amazon could absorb its biggest competitor in
MENA like Souq instead of competing with it.

According to analysts, Amazon’s core competency lay
in technology infrastructure, logistics which facilitated quick
delivery, huge market share in the e-book market, and brand
reputation. By leveraging these competencies with the added
infrastructure of Souq, analysts felt that Amazon could excel in
MENA as it had in the US.

Digital marketing specialist Mai Gamal contended that the
potential for Amazon’s operations in the region might be “game
changing,” while specifically referring to fast delivery opera-
tions and customer services. “With Amazon, you can return
whatever product you don’t like without hassle, and you can
communicate your complaints very easily, something we really
lack in the region,”65 she said.

However, Amazon had to face certain challenges if it suc-
ceeded in its bid for Souq. Analysts contended that acquisitions
might be the fastest and easiest way to move into a market, but
when cultures, infrastructure, and regulations were varied, the
acquiring company frequently failed to develop the acquired
company. They opined that Amazon would have to face several
challenges if it succeeded in the acquisition of Souq, like the
preference for COD in the Middle East region, customers’ lack
of trust in online platforms, data security concerns, issues with
local logistics, the culture and traditions differing from Western
culture, and local government regulations. If Amazon’s acqui-
sition of Souq succeeded, it would mark the company’s first
move into serving the MENA region, which covered a total of
50 million consumers across several countries, and was also a
relatively untapped e-commerce market.

Emaar Enters the Scene

Emaar had also submitted a US$800 million bid for Souq in
March 2017 competing with Amazon. The Emaar bid included
a US$500 million up-front payment and a guaranteed 15%

http://Souq.com

CASE 6 • SOUQ.COM AND THE BATTLE FOR THE FUTURE OF E-COMMERCE IN THE MENA REGION PC3-23

Majid Al-Futtaim70 (MAF), the UAE-based malls operator,
was also extremely concerned over the result of the Souq sale
in January 2017, to the extent that it was also cited as a pos-
sible bidder for Souq.

Analysts felt that Amazon could not replicate the success
it enjoyed in the US in the rest of the world, particularly in
the fast growing countries in the East. In China, it was con-
testing with Alibaba Group Holding Limited71 (Alibaba) and
in India, it had to fight with big local rivals like Flipkart. Some
analysts opined that the countries in the MENA region had a lot
of untapped e-commerce potential but had their own distinctive
cultures, which might not make Amazon the behemoth of the
e-commerce in MENA.

The choice was left to Mouchawar and the management
team at Souq as they contemplated their move carefully.
Analysts considered this as a battle royal for the future of
e-commerce in the Middle East. Omar Kassim, founder of
market platform JadoPado.com,72 said, “High drama in our

corner of the world. An interesting development even though
I think the Amazon transaction is almost wrapped up. This
will give some shareholders [souq.com] pause as the delta
between Amazons’s assumed offer of $650m and Emaar
Malls’ bid is $150m [higher]. The management team have a
fiduciary duty to their shareholders to achieve the best pos-
sible outcome.”73

Case Questions

1. Critically analyze the reasons for Souq’s success in MENA.
Do you think that the decision to sell out is a good option
for Souq to realize its growth objective?

2. Evaluate the options before Souq in relation to the bids
by Amazon and Emaar.

3. If you were in Ronaldo Mouchawar’s place, what would
your decision be? What are the implications for this deci-
sion going forward?

Endnotes
1. This case was compiled from published sources, and is intended to be

used as a basis for class discussion rather than to illustrate either effective
or ineffective handling of a management situation. © 2018, IBS Cen-
ter for Management Research. All rights reserved. To order copies, call
+91 9640901313 or write to IBS Center for Management Research (ICMR),
IFHE Campus, Donthanapally, Sankarapally Road, Hyderabad 501 203,
Telangana, India or email: casehelpdesk@ibsindia.org Source: www
.icmrindia.org

2. Andrew Raven, “Start-Ups Can Push Middle East Economies into the
21st Century,” www.ifc.org, May, 2017.

3. Frank Kane, “Emaar vs. Amazon: Battle Royal for Souq and Future of E-
Commerce,” www.arabnews.com, March 26, 2017.

4. The Goldman Sachs Group, Inc. is an American multinational finance
company that engages in global investment banking, investment manage-
ment, securities, and other financial services.

5. The Dubai Mall is a shopping mall in Dubai and the largest mall in the
world by total area as of 2017.

6. Yahoo! is a web services provider, wholly owned by Verizon Communi-
cations through Oath Inc. and headquartered in Sunnyvale, California.

7. Dina al-Wakeel, “Souq.com: Riding High on the E-Commerce Wave,”
www.venturemagazine.me, January 28, 2016.

8. Naspers is a South Africa-based multinational internet and media group,
offering services in more than 130 countries.

9. Baillie Gifford is a British company focused on investment and asset man-
agement.

10. IFC, a member of the World Bank Group, is the largest global develop-
ment institution focused exclusively on the private sector in developing
countries.

11. Jabbar Internet Group is a holding company, which, through its subsidiar-
ies, operates a portfolio of online consumer e-commerce and shopping
portals in the Middle East and North Africa.

12. Mena Venture Investments (MVI) is an angel fund that invests in early
stage start-ups with strong growth potential in the Middle East and North
Africa (MENA) region and beyond.

13. Standard Chartered PLC is a UK-based multinational banking and finan-
cial services company headquartered in London, England.

14. Tiger Global Management, LLC is a US-based investment firm that
deploys capital globally in both public and private markets.

15. Ingrid Lunden, “Souq, Amazon of the Middle East, Raises $275M from
Tiger and More at a $1B Valuation,” www.techcrunch.com, February 29,
2016.

16. In 2005, Bezos launched Amazon Prime, a membership program which
offered customers free two-day shipping on their purchases for a fee of
US $79 per year. In 2014, Amazon raised the annual fee for the Amazon
Prime membership by US$20 to US$99, attributing the hike to an in-
crease in fuel and shipping costs.

17. Jamalon is an online bookstore in the Middle East offering Arabic and
English titles with home delivery and customized payment methods.

18. https://www.statista.com/topics/846/amazon/
19. Jeremy Bowman, “After Souq.com Purchase, Will Amazon Ever Be Prof-

itable Abroad?” www.foxbusiness.com, April 2, 2017.
20. Todd Bishop, “Amazon Spent Just $103M on Acquisitions Last Year,

Down Sharply amid Broader Tech M&A Slowdown,” www.geekwire
.com, February 10, 2017.

21. Eugene Kim, “Amazon Says It’s Unlikely to Go on a Buying Spree—But
Don’t Expect M&A Rumours to Cool Down,” www.cnbc.com, July 31, 2017.

22. Public Joint Stock Company (PJSC) is defined as an organization whose
capital is divided into negotiable shares of equal value and a partner
therein shall be liable only to the extent of his share in the capital of the
company, in accordance with the UAE Federal Commercial Companies
Law.

23. “Moody’s Downgrades Dubai Holding to A3 on Review; Emaar’s Baa1
on Review,” www.moodys.com, June 30, 2009.

24. The Gulf Cooperation Council is a regional intergovernmental political
and economic union consisting of all the Arab states of the Persian Gulf,
except for Iraq and Qatar.

25. “Getting in on the GCC E-Commerce Game,” www.middle-east
.atkearney.com, August, 2016.

26. Economic Zones World (EZW) and Dubai Customs started the world’s
first purpose-built smart retail hub “Matajircom” to encourage e-com-
merce in the UAE.

27. Huba Gaspar, “A Peek into the Rapidly Growing Middle East E-Com-
merce Market,” www.yusp.com, July 21, 2016.

28. Wadi.com is a Middle East-based online retail platform.
29. eBay Inc. is a multinational e-commerce corporation headquartered in

San Jose, California.
30. AliExpress.com is an online retail service made up of mostly small Chi-

nese businesses offering products to international online buyers.
31. Glen Dalakian, “25 Essential Stats on E-Commerce in the Middle East

[Stats],” www.wamda.com, October 16, 2012.
32. “Souq’s New Avatar: Deal or No Deal?” www.ameinfo.com, May 30,

2017.

mailto:casehelpdesk@ibsindia.org

http://www.ameinfo.com

http://www.wamda.com

http://www.yusp.com

http://www.middle-east.atkearney.com

http://www.moodys.com

http://www.cnbc.com

http://www.geekwire.com

http://www.foxbusiness.com

https://www.statista.com/topics/846/amazon/

http://www.techcrunch.com

http://www.venturemagazine.me

http://www.arabnews.com

http://www.ifc.org

http://Source:www.icmrindia.org

http://JadoPado.com

PC3-24 PART 3 • COMPREHENSIVE CASES

33. Namshi, based in Dubai, is an online e-commerce site offering footwear
and apparel fashion brands.

34. Soumya Smita Prajna, “E-commerce in the Middle East Gets Ready for a
Makeover,” www.commsmea.com, March 29, 2017.

35. Sukar.com was the first online private shopping club in the Middle East.
It offered beauty, gadgets, and home fashion products.

36. Nina Curley, “Why Middle East E-Commerce Site Souq.com Acquired
Sister Site Sukar.com,” www.wamda.com, April 30, 2012.

37. CASHU is a prepaid online and mobile payment method available in the
Middle East and North Africa.

38. Q Express is a subsidiary of Souq and it serves as the logistics and last
mile delivery entity.

39. Al Quoz is located in western Dubai.
40. Aramex is an international express, mail delivery and logistics services

company based in Dubai, United Arab Emirates.
41. Dina al-Wakeel, “Souq.com: Riding High on the E-Commerce Wave,” www

.venturemagazine.me, January 28, 2016.
42. Nestlé S.A. is a Swiss transnational food and drink company.
43. Christine Grové, “Souq.com Steps into the e-Grocery Business in Egypt

with Nestle,” www.incarabia.com, June 27, 2016.
44. “Ronaldo Mouchawar, Souq.com: “Cash-on-delivery Is Still a Major Part

of Our Business”,” www.thepaypers.com, April 19, 2016.
45. “Amazon to Buy Middle East Online Retailer Souq,” www.bbc.com,

March 28, 2017.
46. The Secretariat of the MENA Customer Delight Award was given to fur-

ther enhance and promote the culture of customer satisfaction and delight
in organizations in the Middle East.

47. “Souq.com Leads Customer Delight in 25 MENA Nations,” www.pr.souq.com,
November 10, 2013.

48. “Billion Dollar Unicorns: Souq.com the Middle East Entry to the Club,”
www.sramanamitra.com, May 31, 2016.

49. Apple Inc. is an American multinational technology company headquar-
tered in Cupertino, California, that designs, develops, and sells consumer
electronics, computer software, and online services.

50. Jojo Puthuparampil, “The Drama Is Over: Amazon Clinches Deal to Buy
Souq.com,” www.incarabia.com, March 28, 2017.

51. Black Friday is the fourth Thursday of November. It has been regarded as
the beginning of the Christmas shopping season in the US and retailers
open very early hours and offer promotional sales.

52. Jack Moore, “White Friday: Middle East’s Jeff Bezos Looks to Capitalize
on Black Friday Tradition,” November 25, 2016.

53. Dina al-Wakeel, “Souq.com: Riding High on the E-Commerce Wave,”
www.venturemagazine.me, January 28, 2016.

54. Liron Hakim Bobrov, “Amazon’s Acquisition of Souq.com: a Digital
Strategy Perspective,” www.similarweb.com, April 3, 2017.

55. “Billion Dollar Unicorns: Souq.com the Middle East Entry to the Club,”
www.sramanamitra.com, May 31, 2016.

56. Dina al-Wakeel, “Souq.com: Riding High on the E-Commerce Wave,”
www.venturemagazine.me, January 28, 2016.

57. Wamda Capital is the MENA region’s leading venture capital firm based
in Dubai investing in exceptional entrepreneurs.

58. Andrew Raven, “Start-Ups Can Push Middle East Economies into the
21st Century,” www.ifc.org, May, 2017.

59. Liron Hakim Bobrov, “Amazon’s Acquisition of Souq.com: a Digital
Strategy Perspective,” www.similarweb.com, April 3, 2017.

60. Noon.com is an e-commerce website based in Dubai backed by Emaar.
61. “Amazon Considers Bid for Souq.Com Stake – Report,” www

.gulfbusiness.com, November 3, 2016.
62. Frank Kane, “Dubai’s Majid Al Futtaim CEO: Souq.com Is a Great Com-

pany,” www.thenational.ae, January 21, 2017.
63. Flipkart is an Indian-based global e-commerce company headquartered

in Bengaluru, Karnataka.
64. “Can Amazon Conquer the Middle East?” www.aljazeera.com, April 1, 2017.
65. Mai Shams El-Din, “Delivering Amazon to the Middle East,”

www.worldcrunch.com, April 5, 2017.
66. “Emaar Malls’ US$800 mil Bid for Souq.com to Challenge Amazon,”

www.theedgemarkets.com, www.theedgemarkets.com, March 27, 2017.
67. Andrew Scott, “Emaar Malls Confirms $800m Bid For Souq.com,”

www.thenational.ae, March 27, 2017.
68. Ibid.
69. Hema Balu, “Emaar Malls Confirms $800m Bid for Souq.com,”

www.dubainewsgate.com, March 28, 2017.
70. Majid Al Futtaim is an Emirati holding company based in Dubai, which

owns and operates shopping malls, retail, and leisure establishments in
the Middle East and North Africa, with operations in 13 countries.

71. Alibaba Group Holding Limited is a Chinese e-commerce company that
provides consumer-to-consumer, business-to-consumer, and business-to-
business sales services via web portals.

72. Jadapado.com is a UAE-based e-commerce website.
73. Andrew Scott, “Emaar Malls Confirms $800m Bid for Souq.com,”

www.thenational.ae, March 27, 2017.

http://www.thenational.ae

http://www.dubainewsgate.com

http://www.thenational.ae

http://www.theedgemarkets.com

http://www.worldcrunch.com

http://www.aljazeera.com

http://www.thenational.ae

Homepage

http://www.similarweb.com

http://www.ifc.org

http://www.venturemagazine.me

http://www.sramanamitra.com

http://www.similarweb.com

http://www.venturemagazine.me

http://www.incarabia.com

http://www.sramanamitra.com

http://www.pr.souq.com

http://www.bbc.com

http://www.thepaypers.com

http://www.incarabia.com

http://www.venturemagazine.me

http://www.wamda.com

http://www.commsmea.com

Case 7 Coming to America: A Successful Japanese Acquisition in Global Business
This case was written by Syed Tariq Anwar, Professor of Marketing and International Business at West Texas A&M University.1

billionaire and one of Japan’s best known CEOs wants to
use Sprint to upend the U.S. wireless industry . . . .”.5 The
Economist further added: “SoftBank cannot offer Sprint air-
waves in America, but it can bring plenty of cash to the table,
thanks to Japan’s near-zero interest rates.”6 de la Merced
in The New York Times corroborated: “Deal to buy Sprint
is SoftBank’s biggest gamble.”7 Nakamoto and Soble in
Financial Times further observed: “SoftBank is no stranger
to daring mergers and acquisitions, including cross-border
ones.”8 These complements, praises, and favorable opinions
about SoftBank reflect the company’s long-term ambitions,
growth, and global expansion.

In the business world, global firms and MNCs are bought
and sold on a regular basis because of their long-term syner-
gies and operational strategies. Also important are the firms’
restructuring and rationalization plans that aim at long-term
growth and internationalization. Globalization is another
catalyst in this never-ending process. Companies design
business models and corporate structures that aim at seeking
internationalization and global expansion.9 There are many
global industries that witness cross-border M&As and tie-ups
on a regular basis. One such industry is the global telecom
sector (equipment manufacturers, handsets manufacturers,
and service providers/telephone firms), which often crosses
national borders to seek alliances, joint ventures, and global
expansion.

The telecom industry and its wireless sector is a prominent
area in global business. Many telecom firms seek international
operations, alliances, and corporate tie-ups. The industry’s
value chains remain diverse and complex because of new tech-
nologies and consumer demand. We witnessed the same corpo-
rate activities with SoftBank and Sprint when the two telecom
players merged in 2013.

To discuss further, this case is divided into the following
sections. Section one briefly discusses the SoftBank-Sprint
merger. Section two provides operational issues of cross-border
M&As. Section three discusses data and case-based research.
Section four analyzes the SoftBank-Sprint merger and its com-
plex negotiations, and pre- and post-merger developments.
Section five provides implications, trends, and future research
directions. The last section concludes the case and its major
developments.

Cross-Border M&As: Issues and Realities

Cross-border M&As are common in the business world and are
pursued by MNCs for growth and expansion. These mergers
mostly take place in developed countries because of their in-
dustry-specific opportunities and business models. Mergers and
acquisitions can result in healthy synergies as well as long-term

The SoftBank-Sprint Merger: 2012–2019
Within the topics of cross-border mergers and acquisitions
(M&As) and global business environment, this case analyzes
and discusses SoftBank’s 2013 acquisition of Sprint, which
at the time was the third largest mobile telephone firm in the
U.S. Unlike other multinational corporations (MNCs) from
Japan, SoftBank at the time of the merger was a high-flying
telecom, technology and Internet firm that had grown by leaps
and bounds since its inception in 1981. SoftBank bought Sprint
for $21.6 billion and continues to be one of the major telecom
and Internet firms in Japan with revenues of over $80 billion.
In 2019, SoftBank also announced its proposal to merge with
T-Mobile, a well-known German telephone company which is
owned by Deutsche Telecom.

In the history of U.S.-Japan business relations, the
SoftBank-Sprint merger was the largest purchase by a Japanese
firm in North America, which caused concerns among the tele-
com companies in the U.S. The case analyzes pre- and post-
merger developments that took place in the SoftBank-Sprint
tie-up and negotiations. The acquisition also revealed complex-
ities in the negotiation process which emerge from global busi-
ness and firms’ corporate rivalries. Because of its timeliness,
the case contributes to the debate of cross-border M&As and
expansion in the telecom industry.

In global business, cross-border M&As are common and
are used by companies to seek growth and global expansion.
At the same time, cross-border M&As are often impacted by
complex forces and regulatory hurdles. Other factors may
include firms’ bargaining tactics, corporate agendas, and
investor-specific strategies. Cross-border M&As can also be-
come highly complex because of firms’ marketing operations
and intertwined global business activities.2

Such was the case when SoftBank of Japan acquired
Sprint in 2013. The $21.6 billion acquisition of Sprint by
SoftBank represented a major corporate breakthrough in
the business world. Behind this high-profile acquisition, we
witnessed a major achievement on the part of SoftBank’s
CEO Masayoshi Son and his corporate team and investors
from Japan and North America (see Figure 1). Along with
other fast growing high-tech firms from East Asia (see
Alibaba, Baidu, Foxconn, Rakuten, Samsung, Tencent, etc.),3
SoftBank stands out in the crowded telecom and Internet
market because of its marvelous initiatives, bold acquisi-
tions, and high-profile growth.

In the global telecom and media sectors, Son was
praised by industry experts and analysts alike. Brooker in
Fast Magazine commented: “the most powerful person in
Silicon Valley.”4 Negishi and Knutson in 2014 in The Wall
Street Journal remarked: “the 56-year Mr. Son, a maverick

PC3-25

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FIGURE 1 Primary, secondary, and tertiary actors in the SoftBank-Sprint merger negotiations (2012–2013)

Source: Format adapted from Anwar, S. T. (2019). “Kraft’s acquisition of Cadbury: Was it an amicable transatlantic merger or a hostile take-
over”? Thunderbird International Business Review, 61(2), p. 446. Author’s compilation and research (2012–2014). See: CNBC, The Economist,
Financial Times, The Japan Times, The New York Times, Reuters, The Wall Street Journal, Yahoo Finance, etc. Notes: (a). Level of involvement
in the merger negotiations: L-Low; H-High. (b). For a list of financial, legal, and regulatory advisors/agencies, see: http://newsroom.sprint.com
/news-releases/sprint-and-softbank-announce-completion-of-merger.htm. (c). CFIUS: Committee on Foreign Investment in the United States.

M08C_DERE7874_10_SE_CASE7.indd 2 15/10/20 12:40 AM

http://newsroom.sprint.com/news-releases/sprint-and-softbank-announce-completion-of-merger.htm

CASE 7 • COMING TO AMERICA: A SUCCESSFUL JAPANESE ACQUISITION IN GLOBAL BUSINESS PC3-27

growth.22 Table 1 provides literature-based highlights and find-
ings of cross-border M&As which deal with opportunities,
problems, and failures. To discuss further, the following two
sections discuss these success factors and problems:

Success Factors, Opportunities, and Problems

In cross-border M&As, company-specific culture and op-
erational strategies play a critical role regarding the merger’s
success and failure. These may encompass strategic changes,
corporate governance, labor and regulatory hurdles, and stake-
holders’ involvement. Other issues are knowledge creation
and synergies of “exploration-exploitation”-based strategies
that can capture growth and expansion.23 In M&As, compa-
nies often seek new technologies and product lines to remain
healthy in their growth, expansion, and long-term prospects.24

Acquisitions can take the forms of “platform acquisition,”
“bolt-on acquisition,” or just buying “strategic assets.”25 Cross-
border M&As mostly aim at “asset exploitation or asset augmen-
tation”26 and can create new ventures. At the same time, newly
created business entities can become redundant entities if man-
aged haphazardly. Employee turnover problems can disrupt the
process. Cross-border M&As can also be impacted by “double
taxation” hurdles and regulatory disruptions. Companies can be
impacted by country-specific corruption, weak governance, and

TABLE 1 Major opportunities, problems, and failures of cross-border M&As: Selected literature-based
research and findings

Success factors and opportunities of cross-border M&As:
• Cross-border M&As create new markets, corporate synergies, and strategies.

• Cross-border M&As may lead to “comparative advantage”; acquiring firms often outcompete competitors.10

• Issues of market entry in the merger process are important for growth and expansion.

• In cross-border M&As, “asset exploitation” and “asset augmentation” are important.11

• Seeking a balance between “exploration and exploitation” is necessary when dealing with cross-border M&As.12

• In the merger process, positive synergies are possible for those buying firms which maintain well-tested business models
and corporate assets.

• In M&As, firms with good learning curve and knowledge are often successful.13

• “English language fluency” is necessary in cross-border M&As.14

• Knowledge management plays a critical role in cross-border M&As.

• Issues of how best to deal with “strategic assets” and “firm-specific resources and capabilities” of acquired firms are critical
in M&As.15

Problems and failures of cross-border M&As:
• Issues of manpower and retention can be complex and problematic in M&As.

• “Value destruction” is a major problem in cross-border M&As.16

• Country-specific institutions determine the success of cross-border M&As.

• In cross-border M&As, countries do not like their strategic firms to be acquired and sold.17

• In global business, cultural differences are major problems in M&As.

• “Linguistic distance and lingua franca proficiency” and “language difficulties” can create problems in M&As.18

• “Culture clashes; cultural differences; culture-dependent problems” are major hindrances in cross-border M&As.19

• “Value destroying acquisitions” are the result of firms’ ill-conceived planning and corporate hubris.20

• Host countries’ “national economic security” can be a major problem when seeking cross-border M&As.21

bureaucratic hurdles.27 Negative areas that impact M&As can
culminate from contractual changes and complex negotiations.
The impact of linguistic differences and language issues may
also cause problems in the post-integration period.28 These may
lead to communication problems and operational disruptions. In
addition, the pace of integration can be determined by the firms’
business models, competitive advantage, and financial prowess.

The SoftBank-Sprint Merger and Its
Complex Negotiations

As stated earlier, the global telecom industry is a major sector
in the business world and carries distinct value chains which are
made up of telecom equipment firms, handset manufacturers,
and service providers. The industry is widely located worldwide
because of heightened consumer demand and growing oppor-
tunities. Changing technologies, regulatory environment, and
mass consumption, cross-border M&As are becoming common
in the telecom industry and are used by firms to target diverse
markets and regions. As stated earlier, M&As are common in
the business world and companies seek inter-organizational co-
operation and acquisitions to expand and grow in domestic and
global markets. In cross-border M&As, we often witness com-
plex negotiations which demand experience and time.

PC3-28 PART 3 • COMPREHENSIVE CASES

The negotiations process can be time consuming and tech-
nically tricky and may revolve around the “RBC Framework”
(‘relationships, behaviors and conditions’),29 “interpersonal
trust,”30 “consensus building,”31 and Machiavellian-based strat-
egies and bargaining tactics.32 During the takeover process,
media coverage often becomes critical and higher stock prices

are common occurrences because of competition among the
bidders.33 Outside stakeholders can also influence the negotia-
tion process because of job losses and displacement of workers.

SoftBank and Sprint witnessed the same issues and hur-
dles in their negotiations in 2012–2013. Table 2 provides a
detailed list of developments and activities that took place in

TABLE 2 Major corporate activities in the SoftBank-Sprint merger: Pre- and post-merger negotiations and corporate developments
(2012–2019)

Source: Welch, C. (2012). SoftBank buys Sprint: Everything you need to know about the multi-billion acquisition, (October 18), (http://www
.theverge.com/2012/10/18/3521256/softbank-buys-sprint-acquisition-news-rumors). Accessed on October 17, 2014. For newspapers, periodicals,
and websites (2012–2019, various issues), see: CNBC, The Economist, Financial Times, The Japan Times, The New York Times, The Wall Street
Journal, and Yahoo Finance.

• October 2012 –SoftBank proposes to acquire Sprint for $19.2 billion; the deal could close in 2013.
–AT&T complains that Softbank’s control of Sprint and Clearwire provides the company an unfair advantage since
it gives more U.S. wireless spectrum to SoftBank.

• January 2013 –U.S. Department of Justice expresses its concern for the SoftBank-Sprint merger and asks the Federal
Communications Commission to delay approving the merger.

• March 2013 –U.S. government objects and would like to oversee SoftBank-Sprint’s future purchases of telecom gear from
Huawei and ZTE, which are two firms from China that supply telecom equipment.
–SoftBank and Sprint agrees not to purchase Chinese networking equipment from Huawei and ZTE.

• April 2013 –Dish Network, a major satellite TV provider from the U.S., shows its desire to acquire Sprint for $25.5 billion; the
merger could build the largest network for mobile, broadband, and TV infrastructure.
–Regardless of Dish Network’s offer, SoftBank expects to have its acquisition of Sprint move forward by buying
the company in July 2013.
–Dish Network asks U.S. regulators to investigate the SoftBank-Sprint merger because of national security concerns
and possible involvement of Chinese telecom equipment providers.
–SoftBank CEO Masayoshi Son calls Dish Network’s bid for Sprint ‘incomplete and illusory’.

• May 2013 –Dish Network chairman Charlie Ergen criticizes SoftBank and comments: ‘culture matters’ in the SoftBank-Sprint
merger.
–SoftBank CEO Son tries to persuade Sprint shareholders regarding SoftBank’s 4G expertise and its competitive
long-term prospects in Japan and North America.
–SoftBank promises to work with the U.S. government because of national security concerns and future telecom-
related contracts.
–SoftBank-Sprint merger gets clearance from the CFIUS and the U.S. Dept. of Treasury.

• June 2013 –SoftBank reveals that it may acquire T-Mobile if its Sprint bid fails.
–SoftBank-Sprint merger is approved by the U.S. Department of Justice.
–SoftBank raises its offer for Sprint to $21.6 billion in cash and stock.
–Sprint shareholders approve Softbank’s offer of $21.6 billion.
–Dish Network withdraws its bid for Sprint.

• July 2013 –FCC approves SoftBank’s acquisition of Sprint. Softbank completes its acquisition of Sprint on July 10; owns 72%
of Sprint shares; the company is called Sprint Corp.
–The acquisition encompasses $21.6 billion; $5 billion in cash to support Sprint’s balance sheet and $16.6 billion
to entice Sprint’s shareholders.
–Dan Hesse becomes CEO of Sprint; Masayoshi Son is the Chairman of the board; Ronald Fisher serves as a direc-
tor and president of SoftBank Holdings Inc.

• 2014 –Marcelo Claure is appointed as the new CEO of Sprint.
• 2015–2016 –Sprint operates as a subsidiary of SoftBank and continues to be number three telecom firm in the U.S. The com-

pany continues to compete with its main competitors in the U.S.
• 2017 –Because of the merger, Softbank accumulates $30 billion debt.

–SoftBank and Saudi Arabia collaborate to start a $100 billion technology fund called ‘Vision Fund’, which remains
active in the tech sector. Major investors of Vision Fund include Saudi Arabia’s Public Investment Fund and Abu
Dhabi’a Mubadala Investment Co.

• 2018 –SoftBank and T-Mobile propose merging the two companies, eventually having a major telecom firm.
• 2019 –Sprint and T-Mobile plan on merging the two firms if approved by the U.S.’s antitrust authorities and the U.S.

Congress. The merger aims at launching 5G technology.
–SoftBank invests $200 million into a European Fund, which was started by Abu Dhabi’s state investment company
Mubadala.

http://www.theverge.com/2012/10/18/3521256/softbank-buys-sprint-acquisition-news-rumors

CASE 7 • COMING TO AMERICA: A SUCCESSFUL JAPANESE ACQUISITION IN GLOBAL BUSINESS PC3-29

actors included board of directors, media relations department,
top management team, post-integration team, and investment
advisors such as Citigroup, Rothschild, UBS, and others.

As required in M&As, the FCC and antitrust/competition
authorities from the EU and Asian countries (China, India, and
others) had to approve the merger after its filing. Interestingly,
the U.S. Department of Treasury’s CFIUS, the U.S. Department
of Justice, and the House Intelligence Committee of the U.S.
Congress made their own inquiries and investigation during the
merger proceedings. A few concerns were raised by these com-
mittees regarding national security issues and involvement of
Chinese networking equipment manufacturers. Charlie Ergen,
CEO of Dish Network, raised his company’s concerns about the
involvement of Chinese companies. Institutional investors, lob-
bying groups, and national media remained part of the second-
ary actors but had no major role in the outcome of the merger.
Tertiary actors such as U.S. suppliers, bloggers/analysts, local
media, AT&T, and Institutional Shareholder Services (ISS)
were somewhat sparse and had a limited impact on the outcome
of the merger.

Applying the issues of complex negotiations, we come to
know three major outcomes that emerged from the merger: (a)
national security concerns were raised regarding the involve-
ment of Chinese networking equipment manufacturers; (b) ob-
jections of Dish Network and AT&T did not materialize in the
absence of proper justifications; and (c) institutional investors
and lobbying groups found no evidence that damaged compe-
tition in the telecom sector and its related areas. Figure 1 re-
veals a complex array of actors and players within the merger
negotiations. The three actors’ involvement in the ten-month
merger proceedings testifies that global business remains com-
plex and multifaceted regarding its competition and operational
environment.

Implications and Changing Trends

In global business, cross-border M&As encourage companies
to seek future growth and expansion. Designing companies’
core competencies and marketing strategies can be complex
and a daunting task. These activities also encompass firms’
products, global operations, and value chains. The following
developments, trends, and future research remain important in
the case discussion:

Issues of Post-Merger Integration

Post-merger integration brings synergies as well as prob-
lems. On many occasions, companies in cross-border M&As
struggled with unexpected events, media frenzy, cultural ad-
justment, and misalignment of corporate strategies. A few
approaches to fix post-merger integration include “consoli-
dation, standardization, coordination, and intervention.”36
Regardless of post-integration approaches and their imple-
mentation, cross-border M&As pose problems in the long
run when markets and technologies change. Both firms had
to deal with the post-merger integration period because of
two distinct corporate cultures, competition, and changing
technologies.

the negotiation process. In October 2012, SoftBank proposed
to acquire Sprint for $19.2 billion and the deal was supposed to
close in 2013. AT&T took notice of the merger and filed a com-
plaint against SoftBank. In January 2013, the U.S. Department
of Justice raised its concern for the SoftBank-Sprint merger
and asked the Federal Communications Commission (FCC)
to delay approving the merger. In March 2013, the U.S. gov-
ernment objected and wanted to oversee SoftBank-Sprint’s
future purchases of telecom equipment from China’s Huawei
and ZTE. Because of national security concerns, SoftBank and
Sprint agreed not to purchase networking gear from Chinese
firms. In April 2013, Dish Network, a major satellite company
from the U.S., entered into the bidding process and showed its
desire to acquire Sprint for $25.5 billion. This proposal was
aimed at building the largest network for mobile, broadband,
and TV infrastructure in the U.S. Dish Network also asked the
U.S. regulators to investigate the merger because of national se-
curity concerns and involvement of telecom equipment manu-
facturers from China.

SoftBank CEO Son called the Dish Network’s bid “in-
complete and illusory.”34 In May 2013, Dish Network chair-
man Charlie Ergen criticized SoftBank and insisted on keeping
Sprint in the U.S. During this process, SoftBank promised to
work with the U.S. government because of national security
concerns. In the coming months, the SoftBank-Sprint merger
was approved by the Committee on Foreign Investment in the
United States (CFIUS) and the U.S. Department of Justice.
Eventually, SoftBank raised its bid to $21.6 billion in cash and
stock and ended up acquiring Sprint. Dish Network could not
pay this amount and later withdrew its bid for Sprint. In July
2013, the FCC approved SoftBank’s acquisition of Sprint and
the company’s buyout of Clearwire. The new company was
called Sprint Corp. Under the leadership of Son and his corpo-
rate team, Sprint Corp. continued to grow by seeking restruc-
turing and rationalization.35

Primary, Secondary, and Tertiary Actors in the
Merger Process

Figure 1 provides an illustrative and detailed involvement
of primary, secondary, and tertiary actors who became em-
broiled in the SoftBank-Sprint merger. Primary actors in-
cluded Masayoshi Son, board of directors, Japanese banks, top
management team, post-integration team, company’s media
relations department, and the Raine Group LLC and Mizuho
Securities as investment advisory firms. Secondary actors in-
volved in the merger negotiation encompassed institutional
investors, lobbyists, and antitrust/competition authorities
from the European Union and Asia. Tertiary actors included
Chinese networking equipment manufacturers, local and na-
tional media, bloggers/analysts, Japanese suppliers, and Japan
Fair Trade Commission. In the case of Sprint, primary and sec-
ondary actors remained actively involved within and outside
the company and exerted wide-ranging influence regarding
the merger’s efficacy and application of fair trade standards. A
major primary actor who became the key spokesperson during
negotiations was Daniel Hesse, CEO of Sprint. Other primary

PC3-30 PART 3 • COMPREHENSIVE CASES

turned $50 billion after the company’s IPO in the U.S. SoftBank
also invested in high-profile companies such as Yahoo Japan,
Arm Holdings (UK), Boston Dynamics (U.S.), Uber (U.S.), Lyft
(U.S.), Didi Chuxing (China), Ola (India), Grab (Singapore), and
others. Son’s entrepreneurial ambitions and visionary personality
aim at making SoftBank a truly global empire in the Internet and
telecom sectors. As a third player in the U.S. telecom market,
Softbank’s acquisition of Sprint was slow to gain traction in the
telecom market because of debt and market hurdles. In global
business, cross-border M&As encourage new research avenues,
which may include corporate tie-ups, FDI-related activities, and
other opportunities. This is particularly evident in the Silicon
Valley and high-tech centers worldwide.

Concluding Comments

The SoftBank-Sprint merger is a useful case-based exercise in
international management. Merging two large-scale business
entities can be tricky if corporate cultures diverge and remain
separated. The main lessons learned from the SoftBank-Sprint
merger are: (1) cross-border M&As are useful but tricky be-
cause of market entry issues and expansion; (2) foreign acqui-
sitions normally fail because of weaker corporate governance,
complex value chains, and questionable business models;
and (3) companies with established brands and operations
can add value to their mergers if planned well. In conclusion,
SoftBank’s acquisition of Sprint was not well received by
other telecom firms in the U.S. and most of the companies
remained wary of SoftBank’s ambitious agenda and expansion
plans. At the same time, SoftBank injected additional funds
in Sprint to revive the company and its expansion plans. As
of 2019, Sprint can revive its growth and future expansion if
it merges with T-Mobile. On the other hand, the SoftBank-
Sprint merger made a good precedent for Japanese MNCs that
plan on seeking expansion in North America and beyond.

Case Questions

1. What are your views of SoftBank’s acquisition of Sprint in
the U.S.’s telecom industry?

2. Investigate and discuss SoftBank and Sprint’s core
competencies in Japan and the U.S.?

3. Analyze and discuss the changing telecom industry
(as of 2020) in the U.S.?

4. What lies ahead for Sprint in the telecom sector?
5. What did you learn from the SoftBank-Sprint merger?

Materializing Future Growth and Expansion

In the SoftBank-Sprint merger, both companies sought the tie-
up because of future opportunities, growth, and expansion. In
2013, Sprint maintained 53,252,000 subscribers with a market
share of 16.7 percent. This was a reasonable market share, which
attracted SoftBank to the U.S. market. Sprint had the network
and organizational skills to operate in the U.S. efficiently and
was familiar with the market as well. This was a major asset
that SoftBank spotted in Sprint for its future growth and expan-
sion. The company’s network was particularly well known and
helped SoftBank to fulfill its ambitious agenda for growth and
expansion. Since SoftBank was never a major player in the U.S.
telecom market, Sprint’s acquisition opened new opportunities
and markets to the company. SoftBank also wanted to increase
its growth and expansion and compete effectively with DoCoMo
and KDDI, which were the two largest telecom firms in Japan.37

Post-Merger Corporate Developments

To consolidate its corporate position and business growth,
Sprint announced it was acquiring T-Mobile in July 2014. This
move was aimed at creating a $32 billion merger. The plan was
somewhat ambitious on the part of Sprint. The FCC took notice
and objected to Sprint’s acquisition of T-Mobile, eventually re-
jecting the merger. In 2019, Sprint and T-Mobile restarted the
process of merging their firms again because of competition
and market opportunities.38

Industry-Specific Issues, Competition and Markets

In the global telecom industry, competition has been height-
ened because of saturation and crowded markets. Such is the
case with the U.S. telecom market that remains attractive. Like
UK’s Vodafone, which one time owned 43 percent of Verizon
in the U.S. market, SoftBank will keep its ownership of Sprint
in a low-profile manner. This can strengthen the Japanese com-
pany and its expansion in the U.S.

Future Issues and Expansion

Like other MNCs, SoftBank may use its U.S. hub to seek ad-
ditional acquisitions and start technology funds. This is evident
from SoftBank’s acquisition of UK-based Arm Holdings, which
is a unique chip-design firm.39 In addition, SoftBank started a
$100 billion Vision Fund in collaboration with Saudi Arabia and
the UAE to seek new startups in the high-tech sector.40 SoftBank’s
future ambitions and growth plans for the U.S. market are evi-
dent from the firm’s $20 million investment in Alibaba, which

Endnotes

1. An earlier version of this work was presented at the 2015 Southwest Case
Research Association Conference, Houston, Texas (March 11–12, 2015).
The material in this case is intended to be used as a basis for classroom
and academic discussion rather than to illustrate either effective or inef-
fective handling of a managerial situation and business practices. © 2019:
Syed Tariq Anwar

2. For detail, see: Anwar, S. T. (2019). “Kraft’s acquisition of Cadbury: Was
it an amicable transatlantic merger or a hostile takeover”? Thunderbird
International Business Review, 61(2), pp. 439–451.; Carleton, J. R.,
& Lineberry, C. S. (2004). Achieving post-merger success. New York:

John Wiley; Schweiger, D. M., & Lippert, R. L. (2005). “Integration:
The critical link in M&A value creation,” in Stahl, G. K., & Mendenhall,
M. E. (eds.), Mergers and acquisitions: Managing cultures and human
resources. Stanford, California: Stanford Business Books, pp. 17–45.;
Humphery, J. M., Sautner, Z., & Suchard, J. (2017). “Cross-border merg-
ers and acquisitions: The role of private equity firms,” Strategic Man-
agement Journal, 38(8), pp. 1688–1700.; Weiss S. E. (1990). “The long
path to the IBM-Mexico agreement: An analysis of the microcomputer
investment negotiations, 1983–86”, Journal of International Business
Studies 21(4), pp. 565–596.; Weiss S. E. (1993). “Analysis of complex

CASE 7 • COMING TO AMERICA: A SUCCESSFUL JAPANESE ACQUISITION IN GLOBAL BUSINESS PC1-31

negotiations in international business: The RBC perspective,” Organiza-
tion Science, 4(2), pp. 269–300.

3. Lucas, L. & Inagaki, K. (2017). “Federation’ of Asian tech chiefs targets
U.S.” Financial Times, (March 9), p. 15.

4. Brooker, K. (2019). “The most powerful person in Silicon Valley,” Fast
Company, (February), p. 80.

5. Negishi, M., & Knutson, R. (2014). With shouts and hugs, Sprint boss
drives turnaround. The Wall Street Journal, (March 7), A1&A2.

6. The Economist. (2013). Dishing out the dosh. (April 20), 67.

7. de la Merced, M. J. (2012), “Deal to buy Sprint is SoftBank’s biggest
gamble,” The New York Times, (October 15), (http://dealbook.nytimes
.com/2012/10/15/deal-to-buy-sprint-is-softbanks-biggest-gamble/). Accessed
on October 19, 2014, p. 1.

8. Nakamoto, M., & Soble, J. (2012), “SoftBank’s record offers few clues
over Sprint,” Financial Times, (October 17), p. 19.

9. See: Prahalad, C. K., & Bhattacharyya. (2011). “How to be a truly global
company,” Strategy+Business, No. 64 (Autumn), pp. 1–8.

10. Brakman, S., Garretsen, H., Van Marrewijk, C., & Van Witteloostuijn, A.
(2013). “Cross-border merger and acquisition activity and revealed com-
parative advantage in manufacturing industries,” Journal of Economics &
Management Strategy, 22(1), p. 28.

11. Buckley, P. J., Munjal, S., Enderwick, P., & Forsans, N. (2016). “Cross-
border acquisitions by Indian multinationals: Asset exploitation or asset
augmentation?” International Business Review, 25, pp. 986.

12. Stettner, U., & Lavie, D. (2014). “Ambidexterity under scrutiny: Explo-
ration and exploitation via internal organization, alliances, and acquisi-
tions,” Strategic Management Journal, 35(13), p. 1903.

13. Collins, J. D., Holcomb, T. R., Certo, S. T., Hitt, M. A., & Lester, R.
H. (2009). “Learning by doing: Cross-border mergers and acquisitions,”
Journal of Business Research, 62, p. 1329.

14. Kroon, D., Cornelissen, J., & Vaara, E. (2015). “Explaining employees’
reactions towards a cross-border merger: The role of English language
fluency,” Management International Review, 55(6), p. 775.

15. Zheng, N., Wei, Y., Zhang, Y., & Yang, J. (2016). “In search of strategic
assets through cross-border merger and acquisitions: Evidence from Chi-
nese multinational enterprises in developed economies,” International
Business Review, 25, p. 177.

16. Aybar, B., & Ficici, A. (2009). “Cross-border acquisitions and firm value:
An analysis of emerging-market multinationals,” Journal of Internation-
al Business Studies, 37, p. 786.

17. Bertrand, O., Hakkala, K. N., Norbäck, P., & Persson, L. (2012). “Should
countries block foreign takeovers of R&D champions and promote
greenfield entry?” The Canadian Journal of Economics/Revue Cana-
dienne d’Economique, 45(3), p. 1083.

18. Cuypers, R. P., Ertug, G., & Hennart, J-F. (2015). “The effects of linguistic
distance and lingua franca proficiency on the stake taken by acquirers in cross-
border acquisitions,” Journal of International Business Studies, 46(4), p. 429.

19. Lee, S., Kim, J., & Park, B. I. (2015). “Culture clashes in cross-border
mergers and acquisitions: A case study of Sweden’s Volvo and South
Korea’s Samsung,” International Business Review, 24, p. 580.

20. Lee, S., Kim, J., & Park, B. I. (2015). “Culture clashes in cross-border
mergers and acquisitions: A case study of Sweden’s Volvo and South
Korea’s Samsung,” International Business Review, 24, p. 580.

21. Wang, Y., Liu, Z., & Zhang, Y. (2007). “Cross-border mergers and acqui-
sitions: Innovative capacity and national economic security,” Journal of
Economic Policy Reform, 10(4), p. 263.

22. For detail, see: Bauer, F., & Matzler K. (2014). “Antecedents of
M&A success: The role of strategic complementarity, cultural fit, and
degree and speed of integration,” Strategic Management Journal, 35(2),
pp. 269–291.; Chatterjee, S., & Brueller, N. N. (2015). “A new M&A
methodology: Five lessons in anticipating post-merger resource interac-
tions and challenges,” Strategy & Leadership, 43(4), pp. 26–37.; Gaffney,
N., Karst, R., & Clampit, J. (2016). “Emerging market MNE cross-border
acquisition equity participation: The role of economic and knowledge
distance,” International Business Review, 25, pp. 267–275.

23. Stettner, U., & Lavie, D. (2014). “Ambidexterity under scrutiny: Explo-
ration and exploitation via internal organization, alliances, and acquisi-
tions,” Strategic Management Journal, 35(13), pp. 1903–1929.

24. McEvily, S. K., Eisenhardt, K. M., & Prescott, J. E. (2004), “The global
acquisition, leverage and protection of technological competencies,”
Strategic Management Journal, Vol. 25, pp. 713–722.

25. See: Brueller, N. N., Carmeli, A., & Drori, I. (2014). “How do different
types of mergers and acquisitions facilitate strategic agility?” California
Management Review, 56(3), pp. 39–57.; Zheng, N., Wei, Y., Zhang, Y., &
Yang, J. (2016). “In search of strategic assets through cross-border merg-
er and acquisitions: Evidence from Chinese multinational enterprises in
developed economies,” International Business Review, 25, pp. 177–186.

26. Buckley, P. J., Munjal, S., Enderwick, P., & Forsans, N. (2016). “Cross-
border acquisitions by Indian multinationals: Asset exploitation or asset
augmentation?” International Business Review, 25, pp. 986–996.

27. Weitzel, U., & Berns, S. (2006). “Cross-border takeovers, corruption, and
related aspects of governance,” Journal of International Business Stud-
ies, 37(6), pp. 786–806.

28. Cuypers, R. P., Ertug, G., & Hennart, J-F. (2015). “The effects of linguis-
tic distance and lingua franca proficiency on the stake taken by acquirers
in cross-border acquisitions,” Journal of International Business Studies,
46(4), pp. 429–442.

29. See: Weiss S. E. (1987). “Creating the GM-Toyota joint venture: A case
in complex negotiations,” Columbia Journal of World Business, 22(2),
pp. 23–37.; Weiss S. E. (1990). “The long path to the IBM-Mexico
agreement: An analysis of the microcomputer investment negotiations,
1983–86,” Journal of International Business Studies, 21(4), pp. 565–
596.; Weiss S. E. (1993). “Analysis of complex negotiations in inter-
national business: The RBC perspective,” Organization Science, 4(2),
pp. 269–300.; Weiss, S. E. (2006). “International business negotiation
in a globalizing world: Reflections on the contributions and future of a
(sub) field,” International Negotiation, 11(2), 287–316.

30. Kong, D. T., Dirks, K. T., & Ferrin, D. L. (2014).“Interpersonal trust within
negotiations: Meta-analytic evidence, critical contingencies, and directions
for future research”, Academy of Management Journal, 57(5), pp. 1235-1255.

31. Liu, L. A., Friedman, R., Barry, B., Gelfand, M. J., & Zhang, Z. (2012).
“The dynamics of consensus building in intracultural and intercultural
negotiations,” Administrative Science Quarterly, 57(2), pp. 269–304.

32. Kapoutsis, I., Volkema, R., & Nikolopoulos, A. (2013). “Initiating nego-
tiations: The role of Machiavellianism, risk propensity, and bargaining
power,” Group Decision & Negotiation, 22(6), pp. 1081–1101.

33. Betton, S., Eckbo, B. E., Thompsn, R., & Thorburn, K. S. (2014). “Merg-
er negotiations with stock market feedback,” Journal of Finance, 69(4),
pp. 1705–1745.

34. Byford, S. (2013). “SoftBank CEO calls Dish bid for Sprint ‘incom-
plete and illusory’,” The Verge, (April 30), (https://www.theverge.com
/2013/4/30/4285174/softbank-masayoshi-son-calls-dish-sprint-bid
-misleading). Accessed on March 19, 2019, p. 1.

35. See: SoftBank. (2014–2017). Company Website. (http://www.softbank
.jp/en/). Accessed between January 2014 and June 2017; Sprint. (2014–
2017). Company Website. (http://www.sprint.com/). Accessed between
January 2014 and June 2017; U.S. Department of the Treasury. (2015).
The Committee on Foreign Investment in the United States, (http://www
.treasury.gov/resource-center/international/Pages/Committee-on
-Foreign-Investment-in-US.aspx). Accessed on January 25, 2015.

36. Schweiger, D. M., & Lippert, R. L. (2005). “Integration: The critical link
in M&A value creation.” In Stahl, G. K., & Mendenhall, M. E. (eds.).
Mergers and acquisitions: Managing cultures and human resources.
Stanford, CA: Stanford Business Books, pp. 17–45.

37. Negishi, M. (2014). “SoftBank to push ahead with acquisitions,”
The Wall Street Journal, (May 8), p. B6.

38. Jenkins, Jr., H. (2019). “Biggest threat to 5G is the D.C. swamp,”
The Wall Street Journal, (March 9–10), p. A13.

39. The Economist. (2019). “Armed with a crystal ball,” (January 5), p. 45–47.

40. Negishi, M., & Dvorak, P. (2019). “Top tech fund seeks to get bigger,”
The Wall Street Journal, (February 7), pp. A1&A6.

http://www.treasury.gov/resource-center/international/Pages/Committee-on-Foreign-Investment-in-US.aspx

http://www.sprint.com/

http://www.softbank.jp/en/

https://www.theverge.com/2013/4/30/4285174/softbank-masayoshi-son-calls-dish-sprint-bid-misleading

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P A R T O U T L I N E

C H A P T E R 9
Staffing, Training, and Compensation
for Global Operations

C H A P T E R 1 0
Developing a Global Management
Cadre

C H A P T E R 1 1
Motivating and Leading

Global Human Resources
Management4

P A R T

286

9-1. To understand the strategic importance to the firm of the IHRM function
and its various responsibilities

9-2. To learn about the major staffing options for global operations and the factors
involved in those choices

9-3. To emphasize the need for managing the performance of expatriates through careful
selection, performance management, and global teams

9-4. To appreciate the necessity of cross-cultural training, job-specific training techniques, and
appropriate compensation for expatriate performance

9-5. To discuss the role of host country managers and the need for their training
and appropriate compensation packages

Staffing, Training, and
Compensation for Global
Operations

O B J E C T I V E S

9
C H A P T E R

Opening Profile: Staffing Company Operations1

B ack in the 2015 Brookfield Global Relocation Trends Survey (GRTS), firms’ human resources
(HR) staffs from 143 MNCs were asked to identify the top three countries that represented
new assignment locations for them. They were China, Brazil, and the UAE. Those that were

considered the most challenging for assigning people, as well as for the assignees, were Brazil, India,
and China, followed by Russia.2 However, a distinction was made between relatively developed cit-
ies, such as Mexico City, pictured here, and less-developed locations in other areas of those countries.
Going into 2020, however, while little has changed about the locations, staffing in those countries has
become very competitive.

In addition to the challenge of assigning and maintaining expatriates in emerging market econo-
mies, the ability to staff subsidiaries in emerging market economies with local managers has become
a major challenge in the race for recruiting and retaining local talent. Emerging economies such as
Brazil, Russia, India, and
China have been develop-
ing so rapidly and have so
attracted increasing over-
seas investment that they
have outpaced the supply
of suitable mid- and upper-
level managers in their own
markets. Foreign firms
wishing to expand their
investments in such econo-
mies are competing for
what talent is available with
both local companies and
other global companies;
however, they are falling Fr

on
tp

ag
e/

Sh
ut

te
rs

to
ck

CHAPTER 9 • STAFFING, TRAINING, AND COMPENSATION FOR GLOBAL OPERATIONS 287

behind the curve in not recognizing that they need different approaches than those they use domesti-
cally. The problem is so acute that many companies have had to reconsider how fast they can expand in
developing economies.

As multinational companies seek to place the right people in the right positions in the right loca-
tions at the right time, global relocation services have become more important—especially as MNCs’
strategies and structures continue to evolve. MNCs that invest in global talent management enable them
to reach new talent and further develop existing talent with multinational experience and skills. In to-
day’s competitive environment, MNCs need to develop global relocation services that customize their
services to deal with the challenges and opportunities associated with workforce mobility.3

The international expansion of companies has coincided with a growing need for a “mobile work-
force” that accepts transfer assignments worldwide. A 2018 report by Global Mobility Solutions on
global relocation reveals some emerging trends. First, support programs need to take into consider-
ation spousal career needs. Second, global relocation programs need to ensure flexibility because the
challenges and opportunities associated with an assignment can vary from location to location. Third,
more countries are imposing constraints on number and types of working visas and work permits, thus
restricting relocation transferees to enter the country legally to work for their respective companies.
Fourth, relocation programs are employing more technology to assist transferees during their reloca-
tion process when they need it, regardless of their location. Mobile technology is making it possible for
transferees to obtain and share information (e.g., uploading expenses for prompt reimbursement). Fifth,
the growing need for specialized relocation services has prompted global relocation programs to out-
source some activities to organizations with expertise managing specific relocation tasks and services.4

Reasons for the shortage of upper-level managers vary by country. Research by Ready et al. shows
that although Brazil has an influx of new graduates available to staff at the low- to mid-management level,
there is a deficit at the upper levels. In India, there is also a surplus at the lower level but a deficit starting at
the middle levels; one additional explanation is the brain drain, in particular in the technology industry. In
Russia, there is a deficit at all management levels because of decades of operating under a planned economy,
together with the great increase in demand by foreign companies. In China, there is a sizable surplus at the
entry level—though of varying quality—but a considerable deficit at all levels up from there.5

Competition for talent in emerging markets is heating up. Global companies should
groom local highfliers—and actively encourage more managers to leave home.6

Clearly, the competition for talent has become global, as has the competition for jobs. The brain
drain from emerging economies has contributed to the dearth of local talent available. Over a million
Chinese went to the United States to study between 1978 and 2006, and 70 percent of them did not go
back. However, that trend has declined significantly as of 2018, according to Wei Yang, president of the
National Natural Science Foundation of China, who stated, “Just 10 years ago, the flow of talent was at
about seven Chinese students leaving for every one that came back. Now it’s six [students] returning in
every seven. . .The brain drain is almost over.”7

Another problem pertains to recruiting and retaining highly sought managers, which has raised salary
requirements.8 In addition, local firms in developing economies such as China are growing rapidly and
becoming global themselves, thereby attracting local talent for their own companies. Added to these vari-
ables, there has been a decline in the willingness of managers to take assignments abroad—57 percent in
2018 versus 64 percent in 2014—perhaps because of global turmoil and uncertainty and concerns for their
families’ safety in some areas, as well as a growing concern about the spouse/partner’s career. According to
the BCG survey, professional mobility varies, of course, as more than 90 percent of Indians and 70 percent
of Brazilians are willing to work abroad.9 Other countries that revealed an increase in the willingness of
people to work abroad were Ireland, Germany, the UK, and the United States, with increased opportunities
in countries such as China and many central and eastern European countries. For instance, Poland, Croatia,
Slovenia, and Romania are significantly below the global mobility average due, in large part, to stronger
economic conditions and increased investment. The BCG study also showed that 67 percent of the employ-
ees in technology and digital economy jobs are willing to accept assignments overseas.

The reasons for employees’ willingness to work abroad have shifted. According to the 2014 BCG
survey, the most frequent reason was broadening one’s personal experience. Although that reason
remains important to respondents in the 2018 BCG study, better career opportunities and standard of
living are now more important to respondents.

The United States remains the top destination for employees to work abroad. Germany has become
the second most attractive location (up from fourth in 2014). Canada remains the third most attrac-
tive location, followed by Australia (up from seventh in 2014). The UK dropped to fifth in the ranking
(second in 2014).10

(Continued )

288 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

The challenge to companies operating around the world is not only to recruit capable local manag-
ers but also to retain them. Problems regarding immigration and cultural adaptation persist.11 Advice
from professionals includes growing your own—that is, to provide sufficient training and career mentor-
ing to elicit loyalty with managers; and, in particular, to balance local human resource needs with global
standards. This may require tailoring employment packages to local markets to attract and keep top tal-
ent rather than applying global policies for the sake of global consistency.12

Ready et al. suggest a framework for attracting and retaining talent that recognizes that managers
in developing markets are motivated by factors that are a function of their culture, business practices,
and personal goals and usually dissimilar to what is expected in the home office. They conclude that
successful companies offer more than a good salary and comprise four distinguishing characteristics that
provide meaning for potential recruits in emerging markets:13

• Brand: That is, a global name brand known for its excellence and with a distinctive competence
in a particular area, for example, technology, in which new recruits would have confidence in
their future.

• Purpose: That is, a company that is breaking into new markets with new models and strategy,
giving new employees a chance to be part of something meaningful.

• Opportunity: That is, a company that provides a fast-track training and career path for new recruits.
• Culture: That is, a company that has an organizational culture of openness and transparency for

employees, with support for their work and career development.14

THE ROLE OF IHRM IN GLOBAL STRATEGY
IMPLEMENTATION

We believe the war for talent will continue to be the major human resource issue to 2020,
when the people pipeline looks to be the most crucial variable separating winners and losers
in the marketplace. . . . Global mobility will play a key role in solving the labor availability
conundrum.15

PricewaterhouseCoopers’14th Annual CEO Survey

Although the phrase “war for talent” was coined more than 30 years ago, the challenge re-
mains. In fact, HR experts contend that it has escalated—“it’s downright hard and complex.”16
Companies around the world are having a difficult time hiring the best talent in order to help
navigate the competitive battlefield—that is, helping company executives with identifying
potential threats and discovering new opportunities.17

This chapter’s opening profile describes the challenges involved in assigning, recruiting, and
retaining suitable managers to staff operations abroad, where the burgeoning demand for talent
is outstripping the supply. In addition, retention of local managers requires continuing effort; the
high turnover rate in Asia, for example, is largely attributable to local managers feeling that those
in the firm’s headquarters don’t understand them and their roles.18 Other challenges for compa-
nies around the world include growing workforce mobility and the increasing trend of outsourc-
ing service and professional jobs, which have now joined manufacturing jobs in the category of
boundaryless human capital (discussed in previous chapters).

The need to outsource employees is just one of the complex issues for international human
resource (IHR) managers as they seek to support strategic imperatives (see Chapter 6). Global
firms are finding that their practices of outsourcing skilled and professional jobs have implica-
tions for their human resource practices at home and around the world. Consequently, a firm
such as Infosys, one of India’s top outsourcing companies, also experiences complex human
resource challenges involved in recruiting, training, and compensating increasingly sophisticated
employees in its attempt to meet the escalating demand for its services; in addition, Infosys has
the same challenges with its operations abroad.

In the ongoing pursuit of global competitive advantage, some MNCs have begun to re-
think the traditional job roles by experimenting with “talent-based” frameworks. For exam-
ple, Microsoft is experimenting with a new platform-for-talent architecture that involves a
“gig mindset.” It has created an internal market for its managers to search for people with
specific skill sets and for employees to pursue opportunities that leverage their capabilities

9-1. To understand the
strategic importance to
the firm of the IHRM
function and its various
responsibilities

CHAPTER 9 • STAFFING, TRAINING, AND COMPENSATION FOR GLOBAL OPERATIONS 289

or help develop new ones. In addition, Microsoft has sought to make work flexibility the new
norm. It also has sought to assess the downstream effects of talent sharing on various HRM
processes such as performance management, and learning and development. Lastly, their
platform for talent approach has led to an increase in the use of freelance talent for various
projects.19 According to Mercer consulting, “Microsoft is stepping thoughtfully and strategi-
cally into the future of work, setting the ground rules for their platform-for-talent approach,
and building a business case for change.”20

It is clear, then, that a vital component of implementing global strategy is international
human resource management (IHRM). Executives questioned about the major challenges
the HR function faces in the global arena cited “(1) enhancing global business strategy,
(2) aligning HR issues with business strategy, (3) designing and leading change, (4) build-
ing global corporate cultures, and (5) staffing organizations with global leaders.”21 IHRM
is therefore increasingly being recognized as a major determinant of success or failure in
international business. In a highly competitive global economy, where the other factors of
production—capital, technology, raw materials, and information—can increasingly be du-
plicated, “the caliber of the people in an organization will be the only source of sustainable
competitive advantage available to U.S. companies.”22 Corporations operating overseas
need to pay careful attention to this most critical resource—one that also provides control
over other resources. In fact, increasing recognition is being given to the role of strategic
human resource management (SHRM)—that is, the two-way role of HRM in both helping
to determine strategy and implementing it. That role in helping the organization develop
the necessary capabilities to enact the desired strategy includes the reality that strategic
plans are developed in large part based on the resources the firm possesses, including the
human resources capabilities.23 IBM is one company that clearly uses its global workforce
to convey and implement its strategy of a globally integrated company—doing business
with clients in whatever location—more than 175 countries.24 The majority of IBM’s em-
ployees are in countries such as India, Japan, Britain, and Brazil. Indeed, IBM employs
130,000 people for its Indian operations—roughly one-third of its total employees—which
now exceeds its U.S. work force.25 The company uses various staffing modes and consid-
ers international assignments important to its goal of global integration. For example, in
India, employees focus on the full range of IBM’s businesses—managing the computing
needs of MNCs and performing research related to visual search, artificial intelligence, and
computer vision for self-driving cars.

The IHRM function comprises varied responsibilities involved in managing human
resources in global corporations, including recruiting and selecting employees, providing
preparation and training, and setting up appropriate compensation and performance manage-
ment programs. Although firms would like to harmonize their IHRM practices around the
world, considerable and powerful variables confound that goal, making it either impractical
or undesirable for many localities. Among these are the complexities of local government
laws and regulations, varying cultural norms and practices, and the long-entrenched and
accepted business practices in the local area. Some examples are shown in Exhibit 9-1. These
factors, in turn, are influenced by national variables in the political, economic, legal, and
institutional arena as well as by competitive factors. Of particular importance to the IHRM
function is the management of expatriates—employees assigned to a country other than their
own—discussed in this chapter and the next, and working within host-country practices and
laws is discussed in the following chapter.

At the first level of planning, decisions are required on the staffing policy suitable for a par-
ticular kind of business, its global strategy, and its geographic locations. Key issues involve the
difficulty of control in geographically dispersed operations, the need for local decision making
independent of the home office, and the suitability of managers from alternate sources.

The interdependence of strategy, structure, and staffing is particularly worth noting. Ideally,
the desired strategy of the firm should dictate the organizational structure and staffing modes
considered most effective for implementing that strategy. In reality, however, there is usually
considerable interdependence among those functions. Existing structural constraints often affect
strategic decisions; similarly, staffing constraints or unique sets of competencies in management
come into play in organizational and, sometimes, strategic decisions. It is thus important to achieve
a system of fits among those variables that facilitates strategic implementation.

290 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

STAFFING FOR GLOBAL OPERATIONS
Global mobility must be open to change, bring innovative ideas, and adapt to emerging
technology solutions and shifting employee and consumer preferences.26

Lisa Johnson, Crown World Mobility’s Consulting Group

International experience is a requirement for the development of leaders in multinational compa-
nies, so providing global mobility remains an ongoing concern. A survey of global mobility trends
by Crown World Mobility revealed several salient trends pertaining to staffing around the globe.
First, respondents stressed that the accompanying partner is becoming increasingly influential;
however, this trend has evolved because of the growing number of dual-career families and male
accompanying spouses. Second, respondents revealed confusion in terms of measuring mobility
return on investment (ROI). Although companies have tended to focus on career development
and retention post-assignment as key metrics, Crown emphasized that “assignment ROI will
need to be agile to reflect the priorities of companies, business functions and employees.”27 The
third trend pertains to the changing demographics with respect to global mobility. As millenni-
als and early-career employees consider positions abroad, offering employees cash— lump sum
payments and/or cash allowances—for their mobility needs is becoming more prevalent. Another
trend pertains to the notion of well-being, which has expanded beyond traditional employee
benefits such as flex-hours and maternity leave.28

In addition to the global war for talent, there are now considerable strategic competi-
tive challenges for some firms regarding the need to “(a) reduce and remove talent in order
to lower the costs of operations, (b) locate and relocate operations around the world, and

9-2. To learn about the major
staffing options for global
operations and the factors
involved in those choices

Local Laws and Practices IHRM Cultural Norms and Practices

Qualifications versus nepotism Recruitment & Selection Individualism/Collectivism

Equal Employment versus women’s roles Masculinity

Laws re hiring local employees Obligation

Skill levels, certification requirements Training & Development

Gov’t pressure for training (e.g., China) Long/short-term orientation

HQ versus local training

Education (U.S.) versus apprentice/OJT (Germany) Power Distance

Achievement versus Seniority (e.g., Japan) Performance Appraisal Source of Power/Status

Locally accepted measures Face-saving; privacy issues

Local standards; minimum wages; benefits Compensation Uncertainty Avoidance

Group-based versus individual performance versus seniority Loyalty/harmony/seniority/face

Unemployment compensation

Local labor laws, restrictions Labor Relations Attitudes toward work

Union power (e.g., high in India) Attitudes toward unions

Union structure (Germany’s “codetermination”) Loyalty/group harmony (e.g., Japan)

Collective bargaining process Paternalism (e.g., Mexico)

Federation of trade unions (e.g., Sweden) Nature of employee relations

Joint Venture union regulations (e.g., China)

STRATEGY

STRUCTURE

ExHIBIT 9-1 Influences on Local HRM Practices

CHAPTER 9 • STAFFING, TRAINING, AND COMPENSATION FOR GLOBAL OPERATIONS 291

(c) obtain equally competent talent anywhere in the world at lower wages.”29 Firms use short-
term assignments and commuter assignments to nearby countries to reduce costs.30

Depending on the firm’s primary strategic orientation and stage of internationalization,
as well as situational factors, managerial staffing abroad falls into one or more of the follow-
ing staffing modes—ethnocentric, polycentric, regiocentric, and global. When the company is
at the internationalization stage of strategic expansion, and has a centralized structure, it will
likely use an ethnocentric staffing approach to fill key managerial positions with people from
headquarters—that is, parent-country nationals (PCNs). Among the advantages of this ap-
proach, PCNs are familiar with company goals, products, technology, policies, and procedures—
and they know how to accomplish things through headquarters. This policy is also likely to be
used when a company notes the inadequacy of local managerial skills and determines a high
need to maintain close communication and coordination with headquarters. For German compa-
nies, the most important reason for assigning expatriates was “to develop international manage-
ment skills.” For companies in Japan and the United Kingdom, it was “to set up a new operation,”
and in the United States, it was “to fill a skill gap.”31

Frequently, companies use PCNs for the top management positions in the foreign
subsidiary—in particular, the chief executive officer (CEO) and the chief financial officer
(CFO)—to maintain close control. PCNs are usually preferable when a high level of technical
capability is required. They are also chosen for new international ventures requiring managerial
experience in the parent company and when there is a concern for loyalty to the company rather
than to the host country—such as when proprietary technology is used.

In addition, the strategic goal of understanding the needs and opportunities in emerging
markets has led an increasing number of top-level executives, including board members and
CEOs, to assign themselves to Asia. As an example, in 2011, John Rice, vice chairman of GE
and president and chief executive of global growth and operations, relocated to Hong Kong with
his wife. Saying his motives were part substance and part symbolism, Mr. Rice conceded that,
“Being outside the United States makes you smarter about global issues. It lets you see the world
through a different lens.”32 According to a survey by the Economist Corporate Network, 45.3
percent of respondents expected to have board members in Asia by 2016.33 Others in the survey
noted that their continuing presence gave them more access to key leaders who regarded them as
more committed to the region.

Generally speaking, however, there can be important disadvantages to the ethnocentric
approach, including (1) the lack of opportunities or development for local managers, thereby
decreasing their morale and their loyalty to the subsidiary; and (2) the poor adaptation and lack
of effectiveness of expatriates in foreign countries. Procter & Gamble, for example, routinely
appointed managers from its headquarters for foreign assignments for many years. After several
unfortunate experiences in Japan, the firm realized that such a practice was insensitive to local
cultures and underused its pool of high-potential, non-American managers.34 Furthermore, an
ethnocentric recruiting approach does not enable the company to take advantage of its worldwide
pool of management skill. This approach also perpetuates particular personnel selections and
other decision-making processes because the same types of people are making the same types of
decisions.

With a polycentric staffing approach, local managers—host-country nationals
(HCNs)—are hired to fill key positions in their own country. This approach is more likely to be
effective when implementing a multinational strategy. If a company wants to act local, staffing
with HCNs has obvious advantages. These managers are naturally familiar with the local culture,
language, and ways of doing business, and they already have many contacts in place. In addi-
tion, HCNs are more likely to be accepted by people both inside and outside the subsidiary, and
they provide role models for other upwardly mobile personnel. For these and other reasons, Tata
Consultancy Services (TCS) follows this staffing policy for some of its subsidiaries, as detailed
in the accompanying “Under the Lens” section.

With regard to cost, it is usually less expensive for a company to hire a local manager than
to transfer one from headquarters, frequently with a family and often at a higher rate of pay.
Transferring from headquarters is a particularly expensive policy when the manager and her or
his family do not adjust and have to be transferred home prematurely. Rather than opening their
own facilities, some companies acquire foreign firms as a means of obtaining qualified local
personnel. Local managers also tend to be instrumental in staving off or more effectively dealing

292 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

with problems in sensitive political situations. Some countries, in fact, legally require a specific
proportion of the firm’s top managers to be citizens of that country.

One disadvantage of a polycentric staffing 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. Poor coordination among subsidiaries of a multinational firm
could constrain strategic options. An additional drawback of this policy is that the headquarters
managers of multinational firms will not gain the overseas experience necessary for any higher
positions in the firm that require the understanding and coordination of subsidiary operations.

In the global staffing approach, the best managers are recruited from within or outside
of the company, regardless of nationality. This practice—recruiting third country nationals
(TCNs)—has been used for some time by many European multinationals. Now, HRM profes-
sionals everywhere are realizing that “the emergence of a global talent pool following China and
India’s decade of growth will increasingly influence talent development and acquisition.”35

A global staffing approach has several important advantages. First, this policy provides a
greater pool of qualified and willing applicants from which to choose, which, in time, results in
further development of a global executive cadre. As discussed further in Chapter 10, the skills
and experiences those managers use and transfer throughout the company result in a pool of
shared learning that is necessary for the company to compete globally.

Second, where third-country nationals are used to manage subsidiaries, they usually bring
more cultural flexibility and adaptability to a situation, as well as bilingual or multilingual skills,
than parent-country nationals, especially if they are from a similar cultural background as the
host-country coworkers, and they are accustomed to moving around. In addition, when TCNs are

UNDER THE LENS
Tata’s Staffing Challenges in the United States 36

T ata Consultancy Services (TCS) provides IT services, business solutions, and outsourcing
around the world. The Indian company, which sends thousands of employees abroad to work in
client locations, is part of the Tata Group—one of India’s largest industrial conglomerates—and

currently has over 417,000 employees representing 151 nationalities across 46 countries.37

In 2008, TCS decided to buy a facility in Milford, Ohio, to be closer to a number of Fortune 500
clients in the area and to hire American graduates from the several nearby universities. TCS’s strategy
is to compete with consultancy giants such as IBM and Accenture on their home turf. More than half of
TCS’s revenue is from North America, with about 16,000 employees. TCS was anxious to compete for
the estimated $52 billion in U.S. federal contracts. In 2011, TCS had 450 employees in Ohio, nearly all
American, partly because of the difficulty of getting visas for Indians, and the company had plans to hire
a further 500-plus, adding to its 215,000-strong global workforce.38

Factors affecting TCS’s staffing practices in the United States include the Ohio government’s ban
in September 2010 on outsourcing government contracts to overseas operations, and the difficulty in
finding sufficient numbers of qualified engineers in the United States. Even so, TCS faces a cost increase
of around seven times for a U.S. worker compared with one hired to do similar work in India.

While balancing the “war for talent” challenge with the growing need to relocate top talent in
MNCs, there is a slippery slope for companies considering nonlocal talent for key positions. In 2018,
TCS’s U.S. operations were sued for alleged discrimination in hiring based on race and national origin.
TCS is not alone, as Infosys and HCL Technologies have endured lawsuits. Prior lawsuits on TCS’s U.S.
hiring practices have been thrown out of court according to a TCS spokesperson: “Indeed, the federal
court in California previously rejected a class-action for hiring discrimination by the same law firm con-
cerning TCS’ hiring practices, citing the same issues.”39

Clearly, the staffing challenges TCS faces in its U.S. subsidiary are just the tip of the iceberg for
an IT company needing highly qualified employees around the world. In its attempt to attract and retain
skilled local talent continually, Tata’s HR vice president stresses the importance of recognizing the vary-
ing factors that will motivate people in its different locations. The company “has a tailored employee
value proposition for each of its major markets.”40 The company understands, for example, that quality
is of paramount importance to its managers in India; that in China, its managers are primarily interested
in opportunities for personal development; and that the U.S. managers look for interesting jobs.

CHAPTER 9 • STAFFING, TRAINING, AND COMPENSATION FOR GLOBAL OPERATIONS 293

placed in key positions, employees perceive them as acceptable compromises between headquar-
ters and local managers; thus, appointing them works to reduce resentment.

Third, it can be more cost-effective to transfer and pay managers from some countries than
from others because their pay scale and benefits packages are lower. Indeed, firms with a truly
global staffing orientation are phasing out the ethnocentric concept of a home or host country.
In fact, as globalization increases, terms such as TCNs, HCNs, and expatriates are becoming
less common because of the kind of situation in which a manager may leave her native Ireland
to take a job in England, then be assigned to Switzerland, to China, and so on, without returning
to Ireland. As part of that focus, the term transpatriate is increasingly replacing the term
expatriate. Firms such as Philips, Heinz, Unilever, IBM, and ABB have a global staffing approach,
which makes them highly visible and seems to indicate a trend.

Overall, firms still tend to use expatriates in key positions in host countries that have
a less familiar culture and in less-developed economies. Clearly, this situation arises out of
concern about uncertainty and the ability to control implementation of the corporation’s goals.
However, given the generally accepted consensus that staffing, along with structure and sys-
tems, must fit the desired strategy, firms desiring a truly global posture should adopt a global
staffing approach. That is easier said than done. As shown in Exhibit 9-2, such an approach
requires the firm to overcome barriers such as the availability and willingness of high-quality
managers to transfer frequently around the world, dual-career constraints, time and cost
constraints, conflicting requirements of host governments, and ineffective human resource
management policies.

In a regiocentric staffing approach, recruiting is done on a regional basis—say, within
Latin America for a position in Chile. This staffing approach can produce a specific mix of
PCNs, HCNs, and TCNs, according to the needs of the company or the product strategy.

More recently, a staffing option known as inpatriates has been used to provide a linking
pin between the company’s headquarters and local host subsidiaries. Inpatriates are managers
with global experience who are transferred to the organization’s headquarters country so that
their overseas business and cultural experience and contacts can facilitate interactions among the
country’s far-flung operations.41 U.S.-based Rackspace inpatriated some of its European execu-
tives to the United States in order to integrate new ideas and experiences into their “Racker”
mindset.42

Top
management
commitment

Staff availability

Time and cost
constraints

Host government
requirements

HRM policies

Globalization
Momentum

Global
staffing
policy

Momentum
Maintained

Search for
global operators

Staff transfers

International
team

B
a
r
r
i
e
r
s

ExHIBIT 9-2 Maintaining a Globalization Momentum

Source: Based on and adapted from D. Welch, “HRM Implications of Globalization,” Journal of General
Management 19, No. 4 (Summer 1994), pp. 52–69, used with permission of Braybrooke Press, 2011.

294 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

Inpatriate managers can provide communication of strategic goals, change processes, and
provide continuity among revolving expatriates and host nationals; in addition, they can facili-
tate multicultural management teams in global organizations.43 Nestlé, for example, brings in
managers at all levels from around the world to its Swiss headquarters to ensure that its execu-
tives become acquainted with the firm’s best talent. The inpatriates are also happy to do this
because they gain relationships all around and can network with one another in addition to gain-
ing the knowledge and familiarity with the firm’s headquarters people and processes.44 Other
companies that have brought inpatriate managers into their headquarters operations are Quaker
Chemical Company (Guus Lobsen, Holland); Coca-Cola Co. (John Hunter, Australia); and Sara
Lee Corporation (Cornelis Boonstra, Holland).

A critical success factor in the use of inpatriates is their ability to develop acceptance and
trust among the people in the various locations, making it imperative for the firm to retain them
on a long-term basis.45 For their part, there is considerable challenge in that inpatriates are ex-
pected “to become a parent country manager in language and lifestyle, yet play a double role as
a host country national” when returning home.46 Some of the pros and cons of the different staff-
ing practices are shown in Exhibit 9-3.

What factors influence the choice of staffing policy? Among them are the strategy and orga-
nizational structure of the firm as well as the factors related to the particular subsidiary (such as
the duration of the particular foreign operation, the types of technology used, and the production
and marketing techniques necessary). Factors related to the host country also play a part (such

Advantages Drawbacks

PCNs • Transfer and control firm strategy • Costly to relocate family

• Assignments abroad develop managers • Little development of HCNs

• Integrate knowledge firm-wide • Lack local familiarity/contacts

• Suitable managers not available locally • PCN/family adaptation problems

• Protect proprietary technology • Limits use of global skills/ideas

HCNs • Firm “acts local”; develops HCNs • May have short-term loyalty

• Familiarity with culture, procedures, politics, language,
contacts, laws

• Fulfill government hiring requirements

• Can hit the ground running versus PCNs

• Likely to be less costly • Less firm-wide coordination

• Local role model; employee morale • Possible conflict of interests

• Business may be more accepted

TCNs • Broad global experience • Little development of HCNs

• Pool of shared learning • May lack local contacts

• Cultural flexibility and adaptability • Complex to manage and
harmonize• Language skills

• Often more acceptable than PCNs • Less acceptable than HCNs

• Often less-costly transferees • Costly compared to HCNs

• Liaison between HQ and local firm

Inpatriates • Linking pin between firm HQ and local host subsidiaries • Does not replace need for PCNs or HCNs

• Utilizes overseas experience and contacts to coordinate
global operations

• Probably still perceived as an HQ manager

• Provide continuity among revolving PCNs and HCNs • Difficulty in gaining trust

• Facilitate global multicultural teams

ExHIBIT 9-3 Key Advantages and Drawbacks of Global Staffing Practices

CHAPTER 9 • STAFFING, TRAINING, AND COMPENSATION FOR GLOBAL OPERATIONS 295

as the level of economic and technological development, political stability, regulations regarding
ownership and staffing, and the sociocultural setting).47 Clearly, there are many complex factors
and interactions to consider. As a practical matter, however, the choice often depends on the avail-
ability of qualified managers in the host country. Most MNCs use a greater proportion of PCNs
(also called expatriates) in top management positions, staffing middle and lower management
positions with increasing proportions of HCNs (locals) as one moves down the organizational
hierarchy. The choice of staffing policy has a considerable influence on organizational variables
in the subsidiary, such as the locus of decision-making authority, the methods of communication,
and the perpetuation of human resource management practices. These variables are illustrated in
Exhibit 9-4. The ethnocentric staffing approach, for example, usually results in a higher level of
authority and decision making in headquarters compared to the polycentric approach.48

Without exception, all phases of IHRM should support the desired strategy of the firm. In the
staffing phase, having the right people in the right places at the right times is a key ingredient of
success in international operations. An effective managerial cadre can be a distinct competitive
advantage for a firm.

Aspects of the
Enterprise

Orientation

Ethnocentric Polycentric Regiocentric Global

Primary strategic
orientation/stage

Perpetuation
(recruiting, staffing,
development)

Complexity of
organization

Authority; decision

Evaluation and
control

Rewards

Communication;
information flow

Geographic
identification

International

People of home
country developed for
key positions every-
where in the world

Complex in home
country; simple in
subsidiaries

High in headquarters

Home standards
applied to people and
performance

High in headquarters;
low in subsidiaries

High volume of
orders, commands,
advice to subsidiaries

Nationality of owner

Multidomestic

People of local
nationality developed
for key positions in
their own country

Varied and
independent

Relatively low
in headquarters

Determined locally

Wide variation;
can be high or low
rewards for subsidiary
performance

Little to and from
headquarters; little
among subsidiaries

Nationality of host
country

Regional

Regional people
developed for key
positions anywhere
in the region

Highly interdependent
on a regional basis

High in regional
headquarters and/or
high collaboration
among subsidiaries

Determined
regionally

Rewards for
contribution to
regional objectives

Little to and
from corporate
headquarters, but may
be high to and from
regional headquarters
and among countries

Regional company

Transnational

Best people every-
where in the world
developed for key
positions everywhere
in the world

“Global Web”:
complex, worldwide
alliances/network

Collaboration of
headquarters and
subsidiaries around
the world

Globally integrated

Rewards to inter-
national and local
executives for reaching
local and worldwide
objectives based on
global company goals

Horizontal; network
relations; “virtual”
teams

Truly global company,
but identifying with
national interests
(“glocal”)

ExHIBIT 9-4 Relationships among Strategic Mode, Organizational Variables, and Staffing Orientation 49

296 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

The initial phase of setting up criteria for global selection, then, is to consider which overall
staffing approach or approaches would most likely support the company’s strategy, as previously
discussed—such as HCNs for localization, the (multilocal) strategic approach, and transpatri-
ates and inpatriates for a global strategy. These are typically just starting points using idealized
criteria, however. In reality, other factors creep into the process, such as host-country regula-
tions, stage of internationalization, and—most often—who is both suitable and available for the
position. It is also vital to integrate long-term strategic goals into the selection and development
process, especially when rapid global expansion is intended. Insufficient projection of staffing
needs for global assignments will likely result in constrained strategic opportunities because of a
shortage of experienced managers suitable to place in those positions.

The selection process is set up as a decision tree in which the progression to the next
stage of selection or the type of orientation training depends on the assessment of critical fac-
tors regarding the job or the candidate at each decision point. The simplest selection process
involves choosing a local national because minimal training is necessary regarding the culture
or ways of doing business locally.50 However, to be successful, local managers often require
additional training in the MNC company-wide processes, technology, and corporate culture. If
a local national cannot fill the position, yet the job requires a high level of interaction with the
local community, careful screening of candidates from other countries and a vigorous training
program are necessary.

Most MNCs tend to start 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.51 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. One researcher’s comment represents a growing attitude: “All things being equal, a local
national who speaks the language, understands the culture and the political system, and is often
a member of the local elite should be more effective than an expatriate alien.”52 However, con-
cerns about the need to maintain strategic control over subsidiaries and to develop managers with
a global perspective remain a source of debate about staffing policies among human resource
management professionals. A globally oriented company such as ABB (Asea Brown Boveri), for
example, has 500 roving transpatriates who are moved every two to three years, thus developing
a considerable management cadre with global experience.53

For MNCs based in Europe and Asia, human resource policies at all levels of the organiza-
tion are greatly influenced by the home-country culture and policies. For Japanese subsidiaries
in Singapore, Malaysia, and India, for example, promotion from within and expectations of long-
term loyalty to and by the firm are culture-based practices transferable to subsidiaries.

MANAGING EXPATRIATES
The survey identified three significant challenges facing corporations: finding suitable candidates
for assignments, helping employees—and their families—complete their assignments, and
retaining these employees once their assignments end.54

If some of your expatriates are about to jump ship because they are not getting paid on
time, their families are miserable or their taxes are fouled up, it may be time to move beyond
low-tech tools.55

HR maGazine

An important responsibility of IHR managers is that of managing expatriates—employees they
assign to positions in other countries—whether from the headquarters country or third coun-
tries. Most multinationals underestimate the importance of the human resource function in the
selection, training, acculturation, and evaluation of expatriates. However, although the number
of employers sending staff abroad is on the rise, only half actually have policies in place to gov-
ern these assignments, research shows. In fact, the Brookfield Global Relocation Trends Survey

9-3. To emphasize the
need for managing the
performance of expatriates
through careful selection,
performance management,
and global teams

CHAPTER 9 • STAFFING, TRAINING, AND COMPENSATION FOR GLOBAL OPERATIONS 297

concluded that, although career management was stated as a challenging international assign-
ment management issue by company respondents, only 22 percent indicated that they had a
formal career-management process in place, and only 19 percent had an international assignment
candidate pool in place.56

In addition, too often HR managers are not aware that expatriates are unhappy until
they find out they are losing valuable, experienced managers to another company. So, in
addition to ensuring that there is personal contact with expatriates, a number of firms are
turning to technological applications to keep track of visas and immigration status, payroll
and compensation packages, taxes, housing, and so on, which can make or break the fam-
ily’s situational satisfaction.57

Expatriate Selection
The selection of personnel for overseas assignments is a complex process. While matching the
firm’s criteria for selection with the motivation and suitability of potential candidates, it is also
useful to bear in mind the reasons candidates might have for taking the assignment. In their
survey of reasons people would consider a foreign assignment, the Boston Consulting Group
(BCG), with a sample size of 203,756 from respondents around the world, found a high level of
willingness to work abroad (64 percent) among those looking for new job opportunities; the top
ten reasons were as follows: broaden personal experience, acquire work experience, better career
opportunities, an overall attractive job offer, improved salary prospects, better standard of living,
ability to live in a different culture, for the challenge, learn a new language, and meet new people
to build new networks.58

From the firm’s perspective, criteria for selection are based on the same success factors
as in the domestic setting, but additional criteria must be considered, relative to the specific
circumstances of each international position. Unfortunately, many HRM directors have a long-
standing, ingrained practice of selecting potential expatriates simply on the basis of their do-
mestic track records and their technical expertise.59 The need to ascertain whether potential
expatriates have the necessary cross-cultural awareness and interpersonal skills for the position
is too often overlooked.

Research by Mansour Javidan points to three major global mind-set attributes that success-
ful expatriates possess.

• Intellectual capital, or knowledge, skills, understanding, and cognitive complexity

• Psychological capital, or the ability to function successfully in the host country through
internal acceptance of different cultures and a strong desire to learn from new experiences

• Social capital, or the ability to build trusting relationships with local stakeholders,
whether they are employees, supply chain partners, or customers60

It is also important to assess whether the candidate’s personal and family situation is such
that everyone is likely to adapt to the local culture. Studies have shown that there are five cat-
egories of success for expatriate managers: job factors, relational dimensions such as cultural
empathy and flexibility, motivational state, family situation, and language skills. However, de-
ciding before the expatriate goes on assignment whether he or she will be successful in those
dimensions poses considerable problems for recruitment and selection purposes. Whereas lan-
guage skills, for example, may be easy to ascertain, characteristics such as flexibility and
cultural adjustment—widely acknowledged as most vital for expatriates—are difficult to judge
beforehand. To address the problem of predicting how well an expatriate will perform on an
overseas assignment, Tye and Chen studied factors that HR managers used as predictors of
expatriate success. They found that the greatest predictive value was in the expatriate charac-
teristics of stress tolerance and extraversion and less in domestic work experience, gender, or
even international experience. The results indicate that a manager who is extraverted (sociable,
talkative) and who has a high tolerance for stress (typically experienced in new, different contexts
such as in a foreign country) is more likely to be able to adjust to the new environment, the
new job, and interaction with diverse people than those without those characteristics. HR
selection procedures, then, often include seeking out managers with those characteristics
because they know there will be a greater chance for successful job performance and less
turnover likelihood.61

298 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

These expatriate success factors are based on studies of American expatriates. One could
argue that the requisite skills are the same for managers from any country—and particularly so
for third-country nationals. A study of expatriates in China, for example, found that expatriate
success factors included performance management, training, organizational support, willingness
to relocate, and strength of the relationship between the expatriate and the firm.62

Expatriate Performance Management
Deciding on a staffing policy and selecting suitable managers are logical first steps, but they do
not alone ensure success. When staffing overseas assignments with expatriates, for example, 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 (discussed further in Chapter 10). The inability of the spouse to adjust
to the new environment has been found to be a major—in fact, the most frequently cited—reason
for expatriate failure in U.S. and European companies.63 Despite these obvious concerns, few com-
panies include the spouse in the interviewing process. The following is a synthesis of the factors
researchers and firms frequently mention as the major causes of expatriate failure.

• Selection based on headquarters criteria rather than assignment needs
• Inadequate preparation, training, and orientation prior to assignment
• Alienation or lack of support from headquarters
• Inability to adapt to local culture and working environment
• Problems with spouse and children—poor adaptation, family unhappiness
• Insufficient compensation and financial support
• Poor programs for career support and repatriation

In considering the overall family adjustment and happiness, it is important to pay attention to the
trailing spouse—that is, the spouse or partner of the person taking the assignment overseas. Whether
the situation is that the spouse wants to work in the new location but has not found a position or that
the couple has made a decision for the spouse to devote the time to the children and household, HR
should attempt to help the couple or family have a positive experience and thus retain the employee
and facilitate a successful assignment. Regardless of the family situation, to be successful, the as-
signment must include career support and repatriation programs. Failure to do so often results in the
type of situation described in the following “Under the Lens” feature.

UNDER THE LENS
Expatriate Employees Struggle to Readjust to Old Lives 64

Without Support, Returning Staff May Use Their Experience Abroad to Find
Another Job

Early in her career with a big-four professional services company, Annaliese Allen was seconded
from her home town of Melbourne to the company’s Chicago office, which needed more people
urgently. The move was easy. She was well-paid, eager to explore and made to feel special. Life

was good—until she boarded the plane home after more than two years away.
In Chicago, Ms Allen had impressed decision makers with her aptitude for policy work. Once

home, however, she discovered that her overseas achievements counted for little. She was given tax
compliance work, a business area that was growing but a poor fit for her talents.

She felt unappreciated and adrift. “In the States, I had been doing lots of strategic consulting and
meeting very senior executives . . . when I moved back to Melbourne, I was sitting doing tax returns.”

After two months she resigned, and went to work for the US business on local terms. “I had been
trying to return to my old life, when I had become a different person,” she says.

Ms Allen calls her unhappy homecoming an “extreme return failure”—a combination of profes-
sional disappointment and a dose of reverse culture shock. Yet her experience of a good assignment
followed by a bad return is common.

CHAPTER 9 • STAFFING, TRAINING, AND COMPENSATION FOR GLOBAL OPERATIONS 299

How employers support the people they send abroad colours how those employees look back on
their experiences and how they approach their next role. If things go badly, an employee may use their
international know-how to find another job.

Yet research by Cartus, a relocation business, found even employers that do a lot to help employees
and their families move abroad neglect basics, such as asking how the assignment went or helping in the
readjustment after a period away. Seventy-eight per cent of employers did not know if they were losing
recently returned staff to competitors because they did not collect data.

Foreign assignments are expensive: an industry rule-of-thumb is that sending people abroad costs
two-to-three times the cost of employing them at home, says Diane Douiyssi, a director at Brookfield
Global Relocation Services. So why do companies pay repatriation scant attention?

One reason may be that other tasks seem more urgent. When organisations send people abroad,
often it is “to find an immediate solution to a problem”, says Tanya Thouw, head of HR global mobility
at SAP. What the employee will do once the problem is fixed barely features. David Enser, who heads
international mobility at Adidas and co-founded the RES Forum, an international HR network, says this
is short-sighted. Many multinational employers including his own “[have lost] expensively developed
talent through lack of forward planning”.

Talking to people from day one about the roles that might be open to them when they return—
something just 23 per cent of companies do, according to a survey by Brookfield Global Relocation
Services—might result in fewer post-assignment fallouts.

In the absence of discussion misunderstandings abound, says Benjamin Bader, a professor at
Leuphana University of Lunebürg and a co-author with the University of Hamburg of a study on repa-
triation conducted with the RES Forum. The employee sees the assignment as a passport to promotion,
but the employer simply wants someone to get the job done, and is not making any promises.

Employers who struggle to persuade people to accept assignments need to think carefully about
what employees expect on their return. To overcome a perception that people were “sent overseas and
forgotten”, Adidas introduced new contracts for some types of fixed-term assignments, guaranteeing
people a right of return and help finding their next role.

Oliver Schramm, a senior director at Adidas, is on an assignment to Oregon, for a minimum of
three years, accompanied by his family. He says that “having a job ticket back to Germany” removes the
financial worry that he might not have a job to return to. He and his wife have retirement-age parents
and want their children to resume education in the German school system. “Knowing that we will return
means that we are able to enjoy our adventure,” he says.

Even when bosses are supportive, employees may be wise to seize the initiative. The Leuphana and
Hamburg study found expatriates who networked and banged on the HR department’s door ended up
with bigger and better-paid roles.

The research found that the staff who received the biggest rewards were not always those who
had achieved most while abroad. In fact, performance appeared to have virtually no effect on what the
employee did next.

That could imply that companies are promoting the wrong people because their HR systems are not
set up to share information across the organisation, Prof Bader believes. “If you perform extremely well
and HQ doesn’t know, that’s really a frustration.”

Given the vagaries of international moves, the best strategy for individuals is to prepare for all
eventualities. Katherine Cox, a client director at Schroders, in London, advises expatriates to keep in
contact with as many senior figures as possible while abroad.

While on a four-year secondment to New York, Ms Cox made a point of dropping into the London
office on trips home and scheduling catch-ups with senior colleagues. It landed her a job with a former
boss in a business area she enjoyed.

Encouraging people to share knowledge might also soften the comedown that follows a foreign
adventure. The realisation that, as Mr Enser puts it, “no one is as interested in your stories as you are”,
comes on top of the stress of getting the utilities reconnected and finding the children a new school.

SAP improved its repatriation policies after discovering that the number of people resigning within
three years of returning home was, as Ms Thouw puts it, “higher than we wanted it to be”. It now limits
assignments to three years (two years with a possible 12-month extension), and pairs expatriates with
mentors based in their home country.

“If you send someone abroad for five years, home [can] really seem like a strange country,” Ms
Thouw says. Your friends’ interests may no longer be your interests, colleagues may have come and
gone and even local etiquette that you took for granted may now seem alien.

But what if re-embracing the day-to-day feels too tame after making your mark in an unfamiliar
culture? After working in the US, Ms Allen returned again to Australia — and this time stayed put.

(Continued )

300 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

After careful selection based on the specific assignment and the long-term plans of both the
organization and the candidates, plans must be made for the preparation, training, and develop-
ment of expatriate managers. In the following sections, we discuss training and development
and then compensation. However, it is useful to note that these should be components of an
integrated performance management program, specific to expatriates, which includes goal set-
ting, training, performance appraisal, and performance-related compensation. Some insight into
the variability of performance management functions can be gleaned from the accompanying
“Comparative Management” in Focus feature.

Comparative Management in Focus
Expatriate Performance Management Practices:
Samples from Five Countries

H si-An Shih et al. conducted a study in which they interviewed expatriates and human resource
professionals in global information technology companies headquartered in five countries.
These were Applied Materials (American) with 16,000 employees in 13 countries, Hitachi

High Technologies (Japanese) with 470,000 employees in 23 countries, Philips Electronics (Dutch)
with 192,000 employees in 60 countries, Samsung (Korean) with 173,000 employees in 20 countries,
and Winbond Electronics (Taiwanese) with 47,000 employees in six countries. Shih et al. found that
those companies used standardized forms from headquarters rather than tailoring them to the host
environment; as such, they reflected the company culture but not the local culture in which those
expatriates were operating. There also was lack of on-the-job training from those companies.65 The dif-
ferences in procedures for goal setting, performance appraisal, training, and performance-related pay
among those five companies are detailed in Exhibit 9-5.

“I bought myself a tourist guide and told myself I was a tourist in my own country. It made returning
home much more fun.”

WHAT EMPLOYERS CAN DO TO HELP

Returning home can be as big an upheaval as moving away, but is rarely as well-supported. Here,
managers, HR specialists and returned expatriates offer tips on how employers can help:

MANAGE EXPECTATIONS

If the assignment’s purpose is to do a job that needs doing, say so. Allowing people to uproot on the
false belief that a promotion will follow almost always ends badly.

REWARD THE RIGHT PEOPLE

Keep tabs on progress and make it easy for home and away bosses to swap notes.

HELP EXPATRIATES STAY CONNECTED

Encourage employees to stay in touch with colleagues, and offer home-country mentors, ideally
former expatriates who can smooth the path home.

PLAN FOR REPATRIATION

Have a process that kicks in well before repatriation, and make someone responsible for helping the
employee find their next role.

PUT KNOWLEDGE TO USE

Creating opportunities for people to share what they learnt abroad shows their international experience
is valued—and benefits the business.

CHAPTER 9 • STAFFING, TRAINING, AND COMPENSATION FOR GLOBAL OPERATIONS 301

Company Goal Setting
Performance
Appraisal

Training and
Development

Performance-related
Pay

AMT
(American)

Short-term: sending unit’s
general manager
Long term: host country’s
general manager

Annual performance appraisal
Open feedback
Interview

Applied global
university
Seldom take training
programs while on
assignment
No clear connection
between performance
result and career
development

Clear link between
performance and
compensation
Cash bonuses and
stock options

Hitachi
(Japanese)

Self-setting, then finalized by
host-country manager

Annually for managerial
purposes, biannually for
development purposes;
One-way feedback discussion
Seldom take training
programs while on assignment

Orientation
Language training
Can apply to host
location supervisor
No clear connection
between performance
result and career
development

Link between
performance and
compensation not
clear
Seniority-based pay
system
Cash bonuses

Philips
(Dutch)

Self-setting, then finalized by
host-country manager

Biannual performance
appraisal; Open feedback in
interview

Orientation
Seldom take training
programs while on
assignment
No clear connection
between performance
result and career
development

Clear link between
performance and
compensation
Cash bonuses and
stock options

Samsung
(Korean)

Self-setting, then finalized by
host-country manager

Biannually for managerial
purposes, annually for
development purposes;
Open feedback in interview

Orientation
Language training
Can apply to host
location supervisor
No clear connection
between performance
result and career
development

Clear link between
performance and
compensation
Senior managers: cash
bonuses and stock
options
Ordinary expatriates:
cash bonuses

Windbond
(Taiwanese)

Self-setting, then finalized by
host-country manager

Biannual performance
appraisal;
Feedback depends on
manager

Orientation
Seldom take training
programs while on
assignment
Can apply to host
location supervisor
No clear connection
between performance
result and career
development

Clear link between
performance and
compensation
Cash bonuses and
stock options

ExHIBIT 9-5 Expatriate Performance Management from MNEs of Five National Origins

Source: Adapted from His-An Shih, Yun-Hwa Chiang, and In-Sook Kim, “Expatriate Performance Management from MNEs of
Different National Origins,” International Journal of Manpower 26, No. 2 (2005), pp. 161–162. Reprinted with permission of Emerald
Group Publishing Ltd., 2011.

Global Team Performance Management
Global teams are discussed more fully in Chapter 10. But here, we must recognize that expa-
triate performance often includes performance as a team, typically based on discussions and
decisions made with team members in various countries, cultures, and time zones, thus most
often conducted virtually through teleconferencing, Skyping, and various social media, but also

302 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

sometimes personally. As with any HR decision, care must go into the selection and training
of the people who will comprise the team so that the advantages of insight, local knowledge,
and group creativity will support the firm’s strategic plans. Clearly, as described throughout
this book, a first is to include cross-cultural training specific to team members with whom the
interactions will take place. This can be followed up by an initial face-to-face group meeting to
develop trust, feel out communication styles, and iron out practical matters such as the language
to use and the time of day for virtual meetings that would work for everyone. From the team
leader’s perspective, it is also important to find a way to mesh leadership styles and be creative
about how the team as a whole can adapt to one another.66 Often, differences in the relative
emphasis and leadership styles depend on the stage of the project at hand. For example, as
concluded from a study by Zhang et al. on the scope of the project management process, team
members from the Netherlands wanted a very predetermined and formal process, compared
with team members from China, who preferred flexibility in the project goals and scope.67

EXPATRIATE TRAINING AND DEVELOPMENT
It is clear that preparation and training for cross-cultural interactions are critical. Nevertheless,
studies have shown that some MNCs provide only limited training to expatriates. The most
common reasons for insufficient predeparture training are: time constraints; training cost pres-
sures; the short-term nature of the assignments does not warrant consideration; the belief that
ideal candidates do not need predeparture training; and insufficient numbers of training experts.
Interestingly, European MNCs dedicate consider time and expenditure to expatriate training.68

A Global Relocation Trends Survey revealed that attrition rates for expatriates were more
than double the rate of nonexpatriates. It found that 21 percent of expatriates left their companies
during the assignments, and another 23 percent left within a year of returning from the assign-
ment.69 Moreover, about half of those who remain longer in their overseas assignment function
at a low level of effectiveness. The cost alone of a failed expatriate assignment ranges from
$200,000 to $1.2 million. The indirect costs may be far greater, depending on the expatriate’s
position. Relations with the host-country government and customers may be damaged, resulting
in a loss of market share and a poor reception for future PCNs.

Both cross-cultural adjustment problems and practical differences in everyday living present
challenges for expatriates and their families. Examples are evident from a survey of expatriates
in which they ranked the countries that presented the most challenging assignments to them,
along with some pet peeves from their experiences.

China: A continuing problem for expatriates; one complained that at his welcome banquet, he was
served duck tongue and pigeon head.

Brazil: Expatriates stress that cell phones are essential because home phones don’t work.

India: Returning executives complain that the pervasiveness of poverty and street children is over-
whelming.

Indonesia: Here you need to plan ahead financially because landlords typically demand rent two to
three years in advance.

Japan: Expatriates and their families remain concerned that, although there is excellent medical care,
the Japanese doctors reveal little to their patients.70

Even though cross-cultural training has proved to be of high value in making the assignment
a success, only 20 percent of companies surveyed had formal cross-cultural training for expatri-
ates.71 Much of the rationale for this lack of training is an assumption that managerial skills and
processes are universal. In a simplistic way, a manager’s domestic track record is used as the
major selection criterion for an overseas assignment.

In most countries, however, the success of the expatriate is not left so much to chance.
Foreign companies provide considerably more training and preparation for expatriates than
U.S. companies do. Therefore, it is not hard to understand why Japanese expatriates experi-
ence significantly fewer incidences of failure than their U.S. counterparts, although this may
be partially because fewer families accompany Japanese assignees. Japanese multinationals
typically have recall rates of below 5 percent, signifying that they send abroad managers
who are far better prepared and more adept at working and flourishing in a foreign envi-
ronment.72 The demands on expatriate managers have always been as much a result of the

9-4. To appreciate the necessity
of cross-cultural training,
job-specific training tech-
niques, and appropriate
compensation for expatri-
ate performance

CHAPTER 9 • STAFFING, TRAINING, AND COMPENSATION FOR GLOBAL OPERATIONS 303

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 experi-
ence with those relationships so that these problems may be addressed during predeparture
training. Problem recognition is the first stage in a comprehensive plan for developing expa-
triates. The three areas critical to preparation are cultural training, language instruction, and
familiarity with everyday matters.73 In the model shown in Exhibit 9-6, various development
methods are used to address these areas during predeparture training, postarrival training, and
reentry training. These methods continue to be valid and used by many organizations. Two-
way feedback between the executive and the trainers at each stage helps to tailor the level and
kinds of training to the individual manager. The desired goal is the increased effectiveness of
the expatriate because of familiarity with local conditions, cultural awareness, and his or her
family’s needs in the host country.

Evaluate potential problem areas Candidate lacks cultural familiarity.
Family relations and concerns.
Career needs of spouse.
Relations with host managers/community/government.
Coordination with headquarters.

Select expatriate Select candidate (and family) with best match with host country; cultural
flexibility/experience.
Consult reassignment needs with candidate.

Develop contract
family) in host country. Agree on career development resulting from the
assignment; commit help for spouse’s career.
Decide together on training needs.

Assess development and support needs Provide predeparture training as agreed for cultural awareness; language
training; familiarity with host country government/local community/local
firm operations and business practices/laws.
Provide trip to host if time allows.
Provide local mentor for post-arrival training and orientation.
Provide headquarters mentor for contact/support.
Get regular feedback.

Periodically evaluate effectiveness Retrain and resolve problems, or early repatriation if
and problem areas unresolved.

Repatriate after successful assignment Provide support for repatriation for reentry culture shock and for career
development on reentry. Get feedback on experiences.

Integrate value-added to firm Provide process of knowledge management to integrate expatriate’s
experience in the firm and develop global management cadre.

Debrief expatriate and family
to improve IHRM process

Agree on suitable financial and support package to maintain expatriate (and

ExHIBIT 9-6 IHRM Process to Maximize Effectiveness of Expatriate Assignments

304 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

Cross-Cultural Training
Training in language and practical affairs is quite straightforward, but cross-cultural training
is not; it is complex and deals with deep-rooted behaviors. The actual process of cross-cultural
training should result in the expatriate learning both content and skills that will improve interac-
tions with host-country individuals by reducing misunderstandings and inappropriate behaviors.

CULTURE SHOCK
The goal of training is to ease the adjustment to the new environment by reducing culture shock,
a state of disorientation and anxiety about not knowing how to behave in an unfamiliar culture. The
cause of culture shock is the trauma people experience in new and different cultures, where they
lose the familiar signs and cues that they had used to interact in daily life and where they must learn
to cope with a vast array of new cultural cues and expectations.74 The symptoms of culture shock
range from mild irritation to deep-seated psychological panic or crisis. The inability to work effec-
tively, stress within the family, and hostility toward host nationals are the common dysfunctional
results of culture shock—often leading to the manager giving up and going home.

It is helpful to recognize the stages of culture shock to understand what is happening. Culture
shock usually progresses through four stages, as described by Oberg: (1) honeymoon, when posi-
tive attitudes and expectations, excitement, and a tourist feeling prevail (which may last up to
several weeks); (2) irritation and hostility, the crisis stage when cultural differences result in prob-
lems at work, at home, and in daily living—expatriates and family members feel homesick and
disoriented, lashing out at everyone (many never get past this stage); (3) gradual adjustment, a pe-
riod of recovery in which the expatriate gradually becomes able to understand and predict patterns
of behavior, use the language, and deal with daily activities, and the family starts to accept its new
life; and (4) biculturalism, the stage in which the manager and family members grow to accept and
appreciate local people and practices and become able to function effectively in two cultures.75
Many never get to the fourth stage—operating acceptably at the third stage—but those who do
report that their assignment is positive and growth oriented. In recognition of the importance of
helping expatriates adapt to the local environment, companies such as PepsiCo provide a number
of localized programs to aid the transition. PepsiCo’s 600 expats and their families are encouraged
to join the company’s health and wellness programs and various local sports programs such as
soccer in Dubai, ping-pong in China, and Zumba in Latin countries. The company believes such
activities help their people adjust to the new culture and get involved in the local community. In
addition, the company provides families language lessons and help with child tuition.76

In addition to family and organizational support, HCN coworkers can provide considerable
help for expatriate adjustment. A recent study by Ashish Mahajan and Soo Min Toh concluded
that expatriates who sought advice from HCN coworkers whom they felt were credible and like-
able reported greater satisfaction with their work and adjustment.77 Clearly, most expatriates
have a number of avenues at their disposal to help in the adjustment process for them and their
families if they seek them out and take advantage of the local coworkers and friends.

SUBCULTURE SHOCK
Similar to culture shock, though usually less extreme, is the experience of subculture shock.
This occurs when a manager is transferred to another part of the country where there are cul-
tural differences—essentially from what she or he perceives to be a majority culture to a mi-
nority one. The shock comes from feeling like an immigrant in one’s own country and being
unprepared for such differences. For instance, someone going from New York to Texas will
experience considerable differences in attitudes and lifestyle between those two states. These
differences exist even within Texas, with cultures that range from roaming ranches and high
technology to Bible-belt attitudes and laws to areas with a mostly Mexican heritage.78 As with
other regions in the world, expatriates coming to the United States might need considerable
adjustment after working in, say, San Francisco, California, and then being posted elsewhere in
the United States.

Training Techniques
Many training techniques are available to assist overseas assignees in the adjustment process, al-
though too often programs include only some language coaching and introduction to the host country.

CHAPTER 9 • STAFFING, TRAINING, AND COMPENSATION FOR GLOBAL OPERATIONS 305

Most training programs take place in the expatriate’s own country prior to leaving. Although
this is certainly a convenience, the impact of host-country programs can be far greater than those
conducted at home because there is no better way for someone to experience the culture and the
local people than actually being there. Some MNCs are beginning to recognize that there is no
substitute for on-the-job training (OJT) in the early stages of the careers of managers they hope
to develop into senior-level global managers. Exhibit 9-7 shows some global management devel-
opment programs for junior employees.

In addition, according to Eduardo Caride, Telefonica’s regional manager in Latin America,
there is no better training than the experience managers get by working in one country and then
being able to use that knowledge and experience in another country; in addition, the relationships
that are made around the world greatly facilitate business transactions.79 After assignments in
Miami, Telefonica’s head office in Spain, and then Argentina, he says:

I can tell you, it helps to have been on both sides of the world.80

Eduardo Caride, Telefonica, HaRvaRd business RevieW

INTEGRATING TRAINING WITH GLOBAL ORIENTATION
In continuing our discussion of strategic fit, it is important to remember that training programs,
like staffing approaches, should be designed with the company’s strategy in mind. Although it
is probably impractical to break down those programs into many variations, it is feasible at least
to consider the relative level or stage of globalization that the firm has reached, because obvious
major differences would be appropriate—for example, from the initial export stage to the full
global stage. Exhibit 9-8 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—
export, multidomestic, multinational, and global. It is noteworthy, for example, that the training
of host-country nationals for a global firm has a considerably higher level of scope and rigor than
that for the other stages and borders on the standards for the firm’s expatriates.

As a further area for managerial preparation for global orientation—in addition to training
plans for expatriates and for HCNs separately—there is a particular need to anticipate poten-
tial problems with the interaction of expatriates and local staff. In a study of expatriates and
local staff (inpatriates) in Central and Eastern European joint ventures and subsidiaries, Peterson
found that managers reported a number of expatriate behaviors that helped them integrate with
local staff but also some that were hindrances (see Exhibit 9-9).82 Clearly, this kind of feedback
from MNC managers in the field can provide the basis for expatriate training and help HCNs
anticipate and work with the expatriates to meet joint strategic objectives.

With new growth opportunities around the world, some MNCs have developed global
learning programs that encourage employees to think globally. One such company is financial

• ABB (Asea Brown Boveri) rotates about 500 managers around the world to different
countries every two to three years in order to develop a management cadre of transpatriates
to support their global strategy.

• PepsiCo has an orientation program for its foreign managers, which brings them to the
United States for one-year assignments in bottling division plants.

• British Telecom uses informal mentoring techniques to induct employees into the ways of
their assigned country; existing expatriate workers talk to prospective assignees about the
cultural factors to expect ( www.FT.com).

• Honda of America Manufacturing gives its U.S. supervisors and managers extensive
preparation in Japanese language, culture, and lifestyle and then sends them to the parent
company in Tokyo for up to three years.

• General Electric likes its engineers and managers to have a global perspective whether or
not they are slated to go abroad. The company gives regular language and cross-cultural
training for them so that they are equipped to conduct business with people around the
world (www. GE. com).

ExHIBIT 9-7 Corporate Programs to Develop Global Managers

306 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

services provider MasterCard, which provides services and support in over 200 countries. To
create a global mindset among its employees, MasterCard employs formal training programs,
short-term project teams, new technologies, and on-the-job business experiences. The company
also offers online language programs, as well as programs dealing with remote management and
cross-cultural communications so that employees learn to work effectively with co-workers and
customers worldwide.83

According to Mastercard’s Chief Learning Officer, Ann Schulte, “As we’ve built this global
payments network, one of our greatest strengths has been developing a workforce that reflects
the incredible diversity of the people and perspectives of the world. It’s allowed us to understand
and cater to the consumer experience in a way that has both a global consistency and local rel-
evance.”84 Thinking globally has become instinctive at MasterCard and has become woven into
the fabric of its leadership development framework.

Export Stage MNC Stage

Training Need: Low to moderate Training Need: High moderate to high

Content: Emphasis should be on
interpersonal skills, local culture, customer
values, and business behavior.

Content: Emphasis should be on
interpersonal skills, two-way technology
transfer, corporate value transfer,
international strategy, stress management,
local culture, and business practices.

Host-Country Nationals: Train to understand
parent-country products and policies.

Host-Country Nationals: Train in technical
areas, product and service systems, and
corporate culture.

MDC Stage Global Stage

Training Need: Moderate to high Training Need: High

Content: Emphasis should be on
interpersonal skills, local culture, technology
transfer, stress management, and business
practices and laws.

Content: Emphasis should be on global
corporate operations and systems, corporate
culture transfer, customers, global
competitors, and international strategy.

Host-Country Nationals: Train to familiarize
with production and service procedures.

Host-Country Nationals: Train for proficiency
in global organization production and
efficiency systems, corporate culture, business
systems, and global conduct policies.

ExHIBIT 9-8 Stage of Globalization and Training Design Issues81

Facilitates Integration Hinders Integration

Relationship-building Not using team concept

Speaking the local language Not learning local language

Knowledge sharing Withholding useful information

Cultural adaptability/flexibility Spouse and family problems in adjusting

Respect Superior and autocratic behavior

Overseas experience Limited time in assignment

Develop local value-added from venture Headquarters mentality

Encourage local innovation Dominate from head office

ExHIBIT 9-9 Factors That Facilitate or Hinder the Integration of Expatriate Staff with Local Staff

Source: Based on R. B. Peterson, “The Use of Expatriates and Inpatriates in Central and Eastern Europe
Since the Wall Came Down,” Journal of World Business 38 (2003), pp. 55–69.

CHAPTER 9 • STAFFING, TRAINING, AND COMPENSATION FOR GLOBAL OPERATIONS 307

Global relocation services provider Cartus takes the global mindset a step further by enhanc-
ing global competency development of its employees while helping its clients embrace a global
mindset. Cartus, for example, offers cross-cultural training programs for employees and their
families on extended overseas assignments.

Our clients’ need for a global mindset within the employee base drives our business, both
cross-cultural training and language training . . . Even international assignments for tech
transfer provide the opportunity for increasing global competency development, and ultimate
success requires it.85

Carolyn Ryffel, Director of Global Training Consultant Network and
Curriculum Design, Cartus

Compensating Expatriates
If you’re an expatriate working alongside another expatriate and you’re being treated
differently, it creates a lot of dissension.86

Christopher Tice, Manager,
Global Expatriate Operations, DuPont Inc

The significance of an appropriate compensation and benefits package to attract, retain, and
motivate international employees cannot be overemphasized. Compensation is a crucial link
between strategy and its successful implementation. There must be a fit between compensation
and the goals for which the firm wants managers to aim. So that they will not feel exploited, em-
ployees need to perceive equity and goodwill in their compensation and benefits whether they
are PCNs, HCNs, or TCNs. The premature return of expatriates or the unwillingness of man-
agers 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. One company that
recognizes the need for a reasonable degree of standardization in its treatment of expatriates is
DuPont. The company has centralized programs in its Global Transfer Center of Expertise for
its approximately 400 annual international relocations so its expatriates know that everyone is
getting the same package.

Expatriate costs include initial costs (i.e., one-time costs incurred at the beginning of
expatriate assignments); assignment-specific costs (i.e., ongoing costs that arise during a par-
ticular expatriate assignment); and repatriation costs (i.e., costs that arise at the conclusion of
an expatriate assignment). From the firm’s perspective, the high cost of maintaining appropri-
ate compensation packages for expatriates has led many companies—Colgate-Palmolive, Chase
Manhattan Bank, Digital Equipment, General Motors, and General Electric, among others—to
find ways to cut the cost of PCN assignments as much as possible. According to a relocation
consulting firm, “A USD $100,000/year manager assigned overseas can cost a company over one
million dollars during the duration of a typical 3-year assignment.”87

Firms try to cut overall costs of assignments by either extending the expatriate’s tour, since
turnover is expensive—especially when there is an accompanying family to move—or assigning
expatriates to a much shorter tour as an unaccompanied assignment.

Designing and maintaining an appropriate compensation 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. The problem is that although little variation in typical execu-
tive salaries at the level of base compensation exists around the world, a wide variation in net
spendable income is often present. U.S. executives abroad may receive more in cash and stock,
but they have to spend more for what foreign companies provide, such as cars, vacations, and
entertainment allowances. In addition, the manager’s purchasing power with that net income is
affected by the relative cost of living. The cost of living is considerably higher in most of Europe
than in the United States. In designing compensation and benefit packages for PCNs, then, the
challenge to IHRM professionals is to maintain a standard of living for expatriates equivalent to
their colleagues at home, plus compensating them for any additional incurred costs. This policy
is referred to as “keeping the expatriate whole.”88

To ensure that expatriates do not lose out through their overseas assignment, the balance
sheet approach, or home-based method (see Exhibit 9-10 for an example), is often used to
equalize the standard of living between the host country and the home country and add some
compensation for inconvenience or qualitative loss.

308 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

According to Mercer’s 2017 International Assignment Survey, 31 percent of the MNC re-
spondents pay expatriates in the home currency, 23 percent pay expatriates in the host currency,
while 27 percent of the respondents split the expatriate compensation between home- and host-
country currencies. The study found that U.S. MNCs are less likely to split expatriate compensa-
tion between the two currencies compared to European MNCs. Instead, 54 percent of the U.S.
MNC respondents pay the entire expatriate salary in the home country currency.

The core principle of the balance sheet calculation is the notion of avoiding gains and losses.
That is, an expatriate should derive no gains nor incur any losses stemming from cost-of-living
differences or currency appreciation (depreciation). As a result, expatriate compensation tends
to consist of (1) spendable income for daily living expenditures in the host country and (2)
nonspendable income for savings and other expenditures such as education and housing (e.g.,
furniture, rent, and mortgages). This component may also include mobility premiums and hard-
ship allowances paid by the MNC.89

In fairness, the MNC is obliged to make up additional costs that the expatriate would incur
for taxes, housing, and goods and services. The tax differential is complex and expensive for the
company, and MNCs generally use a policy of tax equalization. This means that the company
pays any taxes due on any type of additional compensation that the expatriates receive for their
assignments; the expatriates pay in taxes only what they would pay at home. The burden of
foreign taxes can be lessened, however, by efficient tax planning—a fact that small firms often
overlook. The timing and methods of paying people determine what foreign taxes are incurred.
For example, a company can save on taxes by renting an apartment for the employee instead of
providing a cash housing allowance. All in all, MNCs have to weigh the many aspects of a com-
plete compensation package, especially at high management levels, to effect a tax equalization
policy. The total cost to the company can vary greatly by location; for example:

Expatriates in Germany may incur twice the income tax they would in the U.S., and they are
taxed on their housing and cost-of-living allowances as well. This financial snowball effect is a
great incentive to make sure we really need to fill the position with an expatriate.90

Managing expatriate compensation is a complex challenge for companies with overseas
operations. All components of the compensation package must be considered in light of both
home- and host-country legalities and practices. Those components include:

Salary: Local salary buying power and currency translation, as compared with home salary; bonuses
or incentives for dislocation

Taxes: Equalizing any differential effects of taxes as a result of expatriate’s assignment

Allowances: Relocation expenses; cost-of-living adjustments (COLA); housing allowance for as-
signment and allowance to maintain house at home; trips home for expatriate and family; private
education for children

Benefits: Health insurance; stock options

Sample Components for Expat Chicago Tokyo Mexico City

Base Salary 1 COLA $100,000 $150,000 $75,000

Relocation Allowance (20%) 30,000 15,000

Housing Allowance (20%) 30,000 15,000

Private Education for Two Children 30,000 20,000

Two Trips per Year Home for Four 12,000 10,000

$100,000 252,000 135,000

Additional costs not estimated here include any local tax differential, health insurance,
placement services for spouse, moving expenses and home sale, predeparture training and
preparation, etc., as well as other negotiated items. In some “dangerous” locales, there will be
additional costs pertaining to the safety of personnel, such as insurance, security guards, etc.

ExHIBIT 9-10 The Balance Sheet Approach to Expatriate Compensation Package—
Hypothetical Examples (Estimates in U.S. Dollars)

CHAPTER 9 • STAFFING, TRAINING, AND COMPENSATION FOR GLOBAL OPERATIONS 309

The localization, or going-rate, approach pays the expatriate the going rate for similar
positions in the host country, plus whatever allowances and benefits for the assignment that the
manager negotiates. With the basic pay similar to other managers in the host country, no mat-
ter where they come from, there is less resentment and more opportunity for open cooperation.
However, when the going rate in a location is less than that in the home country—which is likely
to be the case with a U.S.-based expatriate—she or he is likely to be reluctant to accept that as-
signment unless there are considerable perks in addition to the salary.

With the increasing number of companies that operate around the world and assign and move
personnel (whether one calls them expatriates, transpatriates, or inpatriates) from one country to
another, the design of equitable pay scales has become exceedingly complex. In an International
Assignments Policies and Practices Survey by KPMG, companies noted the need to “review
mobility policies to focus on harmonization of the treatment of globally mobile employees.”91
Should those managers in similar positions who come from different countries to a host country
be paid according to the MNE headquarters location, or the host location, or that manager’s
home location? Or should they all be paid the same according to a globally determined rate for
that job? Further complications arise from any legal or cultural restrictions on compensation in
a particular location.

Most important, to be strategically competitive, the compensation package must be compar-
atively attractive to the kinds of managers the company wishes to hire or relocate. Some of those
managers will, of course, be local managers in the host country. This, too, is a complex situation
requiring competitive compensation policies that can attract, motivate, and retain the best local
managerial talent. In many countries, however, it is a considerable challenge to develop compen-
sation packages appropriate to the local situation and culture while also recognizing the differ-
ences between local salaries and those expatriates or transpatriates expect (that difference itself
often being a source of competitive advantage).

TRAINING AND COMPENSATING
HOST-COUNTRY NATIONALS
Training HCNs
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 indi-
genization policy. Furthermore, multinational companies like to have well-trained managers with
broad international experience available to take charge in many intercultural settings, whether at
home or abroad, and, increasingly, in developing countries.

Kimberly-Clark, for example, with more than 60,000 employees around the world, has
steadily increased its talent development and training programs in all countries but, more re-
cently, has focused on developing markets. “In Latin America, the average employee has gone
from receiving practically no training time to about 38 hours each year. By contrast, workers in
Europe now receive 40 hours per year—eight hours more than in 1996.”92

Training for HCNs by foreign companies operating in the United States can be quite surpris-
ing for managers operating in their own country when they have to learn new ways. Toyota is
an example of how employees at all levels must be trained in the Toyota Way. As recounted by
Ms. Newton, a 38-year-old Indiana native who joined Toyota after college 15 years ago and now
works at the North American headquarters in Erlanger, Kentucky:

For Americans and anyone, it can be a shock to the system to be actually expected to make
problems visible. Other corporate environments tend to hide problems from bosses.93

What Ms. Newton is referring to are the colored bar charts against a white bulletin board,
which represent the work targets of individual workers, visibly charting their successes or fail-
ures to meet those targets. This is part of the Toyota Way. The idea is not to humiliate but to
alert coworkers and enlist their help in finding solutions. Ms. Newton, now a general manager in
charge of employee training and development at Toyota’s North American manufacturing sub-
sidiary, said it took a while to accept that fully.94

9-5. To discuss the role of host
country managers and the
need for their training and
appropriate compensation
packages

310 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

Certainly, there is no arguing with success—in 2009, Toyota became the largest global automaker
in sales. The training institute in Mikkabi has trained more than 700 foreign executives, including
cultural orientation with the same intensity as its training in the production processes. Core concepts
such as ownership of problems and visibility are impressed upon new employees. A sense of shared
purpose is conveyed with open offices—often without even cubicle partitions between desks.95

In 2015, Toyota’s newest Kentucky plant began production of its luxury brand, Lexus ES
350, which required more time for each production step, more sensory tasks, and more special-
ized skills. Roughly 75 percent of the Lexus employees came from its Camry plant. Toyota’s
Camry workers were transferred only to Lexus areas where there was a skill match. This HR
initiative proved so effective that Toyota employed it throughout its Kentucky operations.

The Lexus staff received roughly 1.5 million hours of training, mostly from Lexus trainers
who were brought in from Japan. The U.S. Lexus plant workers were trained on the principles of
Takumi, or master craftsman, which is an expertise that is revered and highly valued in the Lexus
plants in Japan. The Lexus training also embraced kodawari, which is a Japanese principle that
means every tiny detail matters. For example, the plant’s master stitcher was required to master
origami with the nondominant hand in order to enhance dexterity. Similarly, Lexus workers had
to learn to use their senses “to detect a flaw that is as minute as a thread of human hair.” The
Lexus training involved extensive book learning as well.

Before those team members ever touched a car, they were required to learn, then recite from
memory, the information held in those pages. Which on average was 90 steps per process.96

Wil James, President of Toyota Manufacturing USA

Many multinationals, in particular chains, wish to train their local managers and workers to
bridge the divide between, on the one hand, the firm’s successful corporate culture and practices
and, on the other, the local culture and work practices. One example of how to do this in China is
Starbucks, which is featured in the following “Management in Action.”

MANAGEMENT IN ACTION
Starbucks’ Java Style Helps to Recruit, Train, and Retain
Local Managers in China

When we first started, people didn’t know who we were and it was rough finding sites. Now
landlords are coming to us.

David Sun,
President of Beijing Mei Da Coffee Company (Former Starbucks Partner for

Northern China), THe eConomisT, October 6, 2001

A s we see from the preceding quote, Starbucks has achieved a remarkable penetration rate in
China, given that it is a country of devoted tea drinkers who do not take readily to the taste of
coffee.

Starbucks is no stranger to training leaders from around the world into the Starbucks style. As of
2019, Starbucks has 24,000 store-owned and licensed locations in 75 countries, as detailed here:

Locations around the globe: Argentina, Aruba, Australia, Austria, Bahamas, Bahrain, Belgium,
Bolivia, Brazil, Brunei, Bulgaria, Canada, Chile, Mainland China, Colombia, Costa Rica, Curacao,
Cyprus, Czech Republic, Denmark, Egypt, El Salvador, Finland, France, Germany, Greece, Guatemala,
Hong Kong, Hungary, India, Indonesia, Ireland, Japan, Jordan, Korea, Kuwait, Lebanon, Macau, Malaysia,
Mexico, Monaco, Morocco, Netherlands, New Zealand, Norway, Oman, Panama, Peru, Philippines, Poland,
Portugal, Puerto Rico, Qatar, Romania, Russia, Saudi Arabia, Singapore, Spain, Sweden, Switzerland,
Taiwan, Thailand, Turkey, United Arab Emirates, United Kingdom, United States, and Vietnam.97

As of 2018, Starbucks has 3,600 stores in over 150 cities throughout China. According to the com-
pany’s China CEO, Belinda Wong, “Starbucks is opening one store in China every 15 hours.”98

Company managers nevertheless have had quite a challenge in recruiting, motivating, and retaining
managers for its Beijing outlets (and, more recently, in its Qunguang Square outlet in Central China).
Starbucks’ primary challenge has been to recruit good managers in a country where the demand for
local managers by foreign companies expanding there is far greater than the supply of managers with
any experience in capitalist-style companies. Chinese recruits have stressed that they are looking for an

CHAPTER 9 • STAFFING, TRAINING, AND COMPENSATION FOR GLOBAL OPERATIONS 311

opportunity to train and advance in global companies rather than for money. They know that managers
with experience in Western organizations can always get a job. The brand’s pop-culture reputation is
also an attraction to young Beijingers.

In the early days of Starbucks China, the company exposed the recruits to java-style culture as well
as trained them for management. Starbucks brought them to Seattle, Washington, for three months to
give them a taste of the West Coast lifestyle and the company’s informal culture, such as Western-style
backyard barbecues.

Then they were exposed to the art of cappuccino making at a real store before dawn and concoct-
ing dozens of fancy coffees. They received the same intensive training as anyone else anywhere in the
world. One recruit, Mr. Wang, who worked in a large Beijing hotel before finding out how to make a
triple grande latte, said that he enjoyed the casual atmosphere and respect. The training and culture were
very different from what one would expect at a traditional state-owned company in China, where the
work was strictly defined and has no challenge for employees.

In 2012, Starbucks reaffirmed its long-term commitment to China by establishing Starbucks China
University. The University offers training programs, for example, that deal with coffee knowledge and
culture training. Moreover, it provides customized courses in retail and related training as well as leader-
ship development vis-à-vis digital and mobile platforms.

Our partners are at the heart and soul of our signature Starbucks experience and also the
cornerstone of Starbucks success. It is therefore critical that Starbucks continues to invest in
their development.99

Belinda Wong, current CEO, Starbucks China

Ms. Wong’s commitment to training and professional development is reinforced by the growing need
for managerial talent. In 2018, she reflected on Starbuck’s growth in China, “I need to promote a store man-
ager every day. . . I need to promote a district manager once a week and an area director once a quarter.”100

Starbucks has found that motivating their managers in Beijing is multifaceted. They know that peo-
ple won’t switch jobs for money alone. They want to work for a company that gives them an opportunity
to learn. They also want to have a good working environment and a company with a strong reputation.
The recruits have expressed their need for trust and participation in an environment where local nation-
als traditionally are not expected to exercise initiative or authority. In all, what seems to motivate them
more than anything else is their dignity.

Source: www.Starbucks.com, Corporate Information, April 16, 2019; Associated Press, “Starbucks
Reorganizes for Growth,” www.nytimes.com; J. Adamy, “Starbucks Raises New-Stores Goal, Enters iTunes
Deal,” Wall Street Journal, October 6, 2006; “China: Starbucks Opens New Outlet in Beijing,” Info-Prod
(Middle East) Ltd., July 20, 2003; “Coffee with Your Tea? Starbucks in China,” Economist, October 6, 2001.

FIGURE 9-1 A Starbucks Coffee Shop in Old Beijing-Style Building
in Beijing, China

http://www.nytimes.com

http://www.Starbucks.com

312 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

Many HCNs are, of course, receiving excellent training in global business and Internet tech-
nology within their home corporations. For example, the German media company Bertelsmann
has specialized training programs to develop and retain local managers. In India, for example,
its high-potential employees can apply for an INSEAD Global Executive MBA.101 Whether in
home corporations, MNC subsidiaries, or joint ventures in any country, managerial training to fa-
cilitate e-business adoption is taking on increasing competitive importance to take advantage of
new strategic opportunities. Although large companies are well ahead of the curve for informa-
tion and communication technologies (ICT), there is considerable need for small and medium-
sized enterprises (SMEs) to adopt such knowledge-creating capabilities.

Managerial training in ICT is particularly critical for firms in new economy and emerging
markets and, taken together, can provide advantage for rapid economic growth in regions such
as Eastern Europe. Research by Damaskopoulos and Evgeniou addressed these needs by survey-
ing more than 900 SME managers in Slovenia, Poland, Romania, Bulgaria, and Cyprus. Although
most managers recognized the opportunities in implementing e-business strategies, they also noted
the urgent need for training to take advantage of those opportunities. Some of the training needs
and issues those SME managers perceived are shown below. Some of these factors are at the firm
level, whereas other issues relate to the market and regulatory levels, such as the need to increase
security for commercial activity on the Internet.102 Such findings highlight the need to recognize
the strategy-staffing-training link and its importance to the overall growth of emerging economies.

Training Priorities for E-Business Development103

• How to develop a business plan and an e-business strategy

• How to develop the partnerships and in-house expertise for e-business

• How to finance e-business initiatives

• Addressing security and privacy concerns

• How to set up electronic payments

• How to develop good customer relations on the Internet

• Training in technology management

• How to collect marketing intelligence online

In another common scenario also requiring the management of a mixture of executives and
employees, American and European MNCs presently employ Asians as well as Arab locals in
their plants and offices in Saudi Arabia, bringing together three cultures: well-educated Asian
managers living in a Middle Eastern, highly traditional society who are employed by a firm
reflecting Western technology and culture. This kind of situation requires training to help all par-
ties effectively integrate multiple sets of culturally based values, expectations, and work habits.

Compensating HCNs
How do firms deal with the question of what is appropriate compensation for host-country
nationals, given local norms and the competitive needs of the firm? For the most part, firms adjust
pay according to market conditions and design methods for job grading and incentive plans.104

Of course, no one set of solutions can be applicable in any country. Many variables apply—
including local market factors and pay scales, government involvement in benefits, the role of
unions, the cost of living, and so on. In Eastern Europe, for example, Hungarians, Poles, and
Czechs spend a considerable portion of their disposable income on food and utilities. Therefore,
East European managers must have cash for about 65 to 80 percent of their base pay, compared to
about 40 percent for U.S. managers (the rest being long-term incentives, benefits, and perks). In
addition, they still expect the many social benefits the old government provided. To be competitive,
MNCs can focus on providing goods and services that are either not available at all or are extremely
expensive in Eastern Europe. Such upscale perks can be used to attract high-skilled workers.

In Japan, in response to a decade-long economic slump, companies are revamping their
HRM policies to compete in a global economy. The traditional lifetime employment and guaran-
teed tidy pension are giving way to the more Western practices of competing for jobs, of basing
pay on performance rather than seniority, and of making people responsible for their own retire-
ment fund decisions.105

CHAPTER 9 • STAFFING, TRAINING, AND COMPENSATION FOR GLOBAL OPERATIONS 313

A key concern of Western managers in China and India, as well as of the firms that outsource
there, is the rapidly rising pay rates in those countries and a shortage of top talent. This talent
shortage is especially problematic in India. With the considerable growth in emerging markets,
foreign firms trying to get on the bandwagon there are finding themselves in a war for talent.
With that kind of supply–demand ratio for local skilled managers, salaries are being pushed up;
that situation then lowers the rationale for hiring local managers instead of sending expatriates.

According to Citigroup, it is also imperative to make clear what benefits, as well as salary,
come with a position because of the way compensation is perceived and regulated around the
world.106 In Latin America, for example, an employee’s pay and title are associated with what
type of car he or she can receive.

CONCLUSION
The IHRM function is a vital component of implementing the global strategy of a firm. In par-
ticular, managing the IHRM functions for and in emerging and developing markets presents
complex challenges at all employee levels; these include the war for talent for managerial and
professional people and the issues of outsourcing employees in those markets. Careful decisions
regarding the appropriate staffing policy for foreign locations are crucial to the success of the
firm’s operations, particularly because of the lack of proximity to and control by headquarters
executives. In particular, the ability of expatriates to initiate and maintain cooperative relation-
ships with local people and agencies will determine the long-term success, even the viability, of
the operation. In a real sense, a company’s global cadre represents its most valuable resource.
Proactive management of that resource by headquarters will result in having the right people in
the right place at the right time, appropriately trained, prepared, and supported. MNCs using
these IHRM practices can anticipate the effective management of the foreign operation, the fos-
tering of expatriates’ careers, and, ultimately, the enhanced success of the corporation.

Summary of Key Points

■ Global human resource management is a vital component
of implementing global strategy and is increasingly rec-
ognized as a major determinant of success or failure in
international business.

■ The main staffing alternatives for global operations
are the ethnocentric, polycentric, regiocentric, and
global approaches; the use of inpatriates supplements
those choices. Each approach has its appropriate uses,
according to its advantages and disadvantages and, in
particular, the firm’s strategy.

■ The causes of expatriate failure include the follow-
ing: poor selection based on inappropriate criteria,
inadequate preparation before assignment, alienation

from headquarters, inability of manager or family to
adapt to local environment, inadequate compensation
package, and poor programs for career support and
repatriation.

■ The three major areas critical to expatriate prepara-
tion are cultural training, language instruction, and
familiarity with everyday matters.

■ Appropriate and attractive compensation packages
must be designed by IHRM staffs to sustain a com-
petitive global expatriate staff. Compensation pack-
ages for host-country managers must be designed to
fit the local culture and situation as well as the firm’s
objectives.

Discussion Questions

9-1. What are the major alternative staffing approaches for interna-
tional operations? Explain the relative advantages of each and
the conditions under which you would choose one approach
over another.

9-2. Why is the HRM role so much more complex, and important,
in the international context?

9-3. Discuss the challenges involved in staffing operations in
emerging markets.

9-4. Explain the common causes of expatriate failure. What are
the major success factors for expatriates? Explain the role
and importance of each.

9-5. What are the common training techniques for managers going
overseas? How should these vary as appropriate to the level
of globalization of the firm?

9-6. Explain the balance sheet approach to international com-
pensation packages. Why is this approach so important?
Discuss the pros and cons of aligning the expatriate
compensation package with the host-country colleagues
compared to the home-country colleagues.

9-7. Discuss the importance of a complete program for expatriate
performance management. What are the typical components
for such a program?

314 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

Application Exercises

9-8. Make a list of the reasons you would want to accept a for-
eign assignment and a list of reasons you would want to reject
it. Do they depend on the location? Compare your list with a
classmate’s and discuss your reasons.

9-9. Research a company with operations in several countries and
ascertain the staffing policy used for those countries. Find out
what kinds of training and preparation are provided for expa-
triates and what kinds of results the company is experiencing
with expatriate training.

Experiential Exercise

This can be done in groups or individually. After the exercise,
discuss your proposals with the rest of the class.

You are the expatriate general manager of a British com-
pany’s subsidiary in Brazil, an automobile component parts
manufacturer. You and your family have been in Brazil for
seven years, and now you are being reassigned and replaced
with another expatriate—Helen Fleming. Helen is bringing
her family: Rupert, an instructor in computer science, who
hopes to find a position; a son, age twelve; and a daughter,
age fourteen. None of them has lived abroad before. Helen
has asked you what she and her family should expect in the

new assignment. Remembering all the problems you and your
family experienced in the first couple of years of your assign-
ment in Brazil, you want to facilitate their adjustment and
have decided to do two things.

9-10. Write a letter to the new expatriate about what to expect both
on the job and in the community. Tell the new expat about
some of the cross cultural conflicts that may be encountered
with coworkers and employees and how to handle them.

9-11. Set up some arrangements and support systems for the fam-
ily and design a support package for them, with a letter to
each family member about what to expect.

CASE STUDY
Kelly’s Assignment in Japan

Well, it’s my job that brought us here in the first place . . . I am going to have to make a decision to
stick with this assignment and hope I can work things out or to return to the United States and prob-
ably lose my promised promotion after this assignment—maybe even my job.

As she surveyed the teeming traffic of downtown Tokyo from her office window, Kelly tried
to assess the situation her family was in, how her job was going, and what could have been done
to lead to a better situation four months ago when she was offered the job.

As a program manager for a startup Internet services company, she had been given the op-
portunity to head up the sales and marketing department in Tokyo. Her boss said that “the sky’s
the limit” as far as her being able to climb the corporate ladder if she was successful in Tokyo.
She explained that she did not speak Japanese and that she knew nothing about Japan, but he
said he had confidence in her because she had done such a great job in Boston and in recent
short assignments to London and Munich. Moreover, the company offered her a very attractive
compensation package that included a higher salary, bonuses, a relocation allowance, a rent-free
apartment in Tokyo, and an education allowance for their two children, Lisa and Sam, to attend
private schools. She was told she had two days to decide, and that they wanted her in Tokyo in
three weeks because they wanted her to prepare and present a proposal for a new account op-
portunity there as soon as possible. Her boss said they would hire a relocation company to handle
the move for her.

That night Kelly excitedly discussed the opportunity with her husband, Joe. He was glad for
her and thought it would be an exciting experience for the whole family. However, he was con-
cerned about his own job and what the move would do to his career. She told him that her boss
had said that Joe would probably find something or be transferred there, but that her boss did seem
unconcerned about that. In the end, Joe felt that Kelly should have this opportunity, and he agreed
to the move. He talked to his boss about a transfer and was told that the manager would look into
that and get back to him. However, he knew that his company was having layoffs because of the

CHAPTER 9 • STAFFING, TRAINING, AND COMPENSATION FOR GLOBAL OPERATIONS 315

economic decline that was taking its toll on profits. The problem was that Kelly had to make a
decision before he could fully explore his options, so Kelly and Joe decided to go ahead with the
plans. To sweeten the deal, Kelly’s company had offered to buy her house in Boston since the
housing market decline had her concerned about whether she could sell without taking a loss.

After the long trip, they arrived at their apartment in Tokyo; they were tired but excited, but
did not anticipate that the apartment would be so tiny, given the very high rent that the company
was paying for it. Kelly realized at once that they had included way too much in their move of
personal belongings to be able to fit into this apartment. Undaunted, they planned to spend the
weekend sightseeing and looked forward to some travel. Japan was beautiful in the spring, and
they were anxious to see the area.

On Monday, Kelly took a cab to the office. She had emailed requesting a staff meeting at
9 a.m. She knew that her immediate staff would include seven Japanese, two Americans, and two
Germans—all men. Her assistant, Peter, to whom she had not yet spoken, was an American who
had also just arrived, coming from an assignment in London. He greeted her at the elevator, look-
ing surprised, and they proceeded to the conference room, where everyone was awaiting the new
boss. Kelly exchanged the usual handshake greetings with the Westerners and then bowed to the
Japanese; an awkward silence and exchange took place, with the Japanese looking embarrassed.
While she attempted a greeting in her limited Japanese that she had studied on the plane, she was
relieved to find that the Japanese spoke English, but they seemed very quiet and hesitant. Peter
then told her that they all thought that “Kelly” was a man, and they all attempted a laugh.

After that, Kelly decided that she would just meet with Peter and postpone the general meet-
ing until the next day. She asked them each to prepare a short presentation for her on their ideas
for the new account. Whereas the Americans and Germans said they would have it ready, the
Japanese seemed reluctant to commit themselves.

Meanwhile, at home Joe was looking into the schools for the children and trying to make
some contacts to look for a job. Travelling, getting information, and shopping for groceries
proved bewildering, but they decided that they would soon get acquainted with local customs.

At the office the next day, Kelly received a short presentation from the Westerners on the staff,
but when it came to the Japanese, they indicated that they had not yet had a chance to meet with
their groups and other contacts to come to their decisions. Kelly asked them why they had not told
her the day before that they needed more time, and when could they be ready. They seemed unwill-
ing to give a direct answer and kept their eyes lowered. In an attempt to lighten the atmosphere
and get to know her staff, Kelly then began chatting casually and asked several of them about their
families. The Americans chatted on about their children’s achievements, the Germans talked about
their family positions, and the Japanese went silent, seemingly very confused and offended.

Still attempting to get everyone’s ideas for an initial proposal to the potential new client,
Kelly later asked one of the Americans who had been there for some time what he thought was
the problem and delay in getting presentations from the Japanese. He told her that they did not
like to do individual presentations, but rather wanted to gain consensus among themselves and
their contacts and present a group presentation. Having learned her lesson, but feeling irritated,
she asked him to intervene and have the presentations ready for the next week. When that time
came, the Japanese made the rest of the presentations but, oddly, they seemed to be addressed
primarily to Peter. Later, Kelly decided to finalize her own presentation to put forth a proposal
for the client, which she set up for the following week.

At home, Joe said that he had not heard anything from his company in Boston and asked Kelly
to contact her company again to request some networking in Tokyo that might lead to job oppor-
tunities for him. Kelly said she would do that, but that there didn’t seem to be any one person back
home who was keeping up with her situation or giving any support about that or about her job.

The children, meanwhile, complained that, although their schools were meant to be bilin-
gual English–Japanese, a majority of the children were Japanese and did not speak English; Lisa
and Sam felt confused and left out. They were disoriented by the different customs, classes, and
foods for lunch. At home, they complained that there was no backyard to go out to play, and they
could not get their programs on the television or understand the Japanese programs.

Back at the office, Kelly worked with her staff to finalize the proposal but noticed a strained
atmosphere. Peter told her that some of them would drop by a local bar for a drink after work,
which helped the whole group to relax together. However, she felt that she could not do that, nor
that she would be accepted as a female.

316 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

The next week, as arranged, Kelly and Peter went to the offices of the client; she knew that
a lot was riding on getting this big new contract. She had asked Peter to let them know ahead of
time that she is a woman, yet the introductions still seemed strained. She planned to get straight
down to business, so when the client company’s CEO handed her his business card, she put it
in her pocket without a glance and did not give him her card. Again, she noticed some shock
and embarrassment all around. (She found out much later that a business card is very important
to a Japanese businessman because it conveys all his accomplishments and position without
having to say it himself.) Flustered, she tried to make light of the situation, patted him on the
back, and asked him what his first name was, saying, rather loudly, that hers was Kelly. He went
quiet again, backed away from her, and, with his head bowed, whispered, “Michio.” He glanced
around at his Japanese colleagues rather nervously.

After a period of silence, Michio pointed to the table of refreshments, and indicated that they
sit and eat; however, Kelly was anxious to present her PowerPoint slides and went to the end of
the table where the equipment was and asked Peter to set up the slides. As she proceeded to go
through the proposal, telling them what her company could do for them, she paused and asked
for questions. However, when Michio and his two colleagues asked questions, they directed them
to Peter, not to her. In fact, they made little eye contact with her at all. She tried to remain cool,
but insisted on answering the questions herself. In the end, she sat down and asked Michio what
he thought of the proposal. He bowed politely and said, “Very good,” and that he would discuss
it with his colleagues and get back to her. However, Kelly did not hear from them, and after a
couple of weeks, she asked Peter to follow up with them. He did that but reported that they were
not going to pursue the contract. Frustrated, she said, “Well, why did Michio say that it looked
very good, then?” She knew that it was a very competitive proposal and felt that something other
than the proposed contract was to blame for the loss of the contract.

Disillusioned, but determined not to give up without success in the assignment, Kelly took a
cab to go home and think about it, but the driver misunderstood her and went the wrong way and
got stuck in traffic. She felt discouraged and wished that she had some female American friends
to whom she could confide her problems.

When Kelly got home, Peter was angrily trying to fix dinner, complaining about the small
appliances and inability to understand the food packages or how to prepare the food. He said he
needed something else to do, but that a job did not seem to be on the horizon for him. He was
also concerned about continuing to live in such a high-cost city on only one salary.

Kelly went to the other room to see the children; they were fighting and complaining that they
had nothing to do and wanted to go home. Kelly felt that the three months they had been there was
not a fair trial and was wondering what to do. She wished she had had more time to prepare for
this assignment, and whenever she contacted the home office, no one seemed able to advise her.

Case Questions

9-12. Explain the clashes in culture, customs, and expectations that occurred in this situation.
9-13. What stage of culture shock is Kelly’s family experiencing?
9-14. Turn back the clock to when Kelly was offered the position in Tokyo. What, if anything, should

have been done differently and by whom?
9-15. You are Kelly. What should you do now?

Endnotes

1. 2015 Brookfield Global Relocation Trends Survey, www
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September 17, 2008; “Talent Retention: Ongoing Problem for
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2. 2015 Brookfield Global Relocation Trends Survey, www
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3. Global Mobility Solutions, Global Relocation Service: Workforce
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CHAPTER 9 • STAFFING, TRAINING, AND COMPENSATION FOR GLOBAL OPERATIONS 317

4. Ibid.
5. Douglas A. Ready, Linda A. Hill, and Jay A. Conger, Winning

the Race for Talent in Emerging Markets. Harvard Business
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6. Martin Dewhurst, Matthew Pettigrew, and Ramesh Srinivasan,
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7. R. Pells, Times Higher Education, March 1, 2018, www
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8. Sirkin, 2008.
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and D. Welch, Decoding Global Talent 2018, www.bcg.com
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10. Ibid.
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13. Ready et al., 2008.
14. Ibid.
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17. Ibid.
18. Ibid.
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2019).
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29. J. Stewart Black and Allen J. Morrison, A Cautionary Tale for
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30. Ibid.; “International Assignments Remain on the Upswing
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31. Ibid.
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Leaders,” New York Times, June 21, 2012, p. B.3.
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35. Lynda Gratton, “Workplace 2025—What Will It Look Like?”
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40. Martin Dewhurst, Matthew Pettigrew, and Ramesh Srinivasan,
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44. Ibid.
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Miriam Moeller, Corralling the ‘Horses’ to Staff the Global
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48. Rochelle Kopp, International Human Resource Policies
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49. Based on, updated, and adapted by H. Deresky, from original
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50. R. L. Tung, Selection and Training of Personnel for Overseas
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51. P. Dowling and R. S. Schuler, International Dimensions of
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318 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

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53. Company information, http://www.ABB.com, accessed July 26,
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54. http://www.GMACGlobalrelocation.com, accessed March 1,
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55. Ed Hannibal, Yvonne Traber, and Paul Jelinek, “Tracking Your
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56. 2014 Global Mobility Talent Trends Survey, Brookfield Global
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57. HRMagazine 60, No. 3 (April 2015), pp. 63–65.
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60. Theresa Minton-Eversole, “Best Expatriate Assignments
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61. M. G. Tye and P. Y. Chen (2005), Selection of Expatriates:
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62. D. Erbacher, B. D’Netto, and J. Espana, Expatriate Success in
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63. Rosalie Tung, American Expatriates Abroad: From Neophytes to
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64. A. Clegg, “Expatriate Employees Struggle to Readjust to Old
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65. Business Wire, 2006.
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69. Ying Zhang, Christopher Marquis, Sergey Filippov, Henk-
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70. Ibid.
71. Ibid.
72. Tung, 1998.
73. Mendenhall and Oddou.
74. K. Oberg, Culture Shock: Adjustments to New Cultural

Environments. Practical Anthropology, July–August 1960,
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75. Ibid.

76. Lynette Clemetson, The Pepsi Challenge: Helping Expats Feel At
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77. Ashish Mahajan and Soo Min Toh, Facilitating Expatriate
Adjustment: The Role of Advice-Seeking from Host Country
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78. Ibid.
79. Eduardo Caride, Diversifying Talent to Suit the Market. Harvard

Business Review, September 2014.
80. Ibid.
81. R. B. Peterson, The Use of Expatriates and Inpatriates in Central

and Eastern Europe since the Wall Came Down. Journal of World
Business 38 (2003), pp. 55–69.

82. Based on J. S. Black, Mark E. Mendenhall, Hal B. Gregersen,
and Linda K. Stroh, Globalizing People through International
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83. M. Weinstein, “World-Class Leaders. Training,” May/June 2012,
https://trainingmag.com/content/world-class-leaders/ (accessed
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84. Ibid.
85. Ibid.
86. Christopher Tice, Manager, Global Expatriate Operations,

DuPont Inc., quoted in Mark Schoeff, International Assignments
Best Served by Unified Policy. Workforce Management 85, No. 3
(2006), p. 36.

87. L. Wilkins and A. Tan (Cap Relo), www.worldwideerc.org
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88. B. W. Teague, Compensating Key Personnel Overseas (New
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89. “Paying Expatriates: Understanding Split Pay,”
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90. S. F. Gale, “Taxing Situations for Expatriates,” Workforce 82,
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91. International Assignment Policies and Practices Survey, 2011,
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92. Gina Ruiz, Kimberly-Clark: Developing Talent in Developing
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93. Martin Fackler, “The ‘Toyota Way’ Is Translated for a New
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94. Ibid.
95. Ibid.
96. L. Putre, “How Toyota Kentucky Trained Its Lexus Workforce,”

http://www.industryweek.com/education-training/how-toyota-
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97. Company website, www.starbucks.com (accessed March 5,
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98. http://www.cnbc.com/2017/12/05/starbucks-is-opening-a-store
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101. Martin Dewhurst, Matthew Pettigrew, and Ramesh Srinivasan,
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102. P. Damaskopoulos and T. Evgeniou, Adoption of New Economy
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103. Based on Damaskopoulos and Evgeniou, 2003.

104. Fay Hansen, The Great Global Talent Race: One World, One
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105. Y. Ono and W. Spindle, “Japan’s Long Decline Makes One Thing
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106. “Personnel Demands Attention Overseas,” Mutual Fund Market
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320

Developing a Global
Management Cadre10

C H A P T E R

10-1. To appreciate the importance of international assignments in developing top managers
with global experience and perspectives and to understand the benefits and costs
associated with expatriate assignments

10-2. To recognize the need to design programs for the careful preparation, adaptation, and
repatriation of the expatriate and any accompanying family, as well as programs for career
management and retention, thereby also transferring knowledge to and from host operations

10-3. To become familiar with the use of global management teams to coordinate host country
and cross-border business

10-4. To recognize the varying roles of women around the world in international management

10-5. To understand the variations in host-country labor relations systems and the impact on
the manager’s job and effectiveness

O B J E C T I V E S

Opening Profile: The Expat Life1

In the last few months, I have met a number of expats who have moved here to Europe
from London because their companies are relocating in order to be within the EU
market if Brexit goes through.

Author’s family contacts in Europe, January 2019

W hat is it like to take an assignment abroad? Well, if you were one of the expats from the west
who was living the good life in Moscow, for example, life took an abrupt turn when they
were recalled in 2014–2015 because so many western companies were pulling out as a result

of the sanctions on Russia. But, if you were an expat from China you were one of the sudden surges of
people moving to Moscow to take up the slack in business opportunities left open by western companies.

This situation—as well as the uncertainty that surrounds Brexit as of this writing in 2019—makes it
clear that expats’ lives are vulnerable to sudden changes in the political and business climate around the
world. Would you like to be an expat (expatriate)? Is it an adventure or a hardship? Experiences of those
who have done a stint abroad are mixed, but it is clear that it is very likely an opportunity that will present
itself at some point during your career. Most companies with global business transactions want their top
employees to have overseas experience. According to Cartus’ 2018 Trends in Global Relocation: Biggest
Challenges survey of 205 mobility managers from across the globe, 28% of expats are under 35 years of
age (Gen Y/Millennials); 47% are 35–52 (Gen X); and 25% are 53 or older (Baby boomers). Moreover, the
Cartus 2018 survey revealed that females represent 40 percent of the global relocation assignees. Another
study indicated that expats are now as likely to be Asian as North American or Western European.2 Procter
& Gamble, for example, established a Global Mobility program roughly 35 years ago. With its increased
global reach, Procter & Gamble’s program has expanded to more than 2500 expatriates in 71 countries.3

Experiences vary by job type, especially by location. Adjustment is easier for those who go to
places where the culture and business practices are similar to their own. Those transitioning between

CHAPTER 10 • DEVELOPING A GLOBAL MANAGEMENT CADRE 321

Western Europe and the United States or Canada, for example, typically adapt easier than those going
to China or Yemen, as related below. Some expatriates enjoy perks that they do not get at home, and
others find they fare worse financially, either while overseas or when they return home. In addition,
with more firms expanding operations in emerging economies, expats often face considerable chal-
lenges such as inefficient infrastructure; limited housing, medical, or educational facilities; security
risks; and political instability. Such conditions often mean that the assignment is turned down or that
the manager will decide to go without his or her family. In most places, assignees expect the assign-
ment to be career-broadening and hope it will leverage them to a promotion. Some expat experiences
are described below.

The global environment can change quickly for expats. Expatriate assignments can include perqui-
sites such as obtaining a nanny, chauffeur, or bodyguard.4 In Shanghai, there are 70,000 expatriates from
around the world, in various capacities. For those in the finance industry, the expat package typically
includes round trips home a year; fees for a real estate agency; moving expenses; at least one month
of temporary accommodation; and language classes if required. For an accompanying family, fees for
private schools, for example, are usually included as well as help for the spouse to find a job. A cost of
living adjustment is typically included as well as an adjustment for tax equalization.

Another trend among expats is stringing together shorter, back-to-back assignments or agree-
ing to longer-term deployments.5 In many circumstances, the adventure that started out with many
concerns turns out to be one that the expats and their families do not want to end. Those people have
settled into their positions and lives in the host country and enjoy their situations. For example, one
reporter assigned to Beijing extended the assignment for a fourth year, “For me, it was an easy deci-
sion. The three years that seemed so ominous turned out to be not nearly enough time to settle into a
new life.” The family wanted to do more traveling as well as really understand and enjoy the culture
of Beijing.6

Assignments in some locations can turn out to be more challenging.
Robert Kneupfer, a lawyer, reflects that, in spite of inconveniences such as the 17-year wait for a

telephone line and the absence of any McDonald’s restaurants, the five years spent in Budapest on behalf
of the international law firm Baker & McKenzie were a “defining moment both personally and profes-
sionally.” Kneupfer’s advice: “Don’t sweat the small stuff. You need to appreciate the bigger-picture
experience.”7 To do that, preparation is important for a positive experience. That advice aligns with
many others as discussed throughout this chapter and the preceding chapter. First and foremost, you and
any accompanying family members must familiarize yourselves ahead of time with the local people and
their culture, their language and communication style, and their ways of living and doing business. Most
important, prepare your family for the stages of adjustment they will go through so that they know what
to expect; plans must be made to integrate them as quickly as possible into the local schools, church,
social life, and so on. It also helps if you can meet with other expat families in the area who will provide

FIGURE 10-1 Enjoying London

R
aw

pi
xe

l/F
ot

ol
ia

(Continued)

322 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

After investing over a million dollars in my overseas experience, I thought someone, some-
where in the organization would want to know what I have learned. I was wrong.9

International Manager

A crucial factor in global competitiveness is the ability of the firm to maximize its global human
resources in the long term. In the globalized economy, the knowledge and management resourc-
es, as well as the skilled and non-skilled employee resources, required for the firm to succeed are
no longer concentrated in a single region but are distributed around the world. There are various
categories of those resources—both people and processes—that IHR managers and others must
develop and maintain; in particular it is essential for them to:

• Maximize long-term retention and benefits of an international cadre through career man-
agement so that the company can develop a top management team with global experience.

• Develop effective global management teams.

• Understand, value, and promote the role of women in international management to maxi-
mize those underused resources.

• Work with the host-country labor relations system to effect strategic implementation and
employee productivity.

EXPATRIATE CAREER MANAGEMENT
Martin Walker, senior director of the Global Business Policy Council at A. T. Kearney, a
consultancy, maintains that the dearth of talent is mainly evident at the very top: “Shortages
do exist—most notably, of people with the internationalized business skills to thrive at senior
management level in global companies.”10

It is clear from the preceding quote that the road to the top necessitates managers to have overseas
experience. For the firm, the ability to develop a top management team, globally experienced,
depends largely on the success of expatriates’ assignments—and that depends on the ability to
manage the transitions for the expatriate and any accompanying family members well.

According to the Cartus survey on “Trends in Global Relocation: 2018 Biggest Challenges,”
managers who are mobile across national borders face three primary challenges: cost control,
immigration, and tax compliance. Cost control was listed as the top challenge by 68 percent
of global relocation managers; however, 44 percent of the survey respondents indicated that
it was a bigger challenge in previous years. Immigration (i.e., knowledge of and adherence to
country-specific requirements) was ranked as the second biggest challenge by 53 percent of
the respondents; yet deemed a bigger challenge than in previous years by 70 percent of the
respondents. Tax compliance was considered a top challenge by 49 percent of the respondents.
The tax compliance challenges stems from underestimating the tax implications for expatriate
assignments or from failing to consider them.11

10-1. To appreciate the impor-
tance of international
assignments in develop-
ing top managers with
global experience and
perspectives and to
understand the benefits
and costs associated with
expatriate assignments

both practical and emotional support. In addition, research shows that part of the pre-departure training
should include setting up a mentor in the headquarters office or in the local area so that regular support
will be available as well as some visibility for your career continuity.

Further advice from a well-traveled expat comes from Philip Shearer, Group President, Clinique,
Estee Lauder. His mother was French, his father British, and he was born in Morocco. After going to
college in France and then business school in the United States, he worked at a pharmaceutical company
in Minneapolis. Then he worked in France, Mexico, Britain, Japan, and again in the United States for
companies such as L’Oréal and the Elizabeth Arden division of Eli Lilly.

Shearer’s advice melds with that of other successful expats who seem to be able to distill their
experiences and travels to arrive at common themes. They recommend that, above all, you should be
yourself and gain a reputation for being trustworthy. In that way, people will trust you and relate to you
no matter where you are from. Shearer warns, however, that Americans generally show off too much.
“But in the end, you have to deliver. And that’s the same all over the world.”8

CHAPTER 10 • DEVELOPING A GLOBAL MANAGEMENT CADRE 323

Another area receiving more attention is data security. The 2018 survey reinforces that
data security remains a focal point for many organizations. For example, a large percentage
of respondents—40 percent—indicated that compliance with the EU General Data Protection
Regulation (GDPR) represents a substantial issue for both organizations and supply chain partners.12

International assignments can have a very favorable effect on an expat’s career progression
with opportunities for advancement into more challenging managerial roles within the company.
Companies that institute changes to the way they manage talent mobility show a higher pro-
motion rates for their mobile employees (e.g., expats). However, companies that do not make
changes to their talent mobility programs reveal a different story—a lower promotion rate for
mobile employees. These results show that companies that make the requisite changes to their
talent mobility programs realize the value of their expatriates.13

Preparation, Adaptation, and Repatriation
In a Brookfield Global Relocation Survey study of global mobility trends, 61 percent of the
survey respondents revealed that their companies communicate the significance of expatriate
assignments to employees’ careers. However, only 41 percent of the respondents indicated that
their companies use mobility policies in the recruitment process for external candidates and only
23 percent have a clearly defined process that incorporates career planning from assignment
acceptance—thus creating a talent management gap.14

Effective human resource management of a company’s global cadre does not end with the
overseas assignment. It ends with the successful repatriation of the executive into company
headquarters. A study by Heidrick & Struggles, the international headhunting firm, revealed that
international experience is extremely important to being appointed as a non-executive director
(NED) in the Asia-Pacific region. For instance, 61 percent of New Zealand’s newly appointed
NEDs possessed experience abroad, followed by Australia (52%), Hong Kong (43%), and
Singapore (39%). The study further revealed that approximately one-third of the appointees were
non-local in Australia (36%), Hong Kong (30%), New Zealand (30%), and Singapore (29%).15
Clearly, these companies have paid careful attention to what is necessary for successful assign-
ments, career management, and repatriation of their experiences and skills. Such firms realize
that long-term, proactive management of such critical resources should begin with the end of
the current assignment in mind—that is, it should begin with plans for the repatriation of the
executive as part of his or her career path. The management of the reentry phase of the career
cycle is as vital as the management of the cross-cultural entry and training. Otherwise, the long-
term benefits of that executive’s international experience may be negated. Shortsightedly, many
companies do little to minimize the potential effects of reverse culture shock (return shock). In
fact, a KPMG survey concluded that “25 percent of organizations surveyed do not know if as-
signees have left the organization within 12 months of returning from international assignment.
For repatriated assignees that are tracked as leaving the organization soon after returning from
assignment, the overriding reason cited is the lack of an appropriate job after repatriation.”16 For
smaller companies, little, if any pre- or post-assignment counseling was provided.

A study by Lazarova and Caligiuri with 58 expatriates from four North American companies
found that repatriates who received supportive practices from their firms felt that their companies
had an interest in their careers and well-being and so were more likely to stay with the firm upon
reentry. The expatriates cited the following HRM practices as important to them.

• Visible signs that the company values international experience

• Career planning sessions

• Communications with home office of details of the repatriation process

• Continuous communications with the home office

• Agreement about position upon repatriation17

Reverse culture shock occurs primarily because of the difficulty of reintegrating into the
organization but also because, generally speaking, the longer a person is away, the more difficult
it is to get back into the swing of things. Not only might the manager have been overlooked and
lost in the shuffle of reorganization, but her or his whole family might have lost social contacts
or jobs and feel out of step with their contemporaries. These feelings of alienation from what

324 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

has always been perceived as home—because of the loss of contact with family, friends, and
daily life—delay the resocialization process. Such a reaction is particularly serious if the family’s
overall financial situation has been hurt by the assignment and if the spouse’s career has also
been kept on hold while he or she was abroad.

For companies to maximize the long-term use of their global 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 use of the increased experience and skills of
returned managers to benefit the home office.

The Role of the Expatriate Spouse
We began to realize that the entire effectiveness of the assignment could be compromised by
ignoring the spouse.18

Steve Ford, Corporation Relocations, Hewlett-Packard

Many companies are beginning to recognize the importance of providing support for spouses and
children—in particular because both spouses are often corporate fast-trackers and demand both
sets of needs to be included on the bargaining table. Research shows that 83 percent of married
expatriates were accompanied by their spouses. However, although about half of the spouses
were employed before the assignment, only 11 percent were employed during the assignment.19
In ECA International’s 2016 Managing Mobility Survey, 54 percent of the respondents expressed
concerns about the impact of a long-term assignment on their spouses’ careers. Another top con-
cern was the effect on family and relationships.20 That survey also indicated that 50 percent of
the respondents stated that when families are unable to adapt to an overseas assignment, cultural
issues were the top reason. Changes in circumstance back in the home country were identified as
the second most frequently stated reason.21

Firms often use informal means, such as intercompany networking, to help find the trailing spouse
a position in the same location. They know that with the increasing number of dual-career couples,
if the spouse does not find a position, the manager will very likely turn down the assignment. They
decline because they cannot afford to lose the income or because the spouse’s career may be delayed
entirely if he or she is out of the workforce for a few years. Companies such as Hewlett-Packard, Shell,
Medtronic, and Monsanto offer a variety of options to address the dual-career dilemma. Clearly, then,
the selection process must include spouses, partners, and entire families. Global assignments must take
account of the expatriate’s personal concerns and future career; otherwise, the company will face the
possibility of early return and a possible doubling of the chances for employee attrition.

At Procter & Gamble, employees and spouses destined for China are sent to Beijing for
two months of language training and cultural familiarization. Nissho Iwai, a Japanese trading
company, gets together managers and spouses who are leaving Japan with foreign managers and
spouses who are on their way there. In addition, the firm provides a year of language training and
information and services for Japanese children to attend schools abroad.

UNDER THE LENS
Should I Stay or Should I Go? Overseas Jobs Demand the Extra Mile22

Even Sympathetic Employers Assume that Female Staff Will Face Problems When
Posted Abroad

For Andrea Huggard-Caine, being sent to Italy as part of a team that was handling a Citibank ac-
quisition in the 1980s was life-changing.

“It broadens your vision,” says Ms Huggard-Caine, who was born in Argentina and brought
up in Brazil, where she was educated at an American school. “I’m multicultural and speak five lan-
guages. But until I actually lived abroad, I did not have it all figured out from a multicultural perspec-
tive,” says Ms Huggard-Caine, who now has her own consulting business.

In a corporate setting, an overseas posting can be a way for women to achieve a breakthrough in
their careers. More than 80 per cent of the women that Stacie Berdan, an author and consultant, inter-
viewed for her book Get Ahead by Going Abroad said their international posting had helped them secure
more senior positions.

CHAPTER 10 • DEVELOPING A GLOBAL MANAGEMENT CADRE 325

Expatriate Retention
Managers returning from expatriate assignments are two to three times more likely to leave the
company within a year because attention has not been paid to their careers and the way they fit
back into the corporate structure back home.23

Firms must design support services to provide timely help for the manager and, therefore, are
part of the effective management of an overseas assignment. The overall transition process ex-
perienced by the company’s international management cadre over time 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, the success of which will be determined largely by the quality of preparation the expatri-
ate has received; (2) the entry transition to the host country, in which successful acculturation (or
early exit) will depend largely on monitoring and support; and (3) the entry transition back to the
home country or to a new host country, in which the level of reverse culture shock and the ease of
re-acculturation will depend on previous stages of preparation and support.24

A company may derive many potential benefits from carefully managing the careers of its
expatriates. By helping managers make the right moves for their careers, the company will be
able to retain people with increasing global experience and skills.

However, from the individual manager’s perspective, most people understand that no one can
look out better for one’s interests than oneself. With that in mind, managers must ask themselves,

In a globalised economy, international experience benefits everyone’s career. However, Ms Berdan
says that for women trying to stand out in a male-dominated business world, overseas experience is
particularly helpful.

“The women I interviewed said there were opportunities they did not have in their home market
that they could tap into somewhere else, and that they could use [the experience] to differentiate them-
selves,” she says.

However, while overseas postings provide benefits, they also come with particular challenges for
women. These range from the practical, such as navigating unfamiliar childcare and school systems, to the
question of the “trailing spouse” or working in cultures where male suspicion of women in business persists.

“A major concern is the role of the husband,” says Mara Swan, executive vice-president of global
strategy and talent at ManpowerGroup, the recruitment company. “In certain countries, it’s not as ac-
cepted if they’re not working and they’re taking over the role of the woman.”

While many international cities and organisations have well-established social opportunities for
expat wives, the needs of accompanying husbands have until recently been overlooked.

Similarly, executives in some countries can be reluctant to accept women as business leaders. In
that case, says Ms Swan, “the most important thing is to establish that she’s a decision maker, and often
that has to come from the top,” says Ms Swan. “The endorsement is very important.”

Such problems can be overcome. “I was late-20s and blonde and in Asia, and I was not taken seri-
ously at first,” says Ms Berdan, who worked for several years in Hong Kong at Burson-Marsteller, the
communications firm. “But once you deliver, that’s all people care about.”

For some women, the first hurdle may be winning the overseas posting in the first place. “The
vast majority of the world is open to women, yet companies are unsure and see it as high risk,” says
Ms Berdan. “A lot of it has to do with the fact that HR departments are not global and make assumptions.”

This may help explain why the proportion of women expats working in business remains small.
While the 2016 Global Mobility Trends Survey — from BGRS, the global relocation services firm —
recorded the highest proportion of female expats in the survey’s 21-year history, they still made up just
25 per cent of the total.

Nevertheless, demand from women for overseas postings is rising. In a recent survey by PwC,
the professional services firm, more than 70 per cent of millennial women — born between 1980 and
1995 — said they wanted to work outside their home country.

In competitive labour markets, therefore, companies that want to attract the best employees need to
be ready to support and encourage their female executives to work abroad. Ms Berdan argues that HR
departments have a key role in this: they can both challenge any resistance towards women seeking over-
seas positions and encourage those who have not yet considered the advantages of an overseas posting.

All expats have to excel at what they do — “and that’s gender neutral,” she says. The further ques-
tion for employers is “about making sure opportunities are open to everybody”.

326 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

and their superiors, what role each overseas stint will play in career advancement and what pro-
active role each will play in one’s own career. Retaining the returning expatriate within the com-
pany (assuming he or she has been effective) is vitally important to gaining the knowledge and
benefit from the assignment. Yet, as discussed earlier, the attrition rate for expatriates is about
double that of non-expatriates for the following reasons.

• Expatriates are more marketable and receive more attractive offers from other employers.

• Expatriates find that their compensation packages on overseas assignments are more gen-
erous than at home and go from one company to another to take advantage of that.

• Expatriates feel unappreciated and dissatisfied both during and after the assignment and
leave the company.25

It is essential, therefore, for the company to pay careful attention to maintaining and retain-
ing the expatriate by managing both the assignment and the repatriation of the expatriate and
the family.

THE ROLE OF REPATRIATION IN DEVELOPING
A GLOBAL MANAGEMENT CADRE
In the international assignment, both the manager and the company can benefit from the en-
hanced skills and experience the expatriate gains. Many returning executives report an improve-
ment in their managerial skills and self-confidence. Some of these acquired skills, as reported by
Adler, include the following.

• Managerial skills, not technical skills: Learning how to deal with a wide range of peo-
ple, to adapt to their cultures through compromise, and not to be a dictator

• Tolerance for ambiguity: Making decisions with less information and more uncertainty
about the process and the outcome

• Multiple perspectives: Learning to understand situations from the perspective of local
employees and businesspeople

• Ability to work with and manage others: Learning patience and tolerance—realizing
that managers abroad are in the minority among local people; learning to communicate
more with others and empathize with them26

Knowledge Transfer
In addition to the managerial and cross-cultural skills expatriates acquire, the company benefits
from the knowledge and experience those managers gain about how to do business overseas
and about new technology, local marketing, and competitive information. Expatriates have long
served as facilitators of intra-firm knowledge transfer and application. Traditionally, it has been
assumed that the role of expatriates is partly to bring knowledge from the corporate headquarters
to subsidiaries; however, it is clear that there is a potential strategic advantage when expatriates
acquire knowledge while on international assignment and bring it back to the center of the orga-
nization or disseminate it across other subsidiaries.27 For example, expatriates may accumulate
knowledge from abroad in five areas:

• Knowledge about what (such as differences in customer preferences)
• Knowledge about why (e.g., understanding how cultural differences affect cross-cultural

understanding)
• Knowledge about how (e.g., management skills such as delegating responsibilities)
• Knowledge about when (e.g., knowledge about the effect of timing)
• Knowledge about who (e.g., relationships created over the life of an assignment)28

Expatriate experience not only brings knowledge about culture differences but also creates in-
sights about HQ–subsidiary relations, from which ideas about improving business can be derived.29
However, as Lazarova and Tarique found, “repatriates’ motivation to contribute to collective organi-
zational learning is primarily driven by the fit between their individual career objectives and the ca-
reer development opportunities offered by the organization upon return.”30 They found that several

10-2. To recognize the need
to design programs for
the careful preparation,
adaptation, and repa-
triation of the expatriate
and any accompany-
ing family, as well as
programs for career
management and reten-
tion, thereby also trans-
ferring knowledge to and
from host operations

CHAPTER 10 • DEVELOPING A GLOBAL MANAGEMENT CADRE 327

conditions have to be met to transfer knowledge successfully. First, the repatriates have to (a) have
valuable knowledge to transfer and (b) be motivated to transfer that knowledge; secondly, organiza-
tions need to (a) have the right tools to capture knowledge, and (b) create the right incentives for
repatriates to share their knowledge. Knowledge transfer is optimized when the type of knowledge
repatriates gain is matched by the right knowledge transfer mechanisms—for example, by assign-
ing repatriates to strategic teams—and when career opportunities the organization provides are
congruent with repatriate career goals and aspirations.31 Exhibit 10-1 illustrates the conditions and
process by which knowledge may be successfully integrated into the organization.

Knowledge Acquired:
cultural, local business

acumen, political, negotiating

Retention of manager in firm

GO/NO GO

Firm value placed on
knowledge transfer

Manager’s willingness to share;
ability to transfer/communicate

GO/NO GO

Organizational knowledge
transfer processes

HOW EFFECTIVE?

Level of integration of
knowledge/repatriated manager

Knowledge Management

Organizational Value Added

ExHIBIT 10-1 Variables Influencing Success of Knowledge Transfer from
Repatriated Manager

Source: Based on M. Lazarova and Ibraiz Tarique, “Knowledge Transfer upon
Repatriation,” Journal of World Business, 40, 4 (2005): 361–373.

The company should therefore position itself to benefit from that enhanced management
knowledge if it wants to develop a globally experienced management cadre—an essential
ingredient for global competitiveness—in particular when there is a high degree of shared
learning among the organization’s global managers. If the company cannot retain good return-
ing managers, their potential shared knowledge is not only lost but also conveyed to another
organization that hires that person. This can be very detrimental to the company’s competitive
stance. Some companies are becoming quite savvy about how to use technology to employ
shared knowledge to develop their global management cadre, to service their customers bet-
ter, and—as a side benefit—to store the knowledge and expertise of their managers around the
world in case they leave the company. That knowledge, it can be argued, is an asset in which
the company has invested large amounts of resources. A successful repatriation program,
then, starts before the assignment. The company’s top management must set up a culture that
conveys the message that the organization regards international assignments as an integral
part of continuing career development and advancement and that it values the skills of the
returnees. The company’s objectives should be reflected in its long-range plans, commitment,
and compensation on behalf of the expatriate. Unfortunately, most companies do very little
to minimize attrition by returning international assignees, with only 14 percent guaranteeing
a position upon the assignee’s return.32 However, GE is one company that sets a model for
effective expatriate career management. With hundreds of expatriates worldwide, it takes care
to select only the best managers for overseas jobs and then commits to placing them in spe-
cific positions upon reentry.

328 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

GLOBAL MANAGEMENT TEAMS
MNCs realize it is essential to maximize their human assets in the form of global management
teams so they can share resources and manage the transnational transfer of knowledge. The term
global management team describes a collection of managers in or from several countries who
must rely on group collaboration if each member is to experience optimum success and goal
achievement. Whirlpool International, for example, is a U.S.–Dutch joint venture with adminis-
trative headquarters in Comerio, Italy, where it is managed by a Swede and a six-person manage-
ment team from Sweden, Italy, Holland, the United States, Belgium, and Germany. To achieve
the individual and collective goals of the team members, international teams must have a global
perspective but at the same time share the expectations of the corporate culture; they also must
be glocal—able to respond to the local market while still be adept at coordinating the parts of the
firm. The role and importance of international teams increase as the firm progresses in its scope
of international activity. Similarly, the manner in which multicultural interaction affects the firm’s
operations depends on its level of international involvement, its environment, and its strategy.

The team’s ability to work effectively together is crucial to the company’s success. In addi-
tion, technology facilitates effective and efficient teamwork around the world. This was found
by the Timberland U.K. sales conference planning team. In the past, the company’s large sales
conferences were cumbersome to organize because their offices were in France, Germany, Spain,
Italy, and the United Kingdom. Then the team started using the British Telecom (BT) Conference
Call system for the arrangements, which saved them much travel and expense. The company
subsequently adopted the BT Conference Call system for the executive team’s country meetings.
Teleconferencing and videoconferencing are now much of the way of life for global businesses.
However, research indicates that face-to-face meetings are the best way to kick off a virtual team
project so that the members can agree on goals and schedules and who is responsible for what.
IBM project teams start with all members in a personal meeting to help to build an understanding
of the other members’ cultures and set up a trusting relationship.33

For global organizations and alliances, the same cross-cultural interactions hold as in MNCs
and, in addition, considerably more interaction takes place with the external environment at all
levels of the organization. Therefore, global teamwork is vital, as are the pockets of cross-cultural
teamwork and interactions that occur at many boundaries.34 For the global company, worldwide
competition and markets necessitate global teams for strategy development, both for the organi-
zation as a whole and for the local units to respond to their markets.

When a firm responds to its global environment with a global strategy and then organizes
with a networked glocal structure (see Chapter 8), various types of cross-border teams are nec-
essary for global integration and local differentiation. These include teams between and among
headquarters and subsidiaries; transnational project teams, often operating on a virtual basis; and
teams coordinating alliances outside the organization.35 In joint ventures, in particular, multicul-
tural teams work at all levels of strategic planning and implementation as well as on the produc-
tion and assembly floor. Clearly, the team’s success is highly dependent on the members’ ability
to understand the culture and communication style of members in other countries. The United
Kingdom is one example where considerable differences in behavior, expectations of business
protocol, and communication are often dismissed by other Westerners because of the assumption
of similarity between English-speaking countries. This brings to mind a quote often attributed to
Winston Churchill, “Britain and America are two nations divided by a common language.”

Virtual Global Teams
Virtual groups, whose members interact through computer-mediated communication systems
(such as desktop video conferencing systems, email, group support systems, the Internet, and
intranets), are linked across time, space, and organizational boundaries.36

As illustrated in the diagram, advances in communication now facilitate virtual global teams
formed of people working from home or work, while traveling, or anywhere in the world,
using their laptops or tablets, Wi-Fi, and smartphones. Virtual global teams, a horizontal
networked structure with people around the world conducting meetings and exchanging infor-
mation through the Internet, enable the organization to capitalize on 24-hour productivity. In
this way, too, knowledge is shared across business units and across cultures.37 The advantages

10-3. To become familiar with
the use of global man-
agement teams to coor-
dinate host country and
cross-border business

CHAPTER 10 • DEVELOPING A GLOBAL MANAGEMENT CADRE 329

Geographic Dispersal: The complexity of scheduling communications such
as teleconferences and video conferences across
multiple time zones, holidays, and so on. Lack of
face-to-face meetings to establish trust or for cross-
interaction processes such as brainstorming.

Cultural Differences: Variations in attitudes and expectations toward time,
planning, scheduling, risk taking, money, relationship
building, and so on. Differences in goal sets and work
styles arising out of such variables as individualism/
collectivism; the relative value of work compared with
other life factors; and variable sets of assumptions,
norms, patterns of behavior.

Language and Communications: Translation difficulties, or at least variations in
accents, semantics, terminology, or local jargon.
Lack of personal and physical contact, which
greatly inhibits trust and relationship building in
many countries; the social dynamics change.
Lack of visibility of nonverbal cues makes
interpretation difficult and creates two-way noise
in the communication process.

Technology: Variations in availability, speed, acceptability,
and cost of equipment necessary for meetings and
communications through computer-aided systems.
Variable skill levels and willingness to interact
through virtual media.

ExHIBIT 10-2 Operational Challenges for Virtual Global Teams

Source: Some of this content is based on Kenneth W. Kerber and Anthony F. Buono, “Leadership Challenges
in Global Virtual Teams: Lessons from the Field,” SAM Advanced Management Journal 69, no. 4 (2004): 4–10.

Virtual Global Teams

Source: Janos Levente/Shutterstock

and cost savings of virtual global teams are frequently offset by their challenges—including
cultural misunderstandings and the logistics of differences in time and space, as shown in
Exhibit 10-2. Group members must build their teams while bearing in mind the group diversity
and the need for careful communication.38

330 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

MANAGEMENT IN ACTION
The Emergence of a Virtual Multinational Enterprise39

Geoff Perlman founded Xojo, Inc. in 1996. The company originally engaged in custom soft-
ware development—companies would hire his company to create a unique software solution
for some business problem they had because they did not have the internal talent to do it them-

selves. About a year later, the company began transitioning to being a developer of software tools that
other developers use to create software. The business started out of Geoff Perlman’s house and when
that would no longer hold them, he acquired office space in Austin, Texas (USA).

In 2008, Xojo’s CEO Geoff Perlman noticed that about half of the office space was empty. He
observed that when he hired talent, the new employees tended to not relocate to Austin. Perlman noted,
“In the software space, we had reached the point where it was practical for people to work remotely and
we didn’t want moving to be an issue. So when the candidates said they would take the job if they didn’t
have to move, we accepted that. From the very beginning we had people who were remote so we had
already gotten used to the idea.”

Since his company was using only half its office space, Perlman met with his Austin staff and asked
them how they would feel about working exclusively from home. He recalled, “There were mixed feelings
about it but mostly people liked the idea. Many occasionally worked from home so it wasn’t entirely alien
to them.” As a test, Perlman told everyone in the Austin office to work from home for the next month.
During that month, he and his executive team would determine what changes would have to be made
to various systems. At the end of the month, employees seemed happy working from home, so we were
ready to make the necessary systems changes. Following the move to a virtual multinational organization,
Perlman’s executive administrative assistant, who started out in Austin, then moved to Northern California.
In 2018, she moved to Oregon and has been given ever-increasing responsibility. Over the years, Perlman
hired several overseas software programmers, who were always remote by virtue of their locations.

Geoff Perlman recognized that being a virtual multinational organization comes with challenges.
“When you go virtual, you start to realize just how much of your operation is dependent on physical
proximity to your co-workers. We were used to walking into someone’s office with a document or dis-
cussing a new plan over lunch. When you are virtual, being in the physical presence of a co-worker is
exceptionally rare. It only occurs once a year at our annual conference for most of my staff. There are
some here in Austin but we even only get together for lunch a few times a year at most.”

Perlman also mentioned, “The instinct many have is to keep operating the way you always have
but that simply will not work. We had to reimagine how we would operate if we were no longer mostly
in the same office together. We had an on-premise telephone system. That had to go and be replaced
with one that was hosted. We were using on-premise accounting software. When I needed data, I’d go
to accounting and get reports or sit down with someone and review data on the screen. We switched to
a hosted solution where anyone who had a legitimate need for the information on a regular basis, could
get to it through a web browser. Our servers and e-commerce system had to be moved to virtual, hosted
platforms. Basically, anything physical had to become virtual. That’s a lot of infrastructure change.”

Because interaction is so critical, Perlman had to decide how that was going to work as well. He
adopted three systems that are used based upon how quickly one needs information. He contended that
“emailing is for answers that aren’t needed today. Text chatting is used for answers needed today and
video conferencing is used for answers needed now or when a conversation or meeting needs to take
place. Additionally, the virtual equivalent of meeting in the break room is just connecting with a co-
worker on Zoom (videoconferencing provider). Some of our employees just hang out on Zoom while
they work so they don’t feel like they’re working alone.”

Another challenge pertains to weak working relationships in an office environment. In a virtual
environment, the relationships between these individuals deteriorate over time. The Xojo CEO stated,
“We partially solve this by having company meetings once a month on Zoom where we each talk about
what’s going on both professionally and personally as well as answer a question that one of us comes up
with that hopefully reveals something about each of us the others didn’t know before.”

Perlman confessed that when you work from home, the lines often blur between one’s personal
and professional life. “We have fixed workdays and hours when we are expected to be at work but we
have learned that if we ask someone a question via Slack (group text chatting software) or email on a
Saturday afternoon, there’s a good chance we will get a reply. I think we have a corporate culture that is
attractive enough to our employees that no one feels the need to enforce hard and fast rules about being
at work versus being on their own time.”

In light of the challenges, there are many benefits to a virtual organization. No commuting, in-
creased productivity, more flexible schedule, flexible workspace, fewer health issues (no catching a cold

CHAPTER 10 • DEVELOPING A GLOBAL MANAGEMENT CADRE 331

Managing Transnational Teams
The ability to develop and lead effective transnational teams (whether they interact virtually,
physically, or, as is most often the case, a mixture of both) is essential in light of the increasing
use of foreign subsidiaries, joint ventures, and other transnational alliances. The primary corpo-
rate question is how to integrate a diverse pool of cultural values, traditions, and norms in order
to be competitive. These challenges were experienced when Nomura, Japan’s largest investment
bank, acquired most of Lehman Brothers’ operations in Asia, Europe, and the Middle East in
October 2008, following Lehman’s collapse. Nomura had to absorb hundreds of Lehman em-
ployees immediately. Although Nomura is the acquirer, it tried to transform its own culture to be
more globally competitive. As observed by one manager:

Nomura has “a completely domestic culture” . . . one based on Japanese customs of em-
ployment, and where company loyalty is strong, decision-making is slow and tolerance for
risk is low.43

Both the Japanese and the Americans trying to work together felt the cultural divide. In par-
ticular, the Japanese were shocked when Nomura’s management introduced American-style pay
and career structures.44

from a sick co-worker), more personalized workplace, and even healthier eating habits. According to
CEO Geoff Perlman, “The greatest benefit to the organization was one we had not expected. When you
have half your staff in an office and half remote, you often end up with two forms of communication.
For those in your office, you just walk over and talk to them. With remote staff, it’s a different system.
Perhaps you call, email or text. Having two different methods of communication resulted in remote team
members often being left out of conversations because it was more work to include them. Now that ev-
eryone is remote, all meetings are handled the same way, through video conferencing and we know from
the software who is available and who is not. Thus the playing field is completely level and no team
members feel out of the loop anymore.”

VIRTUAL MNE BEST PRACTICES

Teams need a daily huddle. This is a very short (5 to 10 minutes) meeting where each person
discusses what they intend to accomplish that day. According to Xojo CEO Geoff Perlman, “it
makes sure everyone is aware of what others are working on so effort isn’t wasted due to lack of
communication and it creates subtle peer pressure as no one wants to report every day that they are
still working on what they said they’d finish yesterday. It’s important that the people in the huddle
all have direct impact on each other. The engineering team for example has a huddle. No one from
marketing attends as they aren’t working closely enough together on a daily basis.”40

Establish core hours. Your co-workers need to know they can reach you face to face (well, virtu-
ally face to face anyway). However, since you are virtual, you’re likely to have people in differ-
ent time zones. At Xojo, Perlman established core hours of 10 AM to 4 PM CT (USA) for North
America. His co-workers in Europe attend the morning engineering huddle.

Establish monthly company meetings: A monthly company meeting is a great way to boost
positive relationships between co-workers who communicate infrequently. According to Perlman,
“It also is a great way for people in different departments to learn about what’s going on outside
their own department. It’s a great time for leadership to talk about new directions and/or progress
towards existing goals.” 41

Ensure first-rate communications technology. Communication is the life-blood of any organiza-
tion. In a virtual company, team members are almost entirely dependent upon technology for com-
munication. Make sure that the software/services you use for email, text chatting, screen-sharing
and video conferencing are reliable and high quality.

Metrics: Metrics are something all organizations should have but they are even more important
in virtual ones as they are a clear indicator of performance. However, Perlman urges caution, “Be
careful what you measure because that IS what you will get. Measure the wrong thing and there’s
a good chance you will get the wrong thing. For example, if Marketing is supposed to generate
leads, it may be your instinct to measure that. However, that could result in Marketing generating
more and more leads but not necessarily quality ones.”42

332 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

Teams comprising people located in far-flung operations are faced with often-conflicting
goals of achieving greater efficiency across those operations, responding to local differences,
and facilitating organizational learning across boundaries; conflicts arise based on cultural dif-
ferences, local work norms and environments, and varied time zones. A study by Joshi et al.
of a 30-member team of human resource (HR) managers in six countries in the Asia-Pacific
region showed that network analysis of the various interactions among team members can
reveal when and where negative cross-cultural conflicts occur and, thus, provide top man-
agement with information for conflict resolution so that a higher level of synergy may be
attained among the group members. The advantages of synergy include a greater opportunity
for global competition (by being able to share experiences, technology, and a pool of interna-
tional managers) and a greater opportunity for cross-cultural understanding and exposure to
different viewpoints. The disadvantages include problems resulting from differences in lan-
guage, communication, and varying managerial styles; complex decision-making processes;
fewer promotional opportunities; personality conflicts, often resulting from stereotyping and
prejudice; and greater complexity in the workplace.45 In the Joshi study, the greatest conflict
and, therefore, lack of synergy, was not, as one would expect, resulting from the headquarters
subsidiary power divide. Rather, the critical conflicts were between the Country A subsidiary
and Country B subsidiary, given the required communication and workflow patterns between
them. What are other ways that management can ascertain how well its international teams are
performing and what areas need to be improved? In recognizing the areas needing better team
management, executives in a study by Govindarajan and Gupta ranked five key tasks based on
their level of importance, as follows.

Tasks for Global Business Teams46

• Cultivating trust among members

• Overcoming communication barriers

• Aligning goals of individual team members

• Obtaining clarity regarding team objectives

• Ensuring that the team possesses necessary knowledge and skills

The managers also rated the level of difficulty to accomplish that task. The researchers
concluded from their study that the ability to cultivate trust among team members is critical
to the success of global business teams if they want to minimize conflict and encourage
cooperation.47

Following are some general recommendations the researchers make for improving global
teamwork.

• Cultivate a culture of trust; one way to do this is by scheduling face-to-face meetings
early on, even if later meetings will be virtual

• Rotate meeting locations; this develops global exposure for all team members and legiti-
mizes each person’s position

• Rotate and diffuse team leadership

• Link rewards to team performance

• Build social networks among managers from different countries48

What other techniques do managers actually use to deal with the challenge of achiev-
ing cross-cultural collaboration in multinational horizontal projects? A comparative study
of European project groups in several countries by Sylvie Chevrie revealed three main
strategies.49

• Drawing upon individual tolerance and self-control: In this R&D consortium,
the Swiss manager treated all team members the same, ignoring cultural differences,
and the team members coexisted with patience and compromise. Many of the
members said they were used to multinational projects and just tried to focus on
technical issues.

CHAPTER 10 • DEVELOPING A GLOBAL MANAGEMENT CADRE 333

• Trial-and-error processes coupled with personal relationships: This is a specific strat-
egy in which the project manager sets up social events to facilitate acquaintance of the
team members with one another. Then, they discover, through trial and error, what proce-
dures will be acceptable to the group.

• Setting up transnational cultures: Here the managers used the common professional, or
occupational, culture, such as the engineering profession, to bring the disparate members
together within a common understanding and process.

The managers in the study admitted their solutions were not perfect but met their needs as
best they could in the situation. Chevrie suggests that, where possible, a “cultural mediator”
should be used who helps team members interpret and understand one another and come to an
agreement about processes to achieve organizational goals.50

THE ROLE OF WOMEN IN INTERNATIONAL
MANAGEMENT
Whether in global management teams, as expatriates, or as host-country nationals, the importance
of women as a valuable, and often-underused resource should not be overlooked in IHRM efforts
to maximize the company’s global management cadre. On February 26, 2015, Christine Lagarde,
Managing Director of the International Monetary Fund (IMF), explained on various news programs
its committee’s action plan to discuss with heads of state what can be done to improve their country’s
economic progress by removing or lessening the roadblocks to females working there—cultural and
practical. For example, in Japan, she proposed that more women could take jobs if the government
instituted a child-care plan. And, in fact, in August 2015, Prime Minister Shinzo Abe announced
a new law requiring companies with over 300 employees to set targets for hiring more women
managers—at the time, women comprised only 11 percent of supervisory or managerial positions.
Child-care was not addressed in the new law and remains an obstacle. This move was heralded as:

A Step Forward for ‘Womenomics’ in Japan.51

THe Wall sTReeT JouRnal, August 28, 2015

Although it is clear that women are increasingly making their way into the international manage-
ment cadre, their numbers and influence vary greatly around the world.

In light of the growing presence of females in the corner suite, the 2018 ranking by Fortune
magazine of the most powerful women in business in the United States revealed only 25 female
CEOs of large companies, down from 32 female CEOs in 2017.52 At the top of the list are Mary
Barra, CEO of General Motors (#10); Gail Boudreaux of Anthem (#29), Ginni Rommetty,
Chairman, CEO, and President of IBM (#34), Marilyn Hewson of Lockheed Martin (#59),
Safra Catz of Oracle (#82), and Phebe Novakovic of General Dynamics (#99). The decline was
due, in large part, to the retirements of Indra Nooyi of PepsiCo, Denise Morrison of Campbell
Soup Co., and Sheri McCoy of Avon. Another high-profile executive who stepped down was
Hewlett Packard CEO Meg Whitman, who previously served as CEO at eBay. Females served
as CEO of only 5 percent of major North American firms as of the beginning of 2018.53

The Fortune article includes a separate list of “Most Powerful Women: International.” The
European region led the way with 22 of the top 50 female executives: Emma Walmsley, CEO of
GlaxoSmithKline, UK; Ana Botin, Executive Chair of Banco Santander, Spain; and Isabelle Kocher,
CEO of Engie, France. For the Asia region, 18 women made the list including Dong Mingzhu,
Chairwoman and President of Gree Electric Appliances, China; Chua Sock Koong, Group CEO of
Singapore Telecommunications; Ho Ching, Executive Director and CEO of Temasek, Singapore.
Fortune also pointed out that Alibaba is a great company for fostering talented women and featured
Maggie Wei Wu, CFO of Alibaba, and Lucy Peng, Alibaba’s CEO, Lazada. Also, the list featured
Rakefet Russak-Aminoach, President and CEO of Leumi Group, Israel.54

Although women’s advancement in some global companies is impressive, it is still true that
there are limitations on managerial opportunities for many women in their own country—some more
than others—and there are even more limitations on their opportunities for expatriate assignments.

10-4. To recognize the varying
roles of women around
the world in interna-
tional management

334 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

The gap between what executive men and women earn fell sharply in Britain and the United
States after a global focus on sexism in the workplace forced new laws to address the gaping im-
balance, said executive wage comparison website The Pay Index. According to the 2017 Global
Gender Gap Report, Iceland ranks first among 144 countries in terms of gender parity, followed
by Norway, Finland, Rwanda, and Sweden, as shown in Exhibit 10-3. The United Kingdom and
Canada were ranked 15th and 16th, respectively. The United States was ranked 49th while Japan
was listed at 114th.55 “We must have gender pay parity—but we need parity in workplace sup-
port, leadership development, mentorship and sponsorship, and career opportunity, too,” stated
Sarah Alter, president of the U.S.-based Network of Executive Women.56

Whereas women represent 50 percent of the world’s higher education graduates, they occupy
only 25 percent of the management positions. In a 2017 McKinsey study, women tended to use
more leadership behavior that enhances firm performance than their male counterparts. Moreover,
they found that companies in the top quartiles for female representation on executive committees
achieved higher return on equity than companies without female representation—22 percent ver-
sus 15 percent. McKinsey surveyed top executives regarding the leadership behaviors that would
be most effective in addressing the challenges of the future. The results showed that the behaviors
most important to enhancing performance were those embraced most frequently by women—for
example, intellectual stimulation, inspiration, and participative decision making.57

The reasons for the different opportunities for women among various countries can often
be traced to the cultural expectations of the host countries—the same cultural values that keep
women in these countries from the managerial ranks. In Japan, for example, women faced two
key barriers in the workplace—the lack of childcare facilities and the Japanese workstyle, ac-
cording to CEO Takeshi Niimami of Suntory Holdings Limited. He stressed that Japanese firms
need to curtail working hours, exploit communication networks, and enhance flexibility.58

Boardroom diversity has improved; however, women still tend to be underrepresented in
many countries. On average, women accounted for 17.3 percent of corporate board members
and 77.4 percent of MSCI ACWI companies had at least one female director in 2017. In gen-
eral, European companies tend to have more women on their boards (40.8 percent in France,
35.8 percent in Italy, 33.7 percent in Finland, and 26.8 percent in the UK) than the United
States (21.7 percent), India (13.8 percent) and Japan (5.3 percent). Moreover, French, Italian
and Norwegian companies all had at least three female board members.59 Indeed, numerous
European countries—for example, Finland, France, Germany, Italy, and the Netherlands—have
gender board quotas.60 According to a 2018 European Commission report, women served as
board chair in 7.1 percent of the companies.61

Given the powerful figure at the top in Germany—Chancellor Angela Merkel—it seems
surprising to see the low female participation at the top levels, “but a decade of earnest vows

Country Ranking Global Index Score

Iceland 1 0.878
Norway 2 0.830
Finland 3 0.823
Rwanda 4 0.822
Sweden 5 0.816
UK 15 0.770
Canada 16 0.769
Israel 44 0.721
USA 49 0.718
Mexico 81 0.692
China 100 0.674
Japan 114 0.657
Pakistan 143 0.546
Yemen 144 0.516

ExHIBIT 10-3 Global Gender Gap Report, 2017 Rankings

Source: www.weforum.org/reports/the-global-gender-gap-report-2017.

http://www.weforum.org/reports/the-global-gender-gap-report-2017.

CHAPTER 10 • DEVELOPING A GLOBAL MANAGEMENT CADRE 335

from the corporate sector has not dented male-dominated Deutschland AG . . . all 30 DAX com-
panies are run by men.”62 Clearly, traditional cultural values about gender roles in Germany,
as well as lifestyle and laws, can account for much of the disparity in Germany. For example,
most children attend school only in the mornings, which restricts the ability for both parents to
work. Nevertheless, in spite of considerable recent government encouragement in its attempts to
capitalize on females as an economic resource, only about 14 percent of German mothers with
one child resume full-time work and only 6 percent of those with two children. Even though
the German birthrate—at 1.39—is the lowest in Europe and even though there is a generous
14-month shared parental leave after childbirth, German mothers have a strong tendency to stay
home with their children.

In their 32-country study on the cultural indicators of the reasons for the variation in the par-
ticipation of women in management around the world, Toh and Leonardelli found a relationship
between loose and tight cultures and the presence of women in the firms of those countries. They
conclude that in tight cultures, such as Germany and South Korea, the norms of expected behav-
ior are more clear and rigid, with norms of traditional male attitudes, and thus have far fewer
women in leadership positions than those in loose cultures such as New Zealand and Hungary.63
In loose cultures, people are more open to change and variations in expectations, so the general
attitude in the leadership of firms in those cultures is one of a more open and positive perspective
of women leaders.

Organizations don’t do nearly enough, in my view, with regard to trying to design work differ-
ently, in order to better facilitate a more flexible work/life scenario. For me this means visibly
and actively assisting women, ensuring they are able to shape their work days to best meet their
family responsibilities—this could mean working part-time for a period, job-sharing, working
from home, having more control over when the workday starts and finishes. It involves trust and
mutual respect.64

Gail Kelly, former CEO, Westpac

There are considerable differences in female workforce participation around the globe. For
instance, India has one of the world’s lowest rates with only 27 percent of working-age females
having paid jobs outside the home. That rate compares with Arab societies but falls well below
prosperous East Asian countries, in which nearly two-thirds of women work.65 The low rate
in India can be attributed, in part, to insufficient manufacturing jobs. However, another barrier
stems from strong societal norms—in particular, deeply held beliefs about women’s place in the
home and interactions with men who are not part of the family. In more affluent families, men do
not want their wives to work. As such, India’s strong economic growth over the past 15 years has
yielded a drop in both the absolute number of women working and the percentage.66

Opportunities for indigenous female employees to move up the managerial ladder in a given
culture depend on the values and expectations regarding the role of women in that society. In
Japan, for example, the workplace has traditionally been a male domain as far as managerial ca-
reers are concerned (although rapid changes are now taking place, as previously pointed out). To
the older generation, a working married woman represented a loss of face to the husband because
it implied that he was not able to support her. The younger generation and increased global com-
petitiveness have brought some changes to traditional values regarding women’s roles in Japan.
More than 60 percent of Japanese women are now employed, including half of Japanese mothers,
but largely in part-time and temporary positions. How and when the new law and cultural changes
will affect the number of Japanese women in managerial positions remains to be seen. Currently,
only about 11 percent are in managerial positions, compared with about 45 percent in the United
States and 30 percent in Sweden, for example. One can understand the problems Japanese women
face when trying to enter and progress in managerial careers when we review the experiences
of Yuko Suzuki, who went into business for herself after the advertising company she worked
for went bankrupt. However, she could not gain respect or even attention from customers, who
often asked her who her boss was after she finished a presentation. She eventually hired a man
to accompany her, which increased her sales, but, to her dismay, customers would only establish
eye contact with him, even though she was doing the talking and he had nothing to do with the
company.67 Japanese labor economists observe that, “Japan has gone as far as it can go with a
social model that consists of men filling all of the economic, management and political roles.”68

336 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

The lack of expatriates who are female or represent other minority groups does not reflect
their lack of desire to take overseas assignments. Indeed, studies indicate women’s strong will-
ingness to work abroad and their considerable success on their assignments. For example, Adler’s
major study of North American women working as expatriate managers in countries around the
world showed that they are, for the most part, successful.69

Women and minorities represent a significant resource for overseas assignments—whether
as expatriates or as host-country nationals—a resource that U.S. companies underuse. Adler
studied this phenomenon regarding women and recommends that businesses (1) avoid assuming
that a female executive will fail because of the way she will be received or because of problems
female spouses experience; (2) avoid assuming that a woman will not want to go overseas; and
(3) give female managers every chance to succeed by giving them the titles, status, and recogni-
tion appropriate to the position—as well as sufficient time to be effective.70

WORKING WITHIN LOCAL LABOR RELATIONS
SYSTEMS

If you have to close a plant in Italy, in France, in Spain or in Germany, you have to discuss the
possibility with the state, the local communities, the trade unions; everybody feels entitled to
intervene . . . even the Church.71

Jacob Vittorelli, former deputy chairman of Pirelli

An important variable in implementing strategy and maximizing host-country human resources
for productivity is that of the labor relations environment and system within which the managers
of a multinational enterprise (MNE) will operate in a foreign country. Differences in economic,
political, and legal systems result in considerable variation in labor relations systems across
countries. It is the responsibility of the IHRM function to monitor the labor relations systems in
host countries and advise local managers accordingly. In fact, that information should be con-
sidered one input to the strategic decision of whether to operate in a particular country or region.

The Impact of Unions on Businesses
European businesses, for example, continue to be undermined by their poor labor relations and
by inflexible regulations. As a result, businesses often have to move jobs overseas to cut labor
costs, resulting from a refusal of unions to grant any reduction in employment protection or
benefits to keep the jobs at home. In addition, European firms wishing to operate elsewhere in
Europe or to move to other countries have to weigh carefully the labor relations systems and their
potential effect on strategic and operational decisions, as well as political and economic changes,
as illustrated in the accompanying “Under the Lens” feature.

10-5. To understand the varia-
tions in host-country
labor relations systems
and the impact on the
manager’s job and
effectiveness

UNDER THE LENS
German Manufacturer to Close Two UK Plants72

Move by Schaeffler Threatens 600 Jobs at its Llanelli and Plymouth Plants

A German manufacturer of automobile and industrial parts is to shut two UK facilities that to-
gether employ almost 600 people, a decision it attributed to changes in economic conditions
and demand for its products.

Schaeffler delivered the news to workers at its Llanelli and Plymouth plants on Tuesday morning,
and added that the uncertainty around Britain’s departure from the EU had been a contributing factor.

“The changes to our UK footprint are designed to make us more efficient by relocating parts of our pro-
duction closer to where our products are used,” said Juergen Ziegler, Schaeffler’s regional chief executive.

“Brexit is clearly not the single decisive factor behind our decision-making for the UK market, but
the need to plan for various complex scenarios has brought forward the timing.”

The €14bn turnover a year company explained that demand for mechanical car components sup-
plied by its Llanelli plant in south Wales, which employs roughly 220 people, was falling with the rise of
electric cars and only predicted to decline further.

CHAPTER 10 • DEVELOPING A GLOBAL MANAGEMENT CADRE 337

Organized Labor around the World
Labor union membership has been on the decline across most developed nations. In 1985,
30 percent of workers were labor union members in OECD countries. As of 2018, union mem-
bership had dropped to 16 percent. According to OECD statistics, approximately 81 million
workers are part of labor unions in its member states. Moreover, roughly 155 million workers
partake in collective agreements at various levels (e.g., national or regional). That said, the per-
centage of workers covered by collective agreements has declined from 45 percent in 1985 to
32 percent in 2017. The reasons for the drop in union membership include technological and
organizational changes, international expansion of firms, and most noticeable, the decline of the
manufacturing sector in OECD member countries.73

Labor union membership rates vary greatly across OECD countries. For example, Iceland has
a labor union membership rate of 90.4 percent—the highest among OECD countries. Sweden ranks
second with union membership rate of 66.1 percent. In contrast, Japanese and Australia union mem-
bership rates are substantially lower—roughly 17 percent and 13 percent, respectively. As of 2018,
the U.S. union membership rate is 10.1 percent, which is down sharply from 21.0 percent in 1983.74

The traditional trade union structures in Western industrialized societies have been in indus-
trial 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, repre-
senting members in several industries—for example, the metalworkers unions in Europe, which
cut across industries, and general unions, which are open to most employees within a country.75
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 national unions. A single U.S. firm—rather than
an association of firms representing a worker classification—engages in its own negotiations.

Its Plymouth factory, in south-west England, which has a workforce of 365, produces spindle bear-
ings and specialised bearings among other items. Despite being profitable, it will be consolidated into
a larger American sister plant that makes similar products, since both factories are currently underused.

Only 15 per cent of the goods Schaeffler produces in the UK remain in the country, with the major-
ity exported to mainland Europe.

Production from the two plants will be relocated to China, South Korea and Germany, though
Schaeffler emphasised that its biggest UK manufacturing site in Sheffield would remain open. In addi-
tion, the German group will combine two logistics centres in England.

The Unite trade union vowed to oppose the closures. Tony Burke, assistant general secretary, said:
“This is yet another body blow for the UK’s automotive supply chain and the wider car industry. It
should leave no one in any doubt as to what is in store if the UK crashes out of the European Union
without a deal that secures tariff free frictionless trade.”

The announcement came a day after Michelin stunned workers with plans to close its Dundee fac-
tory with the loss of 845 jobs. However, the French tyremaker said its decision had “nothing to do with”
the UK’s impending EU departure.

After talks with the company and trade unions in Dundee on Tuesday, Derek Mackay, Scotland’s
economy secretary, announced the creation of an action group of officials and local politicians to explore
options for the site.

“I have met members of Michelin’s group executive and they have agreed to consider a proposition
that we will bring forward, to secure a sustainable future for the plant,” Mr Mackay said, without giving
details.

He later told the Scottish parliament: “We will leave no stone unturned in our efforts to keep this
plant operational in Dundee.”

Michelin said the Dundee plant had faced difficulties, despite investment of £70m in recent years,
because of changes in the car market that cut demand for premium tyres of the 16-inch and smaller sizes
it manufactures. The factory has also faced increasing competition from “entry-level” Asian rivals.

“The accelerated market transformation has made the [Dundee] plant unsuitable and its conver-
sion is not financially viable,” Michelin said. Unite said on Tuesday it had been working on a flexibility
agreement including voluntary redundancies and reduced shifts that it said would make the Dundee
plant financially viable in the long term.

338 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

In Japan, on the other hand, it is common for a union to represent all workers in a company. In
recent years, company unions in Japan have increasingly coordinated their activities, leading to
some lengthy strikes.

Industrial labor relations systems across countries can be understood only in the context of
the variables in their environment and the sources of origins of unions. These include govern-
ment 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. However, in Europe, collective bargaining takes place between
the employer’s organization and a trade union at the industry level.76 This difference means
that North America’s decentralized, plant-level, collective agreements are more detailed than
Europe’s industry-wide agreements because of the complexity of negotiating myriad details in
multi-employer bargaining. In Germany and Austria, for example, such details are delegated to
works councils by legal mandate.77

The resulting agreements from bargaining also vary around the world. A written, legally
binding agreement for a specific period, common in Northern Europe and North America, is less
prevalent in southern Europe and Britain. In Britain, France, and Italy, bargaining is frequently
informal and results in a verbal agreement valid only until one party wishes to renegotiate.78

Other variables of the collective bargaining process are the objectives of the bargaining and
the enforceability of collective agreements. Because of these differences, managers in MNEs
overseas realize that they must adapt their labor relations policies to local conditions and regula-
tions. They also need to bear in mind that, although U.S. union membership has declined by about
50 percent in the past 30 years, in Europe, overall, membership is still quite high, particularly in
Italy and the United Kingdom—though it, too, has been falling, but from much higher levels.

Most Europeans are covered by collective agreements, whereas most Americans are not.
Unions in Europe are part of a national cooperative culture among government, unions, and
management, and they hold more power than in the United States. Increasing privatization will
make governments less vulnerable to this kind of pressure. It is also interesting to note that some
labor courts in Europe deal separately with employment matters from unions and works councils.

In Japan, labor militancy has long been dead since labor and management agreed 40 years
ago on a deal for industrial peace in exchange for job security. Unions in Japan have little official
clout, especially in the midst of the Japanese recession. In addition, not much can be negotiated
because wage rates, working hours, job security, health benefits, overtime work, insurance, and
the like have traditionally been legislated. However, global competition is putting pressure on
companies to move away from guaranteed job security and pay. Often, however, the managers
and labor union representatives are the same people, a fact that limits confrontation, as does the
cultural norm of maintaining harmonious relationships.

In the industrialized world, tumbling trade barriers are also reducing the power of trade
unions because competitive multinational companies have more freedom to choose alterna-
tive production and sourcing locations. Most new union workers—about 75 percent—will be
in emerging nations such as China and Mexico, where wages are low and unions are scarce.
However, in some countries, such as India, outmoded labor laws are very restrictive for MNEs,
making it difficult to lay off employees under any circumstances and forcing foreign companies
to be very careful in their selection of new employees.

In China, for example, in a surprising move, the government passed a new law that will grant
power to labor unions, in spite of protests by foreign companies with factories there. The order
was in response to a sharp rise in labor tension and protests about poor working conditions and
industrial accidents.79 The All-China Federation of Trade Unions claimed that foreign employers
often force workers to work overtime, pay no heed to labor-safety regulations, and deliberately
find fault with the workers as an excuse to cut their wages or fine them. The move, which under-
scores the government’s growing concern about the widening income gap and threats of social
unrest, is setting off a battle with American and other foreign corporations that have lobbied
against it by hinting that they may build fewer factories in China.80

Protests arose after Walmart, the world’s biggest retailer, was forced to accept unions in its
Chinese outlets; other MNCs then joined the effort to get the Chinese government to reverse its

CHAPTER 10 • DEVELOPING A GLOBAL MANAGEMENT CADRE 339

decision. State-controlled unions in China have traditionally not wielded much power; however,
after years of reports of worker abuse, the government seems determined to give its union new
powers to negotiate worker contracts, safety protection, and workplace ground rules.81 However,
in spite of such well-publicized incidences, the union situation in China is generally regarded as
The Economist states in the following:

In name, the All-China Federation of Trade Unions (ACFTU) is a vast union bureaucracy run-
ning from the national level to small enterprises. In practice it is controlled by the Communist
Party at the national level and, in companies, is mostly a tool of the management.82

THe eConomisT

Chinese managers often ignore workers’ basic rights for reasonable working conditions,
safety, and even the right to be paid. At Foxconn Technology, for example, which is a major sup-
plier to several electronics giants such as Hewlett Packard, Apple, and Microsoft, there were large
protests in January 2012 by workers at its Wuhan plant that involved threats from some workers
to commit suicide. The employees were protesting that they had been forced to work long hours
under poor conditions with little pay. Foxconn resolved the dispute and, under pressure from
Apple and other companies, pledged to improve working conditions in China.83 Increasing pro-
tests and strikes across China are partly attributed to more awareness of labor laws as well as to in-
flationary pressures. The next day, Apple, following the lead of companies such as Intel and Nike,
released a list of its major suppliers, including a list of troubling practices at some of those.84

During the period August 2017 to April 2018, China Labor Watch sent investigators into
Hengyang Foxconn. The investigative team noted that agency staff—referred to as dispatch
workers—constituted more than 40% of the workforce, which violated the legal limit of 10%.
Furthermore, dispatch workers and regular workers faced different working conditions. For
example, dispatch workers received only eight hours of pre-job safety training, far below the
24 hours required by Chinese law. As for compensation, dispatch workers earn an hourly wage
of 14.5 RMB ($2.26 USD) for normal hours and overtime hours. Also, dispatch workers re-
ceived no paid sick leave, whereas regular workers receive 80 percent of their pay during sick
leave. Although Foxconn claimed that it “works hard to comply with all relevant laws and
regulations” and that it seeks to rectify infractions immediately, the CLW report suggests that
there is still room for improvement.85

However, because problems occur in factories from which Apple’s suppliers outsource, or
that supply parts to the suppliers, retaining control and oversight is very difficult. Perhaps, as
discussed in Chapter 2, the improved social responsibility of foreign firms operating in China
might exert pressure for better working conditions for Chinese employees. In China, foreign
subsidiaries must comply with the Trade Union Law. However, there is more pressure for them to
unionize than domestic firms for at least two reasons. First, foreign subsidiaries offer competitive
wages, resulting in higher payments made to the ACFTU. Second, there is the perception that
foreign subsidiaries “westernize” Chinese workers, so unionization is viewed as a countermea-
sure so that the Chinese Communist Party has a vehicle through which to communicate with the
nation’s labor force. Furthermore, policymakers have a stated goal of having 90% of all compa-
nies to have collective bargaining agreements.86

Historically, the existence of unions in the West has been linked closely to improved social
responsibility toward workers, and countries around the world are beginning to catch up as far as
improved conditions for workers. This happens when unions are permitted and have some power
or when governments exert pressure to improve life for workers so that unions will not take hold.
However, strict adherence to union regulations is often traded off by all parties for the local
factory to remain competitive and viable and thus provide jobs and a reasonable level of living
conditions compared to those experienced previously.

Convergence versus Divergence in Labor Systems
In October 2006, the International Trade Union Confederation (ITUC) was formed in Vienna,
comprising the affiliated organizations of the former ICFTU (International Confederation of
Free Trade Unions), and WCL (World Confederation of Labor) and eight other national trade
union organizations, to form a global body.87 As of 2018, the ITUC is the world’s largest trade
union representing 207 million workers through its 331 affiliated organizations in 163 countries

340 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

and territories. Its objective is to promote and defend workers’ rights vis-à-vis cross-border
cooperation between trade unions and within major global institutions. It focuses on “trade
union and human rights; economy, society and the workplace; equality and non-discrimination;
and international solidarity.”88

Political changes, external competitive forces, increased open trade, and frequent moves of
MNCs around the world are forces working toward convergence in labor systems. Convergence
occurs as the migration of management and workplace practices around the world reduce work-
place 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.89 It also occurs as
harmonization is sought, such as for the EU 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.90 It would appear that economic globalization is leading to labor transna-
tionalism and will bring about changes in labor rights and democracy around the world.

Other pressures toward convergence of labor relations practices around the world come from
the activities and monitoring of labor conditions worldwide by various organizations. One of
these organizations 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. The activities and communication chan-
nels of these associations provide unions and firms with information about differences in labor
conditions around the world.91

However, there are considerable forces for continued divergence of unions. These include
government attitudes toward unions; union competition to attract foreign investment and provide
jobs locally; different approaches to structuring unions; as well as how to organize collective
bargaining and deal with workers’ rights. Exhibit 10-4 shows the major forces for and against
convergence in labor relations systems.

Dynamic Forces
Acting on

Current System

Forces to Maintain or
Establish Divergent
Systems

Forces for Global
Convergence

Global competitiveness National labor relations systems
and traditions

MNC presence or consolidation initiatives Social systems
Political change Local regulations and practices
New market economies Political ideology
Free-trade zones: harmonization Cultural norms
(EU), competitive forces (NAFTA) Competition for jobs
Technological standardization, IT Collective bargaining methods
Declining role of unions
Agencies monitoring world labor practices

ExHIBIT 10-4 Trends in Global Labor Relations Systems

Adapting to Local Industrial Relations Systems
Although forces for convergence are found in labor relations systems around the world (as dis-
cussed previously), for the most part, MNCs still adapt their practices largely to the traditions of
national industrial relations systems, with considerable pressure to do so. Those companies, in fact,
act more like local employers, subject to local and country regulations and practices. Although the
reasons for continued divergence in systems seem fewer, they are very strong—notably, political
ideology and the overall social structure and history of industrial practices. In the European Union
(EU), where states are required to maintain parity in wage rates and benefits under the Social
Charter of the Maastricht Treaty, a powerful defense of cultural identity and social systems still

CHAPTER 10 • DEVELOPING A GLOBAL MANAGEMENT CADRE 341

exists, with considerable resistance by unions to comply with those requirements. Managers in
those MNCs also recognize that a considerable gap often exists between the labor laws and the
enforcement of those laws—in particular in less-developed countries.

USMCA and Labor Relations in Mexico
Government control over union activities is very strong, and although some strikes occur, union
control over members remains rather weak. Most labor unions are affiliated with the Institutional
Revolutionary Party (PRI) through the Confederation of Mexican Workers (Confederación de
Trabajadores Mexicanos—CTM).

In 2018, the leaders of United States, Mexico and Canada signed a new trade agreement—
called USMCA—which replaces NAFTA. Pending Congressional approval, one of the most sa-
lient differences in the USMCA compared with NAFTA pertains to protections for workers in the
three member countries. For example, Mexico has agreed to pass laws giving workers the right
to real union representation, to extend labor protections to migrant workers (who are often from
Central America), and to protect women from discrimination.92

According to the USMCA, U.S. automakers that assemble their cars in Mexico will be re-
quired to use more U.S.-made parts in order to gain tariff relief. This aspect of the new trade
agreement benefits U.S. factory workers. Moreover, roughly 40 percent of those cars require
workers to earn at least $16 per hour, which is three times more than the minimum wage in
Mexico. The new agreement permits each country to sanction each other for labor infractions
that impact trade, which differs from the NAFTA agreement.93

Many foreign firms set up production in Mexico—using the advantages of NAFTA, and
now USMCA—at least in part for the lower wages and lower overall cost of operating there,
as well as low transportation costs to the United States—and the Mexican government wants
to continue to attract that investment as it has for many years before NAFTA, and now under
the USMCA. For comparison, the accompanying “Comparative Management in Focus” feature
examines labor relations in Germany.

Comparative Management in Focus
Labor Relations in Germany

In February 2018, IG Metall announced a labor deal in the German state of Baden-
Wuerttemberg that gave workers a 4.3% increase in pay, thus preventing more labor disrup-
tions for companies such as Daimler AG.94

IndustryWeek.com, February 6, 2018

The new labor agreement was finalized after intense negotiations and even a few 24-hour walk-
outs. It stretched over 27 months. The protracted negotiations raised concerns about the broader
economic implications from stagnating wages in Europe’s largest economy.

“We’re glad that we could reach a compromise after negotiating some 13 hours today that we
can describe as bearable, but that also includes painful elements,” ElringKlinger AG Chief Executive
Officer and Suedwestmetall’s top negotiator Stefan Wolf said at a press briefing in Stuttgart.

The collective bargaining drew heavy interest from the European Central Bank as economists
have sought to determine the longer-term impact of stagnating wages in Germany.95

In spite of the commitment to IG Metall, Germany’s codetermination law (mitbestimmung) is
coming under pressure from German companies dealing with global competition and the results of
global trends of outsourcing, industrial restructuring, and the expansion of the service sector.96 That
pressure is increasingly taking the form of concession bargaining to keep jobs at home.

Mitbestimmung refers to the participation of labor in the management of a firm. The law man-
dates representation for unions and salaried employees on the supervisory boards of all companies
with more than 2,000 employees and works councils of employees at every work site. Companies with
2,000 or more staff have to give employees half the votes; those with 500 employees or more have
to give a third of supervisory board seats to union representatives.97 Unions are well integrated into
managerial decision-making and can make a positive contribution to corporate competitiveness and

(Continued)

342 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

restructuring; this seems different from the traditional adversarial relationship of unions and manage-
ment in the United States. However, the fact is that German firms, in the form of affiliated organiza-
tions of companies, have to contend with negotiating with powerful industry-wide unions. Employment
conditions that would be negotiated privately in the United States, for example, are subject to federal
mandates in Germany—a model unique in Europe. Germans on average work fewer hours than those
in any other country than the Netherlands.98 Under pressure from global competition, German unions
incurred huge membership losses. In 2015, 17.7 percent of employees in Germany are union members,
compared to 24.7 percent in the United Kingdom and 67 percent in Sweden.99 As a result, the unions
are now more willing to make concessions and trade flexibility for increased job security.

In Germany, the vast majority of union members are in the DGB—the main union confederation.
However, within the DGB, its individual unions such as IG Metall have considerable independence

Cities over 1 million
Capitals over 1 million

Countries members in EU
Countries not members in EU

MONTENEGRO

CROATIA
SERBIABOSNIA-

HERZEGOVINA

MACEDONIA
ALBANIA

KOSOVO

Seville

Madrid

Valencia

Barcelona

Valletta

Rome

Turin
Milan

Frankfurt

Warsaw
Amsterdam

Dublin

Bonn
Cologne

Hamburg

Copenhagen

Oslo

Reykjavik

Helsinki

Stockholm

Murmansk

Bern
Zurich

Athens

Naples

Palermo

Lisbon

Bordeaux

Paris

Marseille

Geneva

ViennaMunich

Berlin

Brussels

The
Hague

S P A I N

F R A N C E

NORWAY

SWEDEN

F I N L A N D

G E R M A N Y P O L A N D

ESTONIA

LATVIA

LITHUANIA

HUNGARY

ANDORRA
MONACO

LIECH.

LUX.
BELGIUM

N.
IRELAND

ICELAND

IRELAND
NETH.

DENMARK

SWITZ.

AUSTRIA

MALTA

GREECE

CYPRUS

ITALY

PORTUGAL

SICILY

ORKNEY
ISLANDS

SHETLAND ISLANDS
(U.K.)

FAEROE ISLANDS
(Denmark)

SARDINIA

CORSICA

CRETE

Strait of Gibraltar

M e d i t e r r a n e a n
S e a

Ionian
Sea

Bay of
Biscay

N o r t h
S e a

Baltic
Sea

N o r w e g i a n
S e a

A r c t i c O c e a n

A t l a n t i c
O c e a n

A
egean Sea

Adriatic Sea

D e n m a r k S t r a i t

Prague
CZECH

REPUBLIC SLOVAKIA

ROMANIA

BULGARIA

SLOVENIA

Budapest Bucharest

Sofia

Skopje
Tirana

Zagreb

Sarajevo

Belgrade

Podgorica

Pristina

EdinburghGlasgow
SCOTLAND

Birmingham

London

ENGLAND

UNITED
KINGDOM

WALES

MAP 10-1 Germany and Western Europe

Source: Deloitte Services LP

CHAPTER 10 • DEVELOPING A GLOBAL MANAGEMENT CADRE 343

and power. Unions tend to be organized by industry—e.g., metal workers, public sector workers,
retail workers. Trade union membership has tended to be strongest among manual workers in the
manufacturing sector and public services. However, it is generally weaker among employees in the
private services sector.100

The union works councils play an active role in hiring, firing, training, and reassignment dur-
ing times of reorganization and change.101 Because of the depth of works council penetration into
personnel and work organization matters, as required by law, its role has been described by some as
“co-manager of the internal labor market.”102 This situation has considerable implications for how
managers of MNCs plan to operate in Germany.

IG Metall (Industriegewerkschaft Metall—Industrial Union of Metalworkers) had nearly
3.9 million members as of 2018, representing workers at Germany’s biggest companies.103 IG
Metall has traditionally negotiated guidelines regarding pay, hours, and working conditions on a
regional basis. IG Metall’s proactive role on change illustrates the evolving role of unions by lead-
ing management thinking instead of reacting to it. In addition, management and workers tend to
work together because of the unions’ structure. Indeed, such institutional accord is a powerful factor
in changing deeply ingrained cultural traits. Codetermination has clearly helped to modify German
managerial style from authoritarian to something more akin to humanitarian without, it should be
noted, altering its capacity for efficiency and effectiveness.104 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.

Pay for German production workers has been among the highest in the world, about 150 percent
of that in the United States and about ten times that in Mexico. German workers also have the highest
number of paid vacation days in the world and prefer short workdays. Foreign companies operating
in Germany also have to be aware that termination costs—-including severance pay, retraining costs,
time to find another job, and so on—are very high, and that is assuming the company is successful in
terminating the employee in the first place, which is very difficult to do in Europe. This was brought
home to Colgate-Palmolive when it tried to close its factory in Hamburg. The company offered the
500 employees an average severance of $40,000 each, but the union would not accept, and eventually
Colgate had to pay a much higher (undisclosed) amount.

Conflicting opinions over the value of codetermination are increasingly evident as business
practices become increasingly subject to EU policies. A major concern was that firms from other
countries that were considering cross-border mergers would be discouraged by the EU statute that
would oblige them to incorporate codetermination if the new company includes significant German
interests.

CONCLUSION
The role of the IHRM department has expanded to meet the strategic needs of the company
to develop a competitive global management cadre. Maximizing human resources around the
world requires attention to the many categories and combinations of those people, including
expatriates, inpatriates, host-country managers, third-country nationals, global teams, and local
employees. Competitive global companies need top managers with global experience and under-
standing. To that end, attention must be paid to the needs of expatriates before, during, and after
their assignments to maximize their long-term contributions to the company.

Summary of Key Points

■ Expatriate career management necessitates plans for
retention of expatriates during and after their assign-
ments. Through retention, the firm can benefit from the
knowledge and experiences attained on assignments;
otherwise, the next firm that hires the returnee will ben-
efit from that knowledge. Support programs for expatri-
ates should include information from and contact with
the home organization as well as career guidance and
support after the overseas assignment.

■ Expatriates’ assignments offer employees an oppor-
tunity to obtain valuable international experience that
can have a positive influence on their career trajec-
tories. Nevertheless, employees must evaluate both
the benefits and costs prior to accepting an expatriate
assignment.

■ The expatriate’s spouse plays a crucial role in the po-
tential retention and effectiveness of the manager in
host locations. Companies should ensure the spouse’s

344 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

interest in the assignment, include him or her in the
predeparture training, and provide career and family
support during the assignment and upon return.

■ Global management teams offer greater opportunities
for competition—by sharing experiences, technology,
and international managers—and greater opportuni-
ties for cross-cultural understanding and exposure to
different viewpoints. Disadvantages can result from
miscommunication and cross-cultural conflicts and
greater complexity in the workplace.

■ Virtual global teams enable cost-effective, rapid
knowledge sharing and collaboration. Establishing
regular communication and routines, as well as ex-
ploiting technology can help to reduce cross-cultural
and logistical challenges.

■ Women represent an underused resource in inter-
national management, especially since they tend to
employ more leadership behaviors that enhance firm
performance. One reason for this situation is the as-
sumption that culturally based biases may limit the
opportunities and success of female managers and
employees.

■ The labor relations environment, system, and pro-
cesses vary around the world and affect how the in-
ternational manager must plan strategy and maximize
the productivity of local human resources.

■ Labor unions around the world are becoming increas-
ingly interdependent because of the operations of
MNCs worldwide, the outsourcing of jobs around the
world, and the leveling of the playing field for jobs.

10-1. What steps can the company’s International HRM department
take to maximize the effectiveness of the expatriate’s assign-
ment and the long-term benefit to the company?

10-2. Discuss the role of reverse culture shock in the repatriation pro-
cess. 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?

10-3. What are the reasons for the small numbers of female expa-
triates? What more can companies do to use women as a
resource for international management?

10-4. What is a virtual global management team? How do the mem-
bers interact? Discuss the advantages and the challenges
these teams face. Suggest some ways to maximize the ef-
fectiveness of virtual teams across borders.

10-5. Discuss the reasons behind the growing convergence and in-
terdependence of labor unions around the world.

10-6. Discuss the ways in which an expatriate assignment can ben-
efit an employee’s career. Discuss circumstances in which
you would decline an expatriate assignment.

Discussion Questions

10-7. Interview one or more managers who have held positions
overseas. Try to interview two people of different genders.
Ask them about their experiences both in the working environ-
ment and in the foreign country generally. How did they and
their families adapt? How did they find the stage of reentry to

headquarters, and what were the effects of the assignment on
their career progression? What differences do you notice, if
any, between their expatriate experiences?

10-8. Create a 5- to 10-year plan for your career goals. Discuss how
expatriate assignments can help achieve those goals.

Application Exercise

Form groups of six students, divided into two teams, one repre-
senting union members from a German company and the other
representing union members from a Mexican company. These
companies have recently merged in a joint venture, with the
subsidiary to be located in Mexico. These union workers, all

line supervisors, will be working together in Mexico. You are
to negotiate six major points of agreement regarding union rep-
resentation, bargaining rights, and worker participation in man-
agement, as discussed in this chapter. Present your findings to
the other groups in the class and discuss.

Experiential Exercise

CHAPTER 10 • DEVELOPING A GLOBAL MANAGEMENT CADRE 345

Expat Tax Breaks for Brexit Bankers: FT Readers Respond

CASE STUDY

A selection of opinions on the causes and consequences of Brexit job
moves

Niki Blasina, Monika Pronczuk and FT Readers
November 2, 2018

In our recent project analysing the generous tax breaks available to London bankers moving to
the European continent, we invited readers to comment on Brexit-related job moves or share
their experience navigating expatriate tax regimes.

We received hundreds of responses about tax incentives and other factors to consider when
making a relocation decision.

The article also triggered a broader discussion about the estimated number of jobs that could
move due to Brexit and the potential economic effects of such to both the UK and Europe.

Here are some of the best submissions.

Tax incentives are not the whole story

“If you have to relocate, there is a lot more to be looked at: Paris may have nice incentives,
but is also one of the most expensive places in Europe. The Netherlands have one of the high-
est qualities of life in Europe, eg with regards to public services, safety, etc. Luxembourg has
a generally low level of income tax, and only very limited capital gains tax — and no tax on
inheritance in direct line of succession, which is pretty unique on the continent. You may also
want to consider how difficult the local language is, and how much you need to learn to get by
in daily life . . . Just following the tax incentive may leave you high and dry if you want to stay
there for more than a few years.”

— Athanase

Quality of life in Italy beats London

“I got the chance to move out of London and relocate to Italy. I am quite glad. Besides the tax
incentives mentioned in the article, overall I could enjoy a higher quality of life.

Housing in London is [becoming] more and more expensive, requiring even professionals earn-
ing well above the median salary to commute back and forth for hours . . .

In the UK, public higher education is much more expensive than in France, the Netherlands,
Italy, etc, where it is usually free or costs a few hundred euros per year . . .

You need to eat at least three times a day, having a tasty meal in Italy instead of the usual junk
food would definitely make your day better.

Living in Milan, you can spend weekends at the beach in the summer and go skiing in the win-
ter just 1h/2h away by car.

— Luc321

Increase in income inequality

“I certainly understand the rationale for these tax incentives, but they also create greater income
inequality, something the French and Italians in particular rail against, and certainly run counter
to the EU’s condemnation of corporate tax incentives for companies that relocate to Ireland et al.”

— washu

Chasing bankers is the wrong approach

“Fighting for London bankers is short sighted. EU countries should work together to make their
financial market more robust and more uniform, not fight to get bankers. The markets will pun-
ish Eurozone countries soon if this is not done.”

— Tocqueville

346 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

Will locals be outpriced?

“Has anyone actually asked the non-financial markets people, who already live in Paris or
Milan, if they want to encourage the creation of a “financial markets colony” in their cities?
Without question this will result in a reduction in the quality of life of those residents, who will
be priced out of their current way of life.”

— Sensiblelaw

Job moves are being finalised now

“We’re finalising our contracts, relocation and commuting packages now. People will be told
late November their jobs are moving and will have until February/March to decide . . . It’s hap-
pening. And not in insignificant numbers.”

— Leviathan

IT jobs will need to move too

“A lot of IT support and operations will also need to be moved to the EU. There’s been a steady
drip feeding from the UK into eastern Europe for first line support services (call centres, not IT
intensive work). But from Brexit onwards, there will need to be quite a lot more than that. Data
will need to reside in the EU, because of regulatory requirements.”

— Riccardo Ferri

New jobs elsewhere will curb City growth

“The reality is that the initial set-up of entities in other EU countries is just the beginning. It
is a first step. Every bank, asset manager or Fintech will then start staffing those offices in the
future instead of their entities in London . . . Even a company like ours, with just 100 people, we
are moving an initial five to the EU, but also seven new hires will be allocated to our offices in
Madrid instead of London. It is the long term which will see London’s City shrinking.”

— Platipus

Not many jobs are moving

“I work in financial services and have done so for many years. I hear of very few job losses to
the continent as a result of Brexit.”

Case Questions

10-9. Assume you are working in London and your company wants to relocate you to one of their
branches throughout Europe and has given you a choice. You have a spouse and two children of
school age. Consider various capitals in Europe. Draw up a list of your priorities for relocation and
assess three locations. What are your first and second choices?

10-10. What would be your choice as a single person?

1. Thomas Grove, “Expats Flee Moscow as Tensions Flare,” Wall
Street Journal, June 10, 2015, B1; Julia Werdigier, “Paychecks
and Passports,” New York Times, April 2, 2008; Doreen Carvajal,
“Paid in Dollars, Some Americans Are Struggling in Europe,”
New York Times, December 15, 2007; Alan Paul, “The Expat
Life: Clock Counts Down as Decision Weighs: Should I Stay

or Go?” www.wallstreetjournal, February 28, 2008; Monica
Ginsburg, “Getting Ahead by Going Abroad,” Crain’s Chicago
Business 31, No. 50 (2008), p. 20; Philip Shearer and Abby
Ellin, “Foreign from the Start,” www.nytimes.com, September
21, 2003; Jad Mouawad, “Total, the French Oil Company, Places
Its Bets Globally,” www.nytimes.com, February 22, 2009;

Endnotes

http://www.nytimes.com

http://www.wallstreetjournal

CHAPTER 10 • DEVELOPING A GLOBAL MANAGEMENT CADRE 347

Global Relocation Trends Survey, www.brookfieldgrs.com, ac-
cessed March 1, 2009; Keith Bradsher and Julia Werdigier,
“Abruptly Expatriate Bankers Are Cut Loose,” www.nytimes
.com, March 4, 2009.

2. Mark Harrison, Managing International Assignments for
the Modern Expat, ECA International’s Managing Mobility
Survey, September 26, 2016, https://eca-international.com
/insights/articles/september-2016/managing-international-as-
signments (accessed January 17, 2019).

3. Alan Bell, Global Mobility 2020: Insights from P&G, January
17, 2018, http://info.equusoft.com/blog/global-mobility-2020-
insights-from-pg (accessed January 16, 2019).

4. Werdigier.
5. Kate Mayberry, The Problem with Being a Long-Term Expat,

October 24, 2016, www.bbc.com/capital/story/20161024-the
-problem-with-being-a-long-term-expat (accessed January 16, 2019).

6. Wall Street Journal, February 28, 2008.
7. Ginsburg.
8. Shearer and Ellin.
9. Garry Oddou et al., Repatriates as a Source of Competitive

Advantage. Organizational Dynamics (2013), pp. 42, 257–266.
10. The Global Talent Index Report: The Outlook to 2015 was written

by the Economist Intelligence Unit and published by Heidrick &
Struggles.

11. Trends in Global Relocation: Biggest Challenges Survey (2018),
www.cartus.com/en/blog/tracking-global-relocation-trends
-2018-biggest-challenges-survey/ (accessed December 26, 2018).

12. Ibid.
13. BGRS, “Using Data to Demonstrate Mobility’s Value,” www

.bgrs.com/tmts_article/using-data-to-demonstrate-mobilitys
-value/ (accessed January 16, 2019).

14. 2016 Global Mobility Trends, http://globalmobilitytrends.bgrs
.com/#/home (accessed December 26, 2018).

15. “Asia’s leading companies need to make bolder choices when ap-
pointing non-executive directors suggests Heidrick & Struggles’
‘Board Monitor Asia Pacific,’” PR Newswire, December 19,
2018, https://heidrick.mediaroom.com/2018-12-18-Asias-leading
-companies-need-to-make-bolder-choices-when-appointing-non
-executive-directors-suggests-Heidrick-Struggles-Board-Monitor
-Asia-Pacific?mobile=No“(accessed December 27, 2018).

16. “International Assignments Remain on the Upswing Despite
Economic Concerns, Says KPMG,” PR Newswire, December 3,
2008, www.kpmglink.com.

17. M. Lazarova and P. Caligiuri, Retaining Repatriates: The Role of
Organizational Support Practices. Journal of World Business 36,
No. 4 (2001), pp. 389–401.

18. Charlene M. Solomon, One Assignment, Two Lives. Personnel
Journal (May 1996), pp. 36–44.

19. “2015 Global Relocation Trends Survey,” www.brookfieldgrs
.com (accessed August 26, 2015).

20. Mark Harrison, Managing International Assignments for the
Modern Expat, ECA International’s Managing Mobility Survey,
September 26, 2016, https://eca-international.com/insights
/articles/september-2016/managing-international-assignments
(accessed January 17, 2019).

21. Ibid.
22. S. Murray, “Should I Stay or Should I Go? Overseas Jobs

Demand the Extra Mile,” Financial Times, March 7, 2017, http://
www.ft.com/content/56b31c32-f2db-11e6-95ee-f14e55513608
(accessed December 26, 2018).

23. http://www.FT.com, March 5, 2001.
24. P. Asheghian and B. Ebrahimi, International Business (New

York: HarperCollins, 1990), p. 470.
25. Global Relocation Trends Survey, 2011.
26. N. J. Adler, International Dimensions of Organizational

Behavior, 4th ed. (Boston: PWS-Kent, 2002).
27. J. Bonache and C. Brewster, Knowledge Transfer and the

Management of Expatriation. Thunderbird International
Business Review 43, No. 1 (2001), pp. 145–168.

28. Berthoin-Antal, Expatriates’ Contributions to Organizational
Learning. Journal of General Management 26, No. 4 (2001),
pp. 62–84.

29. Ibid.
30. Mila Lazarova and Ibraiz Tarique, Knowledge Transfer upon

Repatriation. Journal of World Business 40, No. 4 (2005),
pp. 361–373.

31. Ibid.
32. 2015 Global Relocation Trends Survey, www.brookfieldgrs.com,

accessed August 26, 2015.
33. J. Conger and E. Lawler, People Skills Still Rule in the Virtual

Company. Financial Times, August 26, 2005.
34. Based largely on Adler, 2002.
35. T. Gross, E. Turner, and L. Cederholm, Building Teams for

Global Operations. Management Review (June 1987), p. 34.
36. T. R. Kayworth and D. E. Leidner, Leadership Effectiveness

in Global Virtual Teams. Journal of Management Information
Systems 18, No. 3 (2001–2002), pp. 7–40.

37. C. Solomon, Building Teams across Borders. Global Workforce
(November 1998), pp. 12–17.

38. Ibid.
39. Interview with Geoff Perlman, December, 2018.
40. Ibid.
41. Ibid.
42. Ibid.
43. Michiyo Nakamoto, “Cultural Revolution in Tokyo,” www

.ft.com, September 17, 2009.
44. Ibid.
45. A. Joshi, G. Labianca, and P. M. Caligiuri, Getting along Long

Distance: Understanding Conflict in a Multinational Team
through Network Analysis. Journal of World Business 37 (2002),
pp. 277–284.

46. V. Govindarajan and A. K. Gupta, Building an Effective Global
Business Team. MIT Sloan Management Review 42, No. 4
(2001), p. 63.

47. Ibid.
48. Ibid.
49. S. Chevrier, Cross-Cultural Management in Multinational

Project Groups. Journal of World Business 38, No. 2 (2003),
pp. 141–149.

50. Ibid.
51. Eleanor Warnok, “A Step Forward for Economics in Japan,” The

Wall Street Journal, August 28, 2015.
52. K. Bellstrom and B. Kowitt, Fortune, September 24, 2018, http://

fortune.com/2018/05/21/women-fortune-500-2018/
53. E. Elsaid and N. Ursel, www.weforum.org/agenda/2018/09

/who-stays-longer-male-or-female-ceos
54. K. Bellstrom and B. Kowitt, Fortune, September 24, 2018.
55. World Economic Forum, The Global Gender Gap Report (2017),

http://www3.weforum.org/docs/WEF_GGGR_2017

http://www.weforum.org/agenda/2018/09/who-stays-longer-male-or-female-ceos

http://fortune.com/2018/05/21/women-fortune-500-2018/

http://www.ft.com

http://www.brookfieldgrs.com

http://www.FT.com

http://www.ft.com/content/56b31c32-f2db-11e6-95ee-f14e55513608

https://eca-international.com/insights/articles/september-2016/managing-international-assignments

http://www.brookfieldgrs.com

http://www.kpmglink.com

https://heidrick.mediaroom.com/2018-12-18-Asias-leading-companies-need-to-make-bolder-choices-when-appointing-non-executive-directors-suggests-Heidrick-Struggles-Board-Monitor-Asia-Pacific?mobile=No

http://globalmobilitytrends.bgrs.com/#/home

http://www.bgrs.com/tmts_article/using-data-to-demonstrate-mobilitys-value/

http://www.cartus.com/en/blog/tracking-global-relocation-trends-2018-biggest-challenges-survey/

http://www.bbc.com/capital/story/20161024-the-problem-with-being-a-long-term-expat

http://info.equusoft.com/blog/global-mobility-2020-insights-from-pg

https://eca-international.com/insights/articles/september-2016/managing-international-assignments

http://www.nytimes.com

http://www.brookfieldgrs.com

348 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

56. Sonia Elks, “The Executive Gender Pay Gap Is Closing—
But Women Are Still Seriously Unrepresented,” Reuters,
November 5, 2018, www.weforum.org/agenda/2018/11
/the-gender-pay-gap-is-narrowing-thanks-to-women

57. “Women Matter: Time to Accelerate,” McKinsey Global
Institute, October 2017. www.mckinsey.com/~/media/mckinsey
/featured%20insights/women%20matter/women%20matter
% 2 0 t e n % 2 0 y e a r s % 2 0 o f % 2 0 i n s i g h t s % 2 0 o n % 2 0 t h e
%20importance%20of%20gender%20diversity/women-matter
-time-to-accelerate-ten-years-of-insights-into-gender-diversity.ashx.

58. Ibid., p. 42.
59. MSCI ASWI refers Morgan Stanley Capital International

(MSCI) All Country World Index (ACWI) is an index com-
prised of stocks from 23 developed countries and 24 emerging
markets. https://www.investopedia.com/terms/m/msci-acwi.asp.
Accessed May 7, 2019. M. T. Eastman, Women on Boards:
Progress Report 2017 (MSCI, December 2017).

60. M. T. Eastman, Women on Boards: Progress Report 2017 (MSCI,
December 2017).

61. European Commission, “2018 Report on Equality Between
Women and Men in the EU,” (European Union, 2018): p. 33

62. Bennhold.
63. S. M. Toh and G. J. Leonardelli, Cultural Constraints on the

Emergence of Women Leaders: How Global Leaders Can
Promote Women in Different Cultures. Organizational Dynamics
(2013), pp. 42, 191–197.

64. Women Matter: Time to Accelerate. McKinsey Global Institute,
October 2017, p. 41.

65. A. Kazmin, “India Social Norms Hit Women’s Fight to Find
Work,” Financial Times, October 30, 2018, p. 2.

66. Ibid.
67. “Japan’s Neglected Resource—Female Workers,” www.nytimes

.com, July 24, 2003.
68. Ibid.
69. M. Jelinek and N. Adler, Women: World Class Managers for

Global Competition. Academy of Management Executive 11, No.
1 (February 1988), pp. 11–19.

70. Ibid.
71. Jacob Vittorelli, Former Deputy Chairman of Pirelli.
72. M. Pooler and M. Dickie, “German Manufacturer to Close

Two UK Plants,” Financial Times, November 6, 2018, http://
www.ft.com/content/ff7ab9ae-e1dd-11e8-8e70-5e22a430c1ad
(accessed December 26, 2018).

73. https://stats.oecd.org; OECD, OECD Employment Outlook 2017
(Paris: OECD Publishing, 2017), http://dx.doi.org/10.1787/empl_
outlook-2017-en. https://read.oecd-ilibrary.org/employment/oecd
-employment-outlook-2017_empl_outlook-2017-en#page3
(accessed March 5, 2019).

74. Ibid; https://www.statista.com/chart/9919/the-state-of-the-unions/.
75. J. S. Daniels and L. H. Radebaugh, International Business, 10th

ed. (Reading, MA: Addison-Wesley, 2004).
76. P. J. Dowling, R. S. Schuler, and D. E. Welch, International

Dimensions of Human Resource Management, 2nd ed. (Belmont
CA: Wadsworth, 1994).

77. Adams.
78. Ibid.
79. D. Barboza, “China Passed Law to Empower Unions and End

Labor Abuse,” New York Times, October 12, 2006.
80. David Barboza, www.nytimes.com, October 12, 2006.
81. Ibid.
82. Anonymous, “Asia: Arbitration Needed: China’s Labour Laws,”

Economist 392, No. 8642 (2009), p. 37.

83. David Barboza, “Foxconn Resolves a Dispute with Some
Workers in China,” International Herald Tribune, January 12,
2012.

84. Nick Wingfield and Charles Duhigg, “Apple Lists Its Suppliers
for the First Time,” International Herald Tribune, January 14,
2012.

85. China Labor Watch. Amazon Profits from Secretly Oppressing
its Supplier’s Workers: An Investigative Report on Hengyang
Foxconn, June 10, 2018, www.chinalaborwatch.org/report/132
(accessed on December 10, 2018).

86. S. Wrest, “Trade Union Law and Collective Bargaining in
China,” Chinese Business Review, April 21, 2017, www
.chinabusinessreview.com/trade-union-law-and-collective-
bargaining-in-china/ (accessed December 29, 2018).

87. B. Barber, “Workers of the World Are Uniting,” Financial Times,
December 7, 2004.

88. International Confederation of Free Trade Unions, www.ituc-csi
.org/ (accessed December 7, 2018).

89. M. M. Lucio and S. Weston, New Management Practices in
a Multinational Corporation: The Restructuring of Worker
Representation and Rights? Industrial Relations Journal 25, No.
2 (2004), pp. 110–121.

90. D. B. Cornfield, Labor Transnationalism? Work and Occupations
24, No. 3 (August 1997), p. 278.

91. Daniels and Radebaugh.
92. A. Campbell, “Trump’s new trade deal is better for workers

than NAFTA was,” Vox, October 2, 2018, www.vox.com/policy
-and-politics/2018/10/2/17925424/trump-mexico-trade-deal
-nafta-workers-labor (accessed December 7, 2018); https://ustr
.gov/sites/default/files/files/agreements/FTA/USMCA/Text/23
_Labor

93. A. Campbell, “Trump’s new trade deal is better for workers
than NAFTA was”; https://ustr.gov/sites/default/files/files
/agreements/FTA/USMCA/Text/23_Labor

94. www.industryweek.com/talent/german-metal-workers-reach-
landmark-labor-deal-lift-wages (accessed December 10, 2018).

95. C. Rauwald and C. Look, “German Metal Workers Reach
Landmark Labor Deal to Lift Wages,” IndustryWeek, February
6, 2018, www.industryweek.com/talent/german-metal-workers
-reach-landmark-labor-deal-lift-wages (accessed December 10,
2018).

96. R. Milne and H. Williamson, “Selective Bargaining: German
Companies Are Driving a Hidden Revolution in Labour
Flexibility,” Financial Times, January 6, 2006.

97. Ibid.
98. “A New Deal in Europe?” BW Online, July 14, 2003, www

.businessweek.com.
99. www.forbes.com/sites/niallmccarthy/2017/06/20/which

-countries-have-the-highest-levels-of-labor-union-membership
-infographic/#7b425c1f33c0 and www.oecd.org (accessed
December 10, 2018).

100. www.worker-participation.eu/National-Industrial-Relations/
Countries/Germany/Trade-Unions (accessed December 29,
2018).

101. H. C. Katz, The Decentralization of Collective Bargaining: A
Literature Review and Comparative Analysis. Industrial and
Labor Relations Review 47, No. 1 (1993), pp. 3–22.

102. Williamson, Financial Times, July 22, 2004.
103. C. Rauwald and C. Look, “German Metal Workers Reach

Landmark Labor Deal to Lift Wages.”
104. www.nytimes.com, July 24, 2004.

http://www.nytimes.com

http://www.worker-participation.eu/National-Industrial-Relations/Countries/Germany/Trade-Unions

http://www.oecd.org

http://www.forbes.com/sites/niallmccarthy/2017/06/20/which-countries-have-the-highest-levels-of-labor-union-membership-infographic/#7b425c1f33c0

http://www.businessweek.com

http://www.industryweek.com/talent/german-metal-workers-reach-landmark-labor-deal-lift-wages

https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/Text/23_Labor

http://www.vox.com/policy-and-politics/2018/10/2/17925424/trump-mexico-trade-deal-nafta-workers-labor

http://www.ituc-csi.org/

http://www.chinabusinessreview.com/trade-union-law-and-collective-bargaining-in-china/

http://www.chinalaborwatch.org/report/132

http://www.nytimes.com

https://www.statista.com/chart/9919/the-state-of-the-unions/

https://read.oecd-ilibrary.org/employment/oecd-employment-outlook-2017_empl_outlook-2017-en#page3

http://dx.doi.org/10.1787/empl_outlook-2017-en

https://stats.oecd.org

http://www.ft.com/content/ff7ab9ae-e1dd-11e8-8e70-5e22a430c1ad

http://www.nytimes.com

https://www.investopedia.com/terms/m/msci-acwi.asp

http://www.mckinsey.com/~/media/mckinsey/featured%20insights/women%20matter/women%20matter%20ten%20years%20of%20insights%20on%20the%20importance%20of%20gender%20diversity/women-matter-time-to-accelerate-ten-years-of-insights-into-gender-diversity.ashx.

http://www.weforum.org/agenda/2018/11/the-gender-pay-gap-is-narrowing-thanks-to-women

349

11-1. To understand the complexity and the variables involved in cross-cultural motivation

11-2. To become familiar with the global leader’s role and environment and what makes a
successful global leader

11-3. To discuss the research on leadership and how leadership styles and practices vary
around the world

11-4. To understand the variables that necessitate contingency leadership: culture, context,
people, and situations

Motivating and Leading

O B J E C T I V E S

11
C H A P T E R

Opening Profile: Motoi Oyama of Asics: The Globally
Minded Shoe Ambassador1

Back in 2001, shortly after Motoi Oyama moved to the Netherlands to become head of Asics
Europe, he ordered a survey on brand recognition across the region. Half the respondents thought
Asics was American. More than 40 per cent had no idea where the company was from.

Mr Oyama was ecstatic.
In his view the entire success of his sportswear company, which commands an eclectic cult follow-

ing of long-distance runners, wrestlers, breakdancers and fans of Quentin Tarantino films, pivots upon
being neutral and global. His leadership, says the 68-year old who became chief executive in 2011, has
been focused on enhancing those qualities and of running a group that can leverage what he calls the
borderless, function-obsessed nature of sports.

“The lucky thing is the name,” he says, reaching for one of the many running shoes within the im-
mediate grasp of his chair and pulling out the tongue to show off the Asics emblem. “Nobody knew we
were Japanese . . . I accepted that [the survey result] was a very good thing for us. The shoes are good for
running. That’s what is important . . . nothing national should be added to the brand.”

Since 2000—and largely through his efforts—Asics (the name was inspired by a Latin phrase) has
gone from being a company with 30 per cent overseas sales to 75 per cent in the last financial year. The
overseas push, he says, was a direct response to criticism from business partners outside Japan—once
in the mid 1980s and again in the early 2000s. Both occasions caused him to accelerate efforts outside
Japan. He was accused of allowing Asics to remain a “sleeping tiger”—a potentially winning product
but unable or unwilling to take the tough decisions required to take on the big global sportswear groups.

His response, which came far earlier than other more globalised Japanese companies, was first to
insist that English became the lingua franca across the group and then to pull back all his Japanese man-
agers from overseas to leave the job of expansion to locals.

The balance should continue to shift towards overseas sales, he says, as Asics pushes further into
China, where marathon running has taken off, and India, where the company hopes to break into the

(Continued)

350 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

cricket shoe market. The 2020 Tokyo Olympics, of which Asics is a major sponsor, will be a significant
opportunity to put the brand directly under the noses of the 40m foreign visitors Japan expects that year.

All this comes from a slightly unlikely setting. Asics head office is an unassuming building in an
industrial park on the outskirts of Kobe—the city where founder Kihachiro Onitsuka produced his first
basketball shoe under the Onitsuka Tiger brand. As Mr Oyama eagerly reminds, the shoes were so good
that Nike founder Philip Knight’s first business was as their distributor in the US.

Perhaps to underline his status as a globally minded globaliser, Mr Oyama punctuates his conversa-
tion with a near constant stream of references to the many periods of his career spent outside Japan. He
describes the decision to revive the Onitsuka Tiger brand as a specific fashion line in 2002, and the mar-
keting coup of actress Uma Thurman wearing the shoes in the film Kill Bill as a key element in boosting
the brand’s profile globally. The mention of the hit Tarantino film elicits a deep guffaw of satisfaction
from the Asics boss.

A blunt realist, he notes the various management bruises he has sustained doing battle with Nike,
Adidas and Puma and the hit his consolidated sales projections have taken (analyst forecasts for 2020
are about Y425bn, $3.8bn) as e-commerce and competition have bitten. He reels off lessons learnt both
from vaunted international sports superstars such as Novak Djokovic (whose customised left shoe he
asks to be brought in to the meeting room) and far-flung managers of sports retail outlets.

Freshest in his mind are the trends he spotted observing the passing feet of runners at the previous
weekend’s Boston Marathon. “There were more lighter-coloured uppers,” he says, fretting that Asics
latest premium marathon shoe may be too dark for current tastes.

Boston is one of a growing number of key fixtures in the Asics calendar as a company that once
dominated the long-distance running market has—in his characteristically candid assessment—lost
huge numbers of customers to competitors in years where the range on offer was not quite right.

“We were number one but we lost that because of the product and other brands. But we can come
back now because we know why we lost share,” says Mr Oyama.

In particular, he says, Asics failed to respond quickly enough to the fact that fitness trends in the US
were pushing customers towards 5km and 10km runs and a softer sole than his company was producing
at the time. Redressing all that, he says, is absolutely critical to the company’s future. And to its share
price, which almost tripled in value in the first four years of Mr Oyama becoming CEO, but have since
shed the lion’s share of that.

For this challenge, Mr Oyama has reunited the company with a key tenet of the founder’s view of
shoemaking: “What he hated most was a reliance on the gut feeling of craftsmen. He always believed
that shoe design should be based on biomechanical data—to study the exact human movements required
by the sport.” That imperative, when translated from 1949 to 2019, has again demanded leadership. As
well as the existing battery of R&D investments and data that Asics has used to design shoes, the com-
pany in 2016 bought fitness-tracking app Runkeeper. The user data it generates have helped produce the
MetaRide—a $250 shoe that purports to save a runner’s energy and which he believes will bring Asics
back to the top of its core game.

“It’s a challenging situation. But there are no borders in sporting goods. It’s about whether the
athletes like the shoes. . .”

Motivating
The two things that people will always be better at than machines are motivating others and
coming up with original ideas.2

Lucy Kellaway, finanCial Times

After managers set up a firm’s operations by planning strategy, organizing the work and
responsibilities, and staffing those operations, they turn their attention to everyday activities.
This ongoing behavior of individual people carrying out various daily tasks enables the firm
to accomplish its objectives. Getting those people to perform their jobs efficiently and effec-
tively is at the heart of the manager’s challenge. As illustrated in the opening profile, Motoi
Ayama recognized that the challenge of motivating and leading in overseas operations requires
the involvement of and delegation to local managers and workers.

Motivation—and therefore appropriate leadership style—is affected by many powerful
variables (societal, cultural, and political). When considering the Japanese culture, for example,

CHAPTER 11 • MOTIVATING AND LEADING 351

as discussed throughout this book, it is not surprising to find that Japanese MNC Fujitsu uses
some motivational techniques very different from those used in the West, such as when it cut
the salaries of around 14,000 managers to motivate them and their subordinates to work harder.
Fujitsu management said that if the company met their profit goal for the year the managers
might have their full salaries restored. The logic was to build a sense of urgency and team spirit.
Japanese workers typically feel a strong kinship to their employers and will work harder if they
see their managers making similar sacrifices for the group goals.3 Clearly, Fujitsu’s decision to cut
pay is based on the Japanese tradition of sink or swim, coworkers and employer banding together,
and its collectivist culture.

Our objective in this chapter is to consider motivation and leadership in the context of di-
verse cultural milieus. We need to know what, if any, differences exist in the societal factors that
elicit and maintain behaviors leading to high employee productivity and job satisfaction. Are
effective motivational and leadership techniques universal or culture based?

CROSS-CULTURAL RESEARCH ON MOTIVATION
Motivation is very much a function of the context of a person’s work and personal life. That
context is greatly influenced by cultural variables, which affect the attitudes and behaviors of
individuals (and groups) on the job. The framework of this context was described in Chapter 3
and illustrated in Exhibit 3-1.

This perspective of the overall context of a person’s life on motivation was confirmed by
a recent research study by Irem Uz on the concept of cultural tightness and looseness (CTL)
among 68 countries, which found:

[T]raditional societies to be tighter, and industrialized societies to be looser.4

JouRnal of CRoss-CulTuRal psyCHoloGy

A tight culture is one with pervasive norms and practices of sanctioning deviance from norms;
people’s values, norms, and behavior are similar to one another. People in tight societies pre-
ferred to live near those who are similar to them; and they tend to feel better when there is
order and predictability in their lives; they tend to be risk-averse. Uz found the five most “tight”
countries to be Morocco, Indonesia, Egypt, Bangladesh, and Jordan. Loose cultures, then, are at
the opposite end of the range of CTL; the most “loose,” according to the study were Belgium,
Luxembourg, France, Great Britain, and Sweden.5 Of course, there is a wide range of differences
between tight and loose; and, as always, we caution that any such findings do not take account of
individual or regional differences. That is, we cannot stereotype, only generalize to show some
ideas of how to lead in various environments.

These findings have considerable implications for both motivation and leadership in that
managers must recognize the impact of the commonly accepted norms of behavior in a society
and how it affects work attitudes and relationships on the job.

Some overlap with Uz’s findings can be observed by applying Hofstede’s research on the
cultural dimensions of individualism—uncertainty avoidance, masculinity, and power distance,
for example—which allows us to make some generalized assumptions about motivation such as
the following.

• High uncertainty avoidance suggests the need for job security, whereas people with low
uncertainty avoidance would probably be motivated by more risky opportunities for vari-
ety and fast-track advancement.

• High power distance suggests motivators in the relationship between subordinates and a
boss, whereas low power distance implies that people would be more motivated by team-
work and relations with peers.

• 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.

• High masculinity suggests that most people would be more comfortable with the tradi-
tional division of work and roles; in a more feminine culture, the boundaries could be
looser, motivating people through more flexible roles and work networks.

11-1. To understand the
complexity and the
variables involved in
cross-cultural motivation

352 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

More recent research, based on Hofstede’s dimensions of individualism and masculinity,
was conducted by Gelade, Dobson, and Auer. They compared what 50,000 workers in a global
pharmaceutical company in 29 nations valued most in their jobs and how that positively affected
their company. The results, based on Hofstede’s individualism dimension, showed that the higher
the level of national individualism (such as is typical in the United States), the more employees
valued their autonomy, opportunities for personal achievements, and a work–life balance. This
compared with employees in the more collectivistic countries (such as in China and Singapore),
who apparently were more motivated when they felt that their jobs fully used their skills and
when they felt that the company was providing them with good working conditions, fringe bene-
fits, and training.6 The findings based on the masculinity dimension were that the higher the level
of masculinity (such as in Japan and Mexico), the more motivated employees were when given
opportunities for high pay, personal accomplishment, and job advancement. This compared with
those from more feminine cultures (such as in Denmark and Sweden), who claimed that factors
related to their relationships with their managers and coworkers provided more commitment to
the organization. The authors conclude that:

These findings show that the sources of organizational commitment are culturally conditioned
and that their effects are predictable from Hofstede’s value dimensions.7

JouRnal of CRoss-CulTuRal psyCHoloGy

Misjudging the importance of these cultural variables in the workplace may result not only
in a failure to motivate but also in demotivation. Rieger and Wong-Rieger present the following
example.

In Thailand, the introduction of an individual merit bonus plan, which runs counter to the soci-
etal norm of group cooperation, may result in a decline rather than an increase in productivity
from employees who refuse to openly compete with each other.8

In considering what motivates people, we have to understand their needs, goals, value sys-
tems, and expectations. No matter what their nationality or cultural background, people are
driven to fulfill needs and achieve goals, but what are those needs, what goals do they want to
achieve, and what can motivate that drive to satisfy their goals?

The Meaning of Work
Because the focus in this text is on the needs that affect the working environment, it is important
to understand first what work means to people from different backgrounds. 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,
and so on.

Another way to view work, however, is through its relationship to the rest of a person’s life.
The Thais call work ngan, which is the same as the Thai word for “play,” and they tend to intro-
duce periods of play in their workdays. On the other hand, most people in China, Germany, and
the United States have a more serious attitude toward work. Especially in work-oriented China,
seven-day workweeks with long hours and few days off are common. A study of average work
hours in various countries conducted by Steers found that Koreans worked longer hours and took
fewer vacation days than workers in most countries.9 The conclusion was that the Koreans’ hard
work was attributable to loyalty to the company, group-oriented achievement, and emphasis on
group harmony and business relationships.

Studies on the meaning of work in eight countries were carried out by George England
and a group of researchers who are called the Meaning of Work (MOW) International Research
Team.10 Their research sought to determine a person’s idea of the relative importance of work
compared to that of leisure, community, religion, and family. They called this concept of work
work centrality, defined as “the degree of general importance that working has in the life of
an individual at any given point in time.” The results showed, for example, that the Japanese
hold work to be very important in their lives; the Brits, on the other hand (the birth country
of one of the co-authors), seem to like their leisure time more than those in the other coun-
tries surveyed. However, given the complexity of cultural and economic variables involved in

CHAPTER 11 • MOTIVATING AND LEADING 353

people’s attitude toward work, the results are difficult to generalize, in particular the implications
of on-the-job work motivation. More relevant to managers (as an aid to understanding culture-
based differences in motivation) are the specific reasons for valuing work. What kinds of needs
does the working environment satisfy, and how does that psychological contract differ among
populations?

The MOW research team provided some excellent insights into this question when it asked
people in the eight countries what they valued about work and what needs their jobs satisfied.
Their research results showed the relative order of importance overall as follows.

• A needed income

• Interest and satisfaction

• Contacts with others

• A way to serve society

• A means of keeping occupied

• Status and prestige11

Note the similarities of some of these functions with Maslow’s need categories12 and
Herzberg’s categories of motivators and maintenance factors. (Frederick Herzberg’s research
focused on how some people are motivated by internal aspirations and life goals, whereas oth-
ers are primarily motivated by the job conditions.13) Clearly, these studies can help international
managers anticipate what attitudes people have toward their work, what aspects of work in their
life context are meaningful to them, and therefore what approach the manager should take in
setting up motivation and incentive plans.

In addition to the differences among countries within each category—such as the higher level
of interest and satisfaction derived from work by the Israelis as compared with the Germans—it
is interesting to note the within-country differences. Although income was the most important
factor for all countries, it apparently has a far greater importance than any other factor in Japan.
In other countries, such as the Netherlands, the relative importance of different factors was more
evenly distributed.

The broader implications of such comparisons about what work means to people are derived
from considering the total cultural context. The low rating the Japanese give to the status and
prestige found in work, for instance, suggests that those needs are more fully satisfied elsewhere
in their lives, such as within the family and community. 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, so business motives are held in the highest regard.14 Muslims feel that work is a
virtue and an obligation to establish equilibrium in one’s individual and social life. The Arab
worker is defined by his or her level of commitment to family, and work is perceived as the
determining factor in the ability to enjoy social and family life.15 A study of 117 managers
in Saudi Arabia by Ali found that Arab managers are highly committed to the Islamic work
ethic and that there is a moderate tendency toward individualism.16

Exhibit 11-1 shows the results of the study and gives more insight into the Islamic work
ethic. A different study by Kuroda and Suzuki found that Arabs are serious about their work
and that favoritism, give and take, and paternalism have no place in the Arab workplace. They
contrasted this attitude to that of the Japanese and Americans, who consider friendship to be an
integral part of the workplace.17

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 meaning different from simply providing the basic economic necessities of life. Economic
differences among countries were found to explain variations in attitudes toward work in a study
by Furnham et al. of more than 12,000 young people from 41 countries on five continents.
Specifically, the researchers found that young people in Far East and Middle Eastern countries
reported the highest competitiveness and acquisitiveness for money, whereas those from North
America and South America scored highest on work ethics and mastery (that is, continuing to
struggle in order to master something).18 Such studies show the complexity of the underlying
reasons for differences in attitudes toward work—cultural, economic, and so on—must be taken

354 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

into account when considering what needs and motivations people bring to the workplace. All in
all, research shows a considerable cultural variability affecting how work meets employees’ needs.

The Needs Hierarchy in the International Context
How can a manager know what motivates people in a specific country? Certainly, by drawing on
the experiences of others who have worked there and by studying the likely type of motivational
structure for the culture in that region.

People’s opinions of how best to satisfy their needs vary across cultures also. One clear
conclusion is that managers around the world have similar needs but show differing levels of
satisfaction of those needs derived from their jobs. Variables other than culture may be at play,
however. One of these variables may be the country’s stage of economic development. Whatever
the reason, 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 rec-
ognized. For example, Japanese automaker, Mazda, experienced this problem in its Michigan
plant. Japanese firms tend to confer recognition in the form of plaques, attention, and applause,
and Japanese workers are likely to be insulted by material incentives because such rewards
imply that they would work harder to achieve them than they otherwise would. Instead, Japanese
firms focus on group-wide or company-wide goals, compared with the American emphasis on
individual goals, achievement, and reward.

When considering the cross-cultural applicability of Maslow’s hierarchy of needs theory,
then, 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. He concluded
that people progress from satisfying basic needs on to satisfying belongingness and esteem
needs, and then to self-actualization needs.19 However, different hierarchies might better reflect

Item* Mean*

Islamic Work Ethic
1. Laziness is a vice. 4.66
2. Dedication to work is a virtue. 4.62
3. Good work benefits both one’s self and others. 4.57
4. Justice and generosity in the workplace are necessary conditions

for society’s welfare. 4.59
5. Producing more than enough to meet one’s personal needs contributes

to the prosperity of society as a whole. 3.71
6. One should carry work out to the best of one’s ability. 4.70
7. Work is not an end in itself but a means to foster personal growth

and social relations. 3.97
8. Life has no meaning without work. 4.47
9. More leisure time is good for society. 3.08

10. Human relations in organizations should be emphasized
and encouraged. 3.89

11. Work enables man to control nature. 4.06
12. Creative work is a source of happiness and accomplishment. 4.60
13. Any man who works is more likely to get ahead in life. 3.92
14. Work gives one the chance to be independent. 4.35
15. A successful man is the one who meets deadlines at work. 4.17
16. One should constantly work hard to meet responsibilities. 4.25
17. The value of work is derived from the accompanying intention

rather than its results. 3.16

ExHIBIT 11-1 The Islamic Work Ethic: Responses by Saudi Arabian Managers

*On a scale of 1–5 (5 = highest)
Source: Based on Abbas J. Ali, Journal of Psychology 126, No. 5 (1992), pp. 507–519.

CHAPTER 11 • MOTIVATING AND LEADING 355

other cultures. For example, Eastern cultures focus more on the needs of society rather than on
the needs of individuals. It is difficult to observe or measure the individual needs of a Chinese
person because, from childhood, these are meshed with the needs of society. Clearly, however,
along with culture, the political beliefs at work in China dominate many facets of motivation.
Traditionally, workers have been 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, which is a powerful motivator. Because
being unemployed has not been an option in China until recently, it has been important for em-
ployees to maintain themselves as cooperating members of the work group, and this cultural
norm still largely prevails in much of China.20 Money is also a motivator, stemming from the
historical political insecurity and economic disasters that have perpetuated the need for a high
level of savings.21

Although more cross-cultural research on motivation is needed, one can draw the tentative
conclusion that managers around the world are motivated more by intrinsic than by extrinsic fac-
tors. Considerable doubt remains, however, about the universality of Western theories because it
is not possible to take into account all the relevant cultural variables when researching motivation.
Different factors have different meanings within the entire cultural context and must be consid-
ered on a situation-by-situation basis. The need to consider the entire national and cultural con-
text is shown in the “Comparative Management in Focus: Motivation in Mexico” feature, which
highlights motivational issues for Mexican workers and indicates the meaning of work to them.

Comparative Management in Focus
Motivation in Mexico

In Mexico, everything is a personal matter; but a lot of managers don’t get it. To get anything
done here, the manager has to be more of an instructor, teacher, or father figure than a boss.

Robert Hoskins, manager, Leviton Manufacturing, Juarez

T o understand the cultural milieu in Mexico, we can draw on research concluding that the
Mexican people as a whole rank high on both power distance (the acknowledgment of hier-
archical 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.22 Recent research by Davila and Elvira
concluded that, “This cultural trend has given rise to a ‘paternalistic’ leadership style in which personal
and social relationships are key to working and leading employees effectively.”23

It is important for managers to recognize that Mexican society is very hierarchical, with a clear
power structure for family, religion, business, politics, and other areas of life. People are accorded
respect according to their age, sex, and rank or position.24

The Mexican culture, generally, is being-oriented, compared to the doing-oriented culture that
prevails in the rest of North America; business takes a backseat to socializing.25 Integral to the being-
orientation is the high-context and implicit communication style of most Mexicans; much takes place
on the level of nonverbal cues, and the assumption of unspoken communication is based on the per-
sonal relationships and trust developed with colleagues. Implicit communication is also based on the
importance attached to respect, whereas any conflict would lose face for all concerned.26 On the other
hand, they maintain a small personal space with others and are a “touching” society. They are also
frequently very expressive and passionate communicators. In addition, that being-orientation leads to
a rather fluid attitude toward time, whereas relationships and commitment to individuals frequently
take precedence over scheduled time commitments.27

It is said that Mexicans work to live compared to those in the United States, for example, who live
to work. One reason for that is that in Mexico the family is of central importance; loyalty and com-
mitment to family and friends frequently determine employment, promotion, or special treatment for
contracts. Decisions and actions are usually based on what is good for the family and the group.28 For
many Mexican males, the value of work lies primarily in its ability to fulfill their culturally imposed
responsibilities as head of household and breadwinner rather than to seek individual achievement.
Machismo (sharp role differentiation based on gender) and prestige are important characteristics of
the Mexican culture.

(Continued )

356 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

As a people, speaking very generally, Mexicans are very proud and patriotic; respeto (respect) is
important to them, and a slight against personal dignity is regarded as a grave provocation.29 Mexican
workers expect to be treated in the same respectful manner that they use toward one another. As noted
by one U.S. expatriate, foreign managers must adapt to Mexico’s “softer culture”; Mexican workers
“need more communication, more relationship-building, and more reassurance than employees in the
U.S.”30 The Mexican people are very warm and have a leisurely attitude toward time; face-to-face
interaction is best for any kind of business, with time allowed for socializing and appreciating the
Mexicans’ cultural artifacts, buildings, and so forth. Taking time to celebrate a worker’s birthday, for
instance, will show that you are a simpático boss and will increase workers’ loyalty and effort. The
workers’ expectations of small considerations that seem inconsequential to U.S. managers should not
be discounted. Personal relationships are of utmost importance to the Mexican people, usually taking
priority over work goals. Trust in friends and family takes precedence over purely business relation-
ships, so that networking through personal contacts is the best way to do business. The following are
some general guidelines on the Mexican culture to guide foreign managers in Mexico.

• Family and friends are first priority; maintaining those relationships and trust takes prece-
dence over outsiders, thus are important for business success.

• The Mexican employee works to live; scheduling and time management is secondary.

• Mexicans are fatalistic, based on strong religious influence.

• Mexicans are nationalistic; history and tradition are important.

• Work harmony is important; Mexicans are sensitive to conflict situations and need to
maintain face.

• Mexicans are very proud; status is evidenced by title, position, and formality in dress and
etiquette.

Most managers in Mexico find that the management style that works best there is authoritative
and paternal. Paternalism is expected; the manager is regarded as el patrón (pronounced “pah-trone”),
or the father figure, whose role it is to take care of the workers as an extended family.31 Employees
expect managers to be the authority; they are the elite—power rests with the owner or manager and
other prominent community leaders. Frequently, if not told to do something, the workers will not do
it, nor will they question the boss or make any decisions for the boss.32 Nevertheless, employees per-
ceive the manager as a person, not as a concept or a function, and success often depends on the abil-
ity of a foreign manager to adopt a personalized management style, such as by greeting all workers
as they arrive for their shifts. To be effective, managers need to realize that a psychological contract
between the manager and the worker encompasses the work group and the community as a whole.
This should include:

• Investment in employees, including salary, benefits, education, training, and development.

• Cooperative efforts in labor relations.

• Community-centered CSR practices.33

Generally speaking, many Mexican factory workers doubt their ability to influence the outcome
of their lives personally. They are apt to attribute events to the will of God or to luck, timing, or rela-
tionships with higher authority figures. For many, decisions are made on the basis of ideals, emotions,
and intuition rather than on objective information. However, individualism and materialism are increas-
ingly evident, particularly among the upwardly mobile high-tech and professional Mexican employees.

Corrective discipline and motivation must occur through training examples, cooperation, and, if
necessary, subtle shaming. As a disciplinary measure, it is a mistake to insult a Mexican directly; an
outright insult implies an insult to the whole family. As a motivation, one must appeal to the pride of
the Mexican employees and avoid causing them to feel humiliated. Given that, getting ahead is often
associated more with outside forces than with one’s own actions; the motivation and reward system
becomes difficult to structure in the usual ways.

Past experiences have indicated that, for the most part, motivation through participative decision-
making is not as effective as motivation through the more traditional and expected autocratic meth-
ods. With careful implementation, however, the mutual respect and caring that the Mexican people
have for one another can lead to the positive team spirit needed for the team structure to be used
successfully by companies. One example is GM’s highest-quality plant in the world in Ramos Arizpe,
near Saltillo, Mexico.34 In a study by Nicholls et al, the Mexican executives surveyed gave some
suggestions for implementing work teams. They suggested the following.

CHAPTER 11 • MOTIVATING AND LEADING 357

• Foster a culture of individual responsibility among team members.

• Anticipate the impact of changes in power distribution.

• 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.35

For the most part, Mexican workers expect that authority will not be abused but rather will fol-
low the family model in which everyone works together in a dignified manner according to their
designated roles.36 Any event that may break this harmony, or seems to confront authority, will likely
be covered up. This may result in a supervisor hiding defective work, for example, or, as in the case
of a steel conveyor plant in Puebla, a total worker walkout rather than using the grievance process.37
Contributing to these kinds of problems is the need to save face for oneself and to respect others’ place
and honor. Public criticism is regarded as humiliating. Employees like an atmosphere of formality and
respect. They typically use flattery and call people by their titles rather than their names to maintain
an atmosphere of regard for status and respect.

The business culture in Mexico is also attributable to prevailing economic conditions in Mexico,
which include low levels of education, training, and technical skills. A context of continuing economic
problems and a relatively low standard of living for most workers help explain why Maslow’s higher-
order needs (self-actualization, achievement, status) are generally not very high on most Mexican
workers’ lists of needs. In discussing compensation, Mariah de Forest, who consults for American
firms in Mexico, suggests the following.

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.38

Global economic problems and cutbacks in auto manufacturing have also affected Mexico, mak-
ing money a pressing motivational factor for most employees. Benefits that most workers cannot afford
are prized. For example, since workers highly value the enjoyment of life, many companies in Mexico
provide recreation facilities—a picnic area, a soccer field, and so forth. Bonuses are expected regard-
less of productivity. In fact, it is the law to give Christmas bonuses of 15 days of pay to each worker.
Fringe benefits are also important to Mexicans; because most Mexican workers are poor, the company
provides the only source of such benefits for them. In particular, benefits that help to manage family-
related issues are positive motivators for employees at least to show up for work. To this end, companies
often provide on-site health care facilities for workers and their families, nurseries, free meals, and even
small loans in crisis situations.39 In addition, companies that understand the local infrastructure prob-
lems often provide a company bus to minimize the pervasive problems of absenteeism and tardiness.

The foregoing statements are broad generalizations about Mexican factory workers. Increasing
numbers of American managers are in Mexico because under the previous agreement—NAFTA—
U.S. businesses were motivated to move operations there. And, as of this writing in 2019, the new
agreement, USMCA, following final ratification, promises to be encouraging for new business op-
portunities in Mexico. For firms on U.S. soil, managers may employ many Mexican-Americans in an
intercultural setting, and they have become known to be very hard-working people in both business
and societal settings. As the second-largest and fastest-growing ethnic group in the United States,
Mexican-Americans represent an important subculture requiring management attention as they take
an increasing proportion of the jobs there and continue to move up the managerial ladders.

Research shows that little conclusive information is available to answer a manager’s direct
question of exactly how to motivate in any particular culture. The reason is that we cannot assume
the universal applicability of the motivational theories, or even concepts, that have been used to
research differences among cultures. Furthermore, the entire motivational context must be taken
into account. For example, Western firms entering markets in both Russia and Eastern Europe
invariably run into difficulties in motivating their local staffs. Except for the younger generation,
most workers have been accustomed to working under entirely different circumstances and usu-
ally do not trust foreign managers. Typically, then, the work systems and responsibilities must be
highly structured because workers in Eastern Europe and Russia are less likely to use their own
judgment in making decisions and because managerial skills are less developed.40 Russia, for

358 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

example, while rapidly becoming Westernized in the big cities, still presents foreign managers
challenges regarding motivation and leadership styles.

In sum, motivation is situational, and savvy managers use all they know about the relevant
culture or subculture—consulting frequently with local people—to infer the best means of moti-
vating in that context. Furthermore, tactful managers consciously avoid an ethnocentric attitude
in which they make assumptions about a person’s goals, motivations, or work habits based on
their own frames of reference, and they do not make negative value judgments about a person’s
level of motivation because it differs from their own.

Many cultural variables affect people’s sense of what is attainable and thus affect motiva-
tion. One example is how much control people believe they have over their environment and their
destiny—whether they believe that they can control certain events and not just be at the mercy
of external forces. Although people in the United States typically feel a strong internal locus
of control, others attribute results to, for example, the will of God (in the case of Muslims) or
to the good fortune of being born in the right social class or family (in the case of many Latin
Americans). For example, whereas most Westerners feel that hard work will get the job done,
many Hong Kong Chinese believe that outcomes are determined by joss, or luck. Clearly, then,
managers must use persuasive strategies to motivate employees when they do not readily connect
their personal work behaviors with outcomes or productivity. Nevertheless, there can be consid-
erable variance in managerial quality within a country as discussed in the following “Under the
Lens” feature.

UNDER THE LENS
Bad Bosses Are Making the UK’s Productivity Puzzle Worse 41

Having a chief we believe can walk the walk, not just talk the talk, shapes how we feel about
our work.42

Gavin Kelly

T he Office, starring 21st-century Britain’s most cringemaking boss, David Brent, may have fin-
ished almost 15 years ago, but poor management is just as present in our lives today as it was
back then. Bad bosses on TV are certainly amusing but the joke, in the end, is on us.

British management is part of our productivity problem. UK practices lag behind other leading
economies such as the US, Canada, Japan, Germany and Sweden, and account for up to a third of the
gap in productivity between companies and countries.

It is true that the vanguard of British business leaders are as good as the best in the world. But the
gap between the best and the rest remains large. What is more, managers, like drivers, tend to think they
are better than average.

Concern about management quality is as old as Britain’s productivity challenge itself—though as
angst about the UK’s relative economic performance gets ever more acute, it would be nice to think the
focus on management would acquire a fresh urgency.

Britain has, after all, undertaken a 30-year experiment. In generations past, bosses griped that they were
held back as they were denied the right to manage. Business would thrive if only it weren’t encumbered with
outdated industrial relations, restrictive practices and a lack of highly skilled workers. Once unshackled, the
argument went, managerial best practice would spread, workplace innovation would flow and productivity
rise. Well, bosses’ wishes were granted: employment regulation became among the most business friendly in
the advanced world, unions withered, graduate numbers surged and executive pay ballooned. The result? All
these years later we can now return an informed judgment: managerial mediocrity still reigns.

The link between the state of British management and national prosperity is not, however, all that
we should fret about. What all too rarely gets discussed in policy circles—in sharp contrast to countless
conversations in canteens, pubs and living rooms across the country—is the impact that our bosses have
on the quality of our working lives.

Management gurus and human resources professionals have long spoken breezily about strate-
gies for “employee engagement”. Cut through the verbiage, though, and you will find little hard-edged
evidence about the impact of different types of chiefs on the wellbeing of workers. Fortunately, that is

CHAPTER 11 • MOTIVATING AND LEADING 359

changing. Research by Andrew Oswald, a professor of economics and behavioural science at Warwick
University, is shining a light inside the black box called “management” in order to understand how it
affects workers. The findings are telling.

Having a boss judged by staff to be highly competent, as opposed to a dud, has twice as positive an
effect on job-satisfaction as the difference between being high paid and low paid. The evidence suggests
that having a boss who we believe can walk the walk, not just talk the talk, powerfully shapes how we
feel about our work.

Some perspective is needed here. A challenging boss may, for instance, make us feel uneasy before
inspiring us to greater things. And there is far more to good management than technical know-how. We
should recognise, too, that tempting though it may be to pin all problems on the personal shortcomings
of Brent-esque bosses, this is to miss the bigger picture. Bad managers are often the product of bad
business models. And they, at least in part, reflect policy failings. All too often we remain loath to trace
persistent managerial weaknesses back to root causes.

Yet the impact of inept management on job satisfaction should give us a jolt. Bad bosses spread
misery. Britons have learnt just to shrug their shoulders or have a laugh about this. But our wellbeing, as
well as wealth, depends on whether we act on it.

Culture and Job Motivation
The role of culture in the motivational process is shown in Exhibit 11-2. An employee’s needs
are determined largely by the cultural context of values and attitudes—along with the national
variables—in which he or she lives and works. Those needs then determine the meaning of work
for that employee. The manager’s understanding of what work means in that employee’s life
can then lead to the design of a culturally appropriate job context and reward system to guide
individual and group employee job behavior to meet mutual goals.

Incentives and rewards are an integral part of motivation in a corporation. Recognizing and
understanding different motivational patterns across cultures leads to the design of appropriate
reward systems.

Culture

Values/Attitudes/Norms

Motivation

Appropriate Motivators
(Intrinsic–Extrinsic)

MOW
(Meaning of work)

Individual/Group
BehaviorNeeds

ExHIBIT 11-2 The Role of Culture in Job Motivation

Reward Systems
In the United States, there are common patterns of rewards, varying among levels of the com-
pany and types of occupations and based on experience and research with Americans. Rewards
usually fall into five categories: financial, social status, job content, career, and professional.
The relative emphasis on one or more of these five categories varies from country to country. In
Japan, for example, reward systems are based primarily on seniority since the 1950s; however
lifetime employment and seniority-based rewards have been coming under scrutiny. The pro-
posed changes have been met with some resistance. For example, Sony and Hitachi switched to
a Western model where salary is based on skills and performance. Some staff members found it
difficult to adjust to a performance-based system. Moreover, managers had to assess employee

360 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

performance more diligently—based on their achievements.43 In addition, a distinction
is made there between the regular workforce and the temporary workforce, which tradition-
ally comprises women expected to leave when they start a family. As is usually the case, the
regular workforce receives considerably more rewards than the temporary workforce in pay
and benefits and the allocation of interesting jobs.44 For the regular workforce, the emphasis
is on the employee’s long-term effectiveness in terms of behavior, personality, and group out-
put. Rewarding the individual is frowned on in Japan because it encourages competition rather
than the desired group cooperation. Therefore, specific cash incentives are usually limited. In
Taiwan, recognition and affection are important; company departments compete for praise from
top management at their annual celebration.

In contrast, the entire reward system in China is very different from that of most countries.
The low wage rates are compensated for by free housing, schools, and medical care. Although
egalitarianism still seems to prevail, the recent free-enterprise reform movements have encour-
aged duo lao, duo de (more work, more pay). One important incentive is training, which gives
workers more power. One approach used in the past—and one that seems quite negative to
Americans—is best illustrated by the example of a plaque award labeled “Ms. Wong—Employee
of the Month.” Although Westerners would assume that Ms. Wong had excelled as an employee,
actually this award given in a Chinese retail store was for the worst employee; the plaque was de-
signed to shame and embarrass her.45 Younger Chinese in areas changing to a more market-based
economy have seen a shift toward equity-based rewards, most likely resulting from a gradual
shift in work values.46

Mercer Global HR Consulting Firm stressed several advantages to adopting an International
Pay Structure as multinational firms battle to recruit top talent worldwide.47 For example, an IPS
approach can help to:

• Assure consistency—on a global or regional basis

• Achieve transparent and streamlined compensation packages

• Attract and retain superior talent worldwide

• Ensure that pay is based solely on the specific position/assignment rather than
an employee’s home-based perception

• Provide market-driven competitive compensation packages

• Maintain employees’ purchasing power across locations

[A]n IPS [International Pay Structure] places a value on a job in the global or regional talent
market, and enables organizations to define compensation packages that best meet the needs
of both the employee and the employer without necessarily being constrained by the borders of
the country the employee is based in48

Mercer, global HR consulting firm, 2019

Mercer’s Global Talent Trends 2019 survey underscored these advantages as respondents
indicated that the top rewards priorities were offering more diverse incentives; differentiating re-
wards for superior performers; and developing creative rewards for talent with high-demand skills.
Also, respondents mentioned skill-based compensation, career progression/experience-based
rewards; compensation transparency; and equity-driven pay bands as top reward priorities.49

No doubt culture plays a significant role in determining the appropriate incentive and reward
systems around the world. Employees in collectivist cultures such as Japan, Korea, and Taiwan
would not respond well to the typical U.S. merit-based reward system to motivate employees
because that would go against the traditional value system and would disrupt the harmony and
corporate culture.

Just as retailers personalize digital advertisements to engage customers, companies can make
the day-to-day work experience more relevant for individual employees. What helps employees
thrive at work varies by country . . . Making the work experience relevant to individual employ-
ees helps them grow and thrive.50

Global TalenT TRends, 2019

CHAPTER 11 • MOTIVATING AND LEADING 361

Indeed, countries differ with respect to what enables employees to prosper in the workplace.
As Exhibit 11-3 shows, knowing the important priorities in each country can bring out the best in
a global workforce and can be a potent source of worldwide competitive advantage.

Leading
Research results label French captains of industry as “autocrats,” Germans as “democrats,”
and British as “meritocrats.”51

DDI, Leaders on Leadership Survey

This section on leadership (and the preceding quote) prompts consideration of the following
questions: To what extent, and how, do leadership styles and practices vary across countries?
What are the forces perpetuating that divergence? Where, and why, will that divergence con-
tinue to be the strongest? Is there any evidence for convergence of leadership styles and prac-
tices around the world? What are the forces leading to that convergence, and how and where
will this convergence occur in the future? What implications do these questions have for cross-
cultural leaders?

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 achiev-
ing 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.

THE GLOBAL LEADER’S ROLE AND ENVIRONMENT
The greatest competitive advantage global companies in the twenty-first century can have is
effective global leaders. Yet this competitive challenge may require managerial and cultural
changes. People tend to rise to leadership positions by proving themselves able to lead in their
home-country corporate culture and meeting the generally accepted behaviors of that national
culture. However, global leaders must broaden their horizons, both strategically and cross-
culturally, and develop a more flexible model of leadership that can be applied anywhere—one
that is adaptable to locational situations around the world.52

In a survey of 197 global HR executives, Thomas, Bellin, Jules, and Lynton found that
those executives “believe that tomorrow’s leaders will need to be more diverse than today’s—
especially in terms of thought styles and work experiences.”53 The study highlighted the need for
global experience, industry experience, and thought styles.

The critical factors necessary for successful leadership abroad have come to be known as
the global mind-set. Typically, that mind-set compares with the traditional mind-set in the areas
of general perspective, organizational life, work style, view of change, and learning.54 Harvard

11-2. To become familiar with
the global leader’s role
and environment and
what makes a successful
global leader

Priority 2

Priority 3

Japan

1=Work/life balance
2=Recognition for achievements
3=Learning opportunities
4=Fun environment

5=Meaningfulness of assignments
6=Sense of belonging
7=Empowerment
8=Effective leadership—clear direction

Mexico

Brazil

Canada

Germany

India

Singapore

France

USA

Hong Kong

Priority 1
2 3 2 2 5 3 1 4 1 1

ExHIBIT 11-3 What Helps Employees to Thrive in the Workplace in Various Countries

Source: Global Talent Trends 2019, Mercer.com; p. 22.

http://Mercer.com

362 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

Business School authors Javidan et al. describe a leader with a global mind-set as having three
major qualities.

• “Intellectual capital: the general knowledge and capacity to learn, including global busi-
ness savvy

• Psychological capital: the openness to differences and capacity to change, such as a thirst
for adventure

• Social capital: the ability to build trusting relationships with and among people who are
different from you, including intercultural empathy and diplomacy”55

Other researchers describe the attributes in terms of the manager’s personal work style and
general perspective; they articulate some of the typical actions and attitudes of a leader with a
global mind-set as shown in Exhibit 11-4.

Morrison, Gregersen, and Black found further information regarding leadership effective-
ness abroad; their research involved 125 global leaders in 50 companies. They concluded that
effective leaders must have global business and organizational savvy. They explain global busi-
ness savvy as the ability to recognize global market opportunities for a company and having a
vision of doing business worldwide. Global organizational savvy requires an intimate knowledge
of a company’s resources and capabilities to capture global markets as well as an understanding
of each subsidiary’s product lines and how the people and business operate on the local level.
Morrison et al. outline four personal development strategies through which companies and man-
agers can meet these requirements of effective global leadership: travel, teamwork, training, and
transfers (the four Ts).56

Travel, of course, exposes managers to various cultures, economies, political systems, and
markets. Working on global teams teaches managers to operate on an interpersonal level while
dealing with business decision-making processes that are embraced by differences in cultural
norms and business models. Although formal training seminars also play an important role,
most of the global leaders interviewed said that the most influential developmental experience
in their lives was the international assignment. Increasingly, global companies are requiring
their managers who will progress to top management positions to have overseas assignment
experience. The benefits accruing to the organization depend on how effectively the assignment
and repatriation are handled, as discussed in Chapter 10. Many top leaders in the world, for
example, have had their start with both homegrown training and an international assignment,
which provided them with considerable skills to operate in the global marketplace. However,
many multinational companies are looking beyond the home country to tap foreign executives
as illustrated in the accompanying “Under the Lens: Japanese Boards Move to Open Up to
Overseas Executives.”

Personal work style High “cultural quotient” (CQ)
Open-minded and flexible
Effective cross-cultural communicator and collaborator
Team player in a global matrix
Supports global objectives and balances global with local
goals and practices

General perspective Broad, systems perspectvei
Personal autonomy and emotional resilience
Change is welcomed and facilitated
Enables boundaryless organizations
Operates easily in cross-cultural and cross-functional
environments
Global learning is sought and used for career development

ExHIBIT 11-4 The Global Mind-set of Successful Leaders

Source: Based on Walker et al., 2003; and Gary P. Ferraro, The Cultural Dimension of International
Business, 5th ed. (Upper Saddle River, NJ: Prentice Hall, 2006).

CHAPTER 11 • MOTIVATING AND LEADING 363

UNDER THE LENS
Japanese Boards Move to Open Up to Overseas Executives57

Toyota Wants to Pay Executives More to Attract the Best of International Talent

Toyota recently proposed to shareholders that it be allowed to lift the cap on total executive com-
pensation to ¥4bn ($36m) a year. The move was a modest request from Japan’s most valuable
company and the world’s second-largest carmaker.

What caught investors’ attention, however, was not the meagre amount, but the company’s stated
reason for the change: Toyota said it wanted more flexibility on pay to help attract foreign executives.

The carmaker currently has just one non-Japanese board member, Frenchman Didier Leroy. But inves-
tors and analysts interpreted this year’s shareholder proposal as a sign that the carmaker plans to inject more di-
versity into its management, which has traditionally consisted of a long-serving group of Japanese executives.

Toyota is not alone. Companies across the Japanese market have started seeking more diverse lead-
ership as they acquire businesses overseas, with the recruitment of international talent seen as important
to remain competitive. In May, Japan’s biggest bank Mitsubishi UFJ Financial Group said it will appoint
two non-Japanese outside directors for the first time.

Among Japanese firms in the Nikkei 225 stock index, 14.7 per cent had at least one foreign director
on their boards last year, compared with 11 per cent in 2013, but still much lower than the 33 per cent of
FTSE 100-listed companies in the UK, according to recruiters Spencer Stuart.

Bankers say the shift will add international flavour to corporate strategies and help Japanese com-
panies improve their management of overseas acquisitions.

In the past year alone, several big companies have stumbled after purchases of foreign businesses
went awry. Toshiba is struggling for survival as it wrestles with the fallout from an ill-fated purchase of
Westinghouse in 2006. Japan Post took a $3.6bn writedown on Toll Holdings, the Australian logistics
business it bought in 2015.

While the reasons for the soured deals vary, some companies have drawn criticism for the way
they have governed their overseas subsidiaries. In particular, bankers observe there are concerns that
Japanese acquirers become too satisfied with closing the deal without working out the harder part of
integration strategy. In some cases, Japanese buyers have taken a hands-off approach, only to inter-
vene when problems arise. By that time, however, it may be already too late as Toshiba’s travails have
illustrated. Other overseas acquisitions have come to grief when companies dispatched executives from
Tokyo who took control and prompted a mass departure of local managers.

In general, Japanese acquirers have lacked ways to motivate local executives to work closely with
their new parent, in part because promotion of executives based at overseas units had been rare. But
there are some encouraging signs of change. After Suntory’s $16bn takeover of Beam in 2014, the
Japanese whisky group added Matt Shattock, chief executive of the US spirits maker, to the Japanese
board. SoftBank will also revamp its management structure in June to install seven foreigners to its
11-member board, including the chief executives of US carrier Sprint and UK chip designer Arm.

There is still a long way to go until foreign executives are a common feature of the Japanese corpo-
rate scene and the experience of foreign executives has been less than encouraging. Michael Woodford,
who started his career at a UK medical devices company that was later acquired by Olympus, was
ousted as president of the Japanese group after just six-and-a-half months. His alleged offence: expos-
ing a long running accounting fraud in 2011. Julie Hamp, Toyota’s chief communications officer, was
arrested two years ago on suspicion of illegally importing a prescription drug from the US.

The proposed change at Toyota—which will see the maximum amount of ¥4bn shared among the
group’s nine board members—may still not be enough to attract executives from outside Japan as it
hunts for top talent in autonomous driving and artificial intelligence. Last year, six of the 10 best-paid
executives at publicly listed Japanese companies were foreigners, with SoftBank’s former president
Nikesh Arora alone earning ¥10.3bn.

But change seems inevitable. Japan’s traditional reliance on seniority-based management is crum-
bling fast, and there is a clear sense of alarm as Toyota, Panasonic and Sony all talk about hiring interna-
tional talent with both the broader skills and mindset to survive the next wave of technological innovation.

Effective global leadership involves the ability to inspire and influence the thinking, at-
titudes, and behavior of people anywhere in the world. The importance of the leadership role
cannot be overemphasized, because the leader’s interactions strongly influence the motivation

364 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

and behavior of employees and, ultimately, the entire climate of the organization. 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.

Managers on international assignments try 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.58

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.59 The
increased number of variables (political, economic, and cultural) in the context of the managerial job
abroad requires astute leadership. Some examples of the variables in the content and context of the
leader’s role in foreign settings are given below.60 The multicultural leader’s role thus blends leader-
ship, communication, motivational, and other managerial skills within unique and ever-changing
environments. We will examine the contingent nature of such leadership throughout this section.

The Leader and the Job61

• Leadership experience and technical knowledge
• Cultural adaptability
• Clarity of information available in host area
• Level of authority and autonomy
• Level of cooperation among partners, government, and employees

The Job Context
• Level of authority granted to leader
• Physical location and local resource availability
• Host professional contacts and community relations
• Organizational structure, scope of internationalization, technology, and so on
• Business environment: social-cultural, political-economic, level of risk
• Systems of staffing, coordination, reward system and decision making, locally

and in home office

Women in Global Leadership Roles
As we consider the variables of the leader, the job, and the job context in the international arena,
and the fact that women in leadership positions around the world encounter specific sets of these
variables, it is useful to gain some insight into their particular sets of circumstances and chal-
lenges, as illustrated in the following “Under the Lens” section.

UNDER THE LENS
French Companies Lead the Way on Gender Diversity

Luxury Brand Kering and Hospitality Group Sodexo Have Majority of Women
Board Members62

France’s ambitious moves to increase gender diversity among its top companies are paying off as
it leads the way over the number of women on boards at European corporates.

The largest listed French companies have an average of 44 per cent of women on their boards,
topping the inaugural European diversity index with the highest number on the continent. Nine groups
listed on the Paris CAC 40 exchange have a majority of women or an equal number of females on their
boards, according to research by European Women on Boards (EWOB) and data provider Ethics & Boards.

French luxury brand Kering and hospitality company Sodexo have a majority female board of
directors and nine other groups have reached parity. This has helped Paris hit its target of a quota of 40
per cent of females on boards for companies listed on the CAC 40 by 2017. France has also proposed a
requirement that companies narrow their gender pay gap or face fines.

CHAPTER 11 • MOTIVATING AND LEADING 365

However, despite the progress in non-executive roles, there has been criticism about the failure of
senior women to break through in top executive positions. In the UK, the latest review found that the
number of female chief executives had fallen from 15 to 12 over the past year. There was also scant
improvement in the top non-executive role of chair.

The number of female chairs in the FTSE 350 had only risen from 17 to 22, according to the
Hampton-Alexander women on boards review, which was published earlier this month. Still, the re-
search from EWOB and Ethics & Boards was encouraging. They published the rankings of the 200
largest European listed companies from the Stoxx 600 on Wednesday. It covers EWOB’s nine mem-
ber countries—Belgium, Czech Republic, Finland, France, Germany, Italy, the Netherlands, Spain and
the UK. Overall, 11 companies in the index have reached board gender parity: Accor, Axa, Bouygues,
Diageo, Kering, Legrand, Publicis Group, Sodexo, Terna, Total and Vivendi. Nine are French-listed, the
others are British and Italian.

“Diversity is really part of sustainable growth,” said Monique Lempereur, chairwoman of EWOB
and managing director of Continental Carbon Company Europe, in an interview with the Financial
Times. Based on data compiled by Ethics & Boards, EWOB has used its index to issue awards to recog-
nise diversity on the board and within the leadership team of the various companies.

Sodexo won the award for the most diverse board that is chaired by a woman. Sophie Bellon leads
a board of seven women and six men. The award is “very powerful recognition” of the company’s efforts
to promote diversity said Ms Bellon. The prize for the board with the highest per cent of women went
to Kering, owner of Gucci, Alexander McQueen and other brands, with 60 per cent female directors. A
few years ago Kering appointed a majority of women to the board in an effort to lead on gender parity
by setting an example at the top, said François-Henri Pinault, chief executive and chairman of Kering.
British-based pharmaceutical group GSK won the prize for a company led by a woman with the most
diverse board. Emma Walmsley is chief executive and GSK’s board is 46 per cent women.

An increasing body of research suggests that more diverse boards improve decision making and
financial returns. Over the past decade countries brought in a patchwork of targets, voluntary initia-
tives and quotas. Norway led the way with France, Italy, Germany and Belgium among the countries
establishing legal quotas. Others such as Denmark, Netherlands, and the UK have opted for softer, more
voluntary regimes.

Last month California became the first US state to require public companies to have a female board
member. Beyond government, big investors such as BlackRock and Japan’s Government Pension Investment
Fund, or GPIF, have also begun to champion the cause. There is debate about whether a binding quota
or voluntary target is more effective. However, Therese Murphy from the European Institute for Gender
Equality, said the “disparity (between member states) shows it is difficult to effect change without positive
action, which can come in the form of legal measures, such as quotas, or voluntary company initiatives”.

In the UK, the voluntary target succeeded—the 100 largest British listed companies had 26.1 per
cent women on their boards by 2015, more than the 25 per cent target and they are on track to achieve the
2020 ambition of 33 per cent. However, EWOB’s Ms Lempereur said: “As soon as you go to (smaller)
companies that do not have quotas . . . the percentage of women in board positions is significantly
lower and we see the same as well at the executive committee.” The UK’s smaller FTSE 350 have a rate
of 26.7 per cent and 75 companies appear to have stopped efforts after appointing one female non-
executive—a so-called one and done. Increasing diversity in the leadership and senior management team
requires organisational change and takes time to deliver results, but female non-executive directors can set
an example. “If women see a woman at the top, they can expect they will have their fair chance to prog-
ress,” said Ms Lempereur. “If there are only white men, they may think twice about joining that company.”

Global Team Leadership
As discussed in previous chapters, global teams have become common means of organizing
management projects and ongoing operations around the world. Their complexity is evident be-
cause the teams comprise people from several countries, various cultures, and probably different
languages; add to that multicultural cauldron the usual virtual communication mode, and the
leadership challenge is considerable without the personal contact and individual contexts that
typically give the leader clues and cement relationships. Studies have concluded that to be effec-
tive in such a multicultural mix, teams should be composed of managers willing both to lead and
to follow, to have open discussion and decision making; that is, to use a team model of shared
leadership in which the leadership role can be fluid and flexible as it passes from one to another
according to the team goals.63 A study by Lisak and Erez concluded that “individuals who scored
high on the three global characteristics—of cultural intelligence, global identity, and openness

366 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

to cultural diversity—were significantly more likely to emerge as leaders than were other team
members.”64 They recommend that the selection of team members and leaders take particular
account of the specific global work culture in which the teams will need to operate to succeed.

I think you need to get over the temptation to repeat a process or system that works well in
one location for every other location — i.e. this is how we did it in Silicon Valley or London or
Sydney, so this is how we’re going to do it in Paris or Tokyo . . . The same can be true of manag-
ing people, not every culture responds to the same process. You need to be willing to be flexible
and occasionally change your process to meet the needs of a different country or culture.65

Eric Yuan, founder and CEO, Zoom Video Communications, Inc.

The Role of Technology in Leadership
Globalization and technology have been and continue to be the two great drivers of change in the
content and context of leaders’ jobs at all levels. Although some say that the pace of globaliza-
tion is slowing down, as discussed in Chapter 1, there is no doubt that all agree that the pace of
technological change continues to accelerate, and thus affects leadership.

Across industries, technology is changing everything. It’s become embedded in products and
services and is essential for core processes and service delivery. CEOs and business leaders
must ask: How can we manage digital innovation, digitize and support the core business, and
reduce complexity and risk? How do we accelerate the digital transformation? How do we cre-
ate value with our technology function—now and in the future?66

Boston Consulting Group, April 8, 2015

Clearly, the leader’s role at all levels is rapidly changing along with each new technological
development. Affecting leaders’ plans and decisions, for example, is the Internet of Things, per-
mitting computer-to-computer instructions and decisions, often controlling a complex global
supply chain; the use of robotics in manufacturing, health care, engineering, and so on; and
firms’ intranets, which permit knowledge sharing and product information throughout global op-
erations. It is clear that big data analytics (cloud-based intelligence for businesses to collect and
analyze large amounts of data) is here to stay and bring considerable benefits to firms’ managers.
There is no turning back, and for all leaders, “new technologies will force you to reconfigure
your strategy, your operations, and your whole approach to business.”67

Individual managers are realizing that the Internet is changing their leadership styles and in-
teractions with employees as well as their strategic leadership of their organizations. They have to
adapt to the hyperspeed environment of e-business as well as to the need for visionary leadership
in a whole new set of competitive industry dynamics. Some of these new-age leadership issues
are discussed in the following feature, “Management in Action: Leadership in a Digital World.”

CROSS-CULTURAL RESEARCH ON LEADERSHIP
Numerous leadership theories focus in various ways on individual traits, leader behavior, inter-
action patterns, role relationships, follower perceptions, influence over followers, influence on
task goals, and influence on organizational culture.68 Here it is important to understand how the
variable of societal culture fits into these theories and what implications can be drawn for inter-
national managers as they seek to provide leadership around the world. Although leadership is a
universal phenomenon, what makes effective leadership varies across cultures.

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. Industry
leaders in France and Italy, for example, are highly regarded for their social prominence and
political power. In Latin American countries, leaders are respected as total persons and leaders
in society, and appreciation for the arts is important. In Germany, polish, decisiveness, and a
wide general knowledge are respected, with their leaders granted a lot of formality by everyone.
Foreigners are often surprised at the informal off-the-job lifestyles of executives in the United
States and would be surprised to see them pushing a lawn mower, for example.

Most research on U.S. leadership styles describes managerial behaviors on, essentially, the
same dimensions, variously termed autocratic versus democratic, participative versus directive,

11-3. To discuss the research
on leadership and how
leadership styles and
practices vary around
the world

CHAPTER 11 • MOTIVATING AND LEADING 367

relations-oriented versus task-oriented, or initiating structure versus consideration continuum.69
These studies were developed in the West, and conclusions regarding employee responses largely
reflect the opinions of U.S. workers. The democratic, or participative, leadership style has been
recommended as the one more likely to have positive results with most U.S. employees.

MANAGEMENT IN ACTION
Leadership in a Digital World

W hat does leadership mean in a digital world in which organizations are flexible and fluid and
the pace of change is extremely rapid? What’s it like to lead in an e-business organization?
Jomei Chang of Vitria Technology describes it as follows: “There’s no place to hide. [The

Internet] forces you to be on your toes every minute, every second.” Is leadership in e-businesses really
all that different from traditional organizations? Managers cite differences in speed of decisions, impor-
tance of flexibility, and having a vision.70 Others cite additional factors, described below.

SYNCHRONIZE YOUR TEAMS TO EFFECTIVELY WORK TOGETHER

At Zoom Video Communications Inc., founder and CEO Eric Yuan uses the company’s own video
communications platform to ensure that his teams are synchronized. Regardless of team members’
locations, Zoom enables them to have face-to-face meetings, even if they are traveling. According
to Eric Yuan, using Zoom technology optimizes and facilitates team interactions, collaboration and
brainstorming. He noted, “multiple people on a team can share screens simultaneously and can also
use Zoom’s white boarding capability to write on their screens and co-annotate each other’s notes — in
fact, our engineers use the feature all the time to brainstorm and write code.”71

MAKE SURE YOUR EMPLOYEES ARE HAPPY

Eric Yuan observed that if the employees are unhappy, nothing else at your company will function well.
To demonstrate the importance of happiness at Zoom, Yuan established a Chief Happiness Officer, who
oversees a team known as the “Happy Crew.” The crew consists of roughly 25 reps who are in different
job functions and locations within Zoom; however, they have volunteered to help instill a happy culture.
The Chief Happiness Officer works with the crew to plan company events, volunteer days, and Fun
Fridays (e.g., themed dress up days). Zoom recognizes one employee each quarter for delivering hap-
piness. According to Yuan, “If your employees are just working toward some goal in the distant future,
every day between now and then will be a slog, and they may not care about the seemingly little things
that have a big impact on the customer experience. Without their happiness you can’t achieve success.”72

DEVELOP A CARING CULTURE

Eric Yuan has built a culture of care at Zoom. The Zoom leadership team expects their co-workers to
care about the community, the company, their teammates, our customers, and themselves. The caring
philosophy is posted on the wall of Zoom’s lobby in every location as a constant reminder to everyone
entering and leaving their work environments, “caring” is embraced in all Zoom all-hands meetings.

HIRE PASSIONATE PEOPLE

Rackspace co-founder and chairman Graham Weston (cloud technology) stated, “The only way
we can be successful is to continue focusing on our purpose-driven culture. Since its early days,
“Fanatical Support” has been the hallmark of the Rackspace culture and the customer service experi-
ence. He asserted that Fanatical Support begins and ends with people, so Rackspace works diligently
to hire people who are passionate about customer service and embrace the “Racker” mindset. Weston
further noted, “Then it’s our job to take care of those people, to create an environment in which they
can thrive and do their best work.” The passion for customer service has spilled over as Rackspace
employees volunteer thousands of hours by providing Fanatical support in the local community.

What we all want from work is to be valued members of a winning team on an inspiring mission.73

Graham Weston, co-founder and chairman, Rackspace

Sources: S.P. Robbins and M. Coulter, Management, 7th ed. (Upper Saddle River, NJ: Prentice Hall, 2001),
used with permission; B. Patel, “‘5 CEO Tips on Leading Large Teams’ with Zoom’s CEO Eric Yuan”; C.
Skarda. “People, Culture Propel Rackspace onto Forbes’ Top Employer List,” Rackspace (blog), April 4, 2016.

368 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

CONTINGENCY LEADERSHIP: THE CULTURE
VARIABLE
Modern leadership theory recognizes that no single leadership style works well in all situations.74
A considerable amount of research, directly or indirectly, supports the notion of cultural contin-
gency in leadership. This means that, as a result of culture-based norms and beliefs about how
people in various roles should behave, what is expected of leaders, what influence they have, and
what kind of status they are given vary from nation to nation. Clearly, this has implications for
what kind of leadership style a manager should expect to adopt when going abroad.

The GLOBE Project
Research by the Global Leadership and Organizational Behavior Effectiveness (GLOBE) research
program comprised a network of 170 social scientists and management scholars from 62 countries
for the purpose of understanding the impact of cultural variables on leadership and organizational
processes. Using both quantitative and qualitative methodologies to collect data from 18,000 man-
agers in those countries, representing the majority of the world’s population, the researchers wanted
to find out which leadership behaviors are universally accepted and which are culturally contingent.
Not unexpectedly, they found that the positive leadership behaviors generally accepted anywhere
are behaviors such as being trustworthy, encouraging, an effective bargainer, a skilled administrator
and communicator, and a team builder; the negatively regarded traits included being uncoopera-
tive, egocentric, ruthless, and dictatorial.75 Leadership styles and behaviors found to be culturally
contingent are charismatic, team-oriented, self-protective, participative, humane, and autonomous.

The results for some of the countries researched are shown in Exhibit 11-5. The first col-
umn (N) is the sample size within that country. The scores for each country on those leadership

11-4. To understand the vari-
ables that necessitate
contingency leadership:
culture, context, people,
and situations

Country N Charisma Team Self-Protective Participative Humane Autonomous

Australia 345 6.09 5.81 3.05 5.71 5.09 3.95
Brazil 264 6.01 6.17 3.50 6.06 4.84 2.27
Canada 257 6.16 5.84 2.96 6.09 5.20 3.65
(English-speaking)
China 160 5.57 5.57 3.80 5.05 5.18 4.07
Denmark 327 6.01 5.70 2.82 5.80 4.23 3.79
Egypt 201 5.57 5.55 4.21 4.69 5.14 4.49
England 168 6.01 5.71 3.04 5.57 4.90 3.92
Greece 234 6.02 6.12 3.49 5.81 5.16 3.98
India 231 5.85 5.72 3.78 4.99 5.26 3.85
Ireland 157 6.08 5.82 3.01 5.64 5.06 3.95
Israel 543 6.23 5.91 3.64 4.96 4.68 4.26
Japan 197 5.49 5.56 3.61 5.08 4.68 3.67
Mexico 327 5.66 5.75 3.86 4.64 4.71 3.86
Nigeria 419 5.77 5.65 3.90 5.19 5.48 3.62
Philippines 287 6.33 6.06 3.33 5.40 5.53 3.75
Poland 283 5.67 5.98 3.53 5.05 4.56 4.34
Russia 301 5.66 5.63 3.69 4.67 4.08 4.63
Singapore 224 5.95 5.77 3.32 5.30 5.24 3.87
South Korea 233 5.53 5.53 3.68 4.93 4.87 4.21
Spain 370 5.90 5.93 3.39 5.11 4.66 3.54
Sweden 1,790 5.84 5.75 2.82 5.54 4.73 3.97
Thailand 449 5.78 5.76 3.91 5.30 5.09 4.28
Turkey 301 5.96 6.01 3.58 5.09 4.90 3.83
USA 399 6.12 5.80 3.16 5.93 5.21 3.75

ExHIBIT 11-5 Culturally Contingent Beliefs Regarding Effective Leadership Styles

Note: Scale 1 to 7 in order of how important those behaviors are considered for effective leadership (7 = highest).
Source: Based on selected data from Den Hartog, R. House et al. (GLOBE Project) Leadership Quarterly 10, No. 2 (1999).

CHAPTER 11 • MOTIVATING AND LEADING 369

dimensions are based on a scale from 1 (the opinion that those leadership behaviors would not be
regarded favorably) to 7 (that those behaviors would substantially facilitate effective leadership).
Note that reading from top to bottom on a single dimension allows comparison among those
countries on that dimension. For example, being a participative leader is regarded as more im-
portant in Canada, Brazil, and Austria than it is in Egypt, Hong Kong, Indonesia, and Mexico. In
addition, reading from left to right for a particular country on all dimensions allows development
of an effective leadership style profile for that country. In Brazil, for example, one can conclude
that an effective leader is expected to be very charismatic, team-oriented and participative, and
relatively humane but not autonomous.

The charismatic leader shown in this research is someone who is, for example, a visionary,
an inspiration to subordinates, and performance-oriented. A team-oriented leader is someone
who exhibits diplomatic, integrative, and collaborative behaviors toward the team. The self-
protective dimension describes a leader who is self-centered, conflictual, and status conscious.
The participative leader is one who delegates decision making and encourages subordinates to
take responsibility. Humane leaders are those who are compassionate to their employees. An
autonomous leader is, as expected, an individualist, so countries that ranked participation as im-
portant tended to rank autonomy in leadership as relatively unimportant. In Egypt, participation
and autonomy were ranked about equally.76

This broad, path-breaking research by the GLOBE researchers can be very helpful to
managers going abroad, enabling them to exercise culturally appropriate leadership styles.
In another stage of this ongoing research project, interviews with managers from various
countries led the researchers, headed by Robert House, to conclude that the status and influ-
ence of leaders vary a great deal across countries or regions according to the prevailing cul-
tural forces. Whereas Americans, Arabs, Asians, the English, Eastern Europeans, the French,
Germans, Latin Americans, and Russians tend to glorify leaders in both the political and
organizational arenas, those in the Netherlands, Scandinavia, and Germanic Switzerland have
very different views of leadership.77 Following are some sample comments made by manag-
ers from various countries.

• Americans appreciate two kinds of leaders. They seek empowerment from leaders who
grant autonomy and delegate authority to subordinates. They also respect the bold,
forceful, confident, and risk-taking leader, as personified by John Wayne in his movies.

• The Dutch place emphasis on egalitarianism and are skeptical about the value of
leadership. Terms like leader and manager carry a stigma. If a father is employed as a
manager, Dutch children will not admit it to their schoolmates.

• Arabs worship their leaders—as long as they are in power!

• Iranians seek power and strength in their leaders.

• Malaysians expect their leaders to behave in a manner that is humble, modest,
and dignified.

• The French expect leaders to be cultivated—highly educated in the arts and in
mathematics.78

Subsequently, further conclusions were drawn from the GLOBE results by Javidan
et al. about which leadership variables are found to be universally effective, about universal
impediments to effectiveness, and culturally contingent attributes. Their findings are listed in
Exhibit 11-6, with the corresponding GLOBE dimension in parentheses.

In phase three of their follow-up research, the GLOBE team surveyed and interviewed 1,060
CEOs and surveyed their more than 5,000 direct reports in 24 countries. Among their many
groundbreaking results, we highlight the one that the team concluded, that:

If an executive’s leadership style meets the expectations of those reporting to him or
her, then there is acceptance and an effective balance for success in meeting goals. The most
effective leaders are those who do not violate cultural norms.79 We can interpret this finding
as confirming other research described here that cross-cultural, cross-border leadership style
needs to blend with the norms, values, and expectations of the host people and institution to
be successful.

370 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

Earlier Leadership Research
Other research also provides insight on the relative level of preference for autocratic versus
participative leadership styles. For example, Hofstede’s four cultural dimensions (discussed in
Chapter 3) provide a good starting point to study leader–subordinate expectations and relation-
ships. We can assume, for example, that employees in countries that rank high on power distance
(i.e., India, Mexico, the Philippines) are more likely to prefer an autocratic leadership style and
some paternalism because they are more comfortable with a clear distinction between managers
and subordinates than with a blurring of decision-making responsibility.

Employees in countries that rank low on power distance (Sweden and Israel) are more likely
to prefer a consultative, participative leadership style, and they expect superiors to adhere to that
style. Hofstede, in fact, concludes that participative management approaches recommended by
many American researchers can be counterproductive in certain cultures.80 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 lead-
ers 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.81 Hofstede
points out that his research reflects the values of subordinates, not the values of superiors.

In another part of his research, Hofstede ranked the relative presence of autocratic norms in
the following countries, from lowest to highest: Germany, France, Belgium, Japan, Italy, the United
States, the Netherlands, Britain, and India. India ranked much higher than the others on autocracy.82

In the Middle East, in particular, little delegation occurs. 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 com-
mand must be rigidly followed.83

Exhibit 11-7 depicts an integrative model of the leadership process that pulls together the
variables described in this book and in the research on culture, leadership, and motivation—
and shows the powerful contingency of culture as it affects the leadership role. Reading from
left to right, Exhibit 11-7 presents contingencies from the broad environmental factors to
the outcomes affected by the entire leadership situation. As shown, the broad context in which the
manager operates necessitates adjustments in leadership style to all those variables relating to
the work and task environment and the people involved. Cultural variables (values, work norms,
the locus of control, and so forth), as they affect everyone involved—leader, subordinates, and
work groups—then shape the content of the immediate leadership situation.

Behaviors and Traits Universally Considered Facilitators of Leadership Effectiveness

• Trustworthiness (integrity)
• Visionary (charismatic-visionary)
• Inspirational and motivating (charismatic-inspirational)
• Communicative (team builder)

Behaviors and Traits Universally Considered Impediments to Leadership Effectiveness

• Being a loner and asocial (self-protective)
• Non-cooperative (malevolent)
• Dictatorial (autocratic)

Culturally Contingent Endorsement of Leader Attributes

• Individualistic (autonomous)
• Status-conscious (status-conscious)
• Risk-taking (charismatic: self-sacrificial)

ExHIBIT 11-6 Cultural Views of Leadership Effectiveness

Source: Based on Mansour Javidan, Peter W. Dorfman, Mary Sully de Luque, and Robert J. House,
“In the Eye of the Beholder: Cross Cultural Lessons in Leadership from Project GLOBE,” Academy of
Management Perspectives 20, No. 1 (2006), p. 75.

CHAPTER 11 • MOTIVATING AND LEADING 371

The leader–follower interaction is then further shaped by the leader’s choice of behaviors
(autocratic, participative, and so on) and by the employees’ attitudes toward the leader and the
incentives. Motivation effects—various levels of effort, performance, and satisfaction—result
from these interactions, on an individual and a group level. These effects determine the outcomes
for the company (productivity, quality) and for the employees (satisfaction, positive climate).
The results and rewards from those outcomes then act as feedback (positive or negative) into the
cycle of the motivation and leadership process.

Clearly, then, international managers should take seriously the culture contingency in
their application of the contingency theory of leadership. They must adjust their leadership
behaviors according to the context, norms, attitudes, and other variables in that society. As
noted, leadership refers not just to the manager–subordinate relationship but also to the impor-
tant task of running the whole company, division, or unit for which a manager is responsible.
When that is a global responsibility, it is vital to be able to adapt one’s leadership style to the
local context on many levels. Nancy McKinstry, an American leader in Europe, is very sensi-
tive to that imperative. Since she moved to Europe, charged with the task of turning around the
troubled Wolters Kluwer, the Dutch publishing group, she “has had plenty of experience of the
way national and cultural differences can both bedevil and enliven business.”84 One immedi-
ate difference she noticed is that she is one of few women in senior management in Holland.
(Since then, as of 2015, the number of women in leadership positions has increased from
20 percent to 50 percent.) That fact, added to the focus of the Dutch media on the executive as
a person and the views of the employees rather than the focus on the company, as in the United
States, was surprising to her. As she continues her restructuring plan, Ms. McKinstry (whose
physician husband commutes every two weeks between his hospital job in New York and his

Context Content Leader–Follower
Situation

Interaction

Influence

Motivation
Effects

Outcomes

Leader
Cultural sensitivity
Values, motives
Ability, experiences
Source of power
Personality, style

Subordinates
Values, norms
Ability, experiences
Needs, motives
Locus of control

Work Groups
Values, norms
Work goals
Authority system
Group processes

Productivity
Quality
Achievement of
individual and
group goals
Positive climate
Satisfaction

Effort
Performance
Ability to achieve
goals
Satisfaction
Turnover
Absenteeism
Quality

Feedback

Rewards

Motivation

External Origin
Political
Economic
Technological
Cultural

Level of
Divergence/
Convergence
of Culture/
Management

Internal Origin
Organization factors
Task factors
Resource availability
Systems
Processes

Leader Behavior
Variables
Autocratic or participative
Task or people oriented
Reward system
Transformational

Employee Behavior
Variables
Expectancy achievement
Value of rewards
Responsiveness to
leader behaviors
Group response

ExHIBIT 11-7 The Culture Contingency in the Leadership Process: An Integrative Model

372 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

family in Amsterdam) has found that there is a misconception that she will apply an American,
bottom-line leadership style. However, she says:

There isn’t that one-size-fits-all approach, not even within Europe. . . . If you have a product or
a customer problem in France, there might be an approach that works extremely well. But if you
took that same approach and tried to solve the exact same problem in Holland, you might fail.85

Nancy McKinstry, Chairman and CEO,
Wolters Kluwer Publishing Group, Holland

Ms. McKinstry explains that in southern Europe, there is far more nuance to what people are
saying than in northern Europe and, in particular, compared to the direct, optimistic style of the
United States. She finds that they often don’t want to say “No” to her, even though they may not
be able to achieve what she is asking them to do. Her leadership approach is to listen hard and
ask, “How are you going to go about meeting this goal?”86

CONCLUSION
Because leadership and motivation entail constant interactions with others (employees, peers,
superiors, outside contacts), cultural influences on these critical management functions are very
strong. Certainly, other powerful variables are intricately involved in the international manage-
ment context, particularly those of economics and politics. Effective leaders carefully examine
the entire context and develop sensitivity to others’ values and expectations regarding personal
and group interactions, performance, and outcomes—and then act accordingly.

Summary of Key Points

■ Motivation and leadership are factors in the successful
implementation of desired strategy. However, although
many of the basic principles are universal, much of the
actual content and process are culture-contingent—a
function of an individual’s needs, value systems, and
environmental context.

■ One problem in using content theories for cross-cultural
research, such as Maslow created, is the assumption of
their universal application. Because they were developed
in the United States, even the concepts, such as achieve-
ment or esteem, may have different meanings in other
societies, resulting in a noncomparable basis of research.

■ Implicit in motivating an employee is understanding
which of the employee’s needs are satisfied by work.
Studies on the meaning of work indicate considerable
cross-cultural differences.

■ A reexamination of motivation relative to Hofstede’s
dimensions of power distance, uncertainty avoidance,
individualism, and masculinity provides another per-
spective on the cultural contexts that can influence
motivational structures.

■ Incentives and reward systems must be designed to
reflect the motivational structure and relative cultural
emphasis on five categories of rewards: financial, so-
cial status, job content, career, and professional.

■ Effective leadership is crucial to the ability of a com-
pany to achieve its goals. The challenge is to decide
what is effective leadership in different international
or mixed-culture situations.

■ The perception of what makes a good leader—both
traits and behaviors—varies a great deal from one so-
ciety to another. The GLOBE leadership study across
62 countries provides considerable insight into cultur-
ally appropriate leadership behaviors.

■ Contingency theory is applicable to cross-cultural
leadership situations because of the vast number of
cultural and national variables that can affect the dy-
namics of the leadership context. These include both
leader–subordinate and group relations, which are
affected by cultural expectations, values, needs, atti-
tudes, perceptions of risk, and loci of control.

■ Joint ventures with other countries present a com-
mon but complex situation in which leaders must
work together to anticipate and address cross-cultural
problems.

■ Even in the digital economy, effective leaders provide
exemplary vision, cultivate a caring culture, and inspire
people in a way that they thrive. And when employees
thrive, so does the organization.

CHAPTER 11 • MOTIVATING AND LEADING 373

Experiential Exercise

Meet with another student, preferably one whom you know
well. Talk with that person and draw up a list of leadership skills
you perceive him or her to possess. Then consider your research
and readings regarding cross-cultural leadership. Name two

countries where you think the student would be an effective
leader and two where you think there would be conflict. Dis-
cuss those areas of conflict. Then reverse the procedure to find
out more about yourself. Share with the class if you wish.

Discussion Questions

11-1. What have you learned from the research on work central-
ity and the relative importance of work dimensions to people
around the world?

11-2. What are the implications for motivation of Hofstede’s
research findings on the dimensions of power distance,
uncertainty avoidance, individualism, and masculinity?

11-3. Explain what is meant by the need to design culturally
appropriate reward systems. Give some examples.

11-4. Develop a cultural profile which might be applicable to many
workers in Mexico and discuss the management style you
would use.

11-5. Describe the variables of content and context in the leader-
ship situation. What additional variables are involved in
cross-cultural leadership? What are the major elements of a
“global mind-set?”

11-6. Explain the theory of contingency leadership and discuss the
role of culture in that theory.

11-7. How can we use Hofstede’s four dimensions—power distance,
uncertainty avoidance, individualism, and masculinity—to
gain insight into leader–subordinate relationships around
the world? Give some specific examples.

11-8. Describe the autocratic versus democratic leadership dimen-
sion. Discuss the cultural contingency in this dimension and
give some examples of research findings indicating differ-
ences among countries.

11-9. Discuss how you would develop a profile of an effective
leader from the research results of the GLOBE project. Give
an example.

11-10. Can there be an effective EU leader? Is this a realistic pros-
pect? Discuss the factors involved with this concept. What
role has the financial crisis in the Eurozone played in this
concept?

Application Exercises

11-11. Using the material on motivation in this chapter, design a suit-
able organizational reward system for the workers in your
company’s plant in Mexico.

11-12. Choose a country and do some research (and conduct in-
terviews if possible) to create a cultural profile. Focus
on factors affecting behavior in the workplace. Integrate
any findings regarding motivation or work attitudes and
behaviors. Decide on the type of approach to motivation
you would take and the kinds of incentive and reward sys-
tems you would set up as manager of a subsidiary in that

country. Use the theories on motivation discussed in this
chapter to infer motivational structures relative to that so-
ciety. Then decide what type of leadership style and pro-
cess you would use. What major contingencies did you
take into account?

11-13. Try to interview several people from a specific ethnic subcul-
ture in a company or in your college regarding values, needs,
expectations in the workplace, and so on. Sketch a motiva-
tional profile of this subculture and present it to your class for
discussion.

How to Bring Cross-Cultural Teams Together

CASE STUDY

Alicia Clegg
March 30, 2017

As the appetite for cross-border deals increases, business schools are mining insights from
corporate couplings that prospered against the odds, in the hope that they hold valuable lessons
for managers struggling to overcome cultural divisions.

374 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

Case studies plunder the past for lessons in how to turn adversity into success. For example,
few would have bet on a good outcome when Haier, China’s leading home appliances maker,
formed a joint venture with Sanyo Electric to develop refrigerators in Japan — a 2007 episode in
corporate history studied by researchers at Iese Business School in Spain.

Speculation was rife among the Japanese workforce that Haier, the majority partner, merely
wanted to rip off Sanyo’s know-how. “There was a lot of uncertainty,” says Du Jingguo, Haier’s
Asia chief executive, of the deal. “Would we co-operate long term or did we just want to take the
technology?”

Culturally, the two companies were poles apart. While Haier promoted staff on merit and
paid by results, Sanyo was wedded to the Japanese tradition of promoting by age and length of
service. Undeterred, Mr Du split the Japanese workforce into small groups and night after night,
over rounds of drinks, he listened to their concerns.

In the end, his softly-softly approach paid off. Guided by what he learnt, Mr Du began to
promote younger employees, but in a way that spared the pride of their seniors, who were given
honorific titles and opportunities to work beyond retirement to compensate for their loss of ex-
pected income.

His bridge-building helped pave the way for Haier’s acquisition in 2012 of Sanyo’s white-
goods business in Japan and other south-east Asian markets — though he paid a price. “After two
years of drinking, I developed a gastric ulcer,” he says.

Acquisitions are an important way for businesses to grow and gain knowledge. With global
M&A activity at highs last seen in 2007, deals today often cut across borders, with emerging
market companies among the biggest spenders. In 2016, according to Deloitte, Chinese acquirers
spent 10 times more on European businesses than vice versa.

However, studies typically find that between 40 and 70 per cent of all deals fail to pay back.
A third of companies blamed differences in corporate culture for their lack of success in one of
only a few quantitative studies of post-deal integration, conducted by Aon Hewitt, the consul-
tancy, in 2011.

For deals that mix businesses from advanced and emerging markets, the statistics may
be worse. On top of differences in corporate ethos and all the other hazards that cause merg-
ers to unravel, such as incompatible IT systems and personality clashes, there is the risk of
cultural misunderstanding. What can organisations do to improve the success rate? And after
a merger, what is the best way for companies from cultures that are worlds apart to work
together?

Encouraging employees with cross-cultural backgrounds, who have lived and worked in
both countries and speak the local language to act as link points between headquarters and local
management is a good first step, says Sebastian Reiche, an associate professor at Iese Business
School, and the co-author of the case study of Haier’s acquisition of Sanyo Electric.

When a foreign acquirer buys a business, employees often fear for their future. Will our
jobs be moved abroad? Do the new owners understand what our customers like? Rather than
parachute in expatriates and risk a brain drain, a wiser course may be to retain the local leader-
ship and build on what made the business successful. As Prof Reiche puts it: “You don’t want to
destroy the asset that you are buying.”

Infosys, the Indian IT business, is grappling with the dual dilemma of how to integrate for-
eign acquisitions without stifling their entrepreneurial spirit or falling foul of cultural differences.

Rajesh Krishnamurthy, who heads Infosys Consulting, cites Noah Consulting, a Houston-
based information management business, still led by its founders under Infosys’s umbrella, as an
acquisition that the business got right.

To help the founders integrate their company into their new parent’s systems,
Mr Krishnamurthy recruited two managers of Indian origin from Infosys’s US operations.
Having lived in India and the US, the managers were also able to provide the cultural translation
sometimes needed between Houston and Bangalore.

Mr Krishnamurthy observes that while some nationalities, notably Americans, spell things
out, Indians make their points in a more roundabout way. They often hate to say no.

His comments are supported by the analysis of communication styles conducted by Erin
Meyer, a professor of organisational behaviour at Insead. When cultures with different styles
of disagreeing meet, she notes in The Culture Map, misunderstandings are the result. As
Mr Krishnamurthy puts it: “It can seem to others that we beat about the bush.”

CHAPTER 11 • MOTIVATING AND LEADING 375

Even businesses that appreciate the importance of culture can be wrongfooted by differences
that they fail to anticipate. Nathan McDonald, co-founder of We Are Social, a London-based
marketing services agency acquired by Blue Focus, China’s largest marketing services group in
2013, highlights the breakneck speed by which business is conducted in some emerging markets
as a potential pinch-point in cross-cultural deals.

“In China, everyone is in a big hurry because the growth is so fast,” he says.
Mr McDonald recalls a sticky moment when the HR director at Blue Focus proposed visit-

ing his team — but at such short notice that he and his partner would have had to cancel client
meetings to host her. So they emailed back, emphasising that while they were eager to spend
time with her, their commitments to their clients took priority.

Now the companies schedule a monthly catch-up call at which future visits are planned.
“We’ve learned how to calibrate our expectations, we’ve adjusted to their pace and they’ve ad-
justed a bit to us,” Mr McDonald says.

While acquirers need to respect cultural differences, an entirely hands-off management style
may not be the answer. Even subsidiaries that relish autonomy want to feel connected to the
wider whole, says Mr Krishnamurthy.

There are commercial drawbacks to managing businesses as standalone entities. If each
company exists in a silo, there is no knowledge-sharing, and no learning from each other’s suc-
cesses and mistakes.

Organising exchange visits and opportunities to collaborate on shared projects may be one
way to foster a sense of collective identity. At Infosys, workers from across the group are encour-
aged to dial into monthly forums and present their top innovations so that good ideas can be shared.

Local differences in the protections that workers enjoy on matters such as disability, health
and safety, gender and LGBT rights are another hazard that companies must negotiate. Though
respecting local law may be all that is required to operate legally, applying different policies in-
ternationally can expose companies to accusations of hypocrisy.

To avoid such problems employers’ forums, such as Business Disability International, rec-
ommend adopting company-wide policies on equality rights and applying them globally.

Mr Du, for his part, remains committed to fostering entrepreneurialism in a culturally sensitive
way. Though progress can be slow — persuading Japanese workers to accept just the basic principle of
performance-related incentives took six months of discussion — he insists that there is no alternative.

“As the manager, I can issue an order, but if people don’t agree in their hearts, the order will
be meaningless,” he says.

Case Questions

11-14. Discuss the importance of top leadership in bringing together effective cross-cultural teams. How
can leaders affect the relative success of cross-border mergers?

11-15. What kinds of potential cross-cultural conflicts are evident in this case?
11-16. What steps did Mr. Du take to pave the way to a successful relationship between Haier and Sanyo

Electric?

Endnotes

1. L. Lewis. April 20, 2019. Motoi Oyama of Asics: the globally
minded shoe ambassador. Financial Times, https://www.ft.com
/content/030f998c-628e-11e9-b285-3acd5d43599eFT.com.
Accessed May 2, 2019.

2. L. Kellaway, “McKinsey’s Airy Platitudes Bode Ill for Its Next
Half-Century,” Financial Times, September 14, 2014, www
.ft.com/content/9dbce952-38d7-11e4-9526-00144feabdc0
(accessed February 26, 2019).

3. “Fujitsu Uses Pay Cuts as a Motivational Tool,” www.nytimes
.com, January 27, 2004.

4. Irem Uz, “The Index of Cultural Tightness and Looseness
Among 68 Countries,” Journal of Cross-Cultural Psychology 46,
No. 3 (2015), pp. 319–335.

5. Ibid.
6. Garry A. Gelade, Paul Dobson, and Katharina Auer, “Individualism,

Masculinity, and the Sources of Organizational Commitment,”
Journal of Cross-Cultural Psychology 39 (2008), p. 599.

http://www.nytimes.com

http://www.ft.com/content/9dbce952-38d7-11e4-9526-00144feabdc0

https://www.ft.com/content/030f998c-628e-11e9-b285-3acd5d43599eFT.com

376 PART 4 • GLOBAL HUMAN RESOURCES MANAGEMENT

7. Ibid.
8. F. Rieger and D. Wong-Rieger, “A Configuration Model of

National Influence Applied to Southeast Asian Organizations,”
Proceedings of the Research Conference on Business in
Southeast Asia, May 12–13, 1990, University of Michigan.

9. R. M. Steers, Made in Korea: Chung Ju Yung and the Rise of
Hyundai (New York: Routledge, 1999).

10. Meaning of Work International Research Team, The Meaning
of Working: An International Perspective (New York: Academic
Press, 1985).

11. Ibid.
12. A. H. Maslow, Motivation and Personality (New York: Harper

and Row, 1954).
13. F. Herzberg, Work and the Nature of Man (Cleveland: Cleveland

World Press, 1966).
14. D. Siddiqui and A. Alkhafaji, The Gulf War: Implications for

Global Businesses and Media (Apollo, PA: Closson Press,
1992), pp. 133–135.

15. Ibid.
16. A. Ali, The Islamic Work Ethic in Arabia. Journal of Psychology

126 (1992): 507–19.
17. Yasamusa Kuroda and Tatsuzo Suzuki, “A Comparative Analysis

of the Arab Culture: Arabic, English and Japanese Language and
Values,” paper presented at the 5th Congress of the International
Association of Middle Eastern Studies, Tunis (September 20–24,
1991), quoted in Siddiqui and Alkhafaji.

18. A. Furnham, B. D. Kirkcaldy, and R. Lynn, National Attitudes to
Competitiveness, Money, and Work among Young People: First,
Second, and Third World Differences. Human Relations 47, No.
1 (1994), pp. 119–132.

19. Abraham Maslow, Motivation and Personality (New York:
Harper & Row, 1954).

20. R. L. Tung, Patterns of Motivation in Chinese Industrial
Enterprises. Academy of Management Review 6, No. 3 (1981),
pp. 481–489.

21. Swee Hoon Ang, The Power of Money: A Cross-Cultural
Analysis of Business-Related Beliefs. Journal of World Business
35, No. 1 (2000), p. 43.

22. Geert Hofstede, National Cultures in Four Dimensions.
International Studies of Management and Organization (Spring–
Summer 1983).

23. Davila and Elvira, 2012.
24. D. Walker, T. Walker, and J. Schmitz, Doing Business

Internationally, 2nd ed. (New York: McGraw-Hill, 2003).
25. Ibid.
26. Ibid.
27. Ibid.
28. M. B. Teagarden, M. C. Butler, and M. Von Glinow, Mexico’s

Maquiladora Industry: Where Strategic Human Resource
Management Makes a Difference. Organizational Dynamics
(Winter 1992), pp. 34–47.

29. John Condon, Good Neighbors: Communication with the
Mexicans (Yarmouth, ME: Intercultural Press, 1985).

30. G. K. Stephens and C. R. Greer, Doing Business in Mexico:
Understanding Cultural Differences. Organizational Dynamics
(Summer 1995), pp. 39–55.

31. Teagarden, Butler, and Von Glinow.
32. Stephens and Greer.
33. David and Elvira, 2012.
34. Ibid.
35. Ibid.
36. Mariah E. de Forest, Thinking of a Plant in Mexico? Academy of

Management Executive 8, No. 1 (1994), pp. 33–40.

37. Ibid.
38. Ibid.
39. Teagarden, Butler, and Von Glinow.
40. Malgorzata Tarczynska, “Eastern Europe: How Valid Is Western

Reward/Performance Management?” Benefits and Compensation
International 29, No. 8 (2000), pp. 9–16.

41. G. Kelly, “Bad Bosses Are Making the UK’s Productivity Puzzle
Worse,” Financial Times, February 26, 2018, p. 11, https://login
.libweb.lib.utsa.edu/login?url=https://search.proquest.com
/docview/2019202750?accountid=7122

42. Ibid.
43. Y. Traber, “International Pay Structures: Why Are Companies

Considering Them?” Mercer.com,
https:/ /mobili tyexchange.mercer.com/Insights/art icle
/ In te r na t iona l -Pay-S t ruc tures -Why-Are-Companies
-Considering-Them (accessed March 2, 2019).

44. Ibid.
45. “Global Talent Trends 2019,” www.mercer.com/content/dam

/mercer/attachments/global/Career/gl-2019-global-talent-trends
-study (accessed March 2, 2019).

46. M. Oi. March 22, 2016. Japan seeks alternatives to its pay system.
https://www.bbc.com/news/35868599. Accessed May 6, 2019.

47. Ibid.
48. A. Ignatius, “Now If Ms. Wong Insults a Customer, She Gets an

Award,” Wall Street Journal, January 24, 1989.
49. T. Saywell, Motive Power: China’s State Firms Bank on

Incentives to Keep Bosses Operating at Their Peak. Far Eastern
Economic Review (July 8, 2000), pp. 67–68.

50. Pyrillis, 2011.
51. A. Maitland, “Le patron, der Chef and the Boss,” Financial

Times, January 9, 2006.
52. A. Morrison, H. Gregersen, and S. Black, “What Makes Savvy

Global Leaders?” Ivey Business Journal 64, No. 2 (1999),
pp. 44–51; and Monash Mt. Eliza Business Review 1, No. 2 (1998).

53. Robert J. Thomas, Joshua Bellin, Claudy Jules, and Nandani
Lynton, Developing Tomorrow’s Global Leaders. Sloan
Management Review, Fall 2013.

54. D. Walker, T. Walker, and J. Schmitz, Doing Business
Internationally (New York: McGraw-Hill, 2003).

55. Mansour Javidan and Mary Teagarden, Making It Overseas.
Harvard Business Review, April 2010.

56. A. Morrison, H. Gregersen, and S. Black, “What Makes Savvy
Global Leaders?”

57. Kana Inagaki, “Japanese Boards Move to Open up to
Overseas Executives,” Financial Times, June 6, 2017, www.ft
.com/content/203b889e-4a95-11e7-919a-1e14ce4af89b
(accessed February 28, 2019).

58. R. H. Mason and R. S. Spich, Management: An International
Perspective (Homewood: IL: Irwin, 1987).

59. Ibid., p. 184.
60. Ibid., p. 186.
61. Based on and excerpted from Mason and Spich.
62. R. Toplensky, “French Companies Lead the Way on Gender

Diversity,” Financial Times, November 28, 2018.
63. Kendall Herbert, Audra I. Mockaitis, and Lena Zander,

An Opportunity for East and West to Share Leadership: A
Multicultural Analysis of Shared Leadership Preferences in
Global Teams. Asian Business & Management 13, No. 3 (2015),
pp. 257–282.

64. Alon Lisak and Miriam Erez, Leadership Emergence in
Multicultural Teams: The Power of Global Characteristics.
Journal of World Business 50 (2015), pp. 3–14.

http://www.ft.com/content/203b889e-4a95-11e7-919a-1e14ce4af89b

https://www.bbc.com/news/35868599

http://www.mercer.com/content/dam/mercer/attachments/global/Career/gl-2019-global-talent-trends-study

https://mobilityexchange.mercer.com/Insights/article/International-Pay-Structures-Why-Are-Companies-Considering-Them

http://Mercer.com

https://login.libweb.lib.utsa.edu/login?url=https://search.proquest.com/docview/2019202750?accountid=7122

CHAPTER 11 • MOTIVATING AND LEADING 377

65. B. Patel, “‘5 CEO Tips On Leading Large Teams’ with Zoom’s
CEO Eric Yuan,” Authority Magazine, https://medium.com
/authority-magazine/5-ceo-tips-on-leading-large-teams-with
-zooms-ceo-eric-yuan-28d505d045f9 (accessed December 11,
2018).

66. Boston Consulting Group. Technology & Digital: Tackling the
Challenge of Technology-Driven Transformation. www.bcg
.com/en-us/capabilities/technology-digital/default.aspx (accessed
December 11, 2018).

67. Ibid.
68. B. M. Bass, Bass & Stogdill’s Handbook of Leadership (New

York: Free Press, 1990).
69. D. McGregor, The Human Side of Enterprise (New York:

McGraw-Hill, 1960). See, for example, R. M. Stogdill, Manual
for the Leader Behavior Description Questionnaire—Form XII
(Columbus: Ohio State University, Bureau of Business Research,
1963); R. R. Blake and J. S. Mouton, The New Managerial Grid
(Houston: Gulf Publishing, 1978).

70. S.P. Robbins and M. Coulter, Management, 7th ed. (Upper
Saddle River, NJ: Prentice Hall, 2001), used with permission.

71. F. E. Fiedler, “Engineering the Job to Fit the Manager,” Harvard
Business Review 43, No. 5 (1965), pp. 115–122.

72. Den Hartog, N. Deanne, R. J. House, Paul J. Hanges, P. W.
Dorfman, S. Antonio Ruiz-Quintanna, et al., “Culture Specific
and Cross-Culturally Generalizable Implicit Leadership Theories:
Are Attributes of Charismatic/Transformational Leadership
Universally Endorsed?” Leadership Quarterly 10, No. 2 (1999),
pp. 219–256.

73. Ibid.
74. B. Patel, “‘5 CEO Tips on Leading Large Teams’ with Zoom’s

CEO Eric Yuan.”
75. Ibid.
76. C. Skarda. “People, Culture Propel Rackspace onto Forbes’ Top

Employer List,” Rackspace (blog), April 4, 2016,
https: / /blog.rackspace.com/people-culture-rackspace
-forbes-top-employer (accessed December 11, 2018).

77. R. House et al., “Cultural Influences on Leadership and
Organizations: Project GLOBE,” Advances in Global
Leadership, 1 (JAI Press, 1999).

78. Ibid.
79. Ibid.
80. Geert Hofstede, Motivation, Leadership and Organization: Do

American Theories Apply Abroad? Organizational Dynamics
(Summer 1980): 42–63.

81. Ibid.
82. Geert Hofstede, “Value Systems in Forty Countries,” Proceedings

of the 4th International Congress of the International Association
for Cross-Cultural Psychology (1978).

83. M. K. Badawy, “Styles of Mid-Eastern Managers,” California
Management Review (Spring 1980), p. 57; various newscasts, 2001.

84. Alison Maitland, “An American Leader in Europe,” leadership
interview with Nancy McKinstry, Wolters Kluwer, Financial
Times, July 15, 2004.

85. Ibid.
86. Ibid.

https://blog.rackspace.com/people-culture-rackspace-forbes-top-employer

http://www.bcg.com/en-us/capabilities/technology-digital/default.aspx

https://medium.com/authority-magazine/5-ceo-tips-on-leading-large-teams-with-zooms-ceo-eric-yuan-28d505d045f9

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Case 8 Daimler China: Facing a Media Firestorm1

Wolfgang Messner and Hyo Jin Yoon wrote this case solely to provide material for class discus-
sion. The authors do not intend to illustrate either effective or ineffective handling of a manage-
rial situation. The authors may have disguised certain names and other identifying information
to protect confidentiality.

This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in
any form or by any means without the permission of the copyright holder. Reproduction of this
material is not covered under authorization by any reproduction rights organization. To order
copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business
School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@
ivey.ca; www.iveycases.com.

Germany. Gärtner’s initial position in South Korea was head of
sales and marketing, Daimler Trucks Korea Ltd., from which he
soon made it to vice- president of commercial vehicle sales.

In 2013, he was invited into a high-potential program, with
sessions on leadership and self-development at the International
Institute for Management Development (IMD). The next pro-
motion came in December 2013 all the way up to the position
of CEO of Daimler Trucks Korea Ltd. In this role, he had full
profit and loss responsibility for new vehicle sales (trucks,
buses, and vans) and after-sales (parts and accessories). He was
further responsible for managing the supply chain production
network of local and regional suppliers.

Move to China

In July 2015, another move was waiting for Gärtner, then age
49, both geographically from South Korea to China, as well
as once more up the corporate ladder. Gärtner was to succeed
Robert Veit as CEO of DTBC. Veit, at age 47, was returning to
Stuttgart headquarters in Germany to take the position of direc-
tor of Mercedes-Benz Truck Overseas.5

This latest promotion clearly underscored Daimler’s con-
fidence in Gärtner. China was the largest vehicle market in the
world. And for Daimler’s Mercedes-Benz trucks, China was al-
ready the fifth-largest market in 2012, with a market share of more
than 50 per cent in the premium segment.6 In the heavy-duty seg-
ment, Daimler solidified its position as the leader in the market. As
of 2013, the trucks and buses division of DTBC pursued a two-
pronged strategy. For the division’s premium segment, the legally
independent company DTBC imported and sold Mercedes-Benz
trucks. For the volume segment, Daimler and Beiqi-Foton Motor
Co., Ltd. (Foton), a Chinese truck manufacturer, entered in a 50/50
joint venture as part of the Beijing Foton Daimler Automotive Co.,
Ltd. Since July 2012, they had been collaborating to manufacture
and distribute the medium- and heavy-duty trucks of the Auman
brand, primarily for the domestic Chinese market.7 The joint ven-
ture was intended to bring a stronger presence for the company by
combining Daimler’s leading truck manufacturing expertise with
Foton’s understanding of the domestic market.

Gärtner had full profit and loss responsibility for DTBC,
including new vehicle sales (trucks, special trucks, and buses),
powertrain components, after-sales (genuine parts, lubricants,
and accessories), and telematics solutions for bus-specific fleet
management.8

On November 20, 2016, Rainer Gärtner, chief executive offi-
cer (CEO) of Daimler Trucks and Buses China Ltd. (DTBC),
the Chinese heavy-duty segment of multinational automobile
manufacturer Daimler AG (Daimler), found himself sitting
in a police station in Beijing, China. The police officers had
taken him in for questioning after a heated quarrel in a parking
lot where he allegedly lost his temper over a parking space.2
Gärtner and a Chinese driver were both trying to park their cars
at the same time in the same space. This resulted in Gärtner
screaming racially loaded insults. Onlookers tried to intervene,
and Gärtner used pepper spray. One bystander got injured and
had to be treated in the hospital for eye injuries.3

How did it all happen? How did a seemingly small frustration
get out of control and turn into such an ugly story? What on earth
had happened to Gärtner? Chinese social media soon connected
this incident with Daimler’s corporate culture and asked people to
boycott Mercedes cars. The story went viral and was picked up
by mainstream news outlets around the world. Against general
upward market trends, Daimler’s share price weakened. What op-
tions did Daimler have to remedy the situation?

Gärtner’s Background

Until that Sunday morning in November 2016, everything was
going perfectly fine for Gärtner. His career was on a smooth
and rather steep trajectory; his life was full of achievements.
He received his Master of Business Administration degree
with a focus on exports, sales, and marketing from the Ludwig
Maximilian University in Munich (Germany), followed by a
Doctor of Philosophy degree in economics from the same uni-
versity in 1997. Besides his native German, he spoke English,
Spanish, and Turkish.4

Gärtner’s employer, Daimler’s business unit Mercedes-Benz
Cars in Germany, entrusted him with increasing responsibilities.
From 2004 to 2010, he was a senior manager with the Mercedes-
Benz Guard division. In this role, he was responsible for product
management and worldwide sales, marketing, and service opera-
tions for armoured cars at headquarters in Stuttgart, Germany.

In 2010, Gärtner was sent on an expatriate assignment to South
Korea. Daimler was paying great attention to the fast-growing
Korean market, which reached a whopping growth in new imported
car registrations of 25.5 per cent over the previous year. Moreover,
71 per cent of foreign cars sold in South Korea that year came from

PC4-1

P A R T 4 : Comprehensive Cases

http://www.iveycases.com

PC4-2 PART 4 • COMPREHENSIVE CASES

featured a moderate editorial, saying that “some people think
this was making a mountain out of a molehill.” However, it also
added that foreign expatriates in China easily become arrogant
about China and “often use racially prejudiced words and ac-
tions about Chinese consumers, even Chinese employees.”19

The news about the Gärtner incident did not stay in China
for long. It quickly spread across the world. International
media, such as Reuters, took notice of the mounting tension re-
garding the incident, carefully observing Daimler’s next move:
“The media reports prompted a spike in online chatter, with the
outburst in the top 10 discussed topics on popular microblog
Sina Weibo on Monday morning. Many users posted comments
saying they would avoid buying Daimler cars.”20

Others, such as the New York Times, took a more repri-
manding tone toward the German expatriate by commenting:
“the Chinese news media and many internet users seized on Mr.
Gärtner as an example of arrogant Western bigotry and demanded
that he and Daimler apologize. He became the latest example of
the power of the Chinese internet to humble governments, com-
panies and people accused of wounding national pride.”21

This was all very bad timing. The controversy over
Gärtner came hard on the heels of another volatile episode
involving 63-year-old Günther H. Oettinger, the European
Commissioner for Digital Economy and Society from
Germany. Oettinger had to apologize after referring to
Chinese people as “slit-eyes” and “sly dogs” in a speech to
business leaders in Hamburg. An amateur video was uploaded
to YouTube, capturing Oettinger’s controversial speech, in
which he caricatured a delegation of Chinese officials he had
met. During the first few days of criticism, Oettinger refused
to apologize, causing China’s Foreign Ministry to condemn
Oettinger for showing a “baffling feeling of superiority”
that is common among many Western politicians. A spokes-
woman for China’s Foreign Ministry stated: “We hope that
they will learn to observe themselves and others objectively,
and to respect others and treat them as equals.”22

As the storm of criticism mounted, Oettinger finally de-
cided to apologize in a statement released by the European
Commission. Oettinger acknowledged that he now realized
his remarks to a German business forum last week had “hurt”
people.23 Relations between China and Germany were further
affected when Germany withdrew approval for a Chinese inves-
tor group’s proposed takeover of German semiconductor equip-
ment maker Aixtron, citing concerns over national security.
The withdrawal resulted in diplomatic tension between the two
countries.24

Moving Forward

Gärtner’s parking space quarrel in the suburb of Beijing not
only resulted in outrage on Chinese social media. On the day of
the incident, Daimler’s share price started a downhill dive from
€65.69 that 10 days later reached a low of €61.90.25 During
the same time period, the DAX remained steady, and the Dow
Jones Industrial Average even showed an upward movement
(see Exhibit 1).26 What actions options did Daimler have to re-
store its brand image?

The Dispute

Life in China was not bad for Gärtner. He stayed in a gated
community in the up-and-coming district of Shunyi, a popu-
lar residential suburb in Northeast Beijing, among other over-
seas executives. Gärtner had a nice house with a little garden
and fence around it, and a showy black Mercedes car in his
driveway.

However, something inexplicable happened on Sunday
morning, November 20, 2016. Gärtner was trying to park his
car in a parking lot inside his residential compound, and a
Chinese driver was trying to do the same thing, at the same
time and in the same space. Apparently, one of the two “stole”
the parking space from the other, starting a frustrated dispute
that quickly heated up. Gärtner allegedly yelled “I’ve been in
China for a year and the first thing that I learned was that all
Chinese are bastards,”9 and defended his parking space with
pepper spray. One onlooker was injured and had to be treated in
the hospital for eye injuries. This incident landed Gärtner in a
Chinese police station.10

In the end, Gärtner was able to settle the dispute with the
Chinese driver in a private manner, and the official police in-
vestigation was quickly closed.11 However, one of the driver’s
friends, who was around when it all happened, posted on social
media his recollection of how Gärtner had screamed racial slurs
to the Chinese passersby and how he unleashed pepper spray
on them.12 The story soon went viral on Chinese media. The
South China Morning Post quoted a social media post: “This
kind of foreigner is making money from Chinese people on one
hand while insulting them at the same time. They hate China
from the bottom of their hearts.”13

Bloggers on Weibo (pronounced ‘way-bore’), a popular
social media microblogging website in China with a market
penetration similar to Twitter in the United States,14 flooded
the Daimler Group profile page, calling for boycotts and de-
manding action. One blogger stated: “I was originally thinking
about buying a Mercedes-Benz S-Class and was also planning
to buy my wife a Mercedes-Benz GLC, but this incident about
the senior executive has made me deeply disappointed towards
the brand. Mercedes-Benz, get out of China!”15

In yet another post, a friend of the passerby who was
treated in the hospital mournfully commented on the incident
as an example of obnoxious foreigners: “These kinds of for-
eigners take money from the Chinese people with one hand
while also abusing them. They must hate China from the depths
of their hearts.”16

Further comments flooded into the original Weibo post
that reported on the parking space dispute: “Get out of China!
China doesn’t welcome you.” “Gärtner should be deported and
never allowed to enter China again.” “I’ll never buy Benz even
if I can afford it. The corporate culture is ugly.”17

Global Times, a popular Chinese newspaper, regretfully
commented on the incident: “But no matter how filthy the
words, hearts should not be filthy . . . . There’s no explaining
away an argument that escalates to using ‘You Chinese . . . .’”18

The Southern Daily, an official Chinese newspaper for
the southern province of Guangdong, was one of the few that

CASE 8 • DAIMLER CHINA: FACING A MEDIA FIRESTORM PC4-3

Case Questions

1. Rainer Gartner’s racial tirade not only led to a firestorm on
social and mainstream media around the world, but also
sent Daimler’s share price on a downhill journey. What
should Daimler do now?

2. Can Daimler fire Gartner? What is the legal situation?
Is it ethical to fire him?

DAI

Dow Jones

€65.69

€61.90

Nov 20
2016

Nov 30
2016

Oct 1
2016

Dec 31
2016

ExHIBIT 1 Daimler Share Price Compared to the Dow Jones Industrial Average

Note: € = EUR = euro; €1 = US$1.05 as of November 20, 2016. The black line shows the Daimler
share price (DAI) from October 1 to December 31, 2016, while the dotted line shows the Dow Jones
Industrial Average price.

Source: Created by the case authors with share price data from “Daimler/WKN: 710000/ISIN:
DE0007100000,” ING DiBa Wertpapiere, December 31, 2016, accessed October 16, 2017, https://
wertpapiere.ing-diba.de/DE/Showpage.aspx?pageID=28&ISIN=DE0007100000&.

3. A seemingly small quarrel about a parking space
started Gartner on an aggressive tirade. Why was
this the last straw? What could have caused Gartner’s
frustration?

4. How can companies prepare their expatriates and interna-
tional sojourners to prevent such dire situations?

Endnotes

1. This case has been written on the basis of published sources only.
Consequently, the interpretation and perspectives presented in the case
are not necessarily those of Daimler AG or any of its employees.

2. Joshua Rett Miller, “Daimler Exec Booted over Alleged Racist Rant: ‘All
You Chinese Are B−−−−−ds!’” New York Post, November 22, 2016, ac-
cessed January 21, 2018, https://nypost.com/2016/11/22/daimler-exec
-booted-over-alleged-racist-rant-all-you-chinese-are-b−−−−−ds/amp/.

3. Wang Yijing, “Auto Boss ‘Called Chinese Bastards,’” ShanghaiDaily.
com, November 22, 2016, accessed January 21, 2018, https://www.shine.
cn/archive/nation/Auto-boss-called-Chinese-bastards/shdaily.shtml.

4. “Mercedes-Benz Executive Rainer Gärtner Insults China” [in Chinese],
November 22, 2016, accessed January 20, 2018, https://weibo
.com/3761868337/.EiDXAAqcP?from=page_1005053761868337
_profile&wvr=6&mod=weibotime&type=repost#_rnd1511662721825.

5. Florian Martens, Susanne Lenz, and Senol Bayrak, “Leadership
Changes in Daimler Trucks Unit in China,” Daimler Global Media Site,
June 30, 2015, accessed October 18, 2017, http://media.daimler.com
/marsMediaSite/en/instance/ko/Leadership-Changes-in-Daimler-Trucks
-Unit-in-China.xhtml?oid=9918579.

6. Daimler AG, “Milestone for Daimler in China: Integrated Sales Company
for Cars,” Daimler investor relations release, December 17, 2012, accessed

November 25, 2017, www.daimler.com/documents/investors/nachrichten/
Capitalmarktmeldungen/daimler -ir-release-en-20121217 .

7. Florian Martens, et al., op cit.
8. “Mercedes-Benz Executive Rainer Gärtner Insults China” [in Chinese],

op. cit.
9. Stephan Scheuer, “Daimler Removes Executive for China Insult,” Handels-

blatt Global, November 23, 2016, accessed October 18, 2017, https://global.
handelsblatt.com/companies-markets/daimler-removes-executive-for
-china-insult-648960.

10. Joshua Rett Miller, op. cit.
11. Rhodri Phillips, “Park and Riled: Daimler’s Boss’s ‘Racist Meltdown’ in

Chinese Car Row Causes Outrage after German Exec Is NOT Sacked,”
Sun, November 23, 2016, accessed January 22, 2018, https://www.the
-sun.co.uk/news/2243594/daimler-bosss-racist-meltdown-in-chinese-car
-row-causes-outrage-after-german-exec-is-not-sacked/.

12. “Executive’s Humiliating Story of Spraying Pepper-Spray Exposed,
Beijing Police Responds” [in Chinese], Sina News, November 22,
2016, accessed October 19, 2017, http://news.sohu.com/20161120/
n473679966.shtml.

13. Nectar Gan, “Senior Daimler Executive Removed from Post after Racist Ti-
rade against Chinese People in Beijing Parking Row,” South China Morning
Post, November 22, 2016, accessed November 26, 2017, www.scmp.com/

http://www.scmp.com/news/china/society/

http://news.sohu.com/20161120/n473679966.shtml

https://www.the-sun.co.uk/news/2243594/daimler-bosss-racist-meltdown-in-chinese-car-row-causes-outrage-after-german-exec-is-not-sacked/

https://global.handelsblatt.com/companies-markets/daimler-removes-executive-for-china-insult-648960

http://-ir-release-en-20121217

http://www.daimler.com/documents/investors/nachrichten/Capitalmarktmeldungen/daimler

http://media.daimler.com/marsMediaSite/en/instance/ko/Leadership-Changes-in-Daimler-Trucks-Unit-in-China.xhtml?oid=9918579

https://weibo.com/3761868337/.EiDXAAqcP?from=page_1005053761868337_profile&wvr=6&mod=weibotime&type=repost#_rnd1511662721825

https://www.shine.cn/archive/nation/Auto-boss-called-Chinese-bastards/shdaily.shtml

http://ShanghaiDaily.com

https://nypost.com/2016/11/22/daimler-exec-booted-over-alleged-racist-rant-all-you-chinese-are-b−−−−−ds/amp/

https://wertpapiere.ing-diba.de/DE/Showpage.aspx?pageID

PC4-4 PART 4 • COMPREHENSIVE CASES

news/china/society/ article/2048191/german-executive-sacked-over-racist
-tirade-china.

14. Kenneth Rapoza, “China’s Weibos vs US’s Twitter: And the Winner Is?”
May 17, 2011, Forbes, accessed November 25, 2017, https://www.forbes
.com/sites/kenrapoza/2011/05/17/chinas-weibos-vs-uss-twitter-and-the
-winner-is/#196533e29b53.

15. “A Benz Top Manager Called All Chinese Bastards. Online
Users Heatedly Discussed about This” [in Chinese], Sohu News,
November 21, 2016, accessed October 18, 2017, http://mt.sohu.com/
d20161121/119540215_351301.shtml.

16. Yuan Yang, “Daimler Executive Removed after ‘Racist Rant’ in China,”
Financial Times, November 21, 2016, accessed October 18, 2017, https://
www.ft.com/content/c506cab0-afbc-11e6-a37c-f4a01f1b0fa1.

17. “A Benz Top Manager Called All Chinese Bastards. Online Users
Heatedly Discussed about This” [in Chinese], op. cit.

18. Chris Buckley, “Daimler Executive Is Removed after Accusations
of Insulting Chinese,” New York Times, November 22, 2016, accessed
October 20, 2017, https://www.nytimes.com/2016/11/22/world/asia/
china-daimler-rainer-gartner.html.

19. Ibid.
20. “Daimler Expresses Regret over Chinese Parking Row Involving Senior

Manager,” Reuters, November 21, 2016, accessed October 19, 2017,
https://www.reuters.com/article/us-daimler-china/daimler-expresses

-regret-over-chinese-parking-row-involving-senior-manager-idUSKBN
-13G19O; Reuters, “Daimler Executive ‘Relieved of Position’ after Parking
Lot Fight,” Fortune, November 21, 2016, accessed Oct 18, 2017, http://
fortune.com/2016/11/21/senior-daimler-executive-china-parking-lot/.

21. Chris Buckley, op. cit.
22. Geoffrey Smith, “How a Racial Slur Has Made the Nasty Spat between

China and Europe Even Worse,” Fortune, November 2, 2016, accessed
October 19, 2017, http://fortune.com/2016/11/02/gunther-oettinger
-china-germany-eu-racial-slur/.

23. Alastair Macdonald, “EU Commissioner Apologizes for Remarks
on China, Gays,” Reuters, November 3, 2016, accessed October 20,
2017, www.reuters.com/article/us-eu-china-oettinger/eu-commissioner
-apologizes-for-remarks-on-china-gays-idUSKBN12Y10D.

24. Guy Chazan, “Germany Withdraws Approval for Chinese Takeover of
Tech Group,” Financial Times, October 24, 2016, accessed November
26, 2017, https://www.ft.com/content/f1b3e52e-99b0-11e6-8f9b
-70e3cabccfae.

25. € = EUR = euro. €1 = $1.05 as of November 20, 2016.
26. The DAX is Germany’s blue chip stock market index; it consists of 30

German companies trading in Frankfurt, including Daimler (DAI). The
Dow Jones Industrial Average is an index of 30 publicly traded compa-
nies in the United States.

http://www.scmp.com/news/china/society/

https://www.ft.com/content/f1b3e52e-99b0-11e6-8f9b-70e3cabccfae

http://www.reuters.com/article/us-eu-china-oettinger/eu-commissioner-apologizes-for-remarks-on-china-gays-idUSKBN12Y10D

http://fortune.com/2016/11/02/gunther-oettinger-china-germany-eu-racial-slur/

http://fortune.com/2016/11/21/senior-daimler-executive-china-parking-lot/

https://www.reuters.com/article/us-daimler-china/daimler-expresses-regret-over-chinese-parking-row-involving-senior-manager-idUSKBN-13G19O

https://www.ft.com/content/c506cab0-afbc-11e6-a37c-f4a01f1b0fa1

http://mt.sohu.com/d20161121/119540215_351301.shtml

https://www.forbes.com/sites/kenrapoza/2011/05/17/chinas-weibos-vs-uss-twitter-and-the-winner-is/#196533e29b53

http://www.scmp.com/news/china/society/

touring shows were governed by the rules and policies of the
countries in which they were performing at a particular point
of time. Moreover, Cirque adopted a global recruitment pol-
icy that was driven by a geocentric approach of hiring talent
from all over the world. According to industry observers, the
challenge for Cirque would be to effectively manage its global
employee base and the effect of its actions on the company’s
culture. Talking about Cirque’s strategy, Marie-Josée Guilbault
(Guilbault), vice president of organization and culture at
Cirque, said, “We can’t be hierarchical or corporate; it won’t
work for the type of business that we are. We’re very careful to
be natural. We’re very big, so we can’t be fully organic, but we
know we need to be flexible.”4

Since 2008, Cirque had been struggling with problems
such as declining profits, a spate of poorly received shows,
and growing competition. Its net worth reportedly dropped
from US$2.7 billion in 2008 to about US$2.2 billion in 2013.5
In 2013, Cirque laid off 400 employees at its Montreal head-
quarters, citing the high production costs of its shows and
a weak economy. Some analysts also reported that Cirque
planned to refocus its business away from circus shows and
on to other ventures. Commenting on whether the sun had set
for Cirque, Howard Sherman, an arts management consultant,
said, “Unless they are overwhelmed by hubris, mismanage-
ment or both, Cirque should to be around for a long time,
and reports of their doom are not merely exaggerated but un-
founded [. . . .] Cirque du Soleil is not too big to fail, but
the company is too inventive and successful to quickly start
counting out, like so many clowns in a car.”6

Background Note

Cirque’s journey began in the early 1980s in Baie-Saint-
Paul, Canada. Les Échassiers de Baie-Saint-Paul, a theater
troupe founded by Gilles Ste-Croix, entertained the people
of the city by walking on stilts, juggling, dancing, breath-
ing fire, and playing music. Guy Laliberté (Laliberté) who
started out as a street performer in Quebec, was a part of the
troupe. The troupe went on to found Le Club des Talons Hauts
(the High Heels Club), and then, in 1982, organized La Fête
Foraine de Baie-Saint-Paul, a cultural event in which street
performers from all over performed and exchanged ideas. In
1984, Quebec City was celebrating the 450th anniversary of
Canada’s discovery by Jacques Cartier, and the Quebec gov-
ernment needed a show that would carry the festivities out
across the province. Laliberté presented a proposal for a show
called Cirque du Soleil (Circus of the Sun), and succeeded in
convincing the government to provide them with a grant of
C$1.5 million.7 The show was a visual treat with incredible

“The artists who come to us often have no idea what it is like to
be part of an organization like ours, because there is no other
organization like Cirque!. Even though we have a lot of really
smart and creative people, your success here lives and dies
on relationship building. People who have a natural ability to
communicate well, who are authentic and transparent, do well
here.”2

—Pat Norris, director of human resources
at Cirque’s Resident Shows Division, in 2014

Montreal-based entertainment company Cirque du Soleil
(Cirque), which started in 1984 as a small group of young street
performers, went on to become a worldwide entertainment
giant with more than 4,000 employees. These included 1,300
performers from 50 different countries. Cirque’s big-budget,
animal-free circuses included a narrative framework, opera,
and theater, with lavish costumes, huge sets, original music,
and high-tech special effects. No spoken language was used
in its shows, and so they were able to reach diverse audiences.
Close to 150 million spectators in nearly 300 cities worldwide
were reported to have seen a Cirque show since 1984 and about
15 million people watched its show in 2014.

Through its strong culture of risk taking and creativity,
Cirque became a leader in artistic entertainment. It offered a
creative work environment where artists were free to express
their thoughts and grow both professionally and personally.
The culture was open and family oriented. Artists were offered
a competitive salary, a safe work environment, and support for
their health and well-being. Other benefits included group in-
surance, a pension plan, travel and health benefits, and paid
holidays. Cirque also encouraged artistic creativity among its
employees in the workplace. According to a former employee,
“I had the great honour of working for this world respected
company. It was hard work of training and pushing yourself
to your physical and mental abilities. My management and
co-workers were encouraging and inspiring to work with. The
greatest reward every night was seeing the audience leaving
with a smile.”3

Cirque ensured that it functioned as a unified whole,
bonded by a common set of workforce principles and practices,
despite the cultural diversity of its employees. It remained ac-
cessible and adaptable as an employer. However, analysts felt
that one of the challenges that Cirque could face going forward,
would be to preserve its creative culture and family atmosphere.
Another challenge for the company was to retain its artists who
were talented, rare to find, and difficult to replace. A major con-
cern for Cirque was addressing its global HR practices. Cirque
had a decentralized HR management system wherein artists of

PC4-5

CASE 9 Cirque du Soleil’s Global Human Resource Management Practices

This case was written by Syeda Maseeha Qumer and Debapratim Purkayastha, IBS Hyderabad.1

PC4-6 PART 4 • COMPREHENSIVE CASES

In 2000, sales reached US$407 million. In January 2001,
Laliberté appointed Daniel Lamarre (Lamarre), who till then had
been the CEO of the TVA Group,11 as president and chief operat-
ing officer of Cirque. In 2003, Cirque was rated Quebec’s most
admired company. A year later, Cirque computerized its recruit-
ment processes by appointing staffing management provider
Taleo Corporation to deploy Web-based tools to allow candidates
to apply for positions online. Instead of manually processing the
nearly 50,000 applications received annually, Cirque could manage
the recruitment process electronically from the first contact to the
final appointment. In April 2004, Cirque had to pay US$600,000
to settle an HIV discrimination case against it. A performer with
Cirque, Matthew Cusick, filed a discrimination complaint against
the company in the federal court after he was asked to leave as
he had tested HIV-positive. The settlement mandated that the anti-
discrimination policies of the company be revised and all the em-
ployees be provided anti-discrimination training. Following this
incident, the HR department was given training on the prevailing
discrimination laws and the responsibilities of the employers. All
the employees spread across the world were educated about HIV
and other diseases by experts in the field. The case proved to be
an eye opener for Cirque, which had always had the reputation of
being an undiscriminating, gay-friendly organization. As a result
of the case, Cirque came up with new HR policies and practices.

To manage a diverse workforce, Cirque formed a dynamic
HR team to manage recruitment, training, and even planning
out HR policies for its employees. In line with its global pres-
ence, Cirque decided to decentralize its HR department. This
was mainly because the performers of the touring shows were
governed by the laws and policies of the countries in which they
were performing at that particular point of time on issues such
as taxing monetary benefits and allowances, maternity benefits,
etc. In the absence of any company policy, Cirque’s touring em-
ployees were covered by the laws of whichever country they
happened to be working in at the time. For instance, a pregnant
employee touring in China would only be eligible for the ma-
ternity leave and benefits related to China. A full-time HR pro-
fessional always accompanied each of Cirque’s touring shows
to help with specific issues like insurance coverage, immigra-
tion, and work/life balance. The touring shows also hired tem-
porary employees for specific roles like ushers, cashiers, and
sales people at the merchandise tents. Many of these employees
followed the touring shows to various cities. If the temporary
employees’ performance was really good, they were absorbed
into the company as permanent employees.

To manage all its personnel, Cirque had four separate head-
quarters. Apart from the International Headquarters in Montreal,
there was the Headquarters-Europe in Amsterdam, Headquarters-
Las Vegas in Las Vegas, and Headquarters-Asia-Pacific in
Singapore. Despite this decentralized approach to workforce
management, Cirque ensured that the company functioned as a
combined family. In 2006, Lamarre replaced Laliberté as Chief
Executive Officer as the latter wanted to devote more time and
energy to guiding the creative processes at Cirque.

In 2007, Cirque initiated a major change in its criteria for
evaluating employees with a view to promoting commitment
and sustainability. Employees were assessed based on their

artistic skills. Thus Cirque was born with the assistance of
the Quebec government. Laliberté chose the name Cirque
du Soleil for his company as he saw the sun as a symbol of
youth, energy, power, and light. The company’s mission was
“to invoke the imagination, provoke the senses, and evoke the
emotions of people around the world.”8 Cirque was not a tra-
ditional circus as no animals were used for the acts. Its shows
were spectacular with live performances, opera, and theater,
with lavish costumes, huge sets, original music, and special
effects. In 1984, Cirque reported sales of US$1.7 million and
it employed about 73 people.9

Cirque’s first production, Le Grand Tour, debuted in the
small Quebec town of Gaspé, and was then performed in 10
other cities across Quebec. The positive response from the
audience encouraged Laliberté to expand Cirque’s operations
outside Quebec. In 1985, the troupe performed outside Quebec
for the first time when it held a show in Ontario. This was fol-
lowed by shows in Ottawa, Toronto, and Niagara Falls. The fol-
lowing year, Cirque organized shows across Canada and put up
several performances at the Children’s Film Festival in British
Columbia and at a world fair in Vancouver. By this time, Cirque
had a seating capacity of 1500.

However, in late 1985, as a result of a series of flop
shows, Cirque went deep into debt, to the tune of US$750,000.
But the company did not go bankrupt as Cirque’s financial
institution, the Desjardins Group, postponed the company’s
debt payment of US$200,000. The Quebec government also
granted sufficient funds to the company so that it could sustain
itself for another year. And in 1987, the status of Cirque was
changed from non-profit to a for-profit entity. That year, the
troupe was invited to the Los Angeles Arts Festival. Although
the company was facing financial problems, Laliberté decided
to take a chance and his troupe staged the show ‘We Reinvent
the Circus’ at the festival. The show was a huge success and
marked Cirque’s entry into the US. In 1990, Cirque debuted
in Europe, staging shows in London and Paris. By 1990,
Cirque’s seating capacity was 2,500 and the tickets were sell-
ing for as high as US $33.5.10

In 1992, Cirque entered into a year-long agreement with
Mirage, a Las Vegas hotel, to perform a show ‘Nouvelle
Experience’. Following its huge success, it launched an-
other production called ‘Mystere’, which was also staged
at Mirage. The following year, Cirque entered into a ten-
year contract with Mirage for the production. Steve Wynn
(Wynn), owner of Mirage, also built a permanent facility for
Cirque at a cost of US$20 million at his new resort, Treasure
Island, which opened in 1994. Cirque’s sales increased from
US$30 million in 1994 to US$110 million in 1996. This
growth was attributed to the success of the show ‘Mystere’.
In 1997, Wynn constructed a US$60 million theater for
Cirque at Bellagio, Las Vegas. Walt Disney also constructed
a permanent theater to house Cirque at Walt Disney World
in California. The same year, a US$22 million facility for
rehearsals and costume designing activities called ‘Creation
Studio’ was created by Cirque in Montreal. This also served
as the company’s headquarters. All of Cirque’s shows were
created and produced here.

CASE 9 • CIRQUE DU SOLEIL’S GLOBAL HUMAN RESOURCE MANAGEMENT PRACTICES PC4-7

synchronized swimmers, and cliff divers. The company also
hired from circus schools. Sometimes it was difficult to approach
certain artists. For instance, dancers and actors had agency repre-
sentation while some sportspersons could not be approached until
they were done with their careers. Cirque also maintained a cer-
tain protocol while approaching artists from other circus families.
“There’s a certain ethic and a respect on our part – maybe we will
not approach the artist, maybe we will approach the grandfather
or the father or the mother and tell them –ask them – ‘Where is
this artist in his or her career?’ Because some of these circus fami-
lies, they depend on each other. (A) flyer needs a catcher; catcher
needs a flyer,”17 said Monson.

The company had a website available in seven languages to
manage recruiting. On an average, Cirque received 30 to 40 ap-
plications per day not just from artists, but from business school
graduates seeking opportunities in IT, finance, accounting, and
legal and human resources.Where the artists were concerned,
they had to first submit a video to Cirque showcasing their tal-
ent. The company then invited exceptional candidates for au-
ditions that were held globally throughout the year. Auditions
could last a full day and artists were asked to perform outside of
their comfort zone. For instance, swimmers were asked to sing
and acrobats to dance. This was done to assess the versatility of
the artists. Discussing the company’s recruitment strategy, Line
Giasson (Giasson), director of international casting at Cirque,
said, “We often choose for personality. One candidate may be
lower on the technical side, but we know that person will bring
something special to the stage. Soft skills are just as important
as technical skills.”18

Prospective candidates were evaluated based on five
attributes – creativity, commitment, responsibility, team-play,
and passion. Generally, the company preferred young people
in their early twenties as it felt that such people would bring
with them different viewpoints and energies. The most impor-
tant criterion that Cirque looked for in an artist was passion.
According to Guilbault, “If you want to be excellent, if you
want to go further, hire people who have some kind of passion,
and just put a bit of magic in it. It works. A bit of craziness
doesn’t hurt.”19

After joining the company, all new hires were required
to go through a formal training period that generally lasted
from a few weeks to four months at the Creation Studio be-
fore being inducted in a show. Cirque adopted a competency-
based training approach that was designed to allow learners
to demonstrate their abilities and enhance their competencies.
The training facility at Cirque’s headquarters included three
acrobatic training rooms, a dance studio, a studio-theater, and
weight-training facilities. At Cirque, artists were trained on two
levels. One was the acrobatic component that taught them all
of the movements the act required, while the other was the ar-
tistic element that focused on developing their facial emotions
in order to play a character. While training, artists were taught
about the safety aspect as well. They were trained on how to
handle the equipment, safety moves, and proper positioning on
the acrobatic equipment. To supervise training programs, the
Creation Studio employed close to 100 trainers from around the
world who were experts in sports, acrobatics, dance, music, and

contribution to Cirque as a creative business and responsible
citizen, in addition to job performance. Employees were ex-
pected to act as Cirque’s ambassadors, showing respect for
people, cultural diversity, and the environment and integrating
more responsible practices in their daily work.

In 2008, Laliberté sold 20% of his stake in the company to
two Dubai firms for US$600 million, but later reclaimed half
the stake. In 2008, Cirque reported sales of US$733 million.
The major portion of Cirque’s revenues was generated from
ticket sales. In addition, it earned a significant amount of rev-
enue from the merchandise it sold at the performances. Cirque
had also expanded into media outlets such as music, books,
television, film, merchandising, and websites. In December
2012, Cirque entered into a joint venture with Bell Media12 to
form Cirque du Soleil Média that developed media content for
television, film, digital, and gaming platforms. Cirque’s subsid-
iaries included 45 DEGREES,13 Cirque du Soleil Hospitality,
Cirque du Soleil Theatrical, 4U2C,14 and Outbox,15 As of
2014, Cirque had 20 shows around the world across five con-
tinents and employed about 4,000 employees globally, includ-
ing 1,300 artists. People from more than 50 nationalities were
represented in the company and 25 different languages were
spoken among the employees and artists. The average age of a
Cirque employee was 35 years.

Selection and Training

As Cirque required people with a wide range of skills, it ap-
pointed talent scouts and recruiters who travelled globally
hunting for artists, creators, coaches, and musicians. Cirque
recruited talent from all over the world. To recruit artists, it de-
pended on a casting team supported by a global network of part-
ners who discovered and recommended artists the world over.
To achieve both athletic and artistic perfection, these scouts
often looked for athletes who had competed in the Olympics
or other championships. They were regulars at Olympic and
World Championship competitions and worked closely with
Olympic coaches and teams to help athletes consider a career
with Cirque after their competitive years were over. For resi-
dent shows, Cirque hired people from the local community.
Talking about Cirque’s recruiting strategy, Pat Norris (Norris),
director of human resources at Cirque’s Resident Shows
Division, said, “Talent acquisition is critical in an organization
like ours. We rely on recruiting the best and most outrageous
performers. They have to be able to bring the show to life night
after night. They do it with skill and spirit repeatedly, system-
atically, and always keep it fresh. Every moment in a live show
is a discovery of what can be done. That is our magic. When
I provide great service in HR – and that’s an innovation unto
itself here – it impacts the performers on stage.”16

While hiring people, Cirque relied on two platforms, one
an art talent acquisition group, and the other a casting agency.
Cirque’s casting director, Krista Monson (Monson), was respon-
sible for casting artists. She worked with a team of 60, including
21 talent scouts, who worked in several countries and across social
media platforms to find the best gymnasts, trapeze artists, contor-
tionists, jugglers, ballet dancers, clowns, mime artists, musicians,

PC4-8 PART 4 • COMPREHENSIVE CASES

the employees were the backbone of such a culture.The com-
pany fostered an environment that encouraged productivity,
creativity, and individual growth. At Cirque, artists from
over 50 countries worked together to put up one of the big-
gest theatrical extravaganzas in the world. Diversity being
at the core of its business, it was imperative for Cirque to
build a work environment where the focus was on the em-
ployees’ quality of life and health and well-being. Hence,
Cirque created an open, safe, creative, and friendly work
environment and provided opportunities for artists to grow
both professionally and personally. “Cirque does not cut cor-
ners. They put care first, and that had never been done by a
circus before,”22 said Mark Borkowski, founder and head of
Borkowski.do.23

The atmosphere at Cirque was open and inviting and artists
were given the space to freely share their ideas. Comparing the
workplace at Cirque to a playground, Heward said, “At Cirque
du Soleil, the ideal working environment is “a fantastical play-
ground” that has rules but that still allows artists, designers, and
employees to see the world through the eyes of a child. Viewing
the world with eagerness, curiosity, excitement, and playful-
ness establishes an open, inviting atmosphere that encourages
thought and action and takes into consideration that it is dif-
ficult to be creative in isolation.”24

Cirque was aware that happy and satisfied employees
were more productive and would positively contribute to the
business. Hence, it treated its employees with professional-
ism and respect. It tried to create a family atmosphere among
its diverse workforce as it promoted teamwork and growth.
Employees enjoyed working in a comfortable environment
that included flexible hours and modern and open work-
spaces. Unconventional clothing and appearance, such as tat-
toos, piercings, and casual dress were acceptable at Cirque,
even at its corporate headquarters. “It’s not the way you dress
that’s important, it’s what you do. If somebody has blue hair,
that’s fine; we won’t put any judgments past them. Some
companies could gain to be a bit looser, because at the end of
the day it’s the results that matter. It’s not what someone looks
like,”25 said Guilbault.

Complimenting the hard work put in by the artists, Cirque
offered them a host of facilities, particularly for its traveling
staff. Services included physical therapy, chefs to prepare meals,
cocktail hours, and barbeques and fun parties where employees
could socialize and spend time with their families. The manage-
ment too was very approachable. “I hope that they always like
working at Cirque, that they have fun. Fun is an important part
of the job here, because if we don’t have any fun, how can we
provide a fun show?” said Marc Gagnon, former vice president
of corporate services, Cirque. At its international headquarters
in Montreal, employees had access to a gourmet kitchen, an
outdoor patio, free trade coffee offered free of charge, a gym,
and a variety of fitness classes offered at a minimum fee. There
were also acrobatic and artistic training rooms for the artists to
train (refer to Exhibit I for general conditions at Cirque). The
chefs served balanced and tasty meals offering a wide range of
tastes. Food was offered at reasonable prices and employees
could even take it home. Birthdays, personal achievements, and

theater. Based on their area of expertise, each trainer supervised
the artists individually. Physiotherapists and fitness specialists
were also available on site to look into the health and physical
fitness of the artists. Cirque’s stage director, Franco Dragone,
described the whole training regime as being “like peeling an
onion to get to the sweet, intense core.” During the training
session, artists stayed at the artists’ residence, located close to
the training facilities. The residence housed 113 rooms, each of
which was equipped with air conditioning, a TV, Internet ac-
cess, a small refrigerator, a microwave, and a private bathroom.
The residence also had other facilities such as a communal
area, a gym, a kitchen, a lounge area, and even a games room.

However, assimilating seasoned artists and athletes into
Cirque’s atmosphere and persuading them to take artistic risks
was a daunting task, according to the company. Cirque was all
about creativity, imagination, and risk taking – qualities not
always associated with athletes. Moreover, a majority of the
gymnasts, athletes, and dancers came from competitive back-
grounds where individual excellence rather than team work was
instilled. Integrating these artists with the company’s culture
could therefore be a difficult task, Cirque felt. Talking about
the challenge, Monson said, “They’re seasoned pros in what
they do, and we want that high level. But we also want them to
do dances in the background dressed in weird costumes. Even
if you’re talking about an Olympic diver, artistic excellence is
usually not something in their vocabulary.”20

In order to help new recruits become absorbed into the Cirque
workforce and overcome cultural shock and resistance, Guilbault
and her team developed certain strategies. For instance, hiring
managers were instructed to inform new employees that it might
take six months to understand and acknowledge how the company
functioned. All new hires were encouraged to try out different roles
in as many operations as possible and gain a comprehensive view
of how Cirque worked. They were given the opportunity to be cre-
ative and develop their own routine. The whole system supported
them in their endeavors. As part of a program for young mentees,
new recruits could work alongside senior managers and contribute
in creating new shows. Sometimes trainees were taken backstage
to understand the way things worked. According to Lyn Heward
(Heward), former Vice President, Creation and President and COO
of the Creative Content Division at Cirque, “For us training is cre-
ative transformation and recruiting is treasure-hunting. Even at
Cirque, we have to work hard at it. We too could lose our soul,
if we didn’t have the commitment. We have a Creative Synergy
department, whose preoccupation is in doing this. Creative
Transformation is the most important doorway for us. We’re trying
to find the ‘pearl,’ the hidden talent in that individual. What is the
unique thing that person brings? I think you need to dig deeper as
we call it treasure-hunting. What makes that person tick and how
does it contribute to the work that you’re doing?”21

Culture at Cirque

Cirque flourished on a culture of risk-taking and creativity
that nurtured talent and gave people an opportunity to show-
case their skills. The work culture at Cirque was based on
involvement, communication, creativity, and diversity and

CASE 9 • CIRQUE DU SOLEIL’S GLOBAL HUMAN RESOURCE MANAGEMENT PRACTICES PC4-9

almost every week. Working in this creative environment has
been a great experience so far and I hope to enjoy it for years
to come!”27 said an employee.

At Cirque, artists could establish careers, create families,
and gain stability – all based on their talent, a rarity in the circus
industry. Cirque offered its employees several developmental
opportunities that allowed them to learn and grow and prevented
them from getting stagnant by working in one position for too
long. For instance, Cirque started a program called ‘TapisVert’,
as part of which young employees could work alongside senior
managers for a specified period and also get involved in the cre-
ation of new shows. At Cirque, artists were free to express their
ideas and creativity. In order to boost employee engagement,
Cirque started an initiative across the company called Eureka in
2001. The program allowed employees from any department to
harness ideas that they were passionate about. The idea was to
do away with the ‘silo’ mentality and establish a ‘no-kill zone’
for ideas so that every employee contributed in the creative pro-
cess. Benoit Mathieu, vice president of costumes and creative
spaces, Cirque, remarked, “It’s to give space to an idea so it
can’t be killed by the immune system of a big company, which
tends to be very strong. We want to give people a tool to be
heard, even if they are not part of executive management. We
can process those ideas so they can either live or die. And if they
die, they should die for a good reason, with people getting feed-
back instead of them just disappearing into the ether.”28

Benefits Galore

Besides offering employees a dynamic work environment,
Cirque also provided them with a wide range of benefits and
services. Generally, artists were hired on contract for a period

local and national holidays were celebrated whenever possible
both on touring and resident shows. Relishing his experience
of working for Cirque, an employee said, “Fun place to work,
Hors du commun! Motivating work environment, a lot of ac-
tivities all the year long. During the summer, terrace, BBQ,
drinks, beach volley-ball, tons of activities, and entertainment.
Danse, Yoga, Zumba, Choir, Sports, etc. Two nice cafeterias,
very good variety of meals. Good benefits and fair pay, very
good balance between life and work.”26

Cirque went to great lengths to provide an enjoyable work
environment for its touring employees as touring shows were
often beset with problems such as homesickness and lack
of personal space. On such shows, employee welfare was a
24/7 responsibility for Cirque as it had to look into issues like
housing, food, and language barriers.Sometimes artists were
even allowed to bring their families along on tours. Social
activities and exchanges were conducted to enable artists to
meet up, get to know each other, and share their experiences.
For instance, during the run of the show Totem at the Royal
Albert Hall in London, which had 52 cast members, Cirque
took good care of its performers. The show travelled with four
chefs who prepared tasty meals using local ingredients. Food
was presented with color-coded labels to indicate its nutri-
tional value. On Sundays, all the cast members brought their
families along for lunch. Each artist had his/her own cubby-
hole, filled with family photographs. According to observers,
the work place was like a home-away-from-home and em-
ployees bonded like family members more than co-workers.
“Working here has been the best opportunity I’ve been given.
Although no job is totally perfect, this one is close! The am-
biance in the office is friendly and outgoing, they amuse the
employees with entertaining activities for all tastes and ages

ExHIBIT I General Conditions at Cirque du Soleil

Source: Adapted from www.cirquedusoleil.com/en/jobs/casting/work/general-condition.aspx.

On Big Top touring shows:
• Artists are offered one- or two-year contracts at a very competitive salary.
• Artists can usually expect to train an average of 12 hours a week.
• Lodging is provided in the form of a private room at a hotel.
• Market allowance is provided.
• Big Top touring shows perform 300 to 350 times a year.

Overview of general conditions on arena touring shows:
• Artists are offered one- or two-year contracts at a very competitive salary.
• Artists can usually expect to train an average of 12 hours a week.
• Lodging is provided in the form of a private room at a hotel.
• Market allowance is provided.
• Arena touring shows perform 270 to 310 times a year.

On resident shows:
• Artists are offered one- or two-year contracts at a very competitive salary.
• Artists can usually expect to train an average of 12 hours a week.
• Lodging is provided until two weeks after the artist’s integration into the show.
• During the creation period of a new show, lodging is provided throughout the process

in Montreal and for four weeks when the production moves to its resident city.
• Resident shows perform 380 to 470 times a year.

http://www.cirquedusoleil.com/en/jobs/casting/work/general-condition.aspx.

PC4-10 PART 4 • COMPREHENSIVE CASES

performances. It was reported that under the new parental in-
surance plan passed by the Quebec government on January 1,
2006, the benefits derived by Cirque employees during mater-
nity leave coupled with government benefits amounted to about
90% of their regular salary.30

Annually, Cirque organized trips at a discounted rate to
allow employees to travel to Cirque shows in other countries.
A certain number of complimentary tickets were also given to
regular employees and they were allowed to enter company
draws as well to win show tickets and trips. Employees also
received discounts on Cirque merchandise. They were gifted
corporate attire on Cirque anniversaries. Cirque also offered
the services of a tutor to the children of touring employees and
child performers. In 2006, Cirque formed a partnership with
a childcare center in Montreal. Under this partnership, 60 day
care centers were set up, of which 30 were reserved for the chil-
dren of Cirque employees.

of 1–2 years at a very competitive salary. Sometimes depend-
ing on the job, they were paid per show or hourly. On an aver-
age, a Cirque employee earned anywhere between US$30,000
and US$100,000 annually29 (refer to Exhibit II for global
remuneration).

Irrespective of whether they worked at its International
Headquarters or at touring or resident shows, the artists and
technicians working in different divisions were entitled to
many benefit packages (refer to Exhibit III for health ben-
efits, Exhibit IV for travel benefits). However, these packages
differed according to location and employment status. They
generally included competitive salaries, paid vacations, insur-
ance plans performance bonuses, lodging and transportation,
medical, dental, disability, and life insurance coverage, retire-
ment plans, gourmet buffet-style meals, and discount tickets
to Cirque shows. The employees also had access to gymna-
siums and training facilities to keep themselves fit for their

On all shows:
• Seniority lump sum
• Four complimentary tickets per year to any resident or touring Cirque du Soleil show
• Ten reduced-price tickets to Cirque du Soleil touring shows
• Discounts on Cirque du Soleil merchandise
• Access to last-minute complimentary tickets for some shows, in some territories

On Big Top touring shows:
• Market allowance is provided
• An average of two weeks of vacation per year during down periods
• Return transportation home at least once a year during down periods
• Ten statutory holidays
• Lodging and transportation between cities
• Lodging is provided in the form of a private room at a hotel.
• Medical, dental, disability, and life insurance coverage
• Bank of sick days
• Kitchen with choice of meals five to six days a week depending on the show

schedule

On our arena touring shows:
• Market allowance is provided
• An average of two weeks of vacation per year during down periods
• Return transportation home at least once a year during down periods
• Ten statutory holidays
• Lodging and transportation between cities
• Lodging is provided in the form of a private room at a hotel.
• Medical, dental, disability, and life insurance coverage
• Bank of sick days
• Catering services five to six days a week

On resident shows:
• Typically, three extended dark periods of nine days or more
• Medical, dental, disability, and life insurance coverage
• Bank of sick days
• Access to the hotel cafeteria if available

ExHIBIT II Global Remuneration

Source: Adapted from www.cirquedusoleil.com/en/jobs/casting/work/global-renumeration.aspx.

http://www.cirquedusoleil.com/en/jobs/casting/work/global-renumeration.aspx.

CASE 9 • CIRQUE DU SOLEIL’S GLOBAL HUMAN RESOURCE MANAGEMENT PRACTICES PC4-11

ExHIBIT III Health Benefits

Source: Adapted from www.cirquedusoleil.com/en/jobs/casting/work/health-benefits.aspx.

In addition to a medical plan (including dental coverage), a Health Services team is present on each
show to assist artists in the following areas:

• Individual and group strength and conditioning programs
• Rehabilitative and injury prevention therapy
• Wellness education
• Exercise therapies (Pilates, yoga, etc.)
• Medical evaluations
• Physical capacity evaluation and consultation
• Nutritional support
• Emergency medical planning and care
• On-site emergency care
• Access to professional medical support
• Workers’ compensation coverage
• Non-occupational insurance coverage
• Medical, dental, disability, and life insurance coverage

ExHIBIT Iv Travel Benefits

Source: Adapted from www.cirquedusoleil.com/en/jobs/casting/work/travel-benefits.aspx.

Big Top and arena touring shows
• Travel at the beginning and end of your employment contract
• Travel between the cities on the tour
• A return trip home once every 12 months
• Local transportation between the site and your accommodations, if the distance is

greater than 1.5 kilometres
• Lodging is provided in the form of a private room at a hotel
• Artist visa and work permit initiated and paid for by Cirque du Soleil

Resident shows
• Local transportation allowance during the first two weeks of integration if you don’t

own a car
• Lodging provided until two weeks after artist’s integration into the show
• During the creation period of a new show: lodging provided throughout the process

in Montreal and for four weeks when the production moves to its resident city
• Artist visa and work permit initiated and paid for by Cirque du Soleil

Communication

At Cirque, communication was transparent and hierarchies
were non-existent. Good communication was important to
ensure that all employees had access to the same information
and to maintain cohesion among the divisions. Internal com-
munication tools including both electronic and print media
were created, and each division was invited to contribute to
these tools. These communication tools ensured that every em-
ployee had a voice and was kept updated about the happenings
at the company. For instance, in 2006, a hotline was set up to
Lamarre whereby employees could ask him questions through
e-mail and get replies via an electronic bulletin available to all
employees.

Employees holding similar positions in different divisions
were encouraged to form practice communities in which they
could share their work methods and approaches. Whenever em-
ployees had a problem or an issue they could easily write or
talk to their supervisors about it and expect the issue to be ad-
dressed. Regular meetings were held to help employees express
their views and concerns. These meetings were called ‘Tapis
Rouge’ for the artists and blue or green carpets for the other
employee groups. The company also had an interactive intranet,
which made communication simple among the employees
spread out across the world. Employee feedback was consid-
ered seriously whenever an important policy was introduced or
revamped. The HR managers visited different Cirque venues
and discussed the issue with a few employees. According to

http://www.cirquedusoleil.com/en/jobs/casting/work/travel-benefits.aspx.

http://www.cirquedusoleil.com/en/jobs/casting/work/health-benefits.aspx.

PC4-12 PART 4 • COMPREHENSIVE CASES

project. In 2006, eight bursaries worth US$2,500 each were
awarded to organizations where Cirque employees volunteered.

To encourage employees to participate in cultural life
outside their work, Cirque started the Support Program for
Employees’ Artistic Projects (PARADE) in 2006. The program
helped employees in their artistic endeavours by providing them
with advice and financial aid. The art work was then exhibited
at Cirque offices in Las Vegas, Orlando, Los Angeles, and the
International Headquarters at Montreal. According to industry
observers, the PARADE program fostered cultural develop-
ment among employees as well as encouraged participation in
cultural activities. In 2007, as part of the PARADE program,
more than US$10,000 was awarded to support employees’ cre-
ative projects in literature, cinema, circus, music, and the visual
arts. Each year in 2012 and 2013, about 75 employees received
support for their artistic creations.

In 2011, to facilitate communication on sustainable devel-
opment issues among its employees on touring shows, Cirque
set up Global Citizenship Committees, which allowed employ-
ees interested in environmental, community, and social justice
issues to set up projects in their workplace. These projects in-
cluded sustainable development awareness and education activ-
ities for employees, implementation of a waste-sorting system
at tour sites, and activities with local community groups.

Health and Safety

Since its inception, the safety and well-being of the artists on
all its shows and training sites had been a prime concern for
Cirque. For a venture as risky as a circus, providing a safe
workplace for its employees who put in a lot of effort to pro-
duce spectacular shows was important, felt Cirque. Moreover,
a number of risk factors were involved such as the difficulty
level of certain artists’ performances, high stress, and tasks
involving heights, chemicals, and heavy equipment. Whether
in the form of injury prevention, on-site emergency care, or
nutritional support, Cirque maintained that ensuring the well-
being of its employees was always a priority. At the company’s
International Headquarters and Touring Shows Division, em-
ployees received training connected with the risks associated
with their work. From the moment a professional artist was
hired and up to his/her induction in a show, he/she had to un-
dergo a comprehensive training program provided by expert
trainers. Cirque also ensured that its equipment and work envi-
ronments complied with the highest safety standards. The com-
pany also came out with manuals on health and safety rules in
the workplace.

As a precautionary measure, Cirque appointed a health and
safety team to inspect event sites and watch performers. This
team suggested changes in case something was wrong. Cirque
also followed the government-mandated workplace safety
regulations in countries where its shows were held. “In some
countries there’s no legislation that says you need to provide
workers’ comp, or sometimes there’s legislation but we’re not
there long enough to benefit from it. But we still want to offer
coverage. So if there’s a hole, we have Cigna32 cover it,”33said
Hélène Thibault, a senior benefits manager at Cirque.

Suzanne Gagnon (Gagnon), former vice president of human re-
sources at Cirque, “We get better from this type of concerned
employee than the ones who say, ‘Everything’s fine, thank you
very much,’ because then we’re just getting what we want to
hear. We want to hear what’s wrong so we can fix it.”31

Cirque ran three publications through which employees
could communicate globally. ‘Hand to Hand’ was a fortnightly
magazine which contained information about openings in the
company, new tours, and the schedules of various Cirque shows
around the world. It was more of a formal corporate periodical.
‘The Ball’, a monthly published at Montreal, mainly carried sto-
ries of Cirque employees around the world. It was like a graf-
fiti wall where any employee could contribute his/her stories.
For instance, there was a column called ‘Culture Shock’ where
employees would give their frank opinions about their experi-
ences in foreign countries. It also contained the feature ‘Be Your
Own Bitch’. In another section, employees could write their
complaints and suggestions and other insider jokes, uncensored
by the managers and supervisors. The third one was ‘Under the
Bleachers’, a publication from the company’s Amsterdam office.
The magazine featured funny photos, interviews, and gossip.

To ensure that employees in all the divisions become fa-
miliar with its core business, Cirque provided them access to
creative content. For instance, employees at its International
Headquarters, whose work was less closely related to the pre-
sentation of shows, were the first to watch acts by artists who
had just completed their training. To keep employees updated
about the new shows, lunchtime discussions with the creative
teams were organized.

Social Involvement

To promote the artistic pursuits of employees, Cirque started
an innovation bursary called ‘Talons Hauts Bursary’ in 2005.
The purpose of the bursary was to promote creativity among
the employees and help them contribute to the organization’s
creative pool. Employees were encouraged to submit inno-
vative ideas and projects related with the activities of Cirque
such as shows, merchandising, hospitality, etc. In 2006, bur-
saries totalling US$25,500 were distributed to six employees
whose creation, marketing, and management projects were se-
lected. Nearly US$30,000 in Talons Hauts bursary prizes were
awarded to 14 employees in 2007.

As part of its Cultural Action programs, Cirque offered
artists the opportunity to exhibit their work at its International
Headquarters and at its Resident Show Division offices in Las
Vegas. The artwork was then displayed in employees’ work
settings to create a vibrant, stimulating environment. Cirque
purchased tickets for performing and visual arts events, exhibi-
tions, and shows and distributed them among its employees.
Cirque’s ticket purchase program allowed employees to attend
artistic events free of charge. For instance, in 2006, over 2,000
tickets, for a total of 90 productions, were distributed to Cirque
employees in Montreal. In 2001, through the ‘Cirquesters Do
Their Part’ program, Cirque recognized the commitment of em-
ployees who became involved as volunteers in the community
and offered them grants after assessing their role in a particular

CASE 9 • CIRQUE DU SOLEIL’S GLOBAL HUMAN RESOURCE MANAGEMENT PRACTICES PC4-13

singled out as being different or exploited based on their na-
tionality or ethnic identity, said observers.

Analysts, however, felt that the vast cultural gaps made
communication difficult between artists and technicians and
sometimes affected the quality of the show. In an effort to
overcome this problem, Cirque’s HR team conducted a basic
language training program for the performers to facilitate open
and unhindered communication. Whenever employees had a
problem or an issue they could easily write or talk to their su-
pervisors about it and expect the issue to be addressed. There
were also many conflicts that arose due to cultural diversity.
For example, the laws regarding sexual harassment were more
stringent in the US than in other countries.39 Kissing to greet
friends and co-workers was quite regular in Canada but could
be considered a form of sexual harassment in the US and some
Asian cultures. In such cases, any complaint from an employee
would lead to the company facing legal issues. Thus, it was
important that the people at Cirque were made tolerant toward
various cultures and traditions that were followed by different
employees at the company. The employees were therefore edu-
cated about the fundamentals of dealing with cultural diversity
so that they could understand each other better.

The touring troupes also faced the challenge of ‘cultural
adaptation’. For example, in Japan, the performers had a tough
time getting used to the stoic and formal behaviour of the audi-
ence. The spectators provided little feedback to the artists, who
were used to a more enthusiastic response. As a result, the HR
department at Cirque received many complaints and resigna-
tions from the artists. As a solution to this problem, Cirque
partnered with FGIWorld (FGI), a Toronto-based work force
counselling company. FGI imparted cross-cultural training for
the next group which was to tour Japan. They developed “An
Introduction to Life in Japan,” a highly interactive training pro-
gram designed to make the performers aware of the local cus-
toms, differences in communication style, Japanese greetings,
and even navigation on the public train system. The program
was quite successful and many artists expressed an interest in
returning to Japan for more tours. Similar training programs
were planned for troupes touring across Europe too. Cirque
also offered an Employee Assistance Program (EAP) for its
touring professionals. This program was designed to provide
professional help and counselling for international artists who
suffered from high levels of mental stress and frustration. It
also included helping the performers overcome the challenges
of cultural differences.

Despite the cultural diversity, Cirque ensured that it
functioned as a unified whole, bonded by a common set of
workforce principles and practices. It tried to maintain cohe-
sion among its employees by organizing social activities and
conducting exchanges whenever possible between the shows.
Through such events, employees were able to meet and get to
know each other and to share their experiences. Exchanges were
sometimes paid for entirely by the tour. But in most cases, each
employee contributed a small part of the costs. Commenting
about the cultural mix at Cirque, an employee said, “The most
difficult aspect of the job other than the physical intensity was
making sure every team mate was satisfied, which was difficult.

Though Cirque had an excellent reputation for safety, it
had witnessed some accidents over the years. In 2013, it was
accused of six safety violations in connection with the death
of a 31-year-old artist Sarah Guillot-Guyard34 (Sarah) during a
performance of the show “Ka” at MGM Resorts International in
Las Vegas. Cirque was cited for not providing adequate training
for the employee and for not properly assessing the workplace
for hazards that required protective equipment in the theater.
OSHA also said that Cirque had removed equipment from the
fatality site before it ordered the company to do so. Cirque was
fined more than US$25,000 in penalties. Talking about the ac-
cident, Cirque spokeswoman Renee-Claude Menard (Menard)
said, “Cirque du Soleil completed an exhaustive review of its
safety policies and procedures in the wake of the tragic acci-
dent involving Sarah. We have redoubled our efforts to ensure
the overall diligence and safety of our performers and crew. We
have received and reviewed the OSHA citations. Safety always
has been the top priority for Cirque du Soleil, its performers,
and crew members.”35 Earlier in 2009 a Ukrainian acrobat,
Oleksandr Zhurov, died during training at its Headquarters in
Montreal. Cirque took the initiative to support the family of
Sarah and pay for her children’s education. According to Kelia
Scott, marketing manager, Acrometis, LLC,36 “It seems like
Cirque du Soleil takes the safety of their performers seriously,
especially since they have gone almost 30 years without a death
during performances. Considering some of the stunts the artists
pull off night after night, I do not think this case was the result
of “cutting corners” or trying to skimp on safety measures. I
think it was truly a tragedy and I appreciate that the company is
doing their best to make sure the victim’s family is taken care
of and extending their efforts on safety procedures.”37

To prevent further accidents, Cirque set up Management
Reviews and Health and Safety Committees to assess the risks
involved in the performances in terms of health and safety. For
instance, in 2014, a Risk Management Governance Committee
was set up specifically to evaluate the risks associated with
acrobatic performance and equipment. To nurture a healthy
work environment Cirque implemented a health and well-being
program at its Headquarters that focused on the lifestyle and
the physical and mental health of its employees. As part of the
first phase of the program, a walk-in clinic was set up at its
Headquarters. Half a day per week, employees could consult a
doctor available at the clinic for any problem. In order to main-
tain a safe environment, Cirque planned to get seasoned profes-
sionals to impart the necessary knowledge and training to its
employees.

Bridging Cultures

As of 2014, Cirque’s employees and artists represented more
than 50 nationalities and spoke 25 different languages. Cirque
valued the diversity of its employees and respected their indi-
viduality and viewpoints. Solo acts were never distinguished
by introduction, technique, physique, or language. Cirque was
an equal opportunity employer38 with the goal of maintaining
a workplace free from any form of discrimination. Though
its shows were diffusions of various cultures, artists were not

PC4-14 PART 4 • COMPREHENSIVE CASES

in Montreal. Through this program, Cirque helped many of its
performers successfully discover and pursue new interests in
a variety of fields. According to the company, “We not only
value our artists for what they can bring to the stage but also
for what they can eventually contribute when their performing
days are over. We have had several artists make the transition
from performance to coaching or stage management, while oth-
ers have successfully moved on to join our Casting, Scouting,
and administrative teams in Montreal. For those artists who are
more attracted to the technical aspects of the theater, our shows
provide a very cutting-edge place to work and learn. Having
knowledge of the most modern theatrical technologies, and ac-
cess to people who can show you how to master them, opens
doors to invaluable skills you can take with you anywhere.”44

Challenges

According to industry experts, one of the biggest challenges
for Cirque was to recruit and retain artists who were talented
and rare to find. As Cirque shows had a lifespan of about fif-
teen years, it was important for the company to not only
find the best performers but also retain them for a long run.
Moreover, as Cirque’s success depended on the creativity and
excellence of its employees, managing and retaining them was
vital, they felt. In 2011, the company’s annual attrition rate was
20%.45 Though the artists were paid competitive salaries, it
was difficult to hold them back. According to analysts, one of
the main reasons for the high attrition rate at Cirque was the
difficult working conditions, particularly for the touring artists,
who had to go through many relocations and a large number of
shows each week. “Admittedly, the circus is a booming cultural
industry. But the working conditions are far from ideal, at least
according to murmurs in the industry,”46 remarked Michel
Beauchemin, head of the APASQ.47 According to observers,
artists at Cirque worked in the most gruelling situations and
their spectacular performances on stage resulted from hours of
planning, practice, and attention to details. It was observed that
artists had to perform up to 3 times a day and 5–6 days a week.
They were expected to rehearse for an average of 12 hours a
week. According to Guilbault, “Cirque is a great company, but
it’s also a very demanding company. There’s a perception that
we’re always having fun, fun, fun, but the reality is we also
work very hard.”48

Another problem for Cirque, according to analysts, was
scouting potential talent, investing loads of money and time in
training them, and then having to replace them owing to some
problem that might arise. It became all the more difficult if an
artist was unique and either difficult or impossible to replace,
they said. “As soon as we find somebody really unique, we are
proud and very excited for a possible new creation. But we are
playing against ourselves, because there’s only one,”49 said
Giasson. A case in point was a 25-year-old acrobat Alan J. Silva
(Silva), from Brazil, who was just 3 feet 10 inches tall. A role
was specially created for Silva in a show called “Zumanity”
where he appeared throughout the show, dancing and flying
through the air with a 6-foot-tall female gymnast. However,
one day Silva hurt his shoulder and had to undergo surgery.

My team consisted of 3 Russians, a Brazilian, 3 Ukrainians, 2
American, 1 Frenchman, and 1 Chinese guy. Obviously the lan-
guage and cultural differences proved challenging. However it
always worked out. Coworkers were some of the most interest-
ing people in the world and the entire company was managed
very well.”40

Career Transition

Cirque knew that the career of an artist was short-lived and
at one point of time they would have to step out of the spot-
light. To help these artists pursue their dreams and look for
an alternative career after their performing years were over,
Cirque launched a career transition program, ‘Crossroads’, in
2003. The program offered a variety of choices to the artists
to continue being a part of the Cirque family. For example, an
artist who was looking for an alternative career and had in-
terest in stage management could meet one of the employees
from the stage management division of the company through
the transition program. The artist was provided guidance and
assistance regarding the steps he/she would have to take to
achieve a career shift from being a performance artist to an em-
ployee providing stage management support. “Some perform-
ers struggle to adjust to life after Cirque. It’s not just laundry,
meals, medical care, education (there is a school on site) that
are provided, the experience is holistic. If you get injured, the
company will make sure you can get another job, train in other
areas, or study for an MBA. Another precaution for life on the
outside: every Cirque artist must learn to do their own make-
up to the highest standard; not to save money, but to ensure
they have another skill to take away with them,”41 noted Lucy
Jones, former Strategic Events Editor at the Telegraph.42

Some of the other alternative employment opportunities
provided were those of fitness coach and naturopaths. And the
company also videotaped veteran artists as they shared their
thoughts on what career moves had or had not proved success-
ful for them over the years. These videos were then shared with
artists who were in a career transition mode. This went a long
way in helping them to choose their future career paths. These
artists were also provided with a guide, ‘My Career Reflection
Guide’, that had six modules filled with advice and suggestions
for the artists to transit smoothly into the next phase in their ca-
reer. “Because our artists are so passionate and so intense, you
have to work things a little differently.You can’t just hope to put
together a traditional career planning program and have them
go with the flow,”43 said Gagnon.

In addition, at Cirque a career development advisor was
always available to the artists. The advisor provided the artists
with the required support to come up with a career plan con-
sidering various aspects like aspirations, needs, skills, etc. If
the artists wanted to study further or complete the education
that they had left midway, the advisor helped them in finding
the right programs and the details of institutions offering those
programs. He/she also guided them on career options that they
could consider both within and outside Cirque. More often than
not, these artists were absorbed by Cirque into its coaching,
stage management, casting, scouting, and administrative teams

CASE 9 • CIRQUE DU SOLEIL’S GLOBAL HUMAN RESOURCE MANAGEMENT PRACTICES PC4-15

there’s also one of the factors that we let grow with our growth
and that was our expenses.”52

Meanwhile, Cirque’s shows were also being criticized
for being too similar and lacking originality. Analysts felt
that there was some dilution in the quality of their shows.
According to David Rosenwasser, a former circus executive,
“I’m not as awed as I used to be. The shows are almost indis-
tinguishable to me.”53 In 2013, revenues dropped to US$850
million from US$1 billion in 2012 though the company re-
ported profits.54 The fall was attributed to a drop in the num-
ber of shows, poor ticket sales, tough economic conditions,
and growing competition. According to Lamarre, the troubles
“certainly brought a lot of humility to the organization.”55
Going forward, Laliberté planned to sell about 20% to 30%
of the company to outside investors and revise Cirque’s
structure and growth plan. He also planned to expand Cirque
into new markets such as China and India and refocus its
business from circus shows to other ventures. “Cirque is a
hive. There is activity everywhere. It’s all exciting, and it’s
all about the show. When I was first hired we were a very dif-
ferent organization. It has been a thrilling ride to get to where
we are today, and we are by no means finished. The future
is extraordinarily exciting. It is a privilege to serve such an
exceptional company,”56 said Norris.

Case Questions

1. Discuss the global human resource management practices
of Cirque. Discuss the challenges faced by Cirque in man-
aging its global employee base.

2. Critically analyze the culture at Cirque. How, according
to you, has the culture fostered creativity and teamwork
in the company?

3. People from five continents and more than 50 nationalities
are represented within Cirque. How does the company
manage such culturally diverse talent to gain competitive
advantage?

4. What steps should Cirque take to retain its employees and
preserve its culture?

Though another person with the same appearance was brought
in to play his part, it did not work and the act was made into a
solo until Silva returned.

Cultural diversity was also an issue. Managing people
of different nationalities who spoke different languages was
a challenge as it complicated communications. People of the
same nationality often stuck together and did not mix with oth-
ers. Moreover, the company had to deal with stereotypes and
preconceptions. Cirque was also criticized for becoming too
structured and not allowing individual performers to excel and
providing very few career advancement opportunities. “People
are often promoted from being an artist up through ranks of
management and have very little competencies as managers.
Poor decisions, conflicting messages to employees, not much
innovation regarding the workplace, few opportunities to ad-
vance your career,”50 pointed out an employee who had worked
at Cirque for more than five years.

Lost Its Way?

In 2012, for the first time in its history, despite generating
more than C$1bn (£634m) in revenues from its shows glob-
ally,51 Cirque did not turn a profit. By August 2012, Laliberté
decided to lay off some of its employees and cut the number of
new touring shows. In 2013, Cirque laid off 400 people, mostly
from its Montreal headquarters, citing production costs and ex-
penses. The layoffs represented 8% of the company’s global
workforce. The company decided to cut down the number of
shows in 2013 to 400 shows compared to 600 shows in 2012
as each show cost as much as US$25 million to develop. Also
Cirque started making other cuts including giving out fewer
anniversary jackets for employees to cutting out child perform-
ers and tutors. Reportedly, the cuts amounted to US$100 mil-
lion of savings. Dismissing rumours that Cirque was failing,
Menard said, “The first thing to say is that the Circus is not in
crisis. Let’s get that straight. We had a record year in terms of
tickets sold. We sold more than 14 million tickets this year. We
had a record year for total revenue, with more than $1 billion.
We’re still pulling our rabbit out of the hat. This being said,

Endnotes
1. This case was compiled from published sources, and is intended to be

used as a basis for class discussion rather than to illustrate either effective
or ineffective handling of a management situation. © 2015, IBS Center
for Management Research. All rights reserved. To order copies, call +91
9640901313 or write to IBS Center for Management Research (ICMR),
IFHE Campus, Donthanapally, Sankarapally Road, Hyderabad 501 203,
Telangana, India or email: info@icmrindia.org Source: www.icmrindia.org

2. Seth Kahan, “Cirque du Soleil: Bringing Innovation to Life,” http://
hrleadsbusiness.org, July 25, 2014.

3. www.indeed.co.in/cmp/Cirque-Du-Soleil/reviews
4. “HR Goes to the Circus,” www.hrmonline.ca, November 2014.
5. Pat Donnelly, “Laliberté Optimistic About Cirque du Soleil’s Future,”

http://montrealgazette.com, December 19, 2014.
6. Howard Sherman, “Premature Vultures Circle Cirque du Soleil,” www

. huffingtonpost.com, January 1, 2013.

7 Mathew Bass, “Guy Laliberte Success Story – From Homeless Street
Performer to Multi Billionaire Owner of Cirque du Soleil,” http://
successgroove.com, December 30, 2013.

8. https://static01.cirquedusoleil.com/en/~/media/press/PDF/cds/cirque
-du- soleil-at-glance

9. “Le Cirque du Soleil: How to Manage Growth,” www.portailrh.org,
September/October 2001.

10. Jeffery L. Covell, “Cirque du Soleil Inc.,” www.answers.com, June 2,
1997.

11. TVA Group is one of the largest private television broadcasters in
Quebec.

12. Based in Canada, Bell Media is a multimedia company with assets in
television, radio, out-of-home advertising, and digital media.

13. 45 DEGREES is a global events and creative content company from the
Cirque Group.

mailto:info@icmrindia.org

http://www.answers.com

http://www.portailrh.org

https://static01.cirquedusoleil.com/en/~/media/press/PDF/cds/cirque-du-soleil-at-glance

http://successgroove.com

http://www.huffingtonpost.com

http://montrealgazette.com

http://www.hrmonline.ca

http://www.indeed.co.in/cmp/Cirque-Du-Soleil/reviews

http://hrleadsbusiness.org

http://Source:www.icmrindia.org

PC4-16 PART 4 • COMPREHENSIVE CASES

14. 4U2C specializes in design and production of visual content environment
by combining video, lighting, set, special effects, and sound.

15. Outbox is a ticket selling tool.
16. www.visionaryleadership.com/docs/Seth-Kahan-CirqueSum12
17. Kristie Lu Stout, “How Cirque du Soleil Scouts Clowns, Trapeze Artists

and Gymnasts,” http://edition.cnn.com, September 12, 2012.
18. “HR Goes to the Circus,” www.hrmonline.ca, November 2014.
19. Nicola Middlemiss, “Behind the Scenes: HR at Cirque du Soleil,” www

.hrmonline.ca, December 23, 2014.
20. Kristie Lu Stout, “How Cirque du Soleil Scouts Clowns, Trapeze Artists

and Gymnasts,” http://edition.cnn.com, September 12, 2012.
21. ArupaTesolin, “Igniting the Creative Spark at Cirque du Soleil,” www

.hr.com, June 18, 2007.
22. Lucy Jones, “Cirque du Soleil: Life is One Big Balancing Act,” www

.telegraph.co.uk, January 9, 2012.
23. Borkowski.do is a UK-based PR and creative agency.
24. J. J. Smith, “Promoting Creativity is Cirque du Soleil’s Business Strat-

egy,” www.shrm.org, March 4, 2008.
25. “HR Goes to the Circus,” www.hrmonline.ca, November 2014.
26. www.indeed.co.in/cmp/Cirque-Du-Soleil/reviews?fcountry=ALL

&start=20
27. www.indeed.ae/cmp/Cirque-Du-Soleil/reviews?fcountry=ALL

&start=20
28. Sachin Shenolikar, “Eureka! An Underground Strategy to Boost Employ-

ee Engagement,” www.realbusiness.com, December 24, 2014.
29. www.jobmonkey.com/uniquejobs/cirque-du-soleil/
30. www.cirquedusoleil.com/en/~/media/about/global-citizenship/pd

f/Review/Review2006
31. Gillian Flynn, “1997 Global Outlook Optimas Award Profile: Cirque Du

Soleil,” www.workforce.com, August 1997.
32. Cigna is a US based global health services company that offers health

insurance and expatriate benefits for employers and organizations with
employees working abroad.

33. Michelle V. Rafter, “A Master Act of Coordination,” www.workforce
.com, December 11, 2007.

34. Sarah Guillot-Guyard, a mother of two young children, joined the “Ka”
show in 2006. She was also a head trainer at CirqueFit, a children’s gym
in Las Vegas.

35. Howard Stutz, “Cirque du Soleil, MGM Grand Hotel Cited for Safety
Violations in Death of Aerialist,” www.reviewjournal.com, October 29, 2013.

36. Acrometis, LLC is a US-based automated claims processing platform
designed specifically for the workers’ compensation industry.

37. Kelia Scott, “What Happens in Vegas Cirque Du Soleil Doesn’t Stay
There,” http://wcinsights.com, October 31, 2013.

38. The bases upon which Cirque would not discriminate included age, so-
cial condition, political convictions, civil status, pregnancy, handicap,
language, sexual orientation, race, colour, ethnic or national origin, and
religion, HIV-AIDS, weight, and size.

39. Cindy Waxer, “Cirque du Soleil’s Balancing Act,” www.workforce.com,
January 5, 2005.

40. www.indeed.com.sg/cmp/Cirque-Du-Soleil/reviews
41. Lucy Jones, “Cirque du Soleil: Life is One Big Balancing Act,” www

. telegraph.co.uk, January 9, 2012.
42. The Telegraph is a British newspaper.
43. Cindy Waxer, “Cirque du Soleil’s Balancing Act,” www.workforce.com,

January 5, 2005.
44. www.cirquedusoleil.com/en/jobs/casting/work/career-transition.aspx
45. Mehrdad Baghai and James Quigley, “Cirque Du Soleil: A Very Different

Vision of Teamwork,” www.fastcompany.com, February 4, 2011.
46. “Cirque du Soleil Cashes in on Magic,” www.independent.co.uk, March

20, 2011.
47. The Association of Business Arts of Quebec (APASQ) represents all de-

signers working in Quebec in the fields of theater, music, dance, enter-
tainment shows, opera, and circus.

48. Nicola Middlemiss, “Behind the Scenes: HR at Cirque du Soleil,” www
.hrmonline.ca, December 23, 2014.

49. “HR Goes to the Circus,” www.hrmonline.ca, November 2014.
50. www.glassdoor.com/Reviews/Cirque-du-Soleil-Reviews-E7495_P2.htm
51. “Is the Sun Going Down on Cirque du Soleil?” www.independent.co.uk,

January 18, 2013.
52. Nelson Wyatt, “Cirque du Soleil Announces 400 Layoffs,” www.thestar

.com, January 16, 2013.
53. Glenn Collins, “Run Away to the Circus? No Need. It’s Staying Here,”

www.nytimes.com, April 28, 2009.
54. Alexandra Berzon, “Cirque du Soleil’s Next Act: Rebalancing the Busi-

ness,” www.wsj.com, December 1, 2014.
55. Ibid.
56. Seth Kahan, “Cirque du Soleil: Bringing Innovation to Life,” http://

hrleadsbusiness.org, July 25, 2014.

http://hrleadsbusiness.org

http://www.wsj.com

http://www.nytimes.com

http://www.thestar.com

http://www.independent.co.uk

http://www.glassdoor.com/Reviews/Cirque-du-Soleil-Reviews-E7495_P2.htm

http://www.hrmonline.ca

http://www.independent.co.uk

http://www.fastcompany.com

http://www.cirquedusoleil.com/en/jobs/casting/work/career-transition.aspx

http://www.workforce.com

http://www.telegraph.co.uk

http://www.indeed.com.sg/cmp/Cirque-Du-Soleil/reviews

http://www.workforce.com

http://wcinsights.com

http://www.reviewjournal.com

http://www.workforce.com

http://www.cirquedusoleil.com/en/~/media/about/global-citizenship/pdf/Review/Review2006

http://www.jobmonkey.com/uniquejobs/cirque-du-soleil/

http://www.realbusiness.com

http://www.indeed.ae/cmp/Cirque-Du-Soleil/reviews?fcountry=ALL&start=20

http://www.indeed.co.in/cmp/Cirque-Du-Soleil/reviews?fcountry=ALL&start=20

http://www.hrmonline.ca

http://www.shrm.org

http://www.telegraph.co.uk

http://www.hr.com

http://edition.cnn.com

http://www.hrmonline.ca

http://edition.cnn.com

http://www.visionaryleadership.com/docs/Seth-Kahan-CirqueSum12

P A R T 5 : Integrative Section

kind of reception do you anticipate from local governments,
suppliers, distributors, and so on?

• Draw up an organization chart showing the company and its
overseas operations, and describe why you have chosen this
structure.

• Decide on the staffing policy you will use for top-level
managers, and give your rationale for this policy.

• Describe the kinds of leadership and motivational systems
you think would be most effective in this environment. Give
your rationale.

• Discuss the kinds of communication problems your manag-
ers might face in the host-country working environment.
How should they prepare for and deal with these problems?

• Explain any special control issues for this overseas opera-
tion that concern you. How do you plan to deal with them?

• Identify the concerns of the host country and the local
community regarding your operations there. What plans do
you have to deal with their concerns and to ensure a long-
term cooperative relationship?

1 Integrative Term Project

2 Integrative Case: IKEA’s Challenges in Russia

Integrative Term Project

This project requires research, imagination, and logic in apply-
ing the content of this course and book.

In groups of three to five students, create an imaginary
company that you have been operating in the domestic arena
for some time. Your group represents top management, and you
have decided it is time to go international.

• Describe your company and its operations, relative size, and
so forth. Give reasons for your decision to go international.

• Decide on an appropriate country in which to operate, and
give your rationale for this choice.

• State your planned entry strategy, and give your reasons for
this strategy.

• Describe the environment in which you will operate and the
critical operational factors that you must consider and how
they will affect your company.

• Give a cultural profile of the local area in which you will be
operating. What are the workers going to be like? What

IC-1

This page is intentionally left blank

Case 10 IKEA’s Challenges in Russia
This case was written by Hadiya Faheem, under the direction of Debapratim Purkayastha, IBS Hyderabad.1

Over the years, IKEA grew and experienced success with
its stores in Russia. Some of its stores went on to become the
top grossing stores in the world for the furniture retailer. More-
over, IKEA introduced its successful new business model in
Russia, wherein its furniture stores were operated not as stand-
alone stores but as part of large shopping and entertainment
complexes. As of the financial year (FY) ended August 2017,
IKEA had 14 hypermarkets in 11 cities in Russia with €8 34.1
billion sales and 67 million visitors.9

IKEA had to contend with many roadblocks caused by the
corrupt bureaucratic system, which prompted it to finally decide
to halt all expansion in Russia in 2009. This was after permission
was denied for the setting up of two IKEA stores in Samara and
Ufa, allegedly after the retailer refused to pay bribes to safety
inspectors. Finally, in 2011, top Russian ministry officials were
able to convince the retailer to go ahead with its expansion.

To add to its troubles, in 2010, IKEA landed up in another con-
troversy when two of its executives, Per Kaufmann (Kaufmann),
a director for IKEA in Eastern Europe, and Stefan Gross (Gross),
a director for IKEA’s shopping mall business in Russia, allegedly
allowed a contractor to pay bribes. Though they did not gain per-
sonally, they did agree to a contractor’s plan to pay a bribe to an
electrical company official. While bribes were common in Russia,
the lapse by IKEA executives showed the company in a bad light
given the fact that it had been involved in a long public campaign
against government corruption in the country.

Even as IKEA was embroiled in several controversies, in
2012, it came to light that it was utilizing ill-defined Russian log-
ging rules to cut down old growth forests.10 The company’s claims
of being an ecologically sensitive company came under question.

Despite facing several challenges in Russia, in 2015, IKEA
reported that China and Russia were its fastest growing markets
with total sales reaching €29 billion for the year ended August 31,
2014.11 Sensing the potential in the country, the company planned
to invest US$2.1 billion in Russia.12 However, an August 2016
ruling by a Russian court ordering IKEA to pay US$7.8 million
to Russian businessman and former IKEA contractor, Konstantin
Ponomaryov, in a decade-long legal dispute over the supply of
power to stores in the city of St. Petersburg, prompted IKEA to
halt its expansion plans in the country once again.

Analysts opined that Russia had huge potential and being
one of the BRIC countries, it was a powerhouse of business op-
portunities. Hence, abandoning the market due to bureaucratic

“[. . .] not all companies succumb to corruption. The Swedish
furniture retailer IKEA has steadfastly refused to bribe Russian
officials.”2

—Alexander Hill, president emeritus of Inter-
Varsity Christian Fellowship3 US, in 2017

“Ikea is clearly quite successful in Russia but in the early
days when they entered the market they took the expres-
sion ‘do as the Romans do’ too literally . . . Ikea today is
a much different company . . . The current management
have the highest standards and follow the rules but that
wasn’t the case when they arrived, when they were too
focused purely on trying to capture market share.”4

—Alexei Slesar, head of capital markets,
Cushman & Wakefield,5 in 2016

In October 2018, Swedish furniture retailer and designer of home
accessories and kitchen appliances the IKEA Group (IKEA) an-
nounced its plans to enter into partnerships with Russian compa-
nies in a bid to boost its local online business, according to Pontus
Erntell, IKEA’s Russia country manager. The retailer planned to
open 100 pick-up points in a bid to boost its online business in Rus-
sia in the financial year September 2018–August 2019. The com-
pany announced ambitious plans to expand its stores in the Russian
market after it witnessed an increase in sales by 2% in the fiscal
year 2017–18, with a 12% increase in visits to its eCommerce site.6

IKEA entered the Russian market in the late 1990s. From
its early days, the company took a firm stand against corrup-
tion, which led to its facing several setbacks when setting up
stores and inaugurating them, and even while advertising for
them. According to the company, “IKEA consistently combats
corruption. All of our divisions operate completely transpar-
ently. The company has adopted a strict code of conduct and its
provisions are binding not only for rank-and-file employees and
executives, but also for business partners. These regulations are
uniform throughout the world and Russia is no exclusion.”7

Since the company refused to pay bribes, it had to deal with
bureaucratic hurdles while getting permits for setting up its stores.
The company stated that the local officials forced a delay in let-
ting IKEA set up its stores citing alleged safety problems. In an-
other instance, IKEA employees found that they were expected
to bribe officials of the electricity department to gain access to
electricity for a grand opening of its store in 2000. The company
worked around the problem by renting several diesel generators
large enough to power an entire shopping mall. As IKEA contin-
ued to expand throughout Russia, it earned the reputation of being
one of the most outspoken critics of Russian corruption. However,
several years later, the company realized that the Russian execu-
tive it had employed for managing the rental agreements had been

PC5-1

P A R T 5 : Integrative Case

PC5-2 PART 5 • INTEGRATIVE CASE

(his hometown in Småland, South Sweden). The company’s
products were well known for their modern architecture and
eco-friendly designs. In addition, the firm paid attention to cost
control, operational details, and continuous product develop-
ment, which allowed it to lower its prices. Instead of selling
pre-assembled products, the company designed furniture that
could be self-assembled. This helped it cut down on costs and
the use of packaging. The company’s website featured around
12,000 products – which represented its entire range.

Corporate Structure

IKEA was structured in such a way as to prevent any kind
of takeover of the company and to protect the Kamprad fam-
ily from taxes. Though Kamprad was the founder, he did not
technically own IKEA. He wanted an ownership structure that
stood for independence, a long-term approach, and continuity.
Therefore in 1982, he created Stichting INGKA Foundation, a
non-profit organization registered in Leiden in the Netherlands.
In 1984, Kamprad transferred 100% of IKEA equity as an

challenges could prove costly for IKEA and competitors could
fill the void left by the retailer. Going forward, IKEA planned to
boost its local online business in Russia and expand into other
international markets such as the Philippines by 2020.

About IKEA

IKEA was a privately held company. It designed and sold
ready-to-assemble furniture, home appliances, and accessories.
From humble beginnings in 1943, the company had gone on
to become the world’s largest furniture retailer by the 2000s.13
In the financial year 2001, the company earned revenues of
€10.4 billion (see Exhibit I for IKEA’s Growth in Revenue). By
2018, the company’s revenues had increased to €38.8 billion
(see Exhibit II for IKEA’s Income Statement). By August 31,
2018, the IKEA Group had a total of 422 stores in more than
50 markets with 957 million visitors.14

IKEA was founded in Sweden in 1943 by 17-year-old Ingvar
Kamprad (Kamprad). IKEA was the acronym of Ingvar Kam-
prad, Elmtaryd (the farm where he grew up), and Agunnaryd

10
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20
01

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20
14

20
15

20
16

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17

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18

Re
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es

in
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ill
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€

ExHIBIT I IKEA’s Revenue Growth (2001–2018)
Total Revenue in Billion €

Source: “IKEA’s Revenue 2001–2008,” www.statista.com, 2018.

ExHIBIT II IKEA’s Consolidated Income Statement (2013–2017)

Source: Adapted from www.ikea.com and IKEA Annual Reports.

In million € (for September 1–August 31 of)

FY17 FY16 FY15 FY14 FY13

Revenue 36,925 35,691 32,658 29,293 28,506

Cost of sales 23,730 20,260 18,221 16,372 15,786

Gross profit 12,565 15,431 14,437 12,921 12,720

Operating cost 9,534 10,932 10,388 9,128 8,694

Operating income 3,031 4,499 4,049 3,793 4,026

Net income 2,473 4,200 3,512 3,329 3,317

http://www.ikea.com

http://www.statista.com

CASE 10 • IKEA’S CHALLENGES IN RUSSIA PC5-3

International Expansion

The first IKEA store was opened in Älmhult, Sweden, in 1953.
Since there was limited opportunity for growth in the Swedish mar-
ket, IKEA decided to expand into international markets. IKEA’s
international expansion progressed in three phases: in 1963, in
Scandinavia; in 1973, in Western Europe; and in 1976, in North
America (see Exhibit IV for IKEA’s International Expansion).

In the 1970s, several stores were launched in different
parts of Europe. IKEA gradually expanded its footprint across
Europe and North America, opening stores in Norway (1963),
Denmark (1969), Switzerland (1973), Germany (1974), Aus-
tralia (1975), Canada (1976), Austria (1977), the Netherlands
(1979), France (1981), Belgium (1984), the US (1985), the UK
(1987), and Italy (1989).

In 1997, IKEA launched its website, www.ikea.com. The
company continued its global expansion endeavor, opening
stores in Hungary (1990), the Czech Republic, Poland (1991),
Spain (1996), China (1998), Russia (2000), Portugal (2004), and
Japan (first in 1977 and later again in 2006 when it reentered the
country). The company also entered into several partnerships to
execute numerous social and environmental projects. By 2004,
IKEA had sales of US$15.5 billion. While 81% of its sales were
from Europe, 16% came from North America, and the remaining
3% from Asia and Australia.17

IKEA’s business concept was to offer furniture with simple
designs at affordable prices. Though the company designed its
own furniture and other items, it manufactured only a mini-
mal portion; most of the supplies were made through a global
network of contract manufacturers, many of them located in
emerging markets.

With regard to human resources, IKEA claimed that it gave
precedence to values and beliefs over skills, academics, or work
experience in all of its standard job interviews. Prospective
employees were expected to fit in with the corporate culture and
had to take a culture quiz to determine their fit.

irrevocable gift to the Foundation. IKEA was privately held by
this Foundation. Its purpose was to hold shares, reinvest in the
IKEA Group, and to fund charity through it. It also protected
IKEA from family squabbling and its inheritance in whole or
in part by the Kamprad family. Kamprad said, “My family will
never have the chance to sell or destroy the company.”15 The
Foundation was controlled by a five-member executive com-
mittee that was chaired by Kamprad and included his wife and
attorney. The Foundation was only controlled (not owned) by
the Kamprad family. The Foundation, however, owned INGKA
Holding BV, a private, for-profit, Dutch company that con-
trolled IKEA’s operations.

IKEA’s structure was a complicated array of not-for-profit
and for-profit organizations. It had two main components – op-
erations and franchising. Operations included the management
of its stores, the design and manufacture of its furniture, and
purchasing and supply functions which were overseen by ING-
KA Holding. As of November 2018, INGKA Holding, IKEA’s
parent group, had 367 stores in 30 countries while the remain-
ing stores were owned by IKEA’s franchisees.16

The franchising part (trademark and concept) was owned by
a separate Dutch company called Inter IKEA Systems. All IKEA
stores (franchised and those run by INGKA Holding) shared 3%
of their revenue with Inter IKEA Systems as a franchise fee. Inter
IKEA Systems was owned by Inter IKEA Holding of Luxem-
bourg, which in turn belonged to Interogo Foundation in Liech-
tenstein. This foundation was also ontrolled by the Kamprad
family. Apart from these holdings, the food joints that operated
in IKEA stores were directly owned by the Kamprad family and
represented a major part of the family income. This corporate
structure allowed Kamprad to maintain tight control over the op-
erations of INGKA Holding and the IKEA stores (see Exhibit III
for IKEA’s Corporate Structure).

Stichting INGKA
Foundation

(The Netherlands)

Group Staff Functions

Interogo Foundation
(Lichtenstein)

Inter IKEA Holding
(Luxembourg)

Inter IKEA Systems
(The Netherlands)

Franchise &
Trademarks

Industrial Groups
Swedwood, Swedspan

IKEA Group

Retail

Range Strategy,
Product Development

& Supplay Chain

Shops & Factories

INGKA Holding B.V.
(The Netherlands)

ExHIBIT III IKEA’s Corporate Structure

Source: Adapted from “Welcome Inside – Yearly Summary FY09” and other sources.

http://www.ikea.com

PC5-4 PART 5 • INTEGRATIVE CASE

* IKEA entered Japan in 1977 and withdrew from the market in 1987 after recording stagnant sales. The retailer reentered the market in 2006.
* Data as of 2018

Source: Compiled from various sources.

ExHIBIT Iv IKEA’s International Expansion

Country First Store Number of Stores Country First Store Number of Stores

Sweden 1958 18 Taiwan 1994 4

Norway 1963 6 Malaysia 1996 1

Denmark 1969 5 Finland 1996 5

Switzerland 1973 9 Russia 2000 14

Germany 1974 46 Greece 2001 5

Australia 1975 7 Israel 2001 2

Canada 1976 12 Portugal 2004 3

Austria 1977 7 Turkey 2005 5

China 1977 16 Romania 2007 1

Japan 1977* 9 Cyprus 2007 1

The Netherlands 1978 12 Ireland 2009 1

Singapore 1978 2 Dominican Republic 2010 1

Spain 1980 19 Bulgaria 2011 1

France 1981 29 Thailand 2011 1

Iceland 1981 1 Lithuania 2013 1

Saudi Arabia 1983 3 Qatar 2013 1

Belgium 1984 6 Jordan 2014 1

Kuwait 1984 1 Croatia 2014 1

USA 1985 38 Indonesia 2014 1

UK 1987 18 South Korea 2014 2

Italy 1989 20 Morocco 2016 1

Hungary 1990 2 Serbia 2017 1

Czech Republic 1991 4 India 2018 1

Poland 1991 8 Latvia 2018 1

United Arab Emirates 1991 2 Bahrain 2018 1

Slovakia 1992 1

IKEA strove hard to project itself as an ethical and envi-
ronmentally conscious company. It took measures to ensure
that the materials it used were sustainably sourced and the la-
bor it employed met international labor regulations. By 2012,
it hoped to fully implement the “IKEA Way,” a roster of rules
and regulations for its suppliers. It was also against child labor
being used at its suppliers’ operations. The idea behind these
rules was to provide the world with a clear picture on the origin,
volume, and kind of wood used in IKEA’s products.

Over the years, IKEA won several recognitions for its ethi-
cal practices. In 2010, it was recognized by the Ethisphere In-
stitute18 as one of the “World’s Most Ethical Companies” in
specialty retail for four consecutive years. In 2012, IKEA was

judged the “2012 World Retail Congress International Retailer
of the Year” because of its superiority as compared to its peers
in global profitability, branding, and strategizing.

For the year ended August 31, 2014, IKEA reported a 3.6%
increase in sales to €29 billion. The growth was attributable to
an increase in spending by Chinese middle-class consumers.
The company reported that its sales in Europe, which accounted
for 70% of IKEA’s total sales, also had improved during the
same period.19

In 2014, IKEA embraced the Internet by launching its
online stores. Commenting on its online business, Peter
Agnefjall, IKEA’s chief executive, said, “We weren’t one of
the early adapters. But we’ve matured in our thinking about

CASE 10 • IKEA’S CHALLENGES IN RUSSIA PC5-5

Russian Consumers Love IKEA, But. . .

In March 2000, IKEA’s first store in Russia was opened at
Khimki (see Exhibit V for IKEA Russia’s Stores). The inaugu-
ral day drew a large crowd of 40,000 shoppers, and a constant
stream of customers emptied the store of its stock within two
weeks.29 People waited for an hour to get into the store, and
all the roads leading to the store were blocked by traffic for
miles around. Analysts believed that the rising middle class in
Russia was looking to abandon the old world Soviet-era fur-
niture in favor of the modern Scandinavian furniture offered
by IKEA.

Russian furniture stores at that time offered only two
choices–pricey furniture for the affluent and cheap ones for the
rest. So, IKEA’s simple, sturdy furniture at affordable rates at-
tracted a lot of attention. IKEA’s low prices in Russia encour-
aged consumers to buy furniture. Ordinarily, buying furniture
in the country required consumers to save several months of
their salary. Many shoppers were taken by surprise by the low
prices, with some of them even wondering whether they were
priced in US dollars rather than Russian rubles. “We spent the
first weekend writing the word ‘ruble’ on all the price tags,”30
Dahlgren quipped. The internal layout at IKEA also worked in
favor of the retailer as customers could ‘walk around’ unimped-
ed by shop assistants, in addition to handling the merchandise.
They were even encouraged to try out the mattresses and sofas
for themselves–something the consumers had never seen before
in Russia. Other factors that contributed to IKEA’s success in
Russia, according to analysts, were its logistics expertise, its
business model, its vertical integration, and its ability to lever-
age economies of scale.31

it. We realized this is not a trend, it’s a megashift.”20 For the
FY ended August 31, 2014, IKEA’s online sales jumped 30%
to €1.4 billion.21

For the FY ended August 31, 2018, IKEA recorded €38.8
billion in sales.22

Early Hiccups in Russia

Since the 1960s, Kamprad had been quite keen to do business in
Russia, when it was still the Soviet Union.23 It was only decades
later, however, that he attempted to set up operations in Russia
for the first time. But the attempt came to naught due to the col-
lapse of the Soviet Union in 1991. Another attempt failed due
to the ‘Russian constitutional crisis of 1993’24 which saw the
beginning of an unfavorable economic scenario in the country.

In 1998, Lennart Dahlgren (Dahlgren), an IKEA veteran
on the verge of retirement, was asked to set up IKEA’s opera-
tions in Russia. Dahlgren soon realized that there was a huge
retail opportunity in the country, quite unlike the view that was
prevalent in the West that Russia was teeming with poor people.
In the early 2000s, a market report from AT Kearney, a global
market consulting firm, stated that in terms of retail expansion,
Russia was the top country in the world. According to the re-
port, “With a growth rate of 30 percent for retail sales from
1999 to 2003 and a relatively sparse retail network to serve its
growing market, Russia is full of promise.”25

At the same time, Dahlgren also realized that Russia had
a highly corrupt bureaucracy, with corrupt officials demanding
bribes for getting anything done. However, in concurrence with
IKEA’s policy of zero tolerance of corruption, Dahlgren decided
that he would not give in to the corrupt system. According to
Dahlgren, “Companies interested in Russia should be absolutely
up-front and honest in their dealings. When a foreign company
pays bribes, there is no end to demands for bribes. In turn, for-
eign companies should feel an urgency to report corruption.”26

To set up IKEA’s first store in Russia, Dahlgren entered
into discussions with the Mayor of Moscow, Yuri Luzhkov (Lu-
zhkov). IKEA wanted to launch its first store in Moscow’s pros-
perous Kutuzovsky Prospekt,27 but the plan fell through when
it became a victim of vicious slander. Later, Luzhkov suggested
that IKEA set up its store in a recently constructed building
complex. However, IKEA found it impractical to set up its store
in that building. When it found another suitable site for setting
up the store and approached Luzhkov to get a lease on it, the
city authorities asked for exorbitant land lease rates. Dahlgren
said, “Buying land on these terms would make it impossible to
keep low prices on products.”28

In the end, IKEA decided to move the project to Khimki,
a suburb 12 miles north of Moscow. The Mayor of Khimki was
more in favor of the idea of the store being set up. As soon as
the construction of the Khimki store began, the ‘Russian Finan-
cial Crisis’, or the ‘Ruble Crisis’, broke out. The crisis was the
result of the Russian Government’s default on domestic debt
and devaluation of the ruble. The crisis period caused a jump
in food prices and a break-out of mass protests. Millions lost
their life savings. Despite the setback, IKEA continued with the
construction of the store.

ExHIBIT v IKEA Russia’s Stores

Source: www.ikea.com.

Store Location Opened

Moscow Khimki 2000

Moscow Teply Stan 2001

St Petersburg Dybenko 2003

Kazan 2004

Moscow Belaya Dacha 2005

Nizhniy Novgorod 2006

St Petersburg Parnas 2006

Yekaterinburg 2006

Novosibirsk 2007

Rostov-on-Don 2007

Adygea Adygea-Kuban 2008

Omsk 2009

Samara 2009

Ufa 2010

http://www.ikea.com

PC5-6 PART 5 • INTEGRATIVE CASE

exemption that made the retailer’s imports economically feasi-
ble. However, Dahlgren felt that tariffs of about 28% (compared
to about 3% in North America and Europe) should come down
for IKEA to prosper in Russia.33

. . .IKEA Faces Many Roadblocks

IKEA also had to face a number of obstacles in its expansion
plans. The business environment in Russia was such that the
company constantly encountered problems with regard to its
stores from government officials in the fire, health and safety,
electricity, tax, customs, and other related departments. These
officials reportedly discovered ‘problems’ with IKEA stores,
especially during critical times such as store openings. They
would then suggest ways by which IKEA could overcome the
issues–usually through some monetary payment or by engag-
ing a party recommended by them to rectify the problem. For
instance, a few weeks before the Khimki store was opened
IKEA was asked by the local utility department officials to
pay a bribe to get an electricity connection for its Khimki
store. Instead of complying with the demand, IKEA decided
to hire large diesel generators to power its store. This became
a standard practice for the company for most of its stores in
Russia.

City authorities in Moscow reportedly held a grudge
against IKEA for its earlier decision to move out of the city.
When the company finally opened its first store in the city, these
authorities refused to give it permission to advertise the store on
the Moscow metro. Dahlgren stated that the municipal authori-
ties refused permission, citing certain scientific studies which
showed that people had unstable psyches underground, hence
IKEA’s ads could be dangerous. IKEA had to secure 300 per-
mits before it could construct a mall in Russia, leaving plenty of
room for the demanding of bribes.34

Again, when IKEA wanted to build an off-ramp over Len-
ingrad Highway to ease traffic and enable customers to reach
the Khimki store without hardship, the authorities put obstacles
in its way. It was only then that IKEA officials realized that
the Leningrad Highway was controlled by Moscow City, rather
than Khimki. Though IKEA had completed all the formalities
necessary to gain the necessary construction permits, the pro-
ceedings were allegedly halted by Luzhkov and his team af-
ter the construction began. They refused to grant permission
for construction of the off-ramp, stating that it would impede
the view of a historic place called the Tank Trap monument,
which marked the place where the Red Army35 had obstructed
the march of the German Nazi forces during World War II.36 As
a result, the off-ramp stood half-constructed for about a year,
causing hardship to customers and traffic snarls on the Lenin-
grad Highway. It was only after Kamprad appealed to Vladimir
Putin37 and the 200 other store owners in the complex protested
against authorities on the issue, that IKEA got the permission
to build the bridge, with the caveat that the off-ramp built by the
company was endorsed by the municipal authorities of Mos-
cow. This cost the company in terms of cost and time, as it had
to pay US$5 million more than it had estimated. Also, the off-
ramp’s construction took three times longer than it should have.

Unlike many other furniture stores in Russia, IKEA laid em-
phasis on customer service. It had a highly selective process of
recruitment, with its initial 440 employees picked from a total
of 16,000 applicants. Moreover, the Store Supervisors, whom it
termed the “Core Employees,” were provided training at IKEA
stores in other countries. IKEA also offered several other ameni-
ties such as free shuttle services from select places, a playroom
for children, and coffee to customers who came in early.

The store continued to be popular, with 100,000 visiting it
even after a month. IKEA opened another store in the Moscow
region within a year of the launch of its first store. The Rus-
sian IKEA stores were similar in size, structure, and style to
their counterparts in other parts of the world. In the first year of
operations, IKEA reported sales of more than US$100 million
in Russia, three times more than what the company had expect-
ed.32 IKEA’s Khimki store became one of its top 10 grossing
stores in the whole world. The rousing response to the store’s
opening encouraged IKEA to formulate ambitious plans for ex-
pansion.

IKEA also tested a new business model for the first time
in Russia. The company had observed that the value of land
surrounding its new stores greatly appreciated over a period of
time. It decided to take advantage of this by developing the ar-
eas around its stores into commercial complexes.

IKEA had a 98-year land lease for its store sites with the
option of purchasing them if Russia ever allowed it. This gave it
sufficient leeway to make use of the excess land to increase its
business prospects. IKEA invited other stores selling electron-
ics, hardware, and clothes, most of whom were leading inter-
national brands, to set up operations at its store sites. It also set
up areas for leisure such as movie theaters, ice rinks, and play
areas in these complexes. Apart from that, the company created
comfort zones which housed cafés, restaurants, childcare facili-
ties, and baby care rooms.

This initiative enabled certain IKEA stores in Russia to be
operated as enormous shopping and entertainment complexes,
unlike in other countries where they were standalone furniture
stores. Over time, IKEA’s new division called the ‘Mega Mall’,
set up to manage these complexes, made more money than the
standalone retail business.

Despite its success, IKEA struggled to make profits in Rus-
sia until the mid-2000s. The main reasons for this were the high
startup costs and the steep 25% tariff imposed on imported fur-
niture. Only 13% of the furniture IKEA sold at its stores was
made locally. Dahlgren was of the opinion that the company
needed to produce 30% of its furniture locally if its operations
were to turn profitable. So, in April 2002, IKEA started produc-
tion at its first Russian factory, in the vicinity of St. Petersburg.
The production facility was built at a cost of US$15 million
and initially employed 250 people. In addition, the company
provided its local suppliers with credit of US$400 million to
purchase equipment. Russia had about 25% of the world’s
hardwood supply and IKEA’s efforts to develop its production
facilities in the country were expected to make Russia a major
supplier for the company for its global operations.

Though IKEA faced several problems in setting up its
stores, Russian officials granted the company a customs

CASE 10 • IKEA’S CHALLENGES IN RUSSIA PC5-7

Kazan’ in the Kazan region, 500 miles east of Moscow, in
2005. The store, built in partnership with Ramstore hypermar-
ket,42 went on to become the largest regional mall in Russia.
Dahlgren said that the authorities in Kazan had been very co-
operative, which enabled the store to be opened in record time.
He said, “It took less than a year between the first meeting with
Kazan’s mayor and the store’s opening—a record impossible
to break anywhere in the world.”43

While IKEA had a smooth ride in the Kazan region, in
2006, the retailer was forced to halt the construction of its
new Mega store in Rostov-on-Don, a city in southern Russia,
with authorities maintaining that the retailer had not obtained
the correct permit. In the same year, i.e. in 2006, IKEA had
to temporarily shut down its Mega store in Nizhny Novgorod,
a city in western Russia, after fire safety inspectors allegedly
found around 1,000 fire safety violations by the retailer. The
company also faced a probe by the prosecutor in Sverdlovsk
Oblast, a region in west-central Russia, into its Mega store in
Yekaterinburg, a city in Russia and administrative center of
Sverdlovsk Oblast, over compliance with sanitary and fire safe-
ty standards. In addition to this, it encountered problems with
launching Mega stores in other Russian cities such as Ufa, St.
Petersburg, Samara, and Novosibirsk, and in the construction of
a warehouse in Solnechnogorsk, a town in Moscow.

All these obstacles notwithstanding, IKEA became the
largest foreign retailer in Russia over a period of time. IKEA’s
Managing Director, Per Wendschlag said, “We are one of the
top-selling IKEA countries in the world. The potential with
141 million people who are interested in consuming and fur-
nishing their homes is big.”44 Moreover, with an investment of
US$4 billion in Russia over a period of 10 years, IKEA became
the country’s largest foreign investor. It opened 14 stores and
three manufacturing facilities, along with one distribution cen-
ter. IKEA’s success was attracting other world retailers to set
up their operations in Russia, according to company officials.
The popularity of IKEA and its impact on the younger gen-
eration resulted in Russia’s yuppies45 being called the ‘IKEA
Generation’.

Despite its success, IKEA put a freeze on its expansion in
June 2009, after officials refused to give it permission to open
two of its stores in the central cities of Samara and Ufa. Offi-
cials refused to give approval in Samara, stating that the walls
of the store were not in a condition to withstand hurricane-force
winds. This despite the fact that such weather conditions were
never been experienced in that region. According to Kirill Ka-
banov, Head of the NGO National Anti-Corruption Committee
in Moscow, the reason for the non-opening of the stores was
IKEA’s refusal to give bribes to safety inspectors.

A company official stated that the municipal authorities had
recommended that IKEA use the services of a local construc-
tion company to “quickly help” fix the construction deficien-
cies.46 Gigibulla Khasaev, Economic Development Minister for
the Samara region, however, stated that the company’s allega-
tions were untrue and that IKEA was publicizing its complaints
to divert attention from its substandard construction.47

IKEA contended that it was tired of being conned by cor-
rupt officials and was halting expansion. Kamprad claimed that

In 2003, IKEA planned to build a US$40 million warehouse
in the Solnechnogorsky district of the Moscow region. Things
worked out smoothly for the company as long as Deputy Gover-
nor Mikhail Men, who was well-disposed toward the company,
was in office. Once he was dismissed, the company began facing
problems with the authorities. Dahlgren accused Vladimir Popov,
who was District Head at that time, of using the police to halt
work at the warehouse. IKEA was given the go-ahead to continue
work only after it donated US$30 million as aid to elderly people
and hired a contractor endorsed by the regional government.

In December 2004, IKEA was all set to inaugurate the
‘Mega Mall’ at Khimki, with an investment of US$250 mil-
lion. During the construction of the store, one of the biggest in
Europe, the then Mayor of Khimki was replaced by Vladimir
Strelchenko (Strelchenko), an ex-military officer who showed
marked indifference toward Western investors. As a result, the
store’s inauguration faced a major setback as officials stalled
the store’s opening, saying that the road to the store ran over
a gas pipe, making it dangerous. Therefore, the company was
ordered to build a new roadway. This was despite the fact that
the pipeline in question also passed underneath a heavily used
six-lane highway and a crucial railroad. Dahlgren contended
that the company had agreed to construct a number of pressure
reducers over the gas pipes, but the real reason the opening was
stopped was because IKEA had refused to pay bribes.

Dahlgren equated the prevention of its store opening to
“sabotage against Russia.”38 This was the first time that a key
official of a multinational company doing business in Russia
had raised his voice against the corruption in the country. “Like
all Western companies in Russia we’re subject to blackmail,
sabotage, and pressure for bribes. In many cases we’re total-
ly in the hands of local chieftains. IKEA is big in Russia and
doesn’t pay bribes,”39 he reiterated.

Dahlgren also decided to stand up to the corrupt bureau-
crats by announcing that the inauguration of the store would
be on December 10, 2004, as per schedule. So, while police
forces blocked the store, Dahlgren and his team, along with the
Swedish Ambassador to Russia held a grand opening ceremony.
This incident attracted the attention of the world media and also
earned IKEA a lot of sympathy, while drawing harsh criticism
against the Khimki municipal authorities. Strelchenko’s superi-
ors were worried that the bad press associated with the incident
would spoil Russia’s reputation. They saw to it that IKEA was
provided the go-ahead for the mall’s opening.

Kamprad made several attempts to meet the political lead-
ership of Russia, but he was not able to meet either Putin or
Dmitry Medvedev.40 In one such attempt in 2005 in which
Dahlgren strove to arrange a meeting between Kamprad and
Putin, he was allegedly told by a senior government official that
it would cost US$5–10 million. “I sensed that it would be better
not to get into that discussion any deeper,”41 quipped Dahlgren.

Freeze on Expansion

There were also instances when IKEA received support from
the Russian authorities that made things smoother for the com-
pany. The company opened another store called the ‘Mega

PC5-8 PART 5 • INTEGRATIVE CASE

(IKEA MOS), was accused of demanding 6.5 million ruble
(US$225,000) from a company that sought to lease two prem-
ises at IKEA’s Mega shopping complex in Tyoply Stan, a sub-
urb in Moscow. Yunalan was accused of stalling the signing of
a lease of the two premises. Consequently, in July 2012, Yuna-
lan was sentenced to five years in a high-security prison after
being found guilty of large-scale extortion. Ingvaldsson and
another accomplice managed to leave the country and Russia
was seeking their extradition. IKEA stated that it welcomed the
investigation by Russian authorities into the incident and would
co-operate fully with them.

In addition to the rising cases of corruption being detected
among its ranks, IKEA’s image took a further beating when
reports on its alleged unethical logging practices surfaced. In
early 2012, a Swedish public service television channel came
out with an investigative report that proclaimed that IKEA’s
subsidiary, Swedwood, was cutting down several hundred
acres of old growth forests every year. While civil rights groups
criticized IKEA’s logging practices based on the report, the
company refuted the allegations and claimed that it was logging
wood according to local guidelines. However, its critics con-
tended that IKEA should show greater responsibility in sourc-
ing wood without taking advantage of defunct environmental
guidelines in countries such as Russia and China, in which it
mostly logged wood. Viktor Säfve, Chairman of Swedish NGO
‘Protect the Forest’, said, “This all comes down to a question of
credibility and we believe that they are cheating their customers
by claiming that the wood they use is sustainably sourced. The
wood they are cutting down in Russia is from a high conserva-
tion area and we have the evidence to prove it. They are hiding
behind flawed and criticized FSC accreditation.”53,54

Even as IKEA was grappling with different issues in Rus-
sia, it faced a boycott threat in the country in 2013 after it re-
moved an article on a British lesbian couple from its monthly
magazine in Russia, in which they spoke about their family life
and how their house was filled with IKEA products. This was
a bid by IKEA to comply with Russia’s controversial law that
banned ‘homosexual propaganda’. Commenting on the article
being removed from the magazine, an IKEA spokeswoman said
that the decision had been taken to “remain neutral.” She added,
“We think our operations in Russia can, in the long run have a
positive effect on society.”55 IKEA suffered a huge backlash in
the country. According to Ulrika Westerlund, chair of the Swed-
ish Federation for Lesbian, Gay, Bisexual and Transgender
Rights, “I find it disappointing that Ikea has simply laid down
flat. No one is really sure what ‘propaganda’ is and if Ikea had
left the article in, that could have served as a test case.”56

IKEA’s troubles rose to another level in September 2014
when Russia’s Investigative Committee conducted a search
on its premises in Khimki in connection with a land deal. The
land dispute dated back to 2007 when IKEA had constructed its
store in Khimki and a group of farmers had challenged its right
to use the land for setting up its store. However, after a series of
arbitrations, a Moscow court decided in IKEA’s favor.

Despite facing several challenges in Russia, in 2015, IKEA
reported that its global sales for the year ended August 2014
stood at €29 billion. According to IKEA, the growth was fueled

the company had been swindled to the tune of US$190 million
because of the failure of Russian authorities to provide electric-
ity to its stores as promised.48

Accusations Against IKEA

However, some incidents seemed to indicate that certain IKEA
officials were bowing down to the all-encompassing corruption
in Russia. Some industry observers believed that, at least in
the initial years, its officials had been involved in corruption.
“They were trying to exploit first-mover advantage and may
have let their due diligence and corporate governance stan-
dards slip by cutting corners,”49 said Cushman & Wakefield’s,
Alexei Slesar.

In 2009, IKEA discovered that the key executives respon-
sible for renting the diesel generators had hyped up the rental
charges in collaboration with the generator rental company,
causing the company a loss of several million dollars.

Though the executives had not committed any personal
indiscretion, their decision to overlook a corrupt transaction
between a subcontractor of IKEA and an electricity company
official in order to resolve a power-supply issue at IKEA’s St.
Petersburg mall did somewhat dent IKEA’s reputation for non-
tolerance of corruption. Speaking on this issue, Kamprad said,
“The documented mess in our Russian shopping center compa-
ny is completely unacceptable. I have been too optimistic. It is
shocking and deplorable that we have wandered off course.”50

In February 2010, IKEA fired Per Kaufmann (Kaufmann),
IKEA director for Central and Eastern Europe, and Stefan
Gross (Gross), IKEA director for real estate in Russia, for turn-
ing a blind eye to corruption. The retailer found out that a bribe
had been offered by a Russian contractor and Kaufmann and
Gross had known about it but had done nothing to prevent the
crime. The bribe was offered in exchange for the signing of a
fake acceptance certificate for electricity equipment in IKEA.
Commenting on the issue, Mikael Ohlsson, the chief executive
and president for the IKEA Group, IKEA’S largest franchisee
which included the Russian operation, said, “We are deeply
upset and disappointed. Corruption is totally unacceptable
for Ikea, and therefore we take this matter very seriously and
will act fast and determined.”51 Commenting on the corruption
scandal at IKEA, Maxim Gladkikh-Rodionov, managing direc-
tor of an auditing firm, Confidence, said, “One gets the impres-
sion that the company is simply being strongly encouraged to
‘be like everybody else’.”52

In 2010, Dahlgren released a book called ‘Despite Ab-
surdity: How I Conquered Russia While It Conquered Me,’ in
which he narrated the difficulties the company had had to go
through to stay true to its principles while being surrounded by
rampant corruption. The book named several people obstruct-
ing IKEA’s business in Russia, from the mayor of Khimki to the
governor of the Moscow Region.

IKEA’s troubles continued in 2011, when it became in-
volved in a bribery scandal. The retailer reported that a Turk-
ish national, Okan Yunalan (Yunalan), who acted as an inter-
mediary for Carl Ola Ingvaldsson (Ingvaldsson), former Head
of the Leasing Department in IKEA’s Russian subsidiary

CASE 10 • IKEA’S CHALLENGES IN RUSSIA PC5-9

Ponomaryov, in a decade-long legal dispute over the supply of
power to stores in the city of St. Petersburg. Commenting on the
ruling, IKEA warned that it would delay the investment, stating
that it wanted to work in a “fair and transparent business cli-
mate,” and accused the authorities of attempting “to use illegal
methods to extract further money from the company.”61

Looking Ahead

By 2020, IKEA aimed to achieve a revenue growth of 1.5 times
to €50 billion from €34.2 billion in the fiscal year ended 2015–
2016. Commenting on its future goals, Walter Kadnar (Kadnar),
the general director of the network in Russia, said, “Our goal
is long-term investment. The disposable incomes of consumers
[in Russia] have declined, and we are trying to attract as many
buyers as we can, keeping prices down. Such a policy should
also enable us to achieve the goals set by 2020.”62

Kadnar believed that the economic slowdown in the Rus-
sian market would continue for another 1–3 years i.e. till 2020.
He added, “We do not think that investment in the price will
immediately be followed by recovery in purchase volumes, but
we believe that now is the right time to start such investments in
order to gain an advantage in the market.”63

Analysts believed that IKEA’s plans for Russia were too
ambitious since the major stumbling block for business was
the host country’s corrupt systems at both the regional and na-
tional levels. In Transparency International’s64 2017 Corrup-
tion Perceptions Index, Russia was placed in the 135th position
(see Exhibit VI for Corruption Perceptions Index for 2017).

by China and Russia as they were the company’s fastest grow-
ing markets. Eight of IKEA’s 10 largest stores in the world were
in China whereas in Russia it had a chain of 14 complexes,
which accounted for 7% of the company’s turnover for the year
ended August 2014.57 IKEA’s sales in Russia were attributed to
the economic slowdown in the country as consumers swarmed
IKEA stores and other Western retailers in anticipation that the
prices would rise sharply. According to Marija Milasevic, se-
nior analyst at Euromonitor International, “Consumers were
afraid to lose their savings and of possible future high price in-
creases. They were massively purchasing durable products.”58

Sensing the tremendous potential offered by the Russian
market, in June 2016, IKEA announced its plans to invest
US$2.1 billion on upgrading its 14 stores across Russia.59 The
announcement came at a time when the Supreme Court of Rus-
sia had given a ruling in favor of IKEA rejecting a plea by
an agricultural enterprise, the Khimki Collective Agricultural
Enterprise, that two 15-storey buildings belonging to IKEA be
demolished. The agricultural enterprise accused IKEA of fak-
ing documents required for obtaining the land on Leningrad
Highway, which led from the center of the city to the main
airport at Moscow. According to IKEA’s press service in Mos-
cow, “There have been no claims since 1993. Nobody has tried
to contest the ownership title for 18 years, but as soon as Ikea
bought it out, a number of claims arose that tried to question
Ikea’s right.”60

However, the retailer halted its expansion plans after a
Russian court in 2016 ordered it to pay US$7.8 million to Rus-
sian businessman and former contractor of IKEA, Konstantin

ExHIBIT vI Corruption Perceptions Index (2017)

2017 Rank Country 2017 Score 2016 Score 2015 Score 2014 Score 2013 Score 2012 Score Region

1 New Zealand 89 90 91 91 91 90 Asia Pacific

2 Denmark 88 90 91 92 91 90
Europe and
Central Asia

3 Finland 85 89 90 89 89 90
Europe and
Central Asia

3 Norway 85 85 88 86 86 85
Europe and
Central Asia

3 Switzerland 85 86 86 86 85 86
Europe and
Central Asia

6 Singapore 84 84 85 84 86 87 Asia Pacific

6 Sweden 84 88 89 87 89 88
Europe and
Central Asia

8 Canada 82 82 83 81 81 84 Americas

8 Luxembourg 82 81 85 82 80 80
Europe and
Central Asia

8 Netherlands 82 83 84 83 83 84
Europe and
Central Asia

8 United Kingdom 82 81 81 78 76 74
Europe and
Central Asia

12 Germany 81 81 81 79 78 79
Europe and
Central Asia

135 Russia 29 29 29 27 28 28
Europe and
Central Asia

Source: Adapted from “Corruption Perceptions Index 2017,” www.transparency.org, February 21, 2018.

http://www.transparency.org

PC5-10 PART 5 • INTEGRATIVE CASE

announced its plans to open its first and largest store in the
Philippines by 2020 with an investment of US$133 million.67
The retailer aimed to set up its first store in Greater Manila with
5 million households and cash in on the economic boom and
rising incomes.

Case Questions

1. Critically analyze IKEA’s foray into Russia. In what ways
was it successful?

2. Discuss the challenges faced by IKEA and how the com-
pany tackled these challenges and made a mark in the
Russian market.

3. Since IKEA continued to face several bureaucratic
challenges in Russia, the retailer planned to halt its ex-
pansion in the country. What should IKEA’s business
strategy be in the future?

Analysts opined that bribery was like another taxation system in
the country, which benefited the political elite including the po-
lice and the Federal Security Service65 (FSB). Analysts pointed
out that while IKEA would have problems in the future, Russia
being part of the BRIC (Brazil, Russia, India, and China) could
not be ignored, considering the tremendous potential offered by
the rising incomes of middle-class consumers in the emerging
markets.

Going forward, IKEA planned to boost its local online
business. By the end of FY August 2019, the retailer planned to
open 100 pick-up points to boost its online business in Russia.66

The company also planned to enter other international
markets. In August 2018, IKEA entered the Indian market by
launching its first store in Hyderabad, capital city of the south-
ern Indian state of Telangana. The company planned to rent
out its furniture offerings in Japan for customers who were
not ready to purchase those items. In November 2018, IKEA

Endnotes
1. This case was prepared from published sources, and is intended to be

used as a basis for class discussion rather than to illustrate either effective
or ineffective handling of a management situation. © 2019, IBS Center
for Management Research. All rights reserved. To order copies, call +91
9640901313 or write to IBS Center for Management Research (ICMR),
IFHE Campus, Donthanapally, Sankarapally Road, Hyderabad 501 203,
Telangana, India or email: casehelpdesk@ibsindia.org Source: www
.icmrindia.org

2. Alexander Hill, “Just Business: Christian Ethics for the Marketplace,”
(IVP Academic, 2017).

3 Founded in 1941, InterVarsity Christian Fellowship is an evangelical
Christian campus ministry that works with students and faculty on US
college and university campuses.

4. Jason Corcoran, “Fraud Claims Sully Ikea’s Russia Expansion on ‘Path
to Communism’,” www.intellinews.com, July 19, 2016.

5. Founded in 1917 in Chicago, Cushman & Wakefield is a commercial real
estate services company.

6. “IKEA Looking for Partnerships with Russian Companies,” www
.pymnts.com, October 11, 2018.

7. “IKEA Cooperates with Investigation in Cases against Executives,”
www. rapsinews.com, July 18, 2012.

8. As of February 12, 2019, 1€ = US$1.13.
9. “ÏKEA Centres Russia – MEGA,” https://mega.ru, 2017.
10. Old growth forests are those that have been left undisturbed for about 300

to 600 years, resulting in them exhibiting unique ecological features.
11. “IKEA Group FY14 Yearly Summary,” www.ikea.com, January 15,

2015.
12. Marina Romanova, “IKEA to Beat ‘The Way to Communism’ and to

Invest US$2.1 BLN in its Russian Malls,” www.russia-briefing.com,
June 24, 2016.

13. “IKEA Mulls Joint Venture with Bosnia Furniture Maker,” www.reuters.
com, January 8, 2008.

14. “Inter IKEA Group Financial Summary FY18,” https://preview
.thenewsmarket.com, November 12, 2018.

15. “IKEA Corporate Structure,” www.ikeafans.com.
16. “Ikea Plans 7,500 Job Cuts, But Will Hire 11,500 for Online Push,” www

.businesslive.co.za, November 21, 2018.
17. Brad Kleindi, “International Marketing,” Cengage Learning, 2006.
18. The research-based Ethisphere Institute based in New York is concerned

with the creation, advancement, and sharing of best practices in business
ethics, corporate social responsibility, anti-corruption, and sustainability.
It publishes a quarterly called the “Ethisphere Magazine.”

19. Jennifer Rankin, “Ikea Sales Driven up by Growing Chinese Middle
Class,” www.theguardian.com, September 9, 2014.

20. Hiroko Tabuchi, “As Profit Slows, Ikea Notes Need to Move Online,”
www.nytimes.com, January 28, 2015.

21. Anna Ringstorm, “Record Sales for IKEA Group as Online Investment
Pays off,” www.reuters.com, September 13, 2016.

22. “Inter IKEA Group Financial Summary FY18,” https://preview
. thenewsmarket.com, November 12, 2018.

23. The Soviet Union or USSR (Union of Soviet Socialist Republics) was in
existence between 1922 and 1991. It constituted 15 socialist states, which
were ruled collectively by the Communist Party.

24. The Russian constitutional crisis of 1993 occurred when a war erupted
between the Russian President, Boris Yeltsin, and the Russian Parliament.
The conflict that was spread over a period of 10 days gave rise to the
deadliest street battle ever witnessed in Moscow. The issue was later re-
solved through the use of military force.

25. Curt Hazlett, “Russia is an Alluring but sometimes Scary Place for West-
ern Retailers,” www.icsc.org, May 2005.

26. Lennart Dahlgren, “The Basics of Doing Business in Russia,” http://
blogs.hbr.org, October 25, 2010.

27. Kutuzovsky Prospekt is one of the key streets in Moscow. It is flanked by
expensive residential areas.

28. Maria Antonova, “Ex-IKEA Boss Bares Russia’s ‘Chaotic Reality’,”
www.sptimes.ru, March 26, 2010.

29. Colin McMahon, “Russians Flock to Ikea as Store Battles Moscow,”
http://articles.chicagotribune.com, May 16, 2000.

30. Colin McMahon, “Russians Flock to Ikea as Store Battles Moscow,”
http://articles.chicagotribune.com, May 16, 2000.

31. Graham H. J. Roberts, “Consumer Culture, Branding and Identity in the
New Russia: From Five-year Plan to 4×4,” Routledge, 2016.

32. James Schofield, “Ikea Wows the Russians,” http://news.bbc.co.uk,
February 22, 2002.

33. Colin McMahon, “Russians Flock to Ikea as Store Battles Moscow,”
http://articles.chicagotribune.com, May 16, 2000.

34. William B. Gamble, “Investing in Emerging Markets: The Rules of the
Game,” Springer Science +Business Media LLC, 2011.

35. Red Army or ‘The Workers’ and Peasants’ Red Army’ were the Soviet
Union’s communist war group, who were active during the time of the Rus-
sian Civil War (1918–22). Later, it became the national army of the USSR.

36. World War II occurred during the period 1939–1945. Several major na-
tions participated in it and it was considered to be the deadliest war in
human history, due to the large number of human causalities and the use
of nuclear weapons.

mailto:casehelpdesk@ibsindia.org

http://articles.chicagotribune.com

http://news.bbc.co.uk

http://articles.chicagotribune.com

http://www.sptimes.ru

http://blogs.hbr.org

http://www.icsc.org

https://preview.thenewsmarket.com

http://www.reuters.com

http://www.nytimes.com

http://www.theguardian.com

http://www.businesslive.co.za

http://www.ikeafans.com

https://preview.thenewsmarket.com

http://www.reuters.com

http://www.russia-briefing.com

http://www.ikea.com

https://mega.ru

http://www.rapsinews.com

Home Page

http://www.intellinews.com

http://www.icmrindia.org

CASE 10 • IKEA’S CHALLENGES IN RUSSIA PC5-11

37. Vladimir Putin has been the President of Russia since May 7, 2012. Previ-
ously, he had served as President from 2000 to 2008. He had also served
as Prime Minister of Russia for the periods 1999–2000 and 2008–2012.

87. Curt Hazlett, “Russia is an Alluring but Sometimes Scary Place for West-
ern Retailers,” www.icsc.org, May 2005.

39. Andrew Osborn, “In Fear of His Life: Ikea’s Man in Moscow Tells of
Threats and Bribes,” www.independent.co.uk, December 15, 2004.

40. Dmitry Medvedev has been the Prime Minister of Russia since May 8,
2012. Previously, he had been President of Russia from 2008 to 2012.

41. Maria Antonova, “Ex-IKEA Boss Bares Russia’s ‘Chaotic Reality’,”
www.sptimes.ru, March 26, 2010.

42. Ramstore Hypermarkets are owned by Turkish retail giant, MigrosTürk-
Ticaret A.Ş. There are about a dozen Ramstore hypermarkets in Russia.

43. Ibid.
44. “IKEA’s Freeze Curtails Medvedev’s Goal,” www.themoscowtimes.com,

March 15, 2011.
45. Yuppie stands for “young urban professional” or “young upwardly-

mobile professional” and generally refers to the earning members of the
upper middle class or upper class, in their 20s and 30s.

46. “Why IKEA is Fed up with Russia,” www.businessweek.com, July 2,
2009.

47. Ibid.
48. Jason Bush, “IKEA Turns Sour on Russia,” http://www.spiegel.de, June

25, 2009.
49. Jason Corcoran, “Fraud Claims Sully Ikea’s Russia Expansion on ‘Path

to Communism’,” www.intellinews.com, July 19, 2016.
50. “Ikea Owner ‘Distressed’ over Russian Expansion,” www.thelocal.se,

December 11, 2010.
51. Andrew E. Kramer, “Ikea Fires 2 Officials in Russia Bribe Case,”

www.nytimes.com, February 15, 2010.
52. Kommersant and Ilya Dashkovsky, “Losing the Good Fight: IKEA’s

Struggle to Remain Honest in Russia,” www.rbth.com, August 29, 2016.
53. FSC (Forest Stewardship Council) includes some of the world’s leading

environmental NGOs who develop ‘Principles and Criteria’ – the highest
standards of forest management which are environmentally appropriate,
socially beneficial, and economically viable.

54. Annie Kelly, “Ikea to go ‘Forest Positive’– But Serious Challenges Lie
Ahead,” www.guardian.co.uk, December 14, 2012.

55. Adam Sherwin, “Ikea Faces Boycott after it Removes Lesbian Couple
from Russian Magazine to Comply with Putin Laws,” www.independent
.co.uk, November 21, 2013.

56. Ibid.
57. Jennifer Rankin, “Ikea Sales Driven up by Growing Chinese Middle

Class,” www.theguardian.com, September 9, 2014.
58. Ivana Kottasova, “IKEA is Making Loads of Money in Russia. Wait,

What?,” https://money.cnn.com, September 10, 2015.
59. Marina Romanova, “IKEA to Beat ‘The Way to Communism’ and to In-

vest US$2.1 BLN in its Russian Malls,” www.russia-briefing.com, June
24, 2016.

60. Jason Corcoran, “Fraud Claims Sully Ikea’s Russia Expansion on ‘Path
to Communism’,” www.intellinews.com, July 19, 2016.

61. “Ikea Threatens to Cut Investments in Russia after Losing Court Battle,”
https://retail.economictimes. indiatimes.com, August 31, 2016.

62. Natalia Ischenko, “IKEA Reduces Prices in Russia,” www.vedomosti.ru,
January 25, 2017.

63. Ibid.
64. Transparency International is an international organization that measures

corruption and publishes a comparative listing of corruption worldwide.
65. The Federal Security Service of the Russian Federation (FSB) is the suc-

cessor to the Soviet Committee of State Security (KGB). It is the primary
domestic security agency of the Russian Federation whose responsibili-
ties include ensuring security and gathering intelligence.

66. “IKEA Eyes Partnership Deals to Boost Russian Online Business,”
www.cnbc.com, October 10, 2018.

67. Cliff Venzon, “World’s Largest Ikea to Open in the Philippines,”
https://asia.nikkei.com, November 20, 2018.

https://asia.nikkei.com

http://www.cnbc.com

http://www.vedomosti.ru

http://indiatimes.com

https://retail.economictimes

http://www.intellinews.com

http://www.russia-briefing.com

https://money.cnn.com

http://www.theguardian.com

http://www.independent.co.uk

http://www.guardian.co.uk

http://www.rbth.com

http://www.nytimes.com

http://www.thelocal.se

http://www.intellinews.com

http://www.spiegel.de

http://www.businessweek.com

http://www.themoscowtimes.com

http://www.sptimes.ru

http://www.independent.co.uk

http://www.icsc.org

achievement versus ascription The source of power and status in society—
one’s achievement versus personal factors such as class, age, gender.

administrative distance Differences in bureaucratic patterns due to colonial ties,
language, religion, and the legal system.

affective appeals Negotiation appeals based on emotions and subjective feelings.

appropriability of technology The ability of an innovating firm to protect its tech-
nology from competitors and to obtain economic benefits from that technology.

appropriateness of monitoring (or control) systems Systems that will not run counter
to local practices, culture, and expectations.

appropriateness of technology The use of technology in production or processes
that is in line with local skills and level of development.

arenas An element of a firm’s strategy that focuses on “Where will a company will
be active . . . and with how much emphasis?” This element addresses product markets,
geographic areas, and customer markets as well as its core technologies and value
creation stages.

attribution The process in which a person looks for an explanation of another
person’s behavior.

axiomatic appeals Negotiation appeals based on the ideals generally accepted in
a society.

B2B Business-to-business electronic transactions.

B2C Business-to-consumer electronic transactions.

balance-sheet approach An approach to the compensation of expatriates that
equalizes the standard of living between the host and home countries, plus compensa-
tion for inconvenience.

born global Companies that start out with a global reach, typically by using their
Internet capabilities.

Brexit Refers to the United Kingdom leaving the EU. The term reflects the combi-
nation of Britain and exit to get Brexit.

business group An organizational model in which legally independent organiza-
tions that bind themselves together with formal and informal ties (e.g., cross-holding
of each other’s equity and/or debt securities) and use collaborative arrangements to
enhance their collective welfare.

CAFTA The U.S.–Central America Free Trade Agreement.

chaebol South Korea’s large industrial conglomerates of financially linked, and
often family-linked, companies that do business among themselves whenever
possible—for example, Daewoo.

civil law The comprehensive set of laws organized into a code; laws are interpreted
based on codes and statutes; used in Europe and Japan.

clustering Geographic concentrations of related, interdependent companies within
an industry that use the same suppliers, labor, and distribution channels.

codetermination (mitbestimmung) The participation of labor in the management
of a firm.

collective bargaining In the United States, for example, negotiations between a la-
bor union local and management; in Sweden and Germany, for example, negotiations
between the employer’s organization and a trade union at the industry level.

collectivism The tendency of a society toward tight social frameworks, emotional
dependence on belonging to an organization, and a strong belief in group decisions.

common law Law based on past court decisions and common custom (precedents);
used in the United States and other countries of English origin.

common market A group of countries committed to (1) removing all barriers to
the free flow of goods, services and factors of production between each other and the
(2) pursuit of a common external trade policy.

communication The process of sharing meaning by transmitting messages through
media such as words, behavior, or material artifacts.

comparative advantage A mutual benefit in the exchange of goods between coun-
tries in which each country exports products in which it is relatively more efficient in
production than other countries.

context in cultures (low to high) Low-context cultures, such as Germany, tend
to use explicit means of communication in words and readily available information;
high-context cultures, such as those in the Middle East, use more implicit means of
communication in which information is embedded in the nonverbal context and un-
derstanding of the people.

contract An agreement by the parties concerned to establish a set of rules to govern
a business transaction.

control system appropriateness The use of control systems that are individually
tailored to the practices and expectations of the host-country personnel.

convergence (of management styles, techniques, and so forth) The phenomenon
of increasing similarity of leadership styles resulting from a blending of cultures and
business practices through international institutions, as opposed to the divergence of
leadership styles necessary for different cultures and practices.

core competencies Important corporate resources or skills that bring competitive
advantages.

corporate social responsibility (CSR) The belief that corporate activities should
take into consideration the welfare of the various stakeholders affected by those ac-
tivities.

CSV Creating Shared Value (see shared value).

cross-cultural teams task-oriented groups that consist of people of at least two
different cultures.

cultural distance Differences in values, languages, religion, trust.

cultural diffusion When immigrants adopt some aspects of the local
culture while keeping aspects of their culture of origin.

cultural noise Cultural variables that undermine the communications of intended
meaning.

cultural savvy A working knowledge of the cultural variables affecting manage-
ment decisions.

cultural sensitivity (cultural empathy) A sense of awareness and caring about the
culture of other people.

culture The shared values, understandings, assumptions, and goals that over time
are passed on and imposed by members of a group or society.

culture shock A state of disorientation and anxiety that results from not knowing
how to behave in an unfamiliar culture.

culture-specific reward systems Motivational and compensation
approaches that reflect different motivational patterns across cultures.

customs union A group of countries committed to (1) removing all barriers
to the free flow of goods and services between each other and (2) the pursuit of a
common external trade policy.

cyber security The technologies, processes, and practices designed to safeguard
networks, devices, programs, and data from attack, damage, theft or unauthorized
access. Also called information technology security.

cybertheft Digital industrial espionage or interference (hacking); theft of financial or
personal information through computers.

degree of enforcement The relative degree of enforcement, in a particular country,
of the law regarding business behavior, which therefore determines the lower limit of
permissible behavior.

dependency (in managing political risk) Keeping the subsidiary and the host nation
dependent on the parent corporation.

differentiation Focusing on and specializing in specific markets.

differentiators An element of a firm’s strategy that focuses on “How will we win in
the marketplace? (e.g., image, customization, price, styling, product reliability)

digital economy A term that reflects all of the digital technology-based economic
processes, transactions, interactions and activities that disrupt and transform markets.

direct control The control of foreign subsidiaries and operations through the use
of appropriate international staffing and structure policies and meetings with home-
country executives (as compared with indirect control).

Glossary

378

GLOSSARY 379

distinctive competencies Strengths that allow companies to outperform rivals.

divergence See convergence.

domestic multiculturalism The diverse makeup of the workforce comprising
people from several cultures in the home (domestic) company.

e-business The integration of systems, processes, organizations, value chains, and
entire markets using Internet-based and related technologies and concepts.

e-commerce The sale of goods or services over the Internet.

e-commerce enablers Fulfillment specialists who provide other companies with
services such as website translation.

economic distance Differences in level of development, natural or human resources,
infrastructure, information, or knowledge.

economic logic An element of a firm’s strategy that focuses on “How will we obtain
our returns? (e.g., lowest cost through scale advantages, lowest cost through scope/
replication advantages, premium prices due to unmatched service and premium prices
due to proprietary product features).

economic risk The level of uncertainty about the ability of a country to meet its
financial obligations.

economic union A group of countries committed to (1) removing all barriers to
the free flow of goods, services and factors of production between each other; (2) the
adoption of a common currency; (3) the harmonization of tax rates; and the (4) pursuit
of a common external trade policy.

environmental assessment The continuous process of gathering and evaluating in-
formation about variables and events around the world that may pose threats or op-
portunities to the firm.

environmental scanning The process of gathering information and forecasting
relevant trends, competitive actions, and circumstances that will affect operations in
geographic areas of potential interest.

ethical relativism An approach to social responsibility in which a country adopts
the moral code of its host country.

ethnocentric approach An approach in which a company applies the morality used
in its home country—regardless of the host country’s system of ethics.

ethnocentric staffing approach An approach that fills key managerial positions
abroad with persons from headquarters—that is, with parent-country nationals (PCNs).

ethnocentrism The belief that the management techniques used in one’s own coun-
try are best no matter where or with whom they are applied.

expatriate One who works and lives in a foreign country but remains a citizen of the
country where the employing organization is headquartered.

expressive-oriented conflict Conflict that is handled indirectly and implicitly,
without clear delineation of the situation by the person handling it.

expropriation The seizure, with inadequate or no compensation, by a local govern-
ment of the foreign-owned assets of an MNC.

Foreign Corrupt Practices Act A 1977 law that prohibits most questionable payments
by U.S. companies to officials of foreign governments to gain business advantages.

foreign direct investment (FDI) A multinational firm’s ownership, in part or in
whole, of an operation in another country.

free trade area (FTA) A group of countries committed to (1) removing all barriers
to the free flow of goods and services between each other but pursuing independent
external trade policies.

franchising An international entry strategy by which a firm (the franchiser) licenses
its trademark, products, or services and operating principles to the franchisee in a host
country for an initial fee and ongoing royalties.

fully owned subsidiary An overseas operation started or bought by a firm that has
total ownership and control; starting or buying such an operation is often used as an
entry strategy. Also called wholly owned subsidiary.

generalizability of leadership styles The ability (or lack of ability) to generalize
leadership theory, research results, and effective leadership practices from one coun-
try to another.

geocentric staffing approach A staffing approach in which the best managers are
recruited throughout the company or outside the company, regardless of nationality—
often, third-country nationals (TCNs) are recruited.

geographical distance Remoteness, different time zones, weak transportation, or
weak communication links.

giri In Japan, it is a short-term obligation to friends, work colleagues, and other
persons of equal or lower status to oneself.

global corporate culture An integration of the business environments in which
firms currently operate, resulting from a dissolution of traditional boundaries and
from increasing links among MNCs.

global functional structure Operations are integrated into the activities and respon-
sibilities of each department to gain functional specialization and economies of scale.

globalism/globalization Global competition characterized by networks of interna-
tional linkages that bind countries, institutions, and people in an interdependent global
economy and a one-world market.

global geographic (area) structure Divisions are created to cover geographic regions;
each regional manager is responsible for operations and performance of the countries
within a given region.

globalization The global strategy of the integration of worldwide operations and
the development of standardized products and marketing approaches.

global management The process of developing strategies, designing and operating
systems, and working with people around the world to ensure sustained competitive
advantage.

global management team Collection of managers in or from several countries
who must rely on group collaboration if each member is to experience optimum
success and goal achievement.

global product (divisional) structure A single product (or product line) represent-
ed by a separate division; each division is headed by its own general manager and is
responsible for its own production and sales functions.

global staffing approach Staff recruited from within or outside of the company,
regardless of nationality.

global strategic alliances Working partnerships that are formed around MNCs
across national boundaries and often across industries.

governmentalism The tendency of a government to use its policy-setting role to
favor national interests rather than relying on market forces.

guanxi The intricate, pervasive network of personal relations that every Chinese
person carefully cultivates.

guanxihu A bond between specially connected firms, which generates preferential
treatment to members of the network.

haptic Characterized by a predilection for the sense of touch.

hedging Companies’ practice of taking out insurance or using local debt financing,
for example, to reduce asset loss due to political risk.

high-contact culture A culture in which people prefer to stand close, touch a great
deal, and experience a close sensory involvement.

high-context communication A type of communication in which people convey
messages indirectly and implicitly.

high-context cultures Cultures where feelings and thoughts are not explicitly
expressed; communication is implicit and as a function of the context and understand-
ing of the person.

horizontal organization (dynamic network) A structural approach that enables
the flexibility to be global and act local through horizontal coordination, shared pow-
er, and shared decision-making across international units and teams.

host-country national (HCN) A worker who is indigenous to the local country
where the plant is located.

human capital Direct or subcontracted employees whose labor becomes part of the
value-added assets of the firm’s product or service. MNCs are increasingly offshoring
(outsourcing) that asset around the world to lower the cost of human capital.

IJV control How a parent company ensures that the way a joint venture is managed
conforms to its own interest.

indirect control The control of foreign operations through the use of reports,
budgets, financial controls, and so forth. See also direct control.

individualism The tendency of people to look after themselves and their immediate
families only and to value democracy, individual initiative, and personal achievement.

information privacy The right to control information about oneself.

information technology (IT) Electronic systems to convey information.

inpatriates Managers with global experience who are transferred to the organiza-
tion’s headquarters country.

instrumental-oriented conflict An approach to conflict in which parties tend to
negotiate on the basis of factual information and logical analysis.

integration Coordination of markets.

intercultural communication Type of communication that occurs when a member
of one culture sends a message to a receiver who is a member of another culture.

internal analysis A way to determine which areas of a firm’s operations represent
strengths or weaknesses (currently or potentially) compared to competitors.

internal versus external locus of control Beliefs regarding whether a person con-
trols his own fate and events or are controlled by external forces.

380 GLOSSARY

international business The profit-related activities conducted across national
boundaries.

international business ethics The business conduct or morals of MNCs in their
relationships to all individuals and entities with whom they come in contact when
conducting business overseas.

international codes of conduct The codes of conduct of four major
international institutions that provide some consistent guidelines for multinational
enterprises relative to their moral approach to business behavior around the world.

internationalization The process by which a firm gradually changes in response to
the imperatives of international competition, domestic market saturation, desire for
expansion, new markets, and diversification.

international joint venture (IJV) An overseas business owned and controlled by
two or more partners; starting such a venture is often used as an entry strategy.

international management The process of planning, organizing, leading,
and controlling in a multicultural or cross-cultural environment.

international management teams Collections of managers from several countries
who must rely on group collaboration if each member is to achieve success.

international social responsibility The expectation that MNCs should be
concerned about the social and economic effects of their decisions regarding activities
in other countries.

Islamic law The dominant legal system in Islamic countries; based on religious
beliefs and followed in approximately 27 countries.

joint venture (JV) A new independent entity jointly created and owned by two or
more parent companies.

keiretsu Large Japanese conglomerates of financially linked, and often family-
linked, groups of companies, such as Mitsubishi, that do business among themselves
whenever possible.

kibun Feelings and attitudes (Korean word).

kinesic behavior Communication through posture, gestures, facial expressions, and
eye contact.

knowledge management The process by which the firm integrates and benefits
from the experiences and skills its employees learn, for example, when repatriating
managers from the host country.

labor relations The process through which managers and workers determine their
workplace relationships.

liability of foreignness All additional costs a firm operating in a market overseas
incurs that a local firm would not incur—in particular spatial costs, unfamiliarity
costs, host-country costs, and home-country costs.

licensing An international entry strategy by which a firm grants the rights to a firm
in the host country to produce or sell a product.

localization approach When firms focus on the local market needs for product or
service characteristics, distribution, customer support, and so on.

low-context cultures Societies where people convey their thoughts and plans in a
direct, straightforward communication style; communication and information is
vexplicit.

locus of decision making The relative level of decentralization in an organization—
that is, the level at which decisions of varying importance can be made—ranging from
all decisions made at headquarters to all made at the local subsidiary.

low-contact culture Cultures that prefer much less sensory involvement, standing
farther apart and touching far less; a distant style of body language.

low-context communication One in which people convey messages directly and
explicitly.

macropolitical risk event An event that affects all foreign firms doing business in
a country or region.

managing environmental interdependence The process by which international man-
agers accept and enact their role in the preservation of ecological balance on the earth.

managing interdependence The effective management of a long-term MNC
subsidiary–host-country relationship through cooperation and consideration for host
concerns.

maquiladoras U.S. manufacturing or assembly facilities operating just south of the
U.S.–Mexico border under special tax considerations.

masculinity The degree to which traditionally masculine values—assertiveness,
materialism, and the like—prevail in a society.

material culture See object language.

matrix structure A hybrid organization of overlapping responsibilities.

micropolitical risk event An event that affects one industry or company or only a
few companies.

MIS adequacy The ability to gather timely and accurate information necessary
for international management, especially in less-developed countries.

multiational enterprises (MNEs) See multinational corporations (MNCs).

monochronic cultures Cultures in which time is experienced and used in a linear
way; there is a past, present, and future, and time is treated as something to be spent,
saved, wasted, and so on. See also polychronic cultures.

moral idealism The relative emphasis on long-term, ethical, and moral criteria for
decisions versus short-term, cost–benefit criteria. See also utilitarianism.

moral universalism A moral standard toward social responsibility accepted by all
cultures.

multicultural leader A person who is effective in inspiring and influencing the
thinking, attitudes, and behavior of people from various cultural backgrounds.

multidomestic (or multi-local) strategy Emphasizing local markets, allowing
more local responsiveness and specialization.

multinational corporation (MNC) A corporation that engages in production or
service activities through its own affiliates in several countries, maintains control over
the policies of those affiliates, and manages from a global perspective.

multinational enterprises (MNEs) See multinational corporations (MNCs).

nationalism The practice by a country of rallying public opinion in favor of national
goals and against foreign influences.

nationalization The forced sale of an MNC’s assets to local buyers with some com-
pensation to the firm, perhaps leaving a minority ownership with the MNC; often
involves the takeover of an entire industry, such as the oil industry.

nearshoring Outsourcing jobs close to the domestic country of the firm or close to
the firm’s markets.

negotiation The process by which two or more parties meet to try to reach
agreement regarding conflicting interests.

neutral versus affective Level of emotional orientation in relationships.

nintai In Japan, it refers to patience.

noise Anything that serves to undermine the communication of the intended meaning.

noncomparability of performance data across countries The control problem
caused by the difficulty of comparing performance data across various countries be-
cause of the variables that make that information appear different.

nontask sounding (nemawashi) General, polite conversation and informal com-
munication before meetings.

nonverbal communication (body language) The transfer of meaning through the
use of body language, time, and space.

object language (material culture) How we communicate through material arti-
facts, whether architecture, office design and furniture, clothing, cars, or cosmetics.

objective–subjective decision-making approach The relative level of rationality
and objectivity used in making decisions versus the level of subjective factors, such
as emotions and ideals.

on In Japan, it is a lifelong indebtedness, typically to the emperor, a parent, or sensai.

open systems model The view that all factors inside and outside a firm—environment,
organization, and management—work together as a dynamic, interdependent system.

openness Traits such as open-mindedness, tolerance for ambiguity, and extrovertedness.

organizational culture (as different from societal culture) The norms and generally ac-
cepted ways of doing things within an organization.

outsourcing or offshoring The use of professional, skilled, or low-skilled workers
located in countries other than that in which the firm is domiciled.

paralanguage How something is said rather than the content—the rate of speech,
the tone and inflection of voice, other noises, laughing, or yawning.

parent-country national (PCN) An employee from the firm’s home country sent to
work in the firm’s operations in another country (see also expatriate).

parochialism The expectation that foreigners should automatically fall into host-
country patterns of behavior.

political risk The potential for governmental actions or politically motivated events to
occur in a country that will adversely affect the long-run profitability or value of a firm.

political union A central political apparatus coordinates economic, social, and
foreign policy.

polycentric staffing approach An MNC policy of using host-country nationals
(HCNs) to fill key positions in the host country.

polychronic cultures Cultures that welcome the simultaneous occurrence of many
things and emphasize involvement with people over specific time commitments or
compartmentalized activities. See also monochronic cultures.

posturing General discussion that sets the tone for negotiation meetings.

GLOSSARY 381

power distance The extent to which subordinates accept unequal power and a
hierarchical system in a company.

privatization The sale of government-owned operations to private investors.

projective cognitive similarity The assumption that others perceive, judge, think,
and reason in the same way.

proxemics The distance between people (personal space) with which a person feels
comfortable.

protectionism A country’s use of tariff and nontariff barriers to close its borders
partially or completely to various imported products that would compete with do-
mestic products.

quantitative approach A means to develop a composite index used to monitor a
country’s creditworthiness and compare with other countries.

questionable payments Business payments that raise significant ethical issues
about appropriate moral behavior in either a host nation or other nations.

regiocentric staffing approach An approach in which recruiting for international
managers is done on a regional basis and may comprise a specific mix of PCNs,
HCNs, and TCNs.

regional economic groups Agreements among countries in a geo-
graphic region to reduce and ultimately remove tariff and nontariff barriers
to the free flow of goods, services, and factors of production between each other.

regionalization strategy The global corporate strategy that links markets within
regions and allows managers in each region to formulate their own regional strategy
and cooperate as quasi-independent subsidiaries.

regulatory environment The many laws and courts of the nation in which an inter-
national manager works.

relationship building The process of getting to know one’s contacts in a host country
and building mutual trust before embarking on business discussions and transactions.

repatriation The process of reintegration of expatriates into the headquarters
organization and career ladder as well as into the social environment.

reshoring Bringing outsourced jobs back to the firm’s domestic country.

resilience Traits such as having an internal locus of control, persistence, a tolerance
of ambiguity, and resourcefulness.

reverse culture shock A state of disorientation and anxiety that results from return-
ing to one’s own culture.

ringi system Bottom-up decision-making process used in Japanese organizations.

self-reference criterion An unconscious reference to one’s own cultural values;
understanding and relating to others only from one’s own cultural frame of reference.

separation The retention of distinct identities by minority groups unwilling or un-
able to adapt to the dominant culture.

shared value (CSV: Creating Shared Value) When the firm initiates internal and
community plans to integrate with the community for mutual long-term benefits.

specific or diffuse Relative level of privacy in relationships.

stages model See structural evolution.

stereotyping The assumption that every member of a society or subculture has the
same characteristics or traits, without regard to individual differences.

staging An element of a firm’s strategy that focuses on, “What will be our speed and
sequence of moves?” (e.g., speed of expansion and sequence of initiatives).

strategic alliances Partnerships between two or more firms that decide they can
pursue their mutual goals better by combining their resources and competitive
advantages.

strategic alliances (global) Working partnerships between MNCs across national
boundaries and often across industries.

strategic business unit (SBU) A self-contained business within a company with its
own functional departments and accounting systems.

strategic freedom of an IJV The relative amount of control that an international
joint venture will have, compared with the parents, in choosing suppliers, product lines,
customers, and so on.

strategic implementation The process by which strategic plans are realized
through the establishment of a system of fits throughout an organization with the de-
sired strategy—for example, in organizational structure, staffing, and operations.

strategic planning The process by which a firm’s managers consider the future
prospects for their company and evaluate and decide on strategy to achieve long-term
objectives.

strategy The basic means by which a company competes: the choice of business or
businesses in which it operates and how it differentiates itself from its competitors in
those businesses.

structural evolution (stages model) The stages of change in an organizational
structure that follow the evolution of the internationalization process.

subcultures Groups within a societal culture that differ in some degree from one
another.

subculture shock A state of disorientation and anxiety that results from the unfa-
miliar circumstances and behaviors encountered when exposed to a different cultural
group in a country than one the person is familiar with.

SWOT analysis An assessment of a firm’s capabilities (strengths and weaknesses)
relative to those of its competitors as pertinent to the opportunities and threats in the
environment for those firms.

subsidiary A business incorporated in a foreign country in which the parent corpo-
ration holds an ownership position.

sustainability The ability for firms to operate on the principles of sustainable
development.

sustainable development Business activities that meet the needs of the stakehold-
ers in the present while also protecting and sustaining future needs for human and
natural resources.

synergy The greater level of effectiveness that can result from combined group
effort than from the total of each individual’s efforts alone.

technoglobalism A phenomenon in which the rapid developments in information
and communication technologies (ICTs) are propelling globalization and vice versa.

terrorism The use of, or threat to use, violence for ideological or political purposes.

third-country nationals (TCNs) Employees hired from a country other than the
headquarters or the host country of a firm’s activities.

transnational corporations (TNCs) Multinational corporations that are truly glo-
balizing by viewing the world as one market and crossing boundaries for whatever
functions or resources are most efficiently available; structural coordination reflects
the ability to integrate globally while retaining local flexibility; typically owned and
managed by nationals from different countries.

transpatriate A term similar to expatriate but referring to managers who may be
from any country other than that in which the firm is domiciled and who tend to work
in several countries over time—that is, a manager who has no true corporate home.

turnkey operation When a company designs and constructs a facility abroad, trains
local personnel, and turns the key over to local management, for a fee.

uncertainty avoidance The extent to which people feel threatened by ambiguous situ-
ations; in a company, this results in formal rules and processes to provide more security.

universalism versus particularism The relative obligation toward an objective ap-
plication of rules, versus a more personal and individual application.

United States-Mexico-Canada Agreement (USMCA) The new free trade agree-
ment between the United States, Mexico, and Canada signed on November 30, 2018.
It replaces NAFTA.

utilitarianism The relative emphasis on short-term cost–benefit (utilitarian) criteria
for decisions versus those of long-term, ethical, and moral concerns. See also moral
idealism.

values A person or group’s ideas and convictions about what is important, good or
bad, right or wrong.

vehicles An element of a firm’s strategy that focuses on, “How will we get there?”
In particular, how will the firm serve the product, customer and geographic markets?
(e.g., internal development, greenfield operations, joint ventures, licensing/franchis-
ing, acquisitions and exporting).

virtual global teams Employees in various locations around the world who coordi-
nate their work and decisions through teleconferencing, email, and so on.

wholly owned subsidiary See fully owned subsidiary.

work centrality The degree of general importance that working has in the life of an
individual at any given time.

workforce diversity The phenomenon of increasing ethnic diversity in the workforce
in the United States and many other countries because of diverse populations and joint
ventures; this results in intercultural working environments in domestic companies.

works council In Germany, an employee group that shares plant-level responsibility
with managers.

World Trade Organization (WTO) A formal structure for continued negotiations
to reduce trade barriers and settle trade disputes.

Index

A
A. T. Kearney Company, 5, 22, 213, 322
ABB’s power grids business, 152–153
Accenture, 121, 292
accountability and trust, 121
achievement versus ascription

dimension, 92
acquisitions, PC3–25–PC3–30
acquisitiveness for money, 353
adaptation to political regulatory

environment, 26
Adidas, 242, 299
administrative distance, 206
affective dimension, 91–92
Afghanistan, 19, 26, PC1–17
Africa

bribery and, 58–59
child labor and, PC1–1, PC1–11
corruption in, 191
as developing economy, 22
global competition, 186
growth opportunities in, 191–193
as relationship-oriented country, 94

African Union (AU), 22
AFTA. See ASEAN Free Trade Area
Agervi, Mats, 232
Aggarwal, Neeraj, 268
Aghi, Mukesh, 178, 179
Agnefjall, Peter, PC5–4–PC5–5
AGS. See Amazon Global Store
AI. See artificial intelligence
Al-Sabah, Meshaal Jaber Al-Ahmed, 194
Albion Stone, 2
Alcoa. See Aluminum Company of

America
Alibaba Group, 30, 209, 228–229, PC3–9,

PC3–23
AliExpress, 228–229
All-China Federation of Trade Unions,

338–339
Allah wills (bukra insha Allah), 108
Allen, Charlie, 3
allowances for expatriates, 308
Aluminum Company of America (Alcoa),

259
amae principle, 100, 174
Amazon Fashion, PC3–1
Amazon Global Store (AGS), PC3–6
Amazon Launchpad, PC3–7
Amazon Web Services (AWS), PC3–1,

PC3–6
Amazon.com

Amazon Prime, 187
e-business of, 34
founding of, PC3–16–PC3–17
in India, 178–179, 187
joint venture formation, 214
in MENA region, PC3–16–PC3–17,

PC3–21–PC3–21
Amazon.com in China

competition concerns, PC3–8–PC3–10
e-commerce market, PC3–2–PC3–5
expansion efforts, PC3–6–PC3–7
fraudulent/counterfeit sellers, PC3–10
future of, PC3–11
government regulations, PC3–10–

PC3–11

introduction to, PC3–1
Joyo.com, PC3–1, PC3–5–PC3–6
localization efforts, PC3–7–PC3–8
overview, PC3–1–PC3–2

Amazon’s Kindle Store, PC3–9
Amazon.UK, PC3–8
Ambani, Mukesh, 179
ambiguity tolerance, 326
Andringa, Mary Vermeer, 248
animal testing campaign, PC1–17
anti-discrimination policies, PC4–6
anti-trade union stance, 52, PC1–18
anti-trafficking organizations, PC1–9
antidumping laws, 199
Aon Risk Solutions Company, 24
Apple, 60, 172, 201, 264
Applied Materials, 300
appropriability of technology, 30–31
appropriateness of monitoring (or control)

systems, 278
AR. See augmented reality
Arab, Hosam, PC3–19
Arab countries. See Souq.com in MENA

region
Arab Spring uprisings, 24–25
Archer Daniels Midland Co, PC1–4
arenas in Strategy Diamond, 203
Argentina, 8, 12, 20, 86
arm’s-length relationships, 119
Arslanian, Henri, 191
artificial intelligence (AI), 117, 142
Artzt, Edwin L., 82
ascription dimension, 92
ASEAN. See Association of Southeast

Asian Nations
ASEAN Free Trade Area (AFTA), 15
Asia/Asia-Pacific region

Amazon in, PC3–1, PC3–5, PC3–16
Body Shop in, 19
corporate competition, 15–16, 337
cultural communication, 132
e-business in, 96, 208, 210, PC3–18
economic growth, 14–15
employment opportunities, 312
expatriates in, 320, 323, 325, 332
globalization and, 264, 268
human rights and, 51, 56
investment banking business in, 59
leadership styles in, 81
macho attitudes of men, 129
manufacturing operations in, 188–189
merger process in, PC3–29
relationship-building in, 156, 158
saving face, 103
service sector outsourcing, 213
sexual harassment concerns, PC4–13
suppliers from, 242
Tata Group in, 9, 246

Asics Europe, 349–350
assertiveness and culture, 86, 102
assignment-specific costs of expatriates,

307
Association of Southeast Asian Nations

(ASEAN), 15, 19
AT&T, PC3–29
attribution process, 119
AU. See African Union

augmented reality (AR), 117
Australia

business expansion into, 245, 259
ethical standards, 57–58
expatriates in, 287, 298, 323
vehicle manufacturing, 8

Austria, 86
autocratic leadership, 173, 366–367,

370–372
autonomous leadership, 369
AWS. See Amazon Web Services
Axtel, Roger, 131

B
ba principle, 101
Bader, Benjamin, 299
Bakus, Paul, PC1–4
balance sheet approach, 307–308
Bandar, Reema bint, 76
Bangladesh, 8, 19, 45, 50, 351
bankruptcy filings, 99, 258, 335, PC4–6
Barber, Melanie, PC1–8
bargaining power, 64, 202, 209, 235
Barra, Mary, 230, 265
Batato, Magdi, PC1–1, PC1–7
B2B (business-to-business) transactions,

33–34, 205, 209–210, 232
B2C (business-to-consumer) transactions,

34, 205, 209, 232, PC3–5, PC3–18
BCG. See Boston Consulting Group
BCG survey, 287
Beauchemin, Michel, PC4–14
behaviors

ethical behavior, 44
eye behavior (oculesics), 132
face behavior in negotiations, 166–167
future-oriented behaviors, 86
kinesic behavior, 131

being-oriented cultures, 102–103, 355
Belgium, 365
Bell Labs, 237–238
Bellon, Sophie, 365
Belloni, Toni, 205
benefit value and trust, 121
benefits for expatriates, 307–309
Berdan, Stacie, 324–325
Bertelsmann, 312
Betzel, Peter, 46
Bewkes, Jeffrey, 187
Bezos, Jeff, PC3–1, PC3–16, PC3–21
Bhanpurawala, Saifuddin, 177
Bhutan, 19
biculturalism stage of culture shock, 304
bilateral trade, 20
Bing (Microsoft), 142
Bing search engine, 52
Bio-Bridges program, PC1–23
Black Friday, PC3–20
Blackstone, 237
blockchain technology, 242–243
Blue Focus, 375
BMS. See Building Management Systems
BMW, 184–186, 229–230
board of directors, 159, 270, 281–282, 364,

PC3–29
Body Shop International Plc.

animal testing campaign, PC1–17
Community Fair Trade, PC1–15–

PC1–16
core values, PC1–15–PC1–18
criticism of, PC1–18–PC1–19
CSR strategy, PC1–13–PC1–24
defense of human rights, PC1–17
‘Enrich Not Exploit’ commitment,

PC1–13, PC1–21–PC1–23
future of, PC1–24
as green business, PC1–18
L’Oréal SA takeover, PC1–13, PC1–

14–PC1–15, PC1–19
marketing strategy, PC1–23–PC1–24
overview of, PC1–13–PC1–14
revival of, PC1–19–PC1–21
self-esteem and, PC1–16–PC1–17
strategy formulation, PC1–21

Bolivia, 12, 20, 310
Borders Bookstores, 258
Borkowski, Mark, PC4–8
born global, defined, 207
Boston Consulting Group (BCG), 5, 186,

297, 366
BPO. See Business Process Outsourcing;

Indian Business Process
Outsourcing

Brabeck-Letmathe, Peter, 263
brand, defined, 288
Brazil

business negotiations, 106
corruption in, 20–21
cross-cultural adjustment problems, 302
culture and management styles, 104–107
economic growth, 20–21
etiquette, 105–107
family values, 105
foreign investment confidence, 5–6
language in, 105
negotiations, 162
society and culture, 105
staffing operations, 287
vehicle manufacturing, 8

Brent, David, 97
Brexit (Britain to exit the European Union)

global business management and, 2–4
impact of, 2–3, 13–14, 257–258
international relocation and, 188–190,

266, 345–346
no-deal Brexit, 223–224

BRH Hardy, 207
bribery, 58–59
Britain. See United Kingdom
British Chambers of Commerce, 223
British Telecom (BT) Conference Call

system, 328
Brookfield Global Relocation Trends Survey

(GRTS), 286, 296–297, 299
Buddhism, 83, 85
Building Management Systems (BMS),

PC1–18
Burke, Tony, 337
Business Disability International, 375
business ethics, 35
Business Process Outsourcing (BPO), 245
business-to-business (B2B) transactions,

33–34, 205, 209–210, 232

382

INDEX 383

Business-to-Customer (B2C) industries,
33–34, 205, 209, 232, PC3–5,
PC3–18

Business-to-Enterprise (B2E) industries,
232

Business-to-Partner (B2P) industries, 232
Business West, 3

C
CAD House, 60
cadre development. See expatriates
CAFTA-DR. See Dominican Republic-

Central America FTA
CAGE. See cultural, administrative,

geographic, and economic
California False Advertising law, PC1–8
California Transparency in Supply Chains

Act, PC1–3, PC1–8
California Unfair Competition Law (UCL),

PC1–8
Canada

bilateral trade, 20
ethical standards, 57
foreign investment confidence, 5–6
legal environment, 29
NAFTA and, 20–21
vehicle manufacturing, 8

capitalism, 6, 85, 109
career management of expatriates,

322–326
Cargill, Inc, PC1–4
Caride, Eduardo, 305
caring culture, 367
Carrefour, 202, PC3–4
Cartier, Jacques, PC4–5
Cartus, 307, 320, 322
Casablanca Finance City (CFC), 193
cash-on-delivery (COD), PC3–2–PC3–3,

PC3–15, PC3–19
CashU system, PC3–19
CCCS. See Competition and Consumer

Commission of Singapore
CD. See cultural distance
censorship, 35, 51–53, 142, 229, 246,

PC3–1, PC3–7
centralization–decentralization continuum,

275
CEO. See chief executive officer
CEP. See Council on Economic Priorities
CFC. See Casablanca Finance City
CFIUS. See Committee on Foreign

Investment in the United States
CFO. See chief financial officer
CFT. See Community Fair Trade
Chaddha, Jagdeep, 97
Chang, Elaine, PC3–1, PC3–6
Changan Ford, 184–186
charismatic leader, 368–370
Charity Commission for England and

Wales, PC1–18
Chavez, Hugo, 25
Chawla, Wilkins, 97
chief executive officer (CEO), 239, 291,

333
chief financial officer (CFO), 291
chief technology officer (CTO), 117
Child, John, 120
Child Labor Monitoring and Remediation

System (CLMRS), PC1–5–PC1–6
child labor/slavery, PC1–1–PC1–5
Child Labour and Women’s Empowerment

Steering Group, PC1–7
China

autocratic leadership, 173
blockchain technology, 243
censorship in, 35, 51–53, 142, 246,

PC3–1, PC3–7
corporate competition, 15–16
corruption in, 16, 28
cross-cultural adjustment problems, 302
Daimler Trucks and Buses China Ltd.,

PC4–1–PC4–3
Dolce & Gabbana (D&G) fashion show,

146–149

economic growth, 8, 17–19
expatriates in, 298, 321, 324
exporting, 16–18, 22, 239
family small businesses, 109
foreign direct investment in, 45–46
foreign investment confidence, 5–6
foreign trade, 22
free-expression rules, 246
garment factories, 53
geopolitical tensions, 24
global strategic alliances, 232–235
globalization and, 109
human capital, 10
human rights challenges, 51–53
individualism, 90
international strategic alliances, 206
Internet data restrictions, 61
labor unions, 338–339
legal environment, 28
manufacturing in, 2
motivation culture in, 355, 360
multinational corporations in, 184–186
negotiations, 157, 165–168
networks of long-standing relationships,

119–121
non-verbal communication, 131
social media in, 117
spinoff businesses, 267–268
staffing operations, 286–287
Starbucks in, 310–311
strategic implementation, 239, 248–249
tips for doing business in, 18–19
as work-oriented, 352

China Internet Network Information
Center (CNNIC), PC3–3

China Labor Watch, 339
China (Shanghai) Free Trade Zone (FTZ),

PC3–6
Chinese Communist Party, 339
Chinese Labour Bulletin, 51
Chinese Value Survey, 91
Choo Mi-ae, 96
Chopra, Gaurav, 97–98
Christianity, 83, 84–85
Chrysler, 251
Chubb Group, 231
Chugh, Rajiv, 178
Cirque du Soleil

background on, PC4–5–PC4–7
career transition, PC4–14
challenges, PC4–14–PC4–15
communication transparency,

PC4–11–PC4–12
culture at, PC4–8–PC4–9
employee benefits, PC4–9–PC4–911
future of, PC4–15
health and safety, PC4–12–PC4–13
introduction to, PC4–5
selection and training, PC4–7–PC4–8
social involvement, PC4–12

Cisco Systems, 9, 117, 269
CISG. See United Nations Convention on

Contracts for the International Sale
of Goods

Citigroup, 62, 257–258, 313
Citroën, 185
Civil Aviation Authority (UK), 130
civil law, 28–29
Clark, B., 130
Clark, Greg, 3, 266
Clavey, Michael, 238
CLMRS. See Child Labor Monitoring and

Remediation System
clustering, 212
CNNIC. See China Internet Network

Information Center
CO2 emissions, PC1–18
coalition building, 159
Coca-Cola Co., 9, 67, 294
cocoa supply chain, PC1–3–PC1–5
COD. See cash-on-delivery
code of conduct, 51, 55, 268, PC1–1,

PC1–11, PC5–1
codetermination law (mitbestimmung),

341–343

Colgate-Palmolive, 343
collaboration skills, 35
collective agreements, 338
collective bargaining, 341
collectivism, 89, 360
Collins, Les, 111–113
Committee on Foreign Investment in the

United States (CFIUS), PC3–29
common law, 28–29
common market, 12
communication. See also cross-cultural

communication
in Cirque du Soleil, PC4–11–PC4–12
cultural communications, 34, 78, 109,

117–119, 127, 135, 140–145, 306
defined, 118
face-to-face communication, 141, 143,

302, 367
implicit communication style, 355
intercultural communication, 78, 119
in Latin America, 103
nonverbal communication, 34, 121–122,

131, 134, 138, 144–145, 355
skills in, 34–35

Community Fair Trade (CFT),
PC1–15–PC1–16

comparative advantage, 201
comparative management

cross-cultural communication,
137–139

of expatriates, 300–301
global business management, 17–19
management and, 51–53
motivation culture, 355–357
role of culture, 99–103
strategic implementation, 237–238

compensation
for expatriates, 307–309
reward systems as, 47, 68, 94, 356,

359–361
transparency in, 360

competition
corporate competition, 15–16
dynamics of, 4
globalization of competitors, 187–188
international competition effects,

198–199
for money, 353
for staffing talent, 287

Competition and Consumer Commission
of Singapore (CCCS), 16

competitive analysis, 199–201
Confederation of Mexican Workers

(Confederación de Trabajadores
Mexicanos, CTM), 341

conflict resolution, 165, 332
Confucian dynamism, 91
Confucianism, 100
consensus building, 159, 175, PC3–28
consideration continuum leadership, 367
contextual intelligence, 80
contingency leadership, 368–372
contingency management, 82–83
contingency theory, 276
contract law, 29
contract manufacturing, 212
control systems in organizational struc-

tures, 276–278
convergence, 80–81, 339–340
cooperative agreements, defined, 229
Corbat, Mike, 257
Corning, 232
corporate competition. See competition
corporate social responsibility (CSR)

Body Shop International Plc., PC1–
13–PC1–24

business benefits from, 47
community-centered, 356
defined, 35, 44
global consensus vs. regional variation,

47–48
human rights challenges, 51–53
of MNCs, 44–53
shared value and, 48
subsistence farmers, 48–49

sustainability and interdependence,
66–69

corruption
in Africa, 191
in Brazil, 20–21
bribery as, 58–59
in business, PC5–7–PC5–9
in China, 16, 28
cross-border M&As and, PC3–27
emerging markets and, 217
fight against, 57–60
in India, 18
in Russia, 21, 238, PC5–1
Samsung and, 44

Corruption Perceptions Index, 57
Cotterill, Joseph, 59–60
Council on Economic Priorities

(CEP), 53
Cox, Katherine, 299
craft unions, 337–338
Creating Shared Value (CSV), 48, 50
Creation Studio, PC4–7–PC4–8
creeping expropriation, 25
critical operational value differences,

93–95
critical thinking skills, 35
cross-border alliances, 229, 232–233
cross-border e-commerce, PC3–2–PC3–5
cross-border mergers and acquisitions,

PC3–25–PC3–30
cross-cultural communication

attitudes in, 127
comparative management, 137–139
context for, 135–137
cultural sensitivity, 142–143
cultural variables in, 121–127
decoding feedback, 144
Dolce & Gabbana (D&G) fashion show,

146–149
encoding language, 143
GLOBE research on culture, 121
information systems, 140–141
information technology, 141–142
introduction to, 34, 118
language in, 128–129
management of, 142–145
miscommunication, 136–137
native English speakers, 130–131
noise in, 118, 119
non-verbal communication, 131–134,

137
process of, 118–119
second-language use, 129–131
selective transmission, 143
social media and, 116–117
social organizations, 127
societal roles, 128
summary of, 145
thought patterns, 127–128
time and, 134
trust in, 119–121

cross-cultural leadership, 366–367
cross-cultural management, 82–83,

373–375
cross-cultural motivation, 351–361
cross-cultural societal ethics, 56
cross-cultural training, 78, 304–307,

PC2–1–PC2–4
Crown Corporations, 29
Crown World Mobility, 290
CSR. See corporate social responsibility
CSV. See Creating Shared Value
CTL. See cultural tightness and looseness
CTO. See chief technology officer
Cuba, 103, 193–195
cultural, administrative, geographic, and

economic (CAGE), 206
cultural adaptation, 144, 288, PC4–13
cultural clusters, 87
cultural communications, 34, 78, 109,

117–119, 127, 135, 140–145, 306
cultural diffusion, 79
cultural distance (CD), 80, 206–207,

219–221, 249

384 INDEX

cultural diversity, 78, 82, 126, 366,
PC4–15

cultural divide, 101, 331
cultural empathy, 78, 142, 297, 362
cultural intelligence, 77, 365–366
cultural noise, 119–120, 139, 145
cultural profiles, 78, 98–103
cultural revolution, 97–98
cultural sensitivity, 78, 82, 142–143
cultural tightness and looseness (CTL),

351
culture

assertiveness and, 86
consequence or cause, 92–93
critical operational value differences,

93–95
decision-making and, 170–172
defined, 288
effects on management, 80–83
future-oriented behaviors, 86
global styles, 104–109
GLOBE Project, 85–87
group-focused cultures, 163
high-/low-contact cultures, 133
high-/low-context cultures, 135, 169
humane orientation, 87
impact on organizations, 78–85
individual-focused cultures, 163
influence on strategic implementation,

249–251
Internet and, 95–98
introduction to, 76–78
material culture, 133
monochronic/polychronic cultures, 134
motivation and, 355–357, 359
national culture, 14, 79, 83, 91, 94, 174,

205, 233, 277
organizational culture, 79–80, 231, 247,

288, 366
performance orientation, 86
polychronic cultures, 134
religion and, 28, 77, 79, 83–85, 107,

137, 206
religion and workplace, 83–85
in social media, 76–77
societal culture, 36, 78–79, 78–80, 83,

221, 248
summary of, 109
transnational cultures, 333
value dimensions, 85–95
variables in cross-cultural communica-

tion, 121–127
workaholic culture, 96

Culture Classification Model, 94
The Culture Map (Meyer), 136
culture shock, 298, 304, 323, PC4–8,

PC4–12
cumulative learning, 234
Cusick, Matthew, PC4–6
customer demands, 190
customs union, 12
cyber security, 4, 60–61, 117, PC2–1,

PC3–11
cyberattack, PC2–1
cybertheft, 4, PC2–1
Czech Republic, 365

D
Dahlgren, Lennart, PC5–5, PC5–7, PC5–8
Daimler, 229–230
Daimler Trucks and Buses China Ltd.

(DTBC), PC4–1–PC4–3
Danish Institute for Human Rights

(DIHR), PC1–6–PC1–7
data breaches, 60, 71–72, 117
Data Inspection Board (DIB), 95
Data Protection Act (DPA), 95
Data Protection Regulation, 71–72
Davis, Christopher, PC1–13, PC1–15,

PC1–23, PC1–24
de Forest, Mariah, 357
decision-making

approaches to, 173
cultural influence on, 170–172

equity-based decisions, 219, 230, 360
ethics and, 61–63
introduction to, 153, 169–170
in Japan, 170, 173, 174–175
leadership strategies, 362
locus of, 233
nema-washi in, 174
ringi in, 174
shinyo in, 174
strategic planning models, 202–203
summary of, 175
top-down decision making, 159

Declaration of Joint Action, PC1–4
decoding feedback, 144
deference in business, 102
Dell Computer, 96, 207, 242, 272
DeltX, PC2–1
democratic leadership, 366–367
Democratic Republic of the Congo (DRC),

243, PC1–17
Denmark, 10, 14
dependency, 26, 234
developing economies

defined, 22
e-waste issues, 68
global trends in, 5, 9, 246
interdependent nature of, 66
investing in, 217, 287
in Latin America, 103
mergers and acquisitions in, 215
MNC impact on, 45
rapidly developing economies, 5, 103,

269
DIB. See Data Inspection Board
differentiation, defined, 264
differentiators in Strategy Diamond, 204
digital age technology, 3, 30, 121, 148
digital marketing, PC1–1, PC3–22
direct coordinating mechanisms, 277
directive leadership, 366–367
Dish Network, PC3–29
Disney, 201, 211, 233, 237, PC4–6
distinctive competencies, 200–201, 288
divergence in labor relations, 339–340
divergent national cultures, 205
Dmitriev, Kirill, 229
Dolce & Gabbana (D&G) fashion show,

146–149
domestic structure plus export department,

260
domestic structure plus foreign subsidiary,

260
Dominican Republic-Central America FTA

(CAFTA-DR), 21
Dow Chemical, 25
DPA. See Data Protection Act
Dragone, Franco, PC4–8
Dragonfly, 61
Drake, Lisa, 243
DRC. See Democratic Republic of the

Congo
DTBC. See Daimler Trucks and Buses

China Ltd.
dual headquarters, 265
Duerte, Rodrigo, 15
DUHR. See Danish Institute for Human

Rights
duo lao, duo de (more work, more pay),

360
Dupont, 34, 307
Dupoux, Patrick, 193
Durov, Pavel, 229
Dyson, 188–190

E
e-businesses

costs of, 96
global expansion strategies, 208–210
overview of, 32–34
training priorities for, 312

e-commerce
Amazon.com in China, PC3–2–PC3–5
global vs. local, 209–210, 246
impact on strategic implementation, 251

in India, 177–179
overview of, 33
Souq.com in MENA region, PC3–15–

PC3–16, PC3–17–PC3–19
e-global strategies, 209–210
e-local strategies, 209–210
e-negotiations, 165
e-waste, 68
EAP. See Employee Assistance Program
Eastern Europe, 312
Eastman Kodak Inc., 258
eBay, 205, 209–210, 333, PC3–8, PC3–18
ECA International, 324
economic distance, 206
economic environment, 23–28
economic growth

African Union, 22
Asia, 14–16
Brazil, 20–21
China, 17–19
global, 8
India, 18–19
Middle East, 21–22
Russian Federation, 21

economic integration, 4, 12, 15
economic logic in Strategy Diamond, 204
economic recovery, 5
economic risk, 5, 27–28, 197, 220
economic union, 12
economies of scale, 190, 206
Economist Corporate Network, 291
economy/economies, 206, 360. See also

developing economies
ECPAT International, PC1–17
ECRA. See Ethical Consumer Research

Association
EEA. See European Economic Area
egalitarianism, 360, 369
Egypt, 21, PC3–18, PC3–20
EJVs. See equity joint ventures
el patrón (manager), 356
ElringKlinger AG, 341
Elumelu, Tony, 191
Emaar Properties PJSC, PC3–15, PC3–17,

PC3–22
EMC. See export management company
emergent structural forms, 268–273
emerging markets

firms in, 186
staffing challenges, 286–287
strategic implementation in, 243–246
strategic planning for, 216–217

Employee Assistance Program (EAP),
PC4–13

employee benefits, PC4–9–PC4–911
employee happiness, 367
encoding language, 143
England. See United Kingdom
‘Enrich Not Exploit’ commitment,

PC1–13, PC1–21–PC1–23
Enser, David, 299
enterprise resource planning (ERP), 141
Entine, Jon, PC1–18
entrepreneurial ecosystems, 11
entry alternatives evaluation, 210–216
entry barriers, 199
environment. See also labor relations envi-

ronment and system; technological
environment

adaptation to political regulatory
environment, 26

global industrialization impact, 68
green business, PC1–18
of leadership, 361–366
legal environment, 28–29
multicultural environments, 4
political environment, 23–28

environmental assessment strategy,
197–198

environmental information sources,
199–202

environmental scanning, 197–198
Equity Bank, 191
equity-based decisions, 219, 230, 360
equity-driven pay, 360

equity joint ventures (EJVs), 219
equity strategic alliances, 229, 230
Ergen, Charlie, PC3–29
ERP. See enterprise resource planning
Essential Do’s and Taboos (Axtel), 131
ethical behavior, defined, 44
Ethical Consumer Research Association

(ECRA), PC1–2
ethical relativism, 47
ethics

bribery concerns, 58–60
cross-cultural societal ethics, 56
decision-making and, 61–63
Facebook data breach, 60, 71–72
in global business management, 55–63
international business ethics, 56
international codes of conduct, 54, 61
introduction to, 55–56
moral idealism, 173
moral universalism, 47–48
slavery in supply chain, PC1–1–PC1–11
in technology uses, 60–61

ethnocentrism, 47, 82, 291
etiquette in Brazil, 105–107
EU Directive on Data Protection, 60
Eu Yan Sang Holdings Ltd., 109
Eurocams, 2–3
European Airbus, 34
European Central Bank, 341
European Commission, 8, 334
European DIGITAL SME Alliance, 241
European Economic Area (EEA), 257
European Free Trade Association, 12
European Round Table of Industrialists, 14
European Union (EU). See also Brexit

Amazon expansion in, PC3–6
animal testing and, PC1–17
antitrust/competition authorities from,

PC3–29
cross-border competition, 16
digital SMEs, 241
General Data Protection Regulation, 323
joint ventures in, 215
labor relations, 340–341
parity in wage rates, 340

European Women on Boards (EWOB),
364–365

Evans, Michael, 229
expatriates

career management, 322–326
comparative management, 300–301
compensation and benefits, 307–309
cross-cultural training, 304–307,

PC2–1–PC2–4
culture shock, 304
example of, 320–322
failure of, 298–300
global orientation and training,

305–307
global team performance management,

301–302
human resource management, 293,

296–309
human resource management of,

323–324
knowledge transfer, 326–327
lack of females as, 336
management of, 296–302
performance management, 298–301
repatriation of, 326–327
retention of, 325–326
selection process, 297–298
subculture shock, 304–305
training and development, 302–309

export department, 260
export loans, 240–241
export management company (EMC), 211
exporting

CAFTA-DR and, 21
child slavery and, PC1–3
by China, 16–18, 22, 239
defined, 211
by emerging markets, 217
by European Union, 13–14, 28
global strategies for, 153, 193, 204

INDEX 385

of harmful products, 48, 68
initial to full stage in, 305
investment capital through, 64
by Japan, 15
licensing and, 211, 259
by Middle East, 21
MNCs and, 259–260, 340
NAFTA and, 20
non-equity modes of, 219
by Oceania, 19
regulatory issues, 29, 31–32
by SMEs, 9–10, 239–240, PC3–6
tariff costs on, 38, 211
trade barriers, 188
U.S. Export Assistance Centers, 240

expressive-oriented conflict, 169
expropriation, 25, 214–216, 251
eye behavior (oculesics), 132

F
face behavior in negotiations, 166–167
face-to-face communication, 141, 143,

302, 367
Facebook, 52, 60, 71–72, 187
Fair Labor Association (FLA),

PC1–4–PC1–5, PC1–11
familialism, 109
family small businesses, 109
family values in Brazil, 105
FBA. See Fulfilment by Amazon
FCPA. See Foreign Corrupt Practices Act
FCS. See Foreign Commercial Service
FDA. See US Food and Drug

Administration
FDI. See foreign direct investment
Federal Communications Commission

(FCC), PC3–29
feedback, 144
feminine cultures, 352
Fernandez de Kerchner, Cristina, 25
Fettah, Nadia, 191
FGIWorld, PC4–13
financial objectives, 197
Finland, 10, 334, 365
Five Forces Industry-Based Model,

201–202, 209
FLA. See Fair Labor Association
flex hours, 290
Flipkart, 178–179, 267
FMC. See US Federal Maritime

Commission
Ford, Steve, 324
Ford Motor Company, 57, 243
Foreign Commercial Service (FCS), 18
Foreign Corrupt Practices Act (FCPA), 59
Foreign Direct Investment Confidence

Index, 5, 6
foreign direct investment (FDI), 5, 19,

45–46, 178, 220–221
foreign executives, 310, 362–363
foreign subsidiaries

cultural differences, 79
domestic structure plus, 260, 277
financial statements of, 278
global management of, 25–29, 207, 331
PCNs for, 291
political instability and, 216
reporting systems for, 276
in United States, 63–64, 194

Forest Stewardship Council (FSC),
PC1–18

Foroohar, Rana, 61
Fortress Europe, 14
Fortune Global 500 companies, 17
Fox-Martin, Adaire, 59–60
Foxconn Technology, 339
France, 8, 14, 137, 140–141, 365
franchising

by Body Shop, PC1–13–PC1–14
contractual agreements with, 219
defined, 211–212
by IKEA, PC5–3–PC5–8
inappropriate use of technology, 31
by Levi Strauss, 268

McDonald’s and, 204, 247
strategies by, 210

free-enterprise reform movements, 360
free-expression rules, 246
free trade area (FTA), 11–12, 15, 191
free trade zone (FTZ), 340, PC3–6
Freedom Fund, PC1–8
Freedom House, PC1–9
Friedman, Thomas, 207
Friedrich, Jonathan, 239
FSC. See Forest Stewardship Council
Fujitsu, 351
Fulfilment by Amazon (FBA), PC3–1,

PC3–7
fully owned subsidiary, 215–216
future-orientation, 86, 91

G
Gagnon, Marc, PC4–8
Gagnon, Suzanne, PC4–12, PC4–14
Gamal, Mai, PC3–22
García-Canal, Estaban, 244
garment factories, 52–53
Gärtner, Rainer, PC4–1–PC4–3
GASME. See Global Alliance of SMEs
GCC. See Gulf Cooperation Council
GDM. See global delivery model
GDP. See gross domestic product
gender gap, 334
gender pay parity, 334
General Data Protection Regulation

(GDPR), 60, 71, 95, 323
General Electric (GE), 327
General Motors (GM), 258, 356
geographic markets, 203–204, 207–209
geographical distance, 206
geopolitical tensions, 24, 238
Germany

assertiveness, 86, 102
cultural profiles, 102–103
foreign investment confidence, 5–6
gender roles in, 334–335
Internet business, 96
labor relations in, 341–343
manufacturing, 14
satisfaction derived from work, 353

Ghandour, Fadi, PC3–21
Ghosn, Carlos, 281–282
Giasson, Line, PC4–7
gig mindset, 288–289
giri principle, 100–101
Gladkikh-Rodionov, Maxim, PC5–8
Global Alliance of SMEs (GASME),

240–241
global business management. See also

management
Brexit and, 2–4
comparative management, 17–19
economic environment, 23–28
economic integration, 12
emerging markets, 5–6
ethics in, 55–63
of foreign subsidiaries, 25–29, 207, 331
globalization and, 4
Harley Davidson case study, 38
legal environment, 28–29
political environment, 23–28
regional trading blocks, 11–12
skill development, 34–35
small and medium-sized enterprises,

2–3, 9–10
summary of, 35–36
teams, 328–333
trade impact, 8
trends in, 5

Global Competitiveness Report, 21
global corporate culture, 47–48, 289
Global Corruption Barometer, 57
global delivery model (GDM), 245
global ethics. See ethics
global expansion

challenges to, 233, 245
competition and, 187
e-business for, 208

by IKEA, PC5–4
by mergers, PC3–25
by MNCs, 259
random acts of violence and, 25
strategies for, 208–210, 296

global function structure, 261
Global Gender Gap Report, 334
global geographic (area) structure,

262–263
global HR practices, PC4–5–PC4–15
global identity, 365–366
global industrialization, 68, 153, 205, 214,

PC3–5
global integration, 207, 263, 270, 272, 289,

328. See also integration
global knowledge skills, 10
global leadership. See leadership
global management. See global business

management
global management cadre. See expatriates
global mobility, 290, 299, 320, 323
Global Mobility Solutions, 287
Global Mobility Trends Survey, 325
Global Oil Company, 111–113
global organized labor, 337–339
global product (divisional) structure, 261
Global Relocation Trends Survey (GRTS),

286, 302
Global Retail Development Index (GRDI),

217
Global Services Location Index (GSLI),

213
global sourcing strategy, 212, 241–243
global staffing approach, 290–296
global strategy. See also international strat-

egy; strategic implementation
alliances, 229, 231–232
competition and, 187
e-commerce and, 251
formulation process, 195
IHRM role in, 288–290, 313
of Infosys, 245
MNCs and, 296
organizational structure and, 259–261,

268, 274
overseas postings and, 325
overview of, 205–206
political risk through, 26

Global Talent Competitiveness Index
(GTCI), 10–11, 14

global team performance management,
301–302

Global Terrorism Index (GTI), 26
global trade, 8, 30, 251
globalization

Asia/Asia-Pacific region, 264, 268
backlash against, 6–8
China, 109
of competitors, 187–188
culture and, 79, 109
defined, 4, 205
effect on corporation, 8–9
emerging markets, 5–6
global business management and, 4
of human capital, 10–11
impact on MNCs, 8–9
India, 9
of information technology, 31–32
international strategy of competitors,

187–188
organizational structures for, 264–268
semi-globalization, 4
technological environment and, 30
training expatriates, 305–307
trends in, 5

Globally Managed Businesses, 263
GLOBE (Global Leadership and Organi-

zational Behavior Effectiveness)
Project, 85–87, 121, 368–370

GM. See General Motors
Gogia, Vir, 179
going-rate approach for expatriates, 309
Goizueta, Robert C., 258
Goncalves, Marco, PC1–11
GoodWeave International, 54

Google, 32, 48, 52, 60–61, 142, 187, 205,
246, 264

Gournay, Patrick, PC1–14
governmentalism, 65
Goy, Julien, PC1–24
Grab, 15–16
gradual adjustment stage of culture shock,

304
Graham, John, 160
GRDI. See Global Retail Development

Index
Greece, 14, 27, 102, 121
Green, Josh, 242
green business, PC1–18
Greenberg, Eva, 231
Greenpeace, PC1–18
Griffin, Brian, PC1–1
Griffith, Matt, 3
Grono, Nick, PC1–8
gross domestic product (GDP), 14, 20–21,

97
group-focused cultures, 163
growth opportunities, 190–193
GRTS. See Global Relocation Trends

Survey
GSK pharmaceutical group, 365
GSLI. See Global Services Location Index
GTCI. See Global Talent Competitiveness

Index
GTI. See Global Terrorism Index
guanxi, 28, 109, 167
Guilbault, Marie-Josée, PC4–5, PC4–

7–PC4–8
Guillén, Mauro F., 244
Guillot-Guyard, Sarah, PC4–13
Gulf Cooperation Council (GCC), PC3–17
Gurr, Doug, PC3–6

H
H. J. Heinz Company, 261
Hagens Berman Sobol Shapiro LLP,

PC1–4–PC1–5
Hall, Edward, 136
Hambrick, Donald, 203–204
Hammad, Saleem, PC3–20
Hampton Hotels, 211
haptic (touching), 133
Harkin-Engel protocol, PC1–4, PC1–5
Harley Davidson case study, 38
harmony in business, 103, 167
Harvard Business Review, 4
Harvard Business School, 361–362
harvest process, 248
Harvey, Roy, 259
hazardous waste, 68
HCNs. See host-country nationals
hedging, 26
Heinz’s Specialty Pet Food Division, 261
‘Help Reggie Find a Date’ campaign,

PC1–23
Hengyang Foxconn, 339
Heritage Foundation, 27
Herzberg, Frederick, 353
Hesse, Daniel, PC3–29
Hiap Moh Printing, 109
hierarchy in business, 103, 109
Higashihara, Toshiaki, 153
high-contact cultures, 133
high-context cultures, 135, 169
Hill, Alexander, PC5–1
Hinduism, 83, 84, 125
Hitachi, 152–153, 300, 359
Hofstede, Geert, 87–90, 102, 103
home-based method, 307–308
home-country costs, 194
Honda, 201
honeymoon stage of culture shock, 304
Hong Kong

corruption and, 58
decision-making in, 173
dual headquarters and, 265
ethical standards, 57–58
expatriation and, 291, 323
language concerns, 18, 142

386 INDEX

Hong Kong (Continued)
McDonald’s in, 267
mergers and acquisitions, PC1–18
performance orientation, 86
trade barriers and, 188
virtual banks, 191
work ethic in, 358

Hong Kong Disneyland, 233
Hoskins, Robert, 355
host-country nationals (HCNs)

compensation of, 312–313
costs, 194
interdependence, 64–66
staffing challenges, 291, 295–296, 304
training of, 309–312

House, Robert, 369
HR. See human resources
HRDD. See Human Rights Due Diligence

Program
Hsi-An Shih, 300
Huatai Insurance Group, 231
Huei-Ting Tsai, 244
Huggard-Caine, Andrea, 324
human capital, 4, 10–11, 191, 204, 214, 288
human-centered management, 109
Human Resource Department, 241
human resource management

expatriates, 293, 296–309
of expatriates, 323–324
global HR practices, PC4–5–PC4–15
host-country nationals, 291, 295–296,

309–313
international human resource

management, 288–290, 303, 313
staffing operations, 286–288, 290–296
strategic human resource management,

289
of transnational teams, 332

human resources (HR), 286
human rights

abuses, 243, PC1–1–PC1–11
campaigning for, 69, PC1–13–PC1–16
censorship and, 142
corporate responsibility for, 44–47
defense of, PC1–17–PC1–17
MNCs responsibility for, 51–52
in overseas markets, 198
sustainability and, 66, 242
violations of, 47–48

Human Rights Due Diligence Program
(HRDD), PC1–6–PC1–7

human trafficking, PC1–2–PC1–3, PC1–7,
PC1–10, PC1–15

humane leader, 369
humane orientation, 86–87
Huthwaite Research Group, 164
Hwang Sang-ki, 43–44

I
IBM, 235, 264, 292
Iceland, 57–58
ICFTU. See International Confederation of

Free Trade Unions
ICI. See International Cocoa Initiative
ICTs. See information and communication

technologies
IDC Internet Executive Advisory Council,

208–209
IFL. See Impact Finance Ltd.
IG Metall, 343
Iger, Bob, 233, 237
IHRM. See international human resource

management
IJV. See international joint ventures
IJV control, 246
IKEA, 46, 207, 245–246, 252–253
IKEA in Russia

challenges, PC5–5
consumer popularity, PC5–5–PC5–6
corporate structure, PC5–2–PC5–3
corruption concerns, PC5–7–PC5–9
expansion freeze, PC5–7–PC5–8
future of, PC5–9–PC5–10
international expansion, PC5–3–PC5–5

introduction to, PC5–1–PC5–2
overview, PC5–2
roadblocks with, PC5–6–PC5–7

ILO. See International Labor Organization
IMF. See International Monetary Fund
immigration and cultural adaptation, 288
Impact Finance Ltd. (IFL), PC2–5–PC2–8
implicit communication style, 355
import barriers, 232
incentives, 193–194
Index of Economic Freedom, 27
India

autocratic leadership, 370
business cards, 127
business etiquette, 126
business in, 123–124
corruption in, 18
cross-cultural adjustment problems, 302
cross-cultural communication, 121–127
cultural revolution, 97–98
dining etiquette, 125–126
dress etiquette, 127
e-commerce, 177–179
economic growth, 8, 16–17
etiquette customs in, 124–126
family role, 124
foreign investment confidence, 5–6
gift-giving etiquette, 125
globalization effects on, 9
human capital, 10
human resource management, 288
Ikea and, 46
Impact Finance Ltd., PC2–5–PC2–8
languages in, 123
naming conventions, 124–125
negotiations, 161
saying no, 124
society and culture, 123–127
staffing operations, 291, 292
strategic implementation in, 252–253
subsistence farmers, 48–49
title usage, 127
vehicle manufacturing, 8

Indian Business Process Outsourcing
(BPO), 245

indirect coordinating mechanisms,
277–278

individual-focused cultures, 163
individual merit bonus plan, 352
individualism, 89–90, 94–95, 351–352
Indonesia, 8, 92, 129, 171, 302
Industrial Revolution, 134
industrial unions, 337–338
industry attractiveness, 199
information and communication

technologies (ICTs), 30, 241, 312
information privacy, 95
information systems, 140–141, 278–279
information technology (IT)

cross-cultural communication, 141–142
defined, 11
e-businesses, 32–34
globalization of, 31–32

Infosys, 11, 214, 245, 374–375
Ingvaldsson, Carl Ola, PC5–8
initial costs of expatriates, 307
initiating structure leadership, 367
inpatriates, 293–294
INSEAD Global Executive MBA, 312
INSPIRE system, 164
institution-based theory, 202
institutional context in culture, 80
Institutional Shareholder Services (ISS),

PC3–29
instrumental-oriented conflict, 169
integration

defined, 264
differentiation–integration continuum,

264
economic integration, 4, 12, 15
global integration, 207, 263, 270, 272,

289, 328
global structures, 260–264
pan-European integration services, 142
vertical integration, 277, PC5–5

intellectual capital, 297, 362
intellectual property (IP), 245
intercultural communication, 78, 119
interdependence

ethics and, 55–63
foreign subsidiaries, 63–64
of host countries, 64–66
introduction to, 44
management of, 63–69
opening profile, 43–44
summary of, 69
sustainability and, 66–69

internal factor analysis, 202–204
International Assignments Policies

and Practices Survey (KPMG),
308–309

international business ethics, 56
International Cocoa Initiative (ICI), PC1–4
international codes of conduct, 54, 61
international competition effects, 198–199
International Confederation of Free Trade

Unions (ICFTU), 339
International Convention for the Protection

of Industrial Property, 31
international expansion

Body Shop, PC1–14
in emerging markets, 241, 244
exporting and, 211
by IKEA, PC5–3–PC5–5
by MNEs, 204
mobile workforce needs, 287
organized labor and, 337

international human resource management
(IHRM), 288–290, 303, 313, 333

international joint ventures (IJV), 214–215,
237, 246–247

International Labor Organization (ILO),
8, 340

international management by women,
333–336

International Monetary Fund (IMF), 22,
333

International Pay Structure (IPS), 360
international social responsibility, 45
international strategic alliances (ISAs), 229
international strategy. See also global

strategy; strategic implementation
challenges to, 194–195
customer demands, 190
economies of scale, 190
globalization of competitors, 187–188
growth opportunities, 190–193
incentives, 193–194
regulations and restrictions, 188
resource access and cost savings, 193
trade barriers and, 188

international talent, 363
international tax breaks, 193
International Trade Administration (ITA),

8, 18
International Trade Union Confederation

(ITUC), 339
internationalization process, 244
Internet

cross-cultural communication, 141–142
culture and, 95–98
culture in social media, 76–77
e-businesses, 32–34
freedom online, 229
as negotiation tool, 164–165

Internet data restrictions, 61
Internet MIS systems, 279
Internet of Things, 366
Internet Service Providers (ISPs), PC3–2
Invest Lithuania, 218
IP. See intellectual property
IPS. See International Pay Structure
Iraq, 26, 131
irritation and hostility stage of culture

shock, 304
ISAs. See international strategic alliances
Islam, 83, 85, 107–108, 162, 369
Islamic law, 28
Islamic work ethic, 353–354
ISPs. See Internet Service Providers

Israel, 10, 82–83, 88, 136, 239, 353
ISS. See Institutional Shareholder Services
IT. See information technology
ITA. See International Trade Administration
Italy, 8, 14, 132, 162
ITUC. See International Trade Union

Confederation

J
Jacobs, Clayton, PC3–1
Jaguar Land Rover, 185
Jamalon.com, PC3–16
James, Wil, 310
Japan

acquisition in global business,
PC3–25–PC3–30

assertiveness, 86
collectivism, 89
consensus building, 159
corporate competition, 15–16
corporate culture in, 80, 82
cross-cultural adjustment problems,

302
cultural profiles, 98–102
cultural sensitivity and, 78
decision-making, 170, 173, 174–175
expatriates in, 314–316
exporting, 15
foreign executives, 363
labor militancy in, 338
motivation culture in, 349–351, 354
negotiations, 152–153, 160–161
networks of long-standing relationships,

119–121
ningensei (human beingness), 140
participative leadership, 173

Japan’s Toyota, 9
Jayaraman, Kishore, 245
JD.com, 230
Johnson, Lisa, 290
Johnson, William R., 261
Johnson Electric, 211
joint venture (JV)

Amazon.com, 214
equity joint ventures, 219
international joint ventures, 214–215,

237, 246–247
knowledge management in IVJs, 248
Russia/Russian Federation, 237–238
in Russian Federation, 237–238
strategic freedom of an IJV, 247
strategic implementation of, 230–231,

246–251
Jomei Chang, 367
Jones, Lucy, PC4–14
Jordan, PC1–17
Joyo.com, PC3–1, PC3–5–PC3–6
JP Morgan Chase, 62

K
Kadle, Praveen, 215
Kamprad, Ingvar, PC5–2–PC5–3
Katinas, Mantas, 218
Kaufmann, Per, PC5–8
Kellaway, Lucy, 350
Kelly, Gail, 335
Kelly, Gavin, 358
Kentucky Fried Chicken, 194
key success factors (KSFs), 202
Khoury, Hussam, PC3–15
Kimberly-Clark, 309
kinesic behavior, 121–122, 131, 134
Kitson, Andrew, PC3–22
Kneupfer, Robert, 321
knowledge application/analysis, 34, 35
knowledge management in IVJs, 248
knowledge transfer, 248, 326–327
kodawari principles, 310
Komorek, Juliusz, 170
Kopp, Rochelle, 174
Korea Occupational Safety and Health

Agency, 43
KPMG. See International Assignments

Policies and Practices Survey

INDEX 387

Kraft Heinz Company, 261
Krishnamurthy, Rajesh, 374–375
Krishnan, K. Ananth, 117
Krueger, Harald, 230
KSFs. See key success factors
Kunming Lida Wood and Bamboo

Products, 167
Kuo, Kaiser, 142
Kuwait, 193–194, PC3–18, PC3–20

L
La Fête Foraine de Baie-Saint-Paul, PC4–5
labor relations environment and system

convergence vs. divergence in, 339–340
global organized labor, 337–339
local industrial relations systems,

340–341
trade union structures, 337–338,

341–343
unions impact on business, 336–337
working within, 336–343

Lafley, Alan, 241
Lagarde, Christine, 333
Lagon, Mark, PC1–9
Laliberté, Guy, PC4–5–PC4–7
Lamarre, Daniel, PC4–6
language

in Brazil, 105
in cross-cultural communication,

128–129
encoding language, 143
in Hong Kong, 18, 142
in India, 123
native English speakers, 130–131
object language, 121, 133
paralanguage, 121, 131, 133–134
second-language use, 129–131
translation in coding, 143

Latin America
bribery in, 58
business alliances, 235
concept of time, 93, 102, 134
cultural profiles, 87, 103, 133–134, 171
direct coordinating mechanism, 277
economy of, 20, 24
employee benefits, 313
employee training, 309
expansion models, 269
leadership styles, 366, 369
outsourcing and, 213
overview of, 103
regiocentric staffing approach, 293, 305
Spotify model, 172

LDCs. See less-developed countries
Le Club des Talons Hauts, PC4–5
leader–follower interaction, 371
leadership

Asia/Asia-Pacific region, 81
autocratic leadership, 173, 366–367,

370–372
autonomous leadership, 369
charismatic leader, 368–370
contingency leadership, 368–372
cross-cultural leadership, 366–367
cross-cultural research on, 366–367
democratic leadership, 366–367
directive leadership, 366–367
environment of, 361–366
GLOBE project, 368–370
GLOBEProject, 85–87, 121
humane leader, 369
initiating structure leadership, 367
introduction to, 361
job context in, 364
Latin America, 366, 369
multicultural leaders, 364
participative leadership, 173, 366–367,

370–372
relations-oriented leadership, 367
role and environment of, 361–366
summary of, 372
task-oriented leadership, 94, 367
team leadership, 365–366, 369
technology and, 366, 367

women in global leadership roles,
364–365

LED lighting, PC1–18
Lee, Cassey, 15
Lee Jae-yong, 44
Lee Sang-hoon, 44
leEurope, 142
legal environment, 28–29
Lehman Brothers, 331
Lei, David, 233
Lempereur, Monique, 365
Lenovo, 265
Les Échassiers de Baie-Saint-Paul, PC4–5
less-developed countries (LDCs), 64
Levi Strauss & Co., 268, PC3–5
Levine, Kate, PC1–20
Lexus, 310
LGBT rights, 375
liability of foreignness, 194–195
licensing

alliances and, 232, 235
defined, 211
e-commerce and, PC3–4
exporting and, 211, 259
global expansion and, 171
restrictions on, 31
Spotify and, 171–172
strategic planning, 211
transnational strategies, 207, 210

lien in face behavior, 166
LinkedIn, 76, 246
literal translation, 128, 143
Livingstone, David, 257
localization

approach for expatriates, 309
industrial relations systems, 340–341
market structures, 267–268
in strategic planning, 206–209

locus of decision making, 233
London Metal Exchange, 3–4
London School of Economics, 97
London’s Unlisted Securities Market,

PC1–14
long-standing relationships, 119–121
long-term/short-term orientation, 91
L’Oréal SA, PC1–13, PC1–14–PC1–15,

PC1–19
loss of sovereignty, 12
low-contact cultures, 133
low-context cultures, 135, 169
low-wage labor, PC1–2
Luzhkov, Yuri, PC5–5
LVMH company, 205

M
Ma, Jack, 29–30
Maastricht Treaty, 340–341
Mackay, Derek, 337
macropolitical risk event, 25
Mail.ru, 228–229
Malaysia, 8, 15–16, 87, 129, 171, 201, 369
Maldives, 19
management. See also comparative man-

agement; global business manage-
ment; human resource management

career management of expatriates,
322–326

comparative management, 17–19, 51–53
contingency management, 82–83
cross-cultural communication, 118,

142–145
cross-cultural management, 82–83,

373–375
culture effects on, 80–83
of expatriates, 296–302, 326
export management company, 211
global management teams, 328–333
global styles, 104–109
human-centered management, 109
of interdependence, 63–69
negotiation in, 162–169
paternalism in, 356
of political risk, 26
quality concerns, 358–359

strategic human resource management,
289

strategic management process, 187
strategic planning contracts, 214
transnational team management,

331–333
upper-level managers, 174, 287
volatility management, 24
women in international management,

333–336
management by objectives (MBO), 239
Managing Mobility Survey, 324
ManpowerGroup, 325
Mansour Javidan, 297
market-based economy, 360
market expansion, 195, 197, 260
market segments, 203, PC3–6
marketing strategy, PC1–23–PC1–24,

PC3–20
Masarik, Graham, 2–3
masculinity culture, 90, 351–352
Maslow’s need categories, 353
MasterCard, 306
material culture, 133
maternity leave, 90, 290, PC4–6, PC4–10
matrix structure, 263–264
May, Theresa, 3
MBO. See management by objectives
McDonald, Nathan, 375
McDonald’s, 236, 247, 252–253, 267–268,

277
McGee, Patrick, 59–60
McKinsey report, 66–67, 233, 334
McKinstry, Nancy, 371–372
McSpotlight, PC1–18
meaning of work (MOW), 352–354
Meaning of Work (MOW) International

Research Team, 352–353
memorandum of understanding (MOU),

PC3–6
MENA Awards Customer Delight

Secretariat, PC3–20
Menard, Renee-Claude, PC4–13
Mercedes-Benz of Germany, 186, 250
Mercer consulting, 289
Mercer Global HR Consulting Firm, 360
Mercosur, 20
mergers, 15–16, PC3–25–PC3–30
merit-based reward system, 360
Merkel, Angela, 334–335
Mexico

bilateral trade, 20
human capital, 10
labor relations in, 341
motivation culture, 355–357
negotiations, 157, 163
vehicle manufacturing, 8

Meyer, Erin, 136, 158, 374
micropolitical risk event, 25
Microsoft, 52, 142, 264, 289
Middle East

autocratic leadership, 173
cross-cultural communication, 137–139
economic growth, 21–22
Islam, 83, 85, 132, 162
Islamic law, 28
Islamic work ethic, 353–354
motivation in, 355

Middle East and North Africa (MENA)
region. See Souq.com in MENA
region

mien-tzu in face behavior, 166
Mirage Hotel, PC4–6
miscommunication, 136–137
mission, defied, 196–197
mitbestimmung (codetermination law),

341–343
Mitsubishi Trading Company, 199
Mitsubishi UFJ Financial Group, 363
MNCs. See multinational corporations
MNEs. See multinational enterprises
mobile technology, 287
mobile workforce, 287
mobility managers, 320
Modi, Narendra, 178

Mohamad, Mahathir, 15
money as motivation, 355
monitoring systems, 239, 277–279,

PC1–11
monochronic cultures, 134
monopolies, 15, 60, 220–221
Monson, Krista, PC4–7, PC4–8
moral idealism, 173
moral universalism, 47–48
Morocco, 192–193
motivation

in China, 355, 360
comparative management, 355–357
cross-cultural research on, 351–361
culture and, 355–357, 359
introduction to, 350–351
Islamic work ethic, 353–354
in Japan, 349–351, 354
meaning of work, 352–354
in Mexico, 355–357
in Middle East, 355
needs hierarchy, 354–358
reward systems, 47, 68, 94, 356,

359–361
MOU. See memorandum of understanding
Mouchawar, Ronaldo, PC3–15
MOW. See meaning of work
Müller, Matthias, 262
multicultural environments, 4, 109
multicultural leaders, 364
multidomestic strategy, 206
multinational corporations (MNCs)

acquisitions and mergers,
PC3–25–PC3–30

appropriability of technology, 30–32
blockchain technology, 242–243
in China, 184–186
corporate social responsibility of,

44–53
cross-cultural communication, 144
cultural clusters, 87
digital age technology, 30
economic risks, 28
global management teams, 328–333
globalization effect on corporation,

8–9
human rights challenges, 51–53
intercultural communication skills, 78
international joint ventures, 214–215
introduction to, 4–5, 8
labor relations and, 336–343
organizational structures of, 258–264
political risks, 25
regulatory issues, 29
risk assessment, 25–27
in Singapore, 188–190
staffing operations, 286–288, 308
stakeholders, 45–47
strategic alliances, 232, 235
strategic implementation, 239
strategic planning by, 186
subsidiary interdependence, 63–64

multinational enterprises (MNEs), 8,
54–55

multiple perspective skills, 326
Murthy, N. R. Narayana, 245
Muslims, 85, 107, 125, 353, PC3–20
mutual obligation, 94, 109, 124
Mwangi, James, 191

N
Naandi Foundation, 48–49
Nadella, Satya, 265
NAFTA. See North American Free Trade

Agreement
national culture, 14, 79, 83, 91, 94, 174,

205, 233, 277
National Natural Science Foundation of

China, 287
National People’s Congress (NPC),

PC3–10–PC3–11
nationalism, 6–7, 65, 89, 148, 198, 216
nationalization, 25
native English speakers, 130–131

388 INDEX

NDEs. See newly developed economies
nearshoring, 212–213
needs hierarchy in motivation, 354–358
negotiation

concessions and agreements stage, 158
conflict resolution, 165
context in, 169
defined, 153–154
e-negotiations, 165
exchanging task-related information

stage, 157
Internet as tool, 164–165
introduction to, 153
management of, 162–169
negotiating teams, 154–155
nontask sounding, 156–157
persuasion stage, 157–158
preparation stage, 154–156
process of, 154–158
relationship-building stage, 156–157
styles of, 158–162
successful global negotiators, 161–162
summary of, 175
translators in, 164
variables in, 155–156

negotiation support systems (NSS), 164
nema-washi in decision-making, 174
Nepal, 19, 123
Nestlé

background on, PC1–1–PC1–2
Child Labor Monitoring and Remedia-

tion System, PC1–5–PC1–6
Clean Drinking Water project, 50
Corporate Business Principles and

Supplier Code, PC1–3
criticism of, PC1–10–PC1–11
Danish Institute for Human Rights,

PC1–6–PC1–7
forced labor admissions,

PC1–7–PC1–10
global management, 294
global sales, 9
in India, 97
L’Oréal ownership, PC1–14
as marketing-oriented companies, 263
in Russia, 237–238
shared value creation, 48, 50
slavery in supply chain, PC1–1–PC1–11
Souq partnership, PC3–20
The Nestlé Cocoa Plan (TNCP), PC1–4,

PC1–11
Netflix, 187
Netherlands, 10, 96, 136, 353, 365, 369
The Network Readiness Index, 31–32
networks of long-standing relationships,

119–121
neutral versus affective dimension,

91–92
New York Commodity Exchange, 49
Newlight Technologies LLC, PC1–23
newly developed economies (NDEs), 206
next-shoring, 243
ngan work, 352
NGOs. See nongovernment organizations
Nigeria, 26, 186, 191
Niimami, Takeshi, 334
Nikkei 225 stock index, 363
nintai principle, 100
Nisbett, Richard E., 135
Nissan-Mitsubishi BV, 281–282
Nissho Iwai, 324
Nixon, Richard, 131
no-deal Brexit, 223–224
Noah Consulting, 374
noise in communication, 118, 119
Nokia, 187–188
Nomura bank, 331
non-equity strategic alliances, 229, 231
non-native speakers, 129–131
non-verbal communication, 131–134,

138, 158
noncomparability of performance data

across countries, 279
nongovernment organizations (NGOs), 3,

57, 64–66

nonspendable income, 308
nontask sounding in negotiations, 156–157
nonverbal communication, 34, 121–122,

131, 134, 138, 144–145, 355
Norinco Group, 214
Norris, Pat, PC4–7
Norris, William C., 58
North American Free Trade Agreement

(NAFTA), 12, 20–21, 341, 357
Norway, 10, 12, 31, 334, 365
NPC. See National People’s Congress
NSS. See negotiation support systems

O
OAU. See Organization of African Unity
object language, 121, 133
objectives, defied, 196–197
obligation oriented people, 100
Oceania region, 19
OECD. See Organisation for Economic

Cooperation and Development
offshoring, 8, 10, 18, 210, 212–214, 219,

241–242
Ohlsson, Mikael, PC5–8
OJT. See on-the-job training
on principle, 100–101
on-the-job behavior, 78, 353
on-the-job training (OJT), 300, 305–306
1000 China-EU SMEs Partnership

Program, 241
‘Online Retailers of Physical Goods’

model, PC3–1
openness traits, 66, 145, 148, 238, 288,

362, 365–366
opportunity, defined, 288
Ordnung principle, 102
Organisation for Economic Cooperation

and Development (OECD), 96,
237, 337

Organization of African Unity (OAU), 22
organizational change, 35, 273, 274–276,

337
organizational culture, 79–80, 231, 247,

288, 366
organizational structures

control systems in, 276–278
defined, 258
design variables, 274–276
direct coordinating mechanisms, 277
dual headquarters, 265
emergent structural forms, 268–273
evaluation variables, 279
evolution and change, 258–264
for globalization, 264–268
indirect coordinating mechanisms,

277–278
integrated global structures, 260–264
introduction to, 258
local market structures, 267–268
monitoring systems, 278–279
role of information systems, 278–279
summary of, 279

organized labor, 337–339
Oswald, Andrew, 359
outsourcing

by Apple, 339
China and, 313
contract manufacturing, 212
e-business, 208
Germany and, 341
global network structure, 272
global relocation programs, 287
global strategy for, 241–245, 251
globalization and, 8, 10
IHRM role in, 288, 313
India and, 18, 313
manager’s role in, 128
negotiation of, 158
service-sector outsourcing, 210,

212–214
service sectors, 213–214
by Tata Consulting, 292

Owen-Jones, Lindsay, PC1–14
Oyama, Motoi, 349–350

P
Pacific International Line, 109
Pakistan, 8, 19, 26
PARADE. See Support Program for

Employees’ Artistic Projects
Paraguay, 12, 20
paralanguage, 121, 131, 133–134
parent-country nationals (PCNs), 291, 295
Paris CAC 40 exchange, 364
Paris terrorist attack (2015), 26
Paris Union, 31
Park Geun-hye, 44
parochialism, 82
participative leadership, 173, 366–367,

370–372
particularism, 91
passion in workplace, 367
Patarnello, Maurizio, 237
paternalism, 87, 89, 109, 353, 356, 370
Pathak, Anuj, PC2–5–PC2–8
Patterson, Clint, 210
Pay Index, 334
Payson Center for International Develop-

ment of Tulane University, PC1–5
PCNs. See parent-country nationals
PepsiCo, 128, 304
performance evaluations, 277–278
performance management, 289, 298,

300–302
performance orientation, 86, 87, 121, 369
Perlman, Geoff, 330–331
personal development strategies, 362
persuasion negotiation, 154, 155, 157–158,

166
Peru, 8, 12
Petersen, Donald, 57
Peugeot-Citroen, 185, 230
P&G. See Procter & Gamble
Philippines, 8, 10, 15–16, 26, 87, 121, 211,

214, PC5–2
Philips Electronics, 300
Pichai, Sundar, 32
Pinault, François-Henri, 365
Pizza Hut, 211
planning phase in strategy, 196
PlayStation network, 61
Point of Sale (POS), PC3–7
Poland, 193, 287, 310, 312
political environment, 22–24, 270
political risk, 12, 22, 24–26, 187, 229, 233
political union, 12, 193
polycentric staffing approach, 291–292,

296
polychronic cultures, 134
Porter, Michael, 201–202, 209
POS. See Point of Sale
Pötsch, Hans Dieter, 262
Powell, Ryan, 208
power distance, 86, 87–89, 95, 100–103,

221, 351
power grids business, 152–153
Pritchard, Marc, 241–242
Procter & Gamble (P&G), 82, 207, 241, 324
product categories, 203, 211, 215, PC3–7
production objectives, 197
profitability objectives, 197
protectionism, 4, 8, 29, 65
proxemics, 121, 131–133
psychological capital, 297, 362
public criticism, 103, 357
punctuality in business, 102
purpose, defined, 288
Putin, Vladimir, 237–238

Q
Q Express, PC3–19–PC3–20
Qatar, 22, PC3–17
Quaker Chemical Company, 294
questionable payments, 58–60

R
Rackspace, 232, 293, 367
random acts of violence, 25

Rao, G. Tirupati, 49
Rao, Prakash, 97–98
rapidly developing economies (RDEs), 5,

103, 269
Rathi, Krishna, 98
rationalization, 265, PC3–25, PC3–29
R&D. See research and development
regiocentric staffing approach, 293, 296
regional economic groups, 11–12, 165
regional trading blocks, 11–12, 205
regionalization in strategic planning,

206–209
relations-oriented leadership, 367
relationship-building

Africa, 94
arm’s-length relationships, 119
Asia/Asia-Pacific region, 156, 158
in business, 102, 356
long-standing relationships, 119–121
negotiation stage, 156–157
Reliance Industries, 179

religion
culture and, 28, 77, 79, 83–85, 107,

137, 206
etiquette and, 124
globalization and, 6
international business ethics and, 56
in Japan, 174
restraint in, 143
role of family, 124
workplace and culture, 83–85

Renault-Nissan BV, 281–282
Renison, Allie, 2
Renschler, Andreas, 250
repatriation, 25, 307, 326–327
Repsol YPF, 25
research and development (R&D), 197,

232, 243
reshoring, 10, 212–213
Reshoring Initiative, 10
resilience traits, 145
resource access and cost savings, 193
resource-based economy, 238
resource-based view, 203
respeto (respect), 356
return on investment (ROI), 35, 279, 290
Revolut app, 191, 218
reward systems, 47, 68, 94, 356, 359–361
Rice, John, 291
rights oriented people, 100
ringi system, 140, 174
risk-sharing, 231
risk tolerance, 171
Roddick, Anita, PC1–13, PC1–15
ROI. See return on investment
Romano, Joe, 129
Root, James, 6
Rorsted, Kasper, 242
Roundtable on Sustainable Palm Oil

(RSPO), PC1–18
Rowan, Jim, 188–189
Royal Dutch Shell, 231
Royal Thai Government, PC1–9
Russia/Russian Federation. See also IKEA

in Russia
corruption in, 21, 238, PC5–1
economic growth, 21
joint ventures in, 237–238
negotiations, 157, 161
political risk, 24
strategic implementation in, 228–229

Rwanda, 334
Ryanair, 170–171
Ryffel, Carolyn, 307

S
SAARC. See South Asia Association of

Regional Cooperation
Säfve, Viktor, PC5–8
SAI (sustainable agriculture initiative), 50
SAIC. See State Administration for

Industry and Commerce
salaries of expatriates, 308
sales conference planning team, 328

INDEX 389

sales-force analysis, 202
Samsung Electronics, 43–44, 259, 300
Sanford C. Bernstein, & Company LLC,

PC1–19
Sanz, Francisco Garcia, 262
SAP software company, 59–60
Sara Lee Corporation, 294
satisfaction derived from work, 353
satyagraha in negotiations, 161
Saudi Arabia, 76–77, 107–108
‘Save the Whales’ campaign, PC1–14
SBUs. See strategic business units
Schechner, Sam, 249
Schramm, Oliver, 299
Schrempp, Jürgen, 250
Schulte, Ann, 306
Schwartz, Jeremy, PC1–13, PC1–19–

PC1–20, PC1–24
SEAFDEC. See Southeast Asian Fisheries

Development Center
seat-of-the-pants strategy, 195
SEC. See US Securities and Exchange

Commission
second-language use, 129–131
Sedran, Thomas, 229
segments of markets, 203, PC3–6
selective transmission, 142–143
self-control of team members, 332
self-determination, 171
self-esteem, PC1–13, PC1–16–PC1–17
self-reference criterion, 82
“sell all, carry few” strategy, PC3–16
semi-globalization, 4
service sector outsourcing, 213–214
Sethi, Sanjay, 178
Shanghai Jiading Industrial Zone Develop-

ment (Group) Co. Ltd., PC3–6
shared value, 44, 48–50, 57, 69, 78, 85
Sharma, Vijay Shekhar, 97
Shattock, Matt, 363
Shaw, George Bernard, 128, 130
Shenkar, Oded, 80, 277
Sherman, Howard, PC4–5
Shibata, Masahisa, 230
Shimoni, Baruch, 82–83
Shiner, 3
Shinto religion, 174
shinyo in decision-making, 174
SHRM. See strategic human resource

management
Siemens, 196
Sikhs, 125
Singapore

corporate competition, 15–16
expatriates in, 304–307, PC2–1–PC2–4
GTCI ranking, 10
multinational corporations in, 188–190

Singh, Atul, 67
Singh, Jasmeet, 245
Singhal, Arvind, 179
situational context in culture, 80
skill development, 34–35
slavery in supply chain, PC1–1–PC1–11
Slesar, Alexei, PC5–1
small and medium-sized enterprises

(SMEs)
economic growth, 18
European DIGITAL SME Alliance, 241
export loans, 240–241
exporting, 9–10, 239–240, PC3–6
global business management, 2–3, 9–10
host-country nationals and, 312
strategic alliances, 235
strategic implementation, 239–241

Smallwood, Marianne, PC1–1
Smart, Bruce, 57
social capital, 297, 362
social justice, PC1–13–PC1–14
social media

cross-cultural communication, 116–117
culture in, 76–77
Dolce & Gabbana (D&G) fashion show,

146–149
Facebook, 52, 60, 71–72, 187
Twitter, 76

social organizations, 121, 127
social responsibility. See corporate social

responsibility
societal culture, 36, 78–80, 83, 221, 248
SoftBank-Sprint merger, PC3–25–PC3–30
softly-softly management approach, 374
Sony, 60, 196, 359
Souq.com in MENA region

Amazon.com in, PC3–16–PC3–17,
PC3–21–PC3–21

background on Souq.com,
PC3–15–PC3–16

business model, PC3–19–PC3–20
e-commerce and, PC3–17–PC3–19
Emaar Properties PJSC and, PC3–15,

PC3–17, PC3–22
future of, PC3–22–PC3–23
introduction to, PC3–15
search for buyer, PC3–21
success of, PC3–20–PC3–21

South Africa, 22, 59–60, 130
South Asia Association of Regional

Cooperation (SAARC), 19
South Korea, 96
Southeast Asian Fisheries Development

Center (SEAFDEC), PC1–9
sovereignty, loss of, 12
SpaceX, 249
spatial costs, 194
spendable income, 307–308
spinoff businesses, 267–268
Spotify, 172, 191–192
Sprint, 265, 363, PC3–25–PC3–30
Sri Lanka, 19
Stadler, Rupert, 262
staffing operations, 286–288, 290–296
stages model, 259
staging in Strategy Diamond, 204
stakeholders, 45–47, 62, PC1–1
Starbucks, 98, 310–311
State Administration for Industry and

Commerce (SAIC), PC3–10
stereotyping, defined, 127
Stichting INGKA Foundation, PC5–

2–PC5–3
‘Stop Sex Trafficking of Children and

Young People’ campaign, PC1–17
strategic alliances

cross-border alliances, 229, 232–233
equity strategic alliances, 229, 230
global strategic alliances, 231–235
guidelines for success, 235–236
international strategic alliances, 229
MNCs and, 232, 235
non-equity strategic alliances, 229, 231
overview, 229–236
SMEs and, 235

strategic business units (SBUs), 261, 263
strategic formulation, 195–196, 200,

220–221
strategic freedom of an IJV, 247
strategic human resource management

(SHRM), 289
strategic implementation. See also global

strategy; international strategy
comparative management, 237–238
cultural influence on, 249–251
e-commerce impact on, 251
in emerging markets, 243–246
global sourcing strategy, 241–243
government influence on, 248–249
joint ventures, 214–215, 230–231,

246–251
overview of, 236–246
SMEs, 239–241
strategic alliances, 229–236
summary of, 251
transnational strategy, 207, 270, 271

strategic management process, 187
strategic planning

competitive analysis, 199–201
contract manufacturing, 212
cultural distance, 221
decision-making models, 202–203
for emerging markets, 216–217

entry alternatives evaluation, 210–216
environmental assessment, 197–198
environmental information sources,

199–202
evaluating alternatives, 205
exporting, 211
foreign direct investment, 220–221
franchising, 211–212
fully owned subsidiary, 215–216
global expansion strategies, 208–210
going international, 187–195
internal factor analysis, 202–204
international competition effects,

198–199
international joint ventures, 214–215
introduction to, 186–187
licensing, 211
localization/regionalization, 206–209
management contracts, 214
mission and objectives, 196–197
offshoring, 212
process of, 195–196
reshoring/nearshoring, 212–213
service sector outsourcing, 213–214
steps in development of, 196–216
strategic choice, 218–220
summary of, 221
timing and scheduling expansions, 220
transnational strategy, 207
turnkey operations, 214
world market approaches, 205–206

strategy, defined, 187
Strategy Diamond, 203–204
stress tolerance, 297
structural evolution model, 259
subculture shock, 304–305
subsidiary relations, 326
subsistence farmers, 48–49
Sudan, PC1–17
suicide rates, 96
Sun, David, 310
Sunny Zhou, 165, 167
Suntory Holdings Limited, 334
supply chain slavery, PC1–1–PC1–11
Support Program for Employees’ Artistic

Projects (PARADE), PC4–12
sustainability, 23, 66–69
sustainable development, 66–68
Svanberg, Carl-Henric, 14
Swan, Mara, 325
Sweden, 10, 83, 86, 96, 162, 334
Swedish Federation for Lesbian, Gay,

Bisexual and Transgender Rights,
PC5–8

Switzerland, 10, 86, 102, 134–135, 263,
273, 293, 369, PC1–1

SWOT (strengths, weaknesses, opportuni-
ties, and threats) analysis, 200–201

Syria, 26
system of fits, 239

T
T-Mobile, 265
Taiwan, 8, 129, 148, 360
takeovers

economic power and, 8
failed attempts, 266
global alliances and, 233
hostile takeovers, 266–267
by L’Oréal, PC1–14–PC1–15
media coverage during, PC3–28
prevention of, PC5–2
proposed takeovers, PC4–2

Takumi principles, 310
task-oriented leadership, 94, 367
Tata Consultancy Services (TCS), 117,

186, 214, 291, 292
Tata Group, 9, 11, 235
tax/taxation

differentials in, 308
expatriates, 308
international tax breaks, 193
zero tax appeal, 189–190

team leadership, 365–366, 369

technological environment
blockchain technology, 242–243
digital age technology, 3, 30, 121, 148
e-businesses, 32–34
ethics in technology uses, 60–61
globalization of information technology,

31–32
leadership and, 366, 367
mobile technology, 287
overview of, 29–34
strategic alliances and, 233
voice technology, 142

Telefonica, 305
Telekom Malaysia, 15
Terashi, Shigeki, 230
terrorism, 25, 26–27
Thai Union Frozen Products PCL, PC1–8,

PC1–9
Thailand

cross-cultural management, 83
human trafficking and, PC1–7–PC1–9
individual merit bonus plan, 352
language issues, 129
vehicle manufacturing, 8

third-country nationals, 277, 292, 298, 343
Thota, Kishore, 9
Thouw, Tanya, 299
Tice, Christopher, 307
time concept, 93, 102, 134
Tmall, PC3–9
TNC. See transnational corporation
TNCP. See The Nestlé Cocoa Plan
tolerance of team members, 332
Toll Holdings, 363
top-down decision making, 159
Toukan, Samih, PC3–15
Toyota, 184–186, 235, 309–310, 363
trade barriers, 4, 20, 188, 191, 212, 214,

240, 338
trade creation, 12
trade diversion, 12
Trade Union Law, 339
trade unions

anti-trade union stance, 52, PC1–18
impact on business, 336–337
structures, 337–338, 341–343
training and development
cross-cultural training, 78, 304–307,

PC2–1–PC2–4
for e-businesses, 312
of expatriates, 302–309
global orientation and, 305–307
host-country nationals, 309–312
Latin America employee training, 309
on-the-job training, 300, 305–306

transfer process, 248
transformation process, 248
transformational outsourcing, 214
translators in negotiations, 164
transnational corporation (TNC), 274
transnational cultures, 333
transnational strategy, 207, 270, 271
transnational team management, 331–333
transparency, 360, PC1–1
transpatriate, 293, 305, 309
Trends in Global Relocation: Biggest

Challenges survey, 320, 322
trial-and-error processes, 333
Trompenaars, Fons, 91–92
trust in cross-cultural communication,

119–121
turnkey operations, 214
Twitch platform, PC3–7
Twitter, 76

U
UAE. See United Arab Emirates
Uber, 15–16, 249
UCL. See California Unfair Competition

Law
UK. See United Kingdom
UK Modern Slavery Act, PC1–3
UN World Conference on Women,

PC1–16

http://Souq.com

390 INDEX

uncertainty avoidance, 86–89, 95,
102–103, 221, 351

Understanding Intercultural Communi-
cation (Samovar, Porter, Jain),
118–119

unfamiliarity costs, 194
UNGPs. See United Nations Guiding

Principles on Business and Human
Rights

UNIDO (United Nations Industrial Devel-
opment Organization), 241

Unilever, 265, 266–267
United Arab Emirates (UAE), 22, PC3–17
United Kingdom (UK)

ethical standards, 57
foreign investment confidence, 5–6
labor relations in, 336–337
management quality concerns, 358–359
miscommunication, 136–137
national identity, 14
non-verbal communication, 132
small business in, 2
vehicle manufacturing, 8
work centrality, 352

United Nations Convention on Contracts
for the International Sale of Goods
(CISG), 28

United Nations Guiding Principles on
Business and Human Rights (UN-
GPs), PC1–3

United States-Mexico-Canada Agreement
(USMCA), 12, 20, 341

United States (US)
arm’s-length relationships, 119
bilateral trade, 20
corporate competition, 15–16
corporate culture in, 82
foreign investment confidence, 5–6
geopolitical tensions, 24
GTCI ranking, 10
information privacy, 95
masculinity, 90
negotiations, 160–161, 163
trade union structures, 337–338

universalism versus particularism, 91
upper-level managers, 174, 287
Uruguay, 12, 20
US Agency for International Development,

PC1–1

US Commercial Service, 240
US Department of Commerce, 8, 18
US Department of Justice, PC3–29
US Department of Treasury, PC3–29
US Export Assistance Centers, 240
US Export-Import (Ex-Im) Bank, 240
US Federal Maritime Commission (FMC),

PC3–6
US Food and Drug Administration (FDA),

8
US Securities and Exchange Commission

(SEC), 59, PC3–10
Usmanov, Alisher, 228–229
USMCA. See United States-Mexico-

Canada Agreement
utilitarianism, 173
Uz, Irem, 351

V
values

benefit value and trust, 121
changing values, 94
core values, PC1–15–PC1–18
critical operational value differences,

93–95
cultural dimensions, 85–95
family values in Brazil, 105
individualism and, 94–95
material factors, 94
shared value, 44, 48–50, 57, 69, 78, 85

Vanier, LJ, PC1–3
variable interest entity (VIE), PC3–11
Veer, Amit, 97
vehicles in Strategy Diamond, 204
Venezuela, 12, 20
Verité, PC1–7, PC1–8
Vermeer Company, 248
vertical integration, 277, PC5–5
videoconferences, 143, 277
VIE. See variable interest entity
Vietnam, 15
virtual banks, 191
virtual global teams, 328–331
virtual private networks (VPNs), 52–53
Vitria Technology, 367
Vittirelli, Jacob, 336
vocational-technical skills, 10
voice technology, 142

volatility management, 24
Volkswagen, 62–63, 261, 262
VPNs. See virtual private networks

W
wa principle, 100, 174
Walker, Martin, 322
Walmart, 98, 178, 202, 205–206,

338–339
Wang Sicong, PC3–10
washi principle, 174
Watanabe, Kenichi, 80
WCL. See World Confederation of Labor
We Are Social, 375
Weber, Manuela, 47
WeChat, 146, PC3–5
Weeks, Wendell, 232
Wei Yang, 287
Weibo, 149, PC3–5
West Africa, PC1–1, PC1–4, PC1–10
Westerlund, Ulrika, PC5–8
Westinghouse, 363
Weston, Graham, 367
WhatsApp messaging app, 52
Whirlpool International, 328
White Friday, PC3–20
Williamson, Debra, 116
Wilson, Stephen V., PC1–11
Winbond Electronics, 300
Witter, Frank, 262
Wizz Air, 170
Wolf, Stephan, 341
Wolters Kluwer, 371
women

exploitation in beauty industry,
PC1–14

feminine cultures, 352
gender gap, 334
gender pay parity, 334
in global leadership roles, 364–365
in international management, 333–336
maternity leave, 90, 290, PC4–6,

PC4–10
Middle Eastern cross-cultural

communication, 137
Women’s Rights Campaign,

PC1–16–PC1–17
Wong, Belinda, 311

Wood, Andrew, PC1–19
work centrality, 352
work/workplace

China as work-oriented, 352
job context in leadership, 364
meaning of work, 352–354
mobile workforce, 287
mobile workforce needs, 287
passion in, 367
relationship-building in, 356
religion and, 83–85
religion and culture, 83–85
satisfaction derived from, 353

work ethic, 353–354, 358
workaholic culture, 96
workforce diversity, 128–129
World Confederation of Labor (WCL), 339
World Cup Soccer, 58
World Economic Forum, 14, 15, 21, 192,

237
World Land Trust, PC1–23
world-scale volume, 190
World Trade Center, 26
World Trade Organization (WTO), 8, 249
World Values Study Group, 121
WorldCom, 62
Wynn, Steve, PC4–6

X
Xi Jinping, 51
Xojo, Inc., 330–331

Y
Yeo, Michael, PC3–6
Youngy Investment Holding Group, 206,

233
YouTube, 76
Yuan, Eric, 366, 367
Yum China, 267–268
Yunalan, Okan, PC5–8

Z
Z.cn domain name, PC3–7
zero tax appeal, 189–190
Zhou Liang, 51
Zhurov, Oleksandr, PC4–13
Zoom Video Communications, 366, 367

Front Cover

Title Page

Dedication

Brief Contents

Contents

Preface

Part 1 The Global Manager’s Environment

Chapter 1 Assessing the Environment

Opening Profile: Small Businesses Steel Themselvesfor No-Deal after Brexit

The Global Business Environment

Globalization

Global Trends

Globalization and Emerging Markets

Backlash against Globalization

Effects of Institutions on Global Trade

Effects of Globalization on Corporations

Small and Medium-Sized Enterprises (SMEs)

The Globalization of Human Capital

Regional Trading Blocs

Under the Lens: South-East Asia Wakes Up to Power of Corporate Competition

Comparative Management in Focus: China Loses Its Allure��

Other Regions in the World

The Global Manager’s Role

The Political and Economic Environment

Political Risk

Political Risk Assessment

Managing Political Risk

Managing Terrorism Risk

Economic Risk

The Legal Environment

Contract Law

Other Regulatory Issues

The Technological Environment

The Globalization of Information Technology

Management in Action: Google to Set Up German Team to Tackle Privacy and Safety Issues��

Global E-Business

Developing Skills to Enhance Your Career

Communication

Critical Thinking

Collaboration

Knowledge Application/Analysis

Business Ethics/Social Responsibility

Conclusion

Summary of Key Points

Discussion Questions

Application Exercises

Experiential Exercise

Case Study: Harley-Davidson Sees $120m Hit from Tariffs This Year ��

Endnotes

Chapter 2 Managing Interdependence

Opening Profile: Samsung Finally Apologises to ItsWorkers around the World Struck Down by Disease

The Social Responsibility of MNCs

CSR: Global Consensus or Regional Variation?

From CSR to Shared Value?

Under the Lens: Speciality Products, Support, and Shared Value are Key to Success: India��

MNC Responsibility toward Human Rights

Comparative Management in Focus: Doing Business in China—Censorship, Human Rights, and the Challenge for Multinationals��

Management in Action: “Impact Beyond Numbers”—GoodWeave’s Global Solution to Child Labor��

Ethics in Global Management

Bribery

Under the Lens: SAP Alerts US to South Africa Kickback Allegations��

Ethics in Uses of Technology

Making the Right Decision

Under the Lens: Volkswagen under the Spotlight��

Managing Interdependence

Foreign Subsidiaries in the United States

Managing Subsidiary–Host Country Interdependence

Managing Environmental Interdependence and Sustainability

Implementing Sustainability Strategies

Conclusion

Summary of Key Points

Discussion Questions

Application Exercises

Experiential Exercise

Case Study: Facebook Faces Fresh Probe After Photo Leak

Endnotes

Comprehensive Cases

Case 1: Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the Way?

Case 2: ‘Enrich Not Exploit’: Can New CSR Strategy Help Body Shop Regain Glory?

Part 2 The Cultural Context of Global Management

Chapter 3 Understanding the Role of Culture

Opening Profile: Social Media Bring Changesto Saudi Arabian Culture

Culture and Its Effects on Organizations

Societal Culture

Organizational Culture

Culture’s Effects on Management

Influences on National Culture

Under the Lens: Religion and the Workplace��

Cultural Value Dimensions

Project GLOBE Cultural Dimensions

Cultural Clusters

Hofstede’s Value Dimensions

Trompenaars’s Value Dimensions

Consequence or Cause?

Critical Operational Value Differences

The Internet and Culture

Under the Lens: Seoul Fights Back against Workaholic Culture: Labour Law��

Management in Action: A Cultural Revolution Is Changing India, One Open-Plan Office at a Time: Office Life Modernisation��

Developing Cultural Profiles

Comparative Management in Focus: Profiles in Culture—Japan, Germany, Latin America��

Culture and Management Styles around the World

Under the Lens: Doing Business in Brazil—Language, Culture, Customs, and Etiquette��

Saudi Arabia

Chinese Family Small Businesses

Conclusion

Summary of Key Points

Discussion Questions

Application Exercises

Experiential Exercises

Case Study: An Australian Manager
in an American
Company

Endnotes

Chapter 4 Communicating Across Cultures

Opening Profile: The Impact of Social Mediaon Global Business

The Communication Process

Cultural Noise in the Communication Process

The Culture–Communication Link

Trust in Communication

Trust in the Digital Age

The GLOBE Project

Cultural Variables in the Communication Process

Under the Lens: Communicating in India—Language, Culture, Customs, and Etiquette

Second Language Use

Under the Lens: Native English Speakers Must Learn How They Come Across

Nonverbal Communication

Under the Lens: Communicating Italian Style��

Context

Management in Action: A Guide to (Mis)communication��

Comparative Management in Focus: Communicating with Arabs��

Communication Channels

Information Technology: Going Global and Acting Local

Managing Cross-Cultural Communication

Developing Cultural Sensitivity

Careful Encoding

Selective Transmission

Careful Decoding of Feedback

Follow-Up Actions

Conclusion

Summary of Key Points

Discussion Questions

Application Exercises

Case Study: Italy’s D & G in China: Fashion Show Canceled in Shanghai Following Scandal

Endnotes

Chapter 5 Cross-Cultural Negotiation and Decision Making

Opening Profile: Hitachi Looks for Deal with ABB on Power Grids Business

Negotiation

The Negotiation Process

Stage One: Preparation

Negotiating Teams

Variables in the Negotiation Process

Stage Two: Relationship Building

Nontask Sounding

Stage Three: Exchanging Task-Related Information

Stage Four: Persuasion

Stage Five: Concessions and Agreement

Understanding Negotiation Styles

Successful Negotiators around the World

Comparing Profiles

Managing Negotiation

Dealing with Translators

Using the Internet to Support Negotiations

Managing Conflict Resolution

Comparative Management in Focus: Negotiating with the Chinese��

Context in Negotiations

Decision Making

The Influence of Culture on Decision Making

Under the Lens: Ryanair Secures UK Licence in Preparation for No-Deal Brexit��

Management in Action: Spotify’s Plan to Beat Apple: Sign the Rest of the World��

Approaches to Decision Making

Comparative Management in Focus: Decision Making in Japanese Companies��

Conclusion

Summary of Key Points

Discussion Questions

Experiential Exercises: Multicultural Negotiations

Case Study: India’s Ecommerce Crackdown Upends Big Foreign Players

Endnotes

Comprehensive Cases

Case 3: Cross-Cultural Challenges for a Singaporean Expatriate in Zurich

Case 4: Anuj Pathak Returns to India

Part 3 Formulating and Implementing Strategy for International and Global Operations

Chapter 6 Formulating Strategy

Opening Profile: Why Ford Is Stalling in China while Toyota Succeeds

Reasons for Going International

Reactive Reasons

Management in Action: Why Dyson Is Shifting Its HQ to Singapore��

Proactive Reasons

Comparative Management in Focus: Global Companies Take Advantage of Growth Opportunities in Africa��

Challenges When Going International

Strategic Formulation Process

Steps in Developing Strategies

Step 1. Establish Mission and Objectives

Step 2. Assess External Environment

Competitive Analysis

Porter’s Five Forces Industry-Based Model

Step 3. Analyze Internal Factors

Step 4. Evaluate Global and International Strategic Alternatives

Approaches to World Markets

Transnational Strategies

Using E-Business for Global Expansion

Step 5. Evaluate Entry Strategy Alternatives

Strategic Planning for Emerging Markets

Management in Action: Strategic Planning for Emerging Markets��

Under the Lens: Revolut’s Russian Founder Stirs Up Lithuania’s Fintech Debate��

Step 6. Decide on Strategy

Timing Entry and Scheduling Expansions

Foreign Direct Investment Decisions under High Uncertainty

The Influence of Culture on Strategic Choices

Conclusion

Summary of Key Points

Discussion Questions

Application Exercises

Experiential Exercise

Case Study: How UK Businesses Are Planning—or Not—for a No-Deal Brexit

Endnotes

Chapter 7 Implementing Strategy

Opening Profile: Alibaba to Set Up Online Retail Service in Russia

Strategic Alliances

Joint Ventures

Non-equity Strategic Alliances

Global Strategic Alliances

Global and Cross-Border Alliances: Motivations and Benefits

Challenges in Implementing Global Alliances

Implementing Alliances between SMEs and MNCs

Guidelines for Successful Alliances

Implementing Strategy

Comparative Management in Focus: Joint Ventures in the Russian Federation��

Implementing Strategies for SMEs

Under the Lens: Breaking Down Barriers for Small or Medium-Sized Enterprises (SMEs)

Implementing a Global Sourcing Strategy: From Offshoring to Next-Shoring?

Under the Lens: Ford to Use Blockchain in Pilot to Trace Cobalt Mined in Congo��

Implementing Strategies for Emerging Economy Firms

Management in Action: Infosys’s Path from Emerging Start-up to Emerging MNC��

Managing the Firm’s Performance in International Joint Ventures

Knowledge Management in IJVs

Government Influences on Strategic Implementation

Cultural Influences on Strategic Implementation

E-Commerce Impact on Strategy Implementation

Conclusion

Summary of Key Points

Discussion Questions

Application Exercise

Case Study: IKEA Finally Opens in India, Minus the Meatballs

Endnotes

Chapter 8 Organization Structure and Control Systems

Opening Profile: Citi Sets Post-Brexit Frankfurt Trading Hub in Motion

Organizational Structure

Evolution and Change in Mnc Organizational Structures

Integrated Global Structures

Management in Action: Volkswagen Makes Sweeping Changes to Management and Structure��

Organizing for Globalization

Dual Headquarters

Under the Lens: Unilever Backs Down on Plan to Move Headquarters From UK��

Organizing to Be Global, Act Local

Under the Lens: Yum China Battles McDonald’s in China��

Emergent Structural Forms

Teams as a Global–Local Structure

Comparative Management in Focus: Changing Organizational Structures of Emerging Market Companies��

Business Groups

Organizational Structure in the Digital Economy

Platform-based Teaming

Centralization and Decentralization

Changing Role of the Headquarters

Digital Organizational Readiness

The Global E-Corporation Network Structure

The Transnational Corporation (TNC) Network Structure

Choice of Organizational Form

Organizational Change and Design Variables

Control Systems for Global Operations

Direct Coordinating Mechanisms

Indirect Coordinating Mechanisms

Managing Effective Monitoring Systems

The Appropriateness of Monitoring and Reporting Systems

The Role of Information Systems

Evaluation Variables across Countries

Conclusion

Summary of Key Points

Discussion Questions

Application Exercises

Experiential Exercise

Case Study: Renault and Nissan Attempt to Ease Tension with New Board

Endnotes

Comprehensive Cases

Case 5: Amazon.com in China: Can Elaine Chang Crack the Chinese Market?

Case 6: Souq.com and the Battle for the Future of E-Commerce in the MENA Region

Case 7:
Coming to America: A Successful Japanese Acquisition in Global Business

Part 4 Global Human Resources Management

Chapter 9 Staffing, Training, and Compensation for Global Operations

Opening Profile: Staffing Company Operations

The Role of IHRM in Global Strategy Implementation

Staffing for Global Operations

Under the Lens: Tata’s Staffing Challenges in the United States��

Managing Expatriates

Expatriate Selection

Expatriate Performance Management

Under the Lens: Expatriate Employees Struggle to Readjust to Old Lives��

Comparative Management in Focus: Expatriate Performance Management Practices: Samples from Five Countries��

Global Team Performance Management

Expatriate Training and Development

Cross-Cultural Training

Training Techniques

Compensating Expatriates

Training and Compensating Host-Country Nationals

Training HCNs

Management in Action: Starbucks’ Java Style Helps to Recruit, Train, and Retain Local Managers in China��

Training Priorities for E-Business Development

Compensating HCNs

Conclusion

Summary of Key Points

Discussion Questions

Application Exercises

Experiential Exercise

Case Study: Kelly’s Assignment in Japan

Endnotes

Chapter 10 Developing a Global Management Cadre

Opening Profile: The Expat Life

Expatriate Career Management

Preparation, Adaptation, and Repatriation

The Role of the Expatriate Spouse

Under the Lens: Should I Stay or Should I Go? Overseas Jobs Demand the Extra Mile��

Expatriate Retention

The Role of Repatriation in Developing a Global Management Cadre

Knowledge Transfer

Global Management Teams

Virtual Global Teams

Management in Action: The Emergence of a Virtual Multinational Enterprise��

Managing Transnational Teams

The Role of Women in International Management

Working Within Local Labor Relations Systems

The Impact of Unions on Businesses

Under the Lens: German Manufacturer to Close Two UK Plants��

Organized Labor around the World

Convergence versus Divergence in Labor Systems

Adapting to Local Industrial Relations Systems

USMCA and Labor Relations in Mexico

Comparative Management in Focus: Labor Relations in Germany��

Conclusion

Summary of Key Points

Discussion Questions

Application Exercise

Experiential Exercise

Case Study: Expat Tax Breaks for Brexit Bankers: FT Readers Respond

Endnotes

Chapter 11 Motivating and Leading

Opening Profile: Motoi Oyama of Asics: The Globally Minded Shoe Ambassador

Motivating

Cross-Cultural Research on Motivation

The Meaning of Work

The Needs Hierarchy in the International Context

Comparative Management in Focus: Motivation in Mexico��

Under the Lens: Bad Bosses Are Making the UK’s Productivity Puzzle Worse��

Culture and Job Motivation

Reward Systems

Leading

The Global Leader’s Role and Environment

Under the Lens: Japanese Boards Move to Open Up to Overseas Executives��

Women in Global Leadership Roles

Under the Lens: French Companies Lead the Way on Gender Diversity��

Global Team Leadership

The Role of Technology in Leadership

Cross-Cultural Research on Leadership

Management in Action: Leadership in a Digital World��

Contingency Leadership: The Culture Variable

The GLOBE Project

Earlier Leadership Research

Conclusion

Summary of Key Points

Discussion Questions

Application Exercises

Experiential Exercise

Case Study: How to Bring Cross-Cultural Teams Together

Endnotes

Comprehensive Cases

Case 8: Daimler China: Facing a Media Firestorm

Case 9: Cirque du Soleil’s Global Human Resource Management Practices

Part 5 Integrative Section

Integrative Term Project

Integrative Case

Case 10: IKEA’s Challenges in Russia

Glossary

Index

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