Module 06: Critical Thinking Euro Disneyland case

International Management

Culture, Strategy, and Behavior

Fred Luthans | Jonathan P. Doh

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ORGANIZATIONAL CULTURES AND DIVERSITY

The World of International Management

Managing Culture and Diversity in Global Teams

A ccording to many international consultants and manag-ers, diverse and global teams are one of the most con- sistent sources of competitive advantage for any organization. Deloitte Touche Tohmatsu, the international accounting and consulting firm, has embraced a global mindset when building its teams. According to the company, “strength from cultural diversity is one of Deloitte’s shared values.” With more than 200,000 employees spread across offices in 150 countries, the company has implemented a corporate culture that regards diversity as a key competitive advantage.1

At Deloitte, as with most multinational organizations, global teams are also virtual teams. According to a study by Kirkman, Rosen, Gibson, and Tesluk, virtual teams are “groups of people who work interdependently with shared purpose across space, time, and organization boundaries using technology to commu- nicate and collaborate.”2 These teams are often cross-cultural and cross-functional. Furthermore, Kirkman and colleagues explain that virtual teams allow “organizations to combine the best expertise regardless of geographic location.”3 To manage a global team, international managers must take into consider- ation three factors: culture, communication, and trust.

Culture At Deloitte, leadership is trained to adapt to the cultural differ- ences that their globally located employees exhibit. Leveraging the experiences of one of their global teams, the company conducted a three-month study into how cultural dynamics impact performance and success. The team included employ- ees from Spain, Germany, Australia, the United States, and Japan. Through this study, Deloitte identified four key findings regarding culture and global leadership:4

1. “Cultural and/or personality diversity is in the eye of the beholder.” Despite prior assumptions that cultural differ- ences would have the largest impact on the team’s final deliverable, the team members in the study were split as to whether culture or personality led to a greater

The previous two chapters focused on national cultures. The overriding objective of this chapter is to examine the interac- tion of national culture (diversity) and organizational cultures and to discuss ways in which MNCs can manage the often inherent conflicts between national and organizational cultures. Many times, the cultural values and resulting behaviors that are common in a particular country are not the same as those in another. To be successful, MNCs must balance and integrate the national cultures of the countries in which they do busi- ness with their own organizational culture. Employee relations, which includes how organizational culture responds to national culture or diversity, deals with internal structures and defines how the company manages. Customer relations, associated with how national culture reacts to organizational cultures, reflects how the local community views the company from a customer service and employee satisfaction perspective. Although the field of international management has long recognized the impact of national cultures, only recently has attention been given to the importance of managing organiza- tional cultures and diversity. This chapter first examines com- mon organizational cultures that exist in MNCs, and then presents and analyzes ways in which multiculturalism and diversity are being addressed by the best, world-class multina- tionals. The specific objectives of this chapter are

1. DEFINE exactly what is meant by organizational culture, and discuss the interaction of national and MNC cultures.

2. IDENTIFY the four most common categories of organiza- tional culture that have been found through research, and discuss the characteristics of each.

3. PROVIDE an overview of the nature and degree of multi- culturalism and diversity in today’s MNCs.

4. DISCUSS common guidelines and principles that are used in building multicultural effectiveness at the team and the or- ganizational levels.

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better, stronger cross-cultural teams. Through the program, individuals are identified as having one or more of the four types of “chemistries”: Pioneer, Driver, Integrator, or Guardian. By sharing their “chemistry” with the team, team members can adapt their style of delivery to better communicate with each other. Deloitte delivers “Business Chemistry” to external clients as well as to its internal teams. To date, more than 90,000 people in 150 countries have used the program.6

In her article “Tips for Working in Global Teams,” Melanie Doulton provides helpful suggestions for good communication in a global team:

∙ When starting a project with a new team, hold an initial meeting in which all members introduce themselves and describe the job each one is going to do.

∙ Hold regular meetings throughout the project to ensure everyone is “on the same page.” Follow up conference calls with written minutes to reinforce what was discussed and what individual team members are responsible for.

∙ Put details of the project in writing, especially for a new team in which everyone speaks in different accents and uses different idioms and colloquialisms.

∙ Communicate using the most effective technology. For example, decide when e-mail is preferable to a phone call or instant messaging is preferable to a videoconfer- ence. In addition, try to understand everyone’s communi- cation style. For example, for a high-context culture such as India’s, people tend to speak in the passive voice, whereas in North America, people use the active voice.7

Moreover, while acknowledging the challenges of communica- tion in virtual teams, Steven R. Rayner also points out that written communication can have an advantage. He states, “The process of writing—where the sender must carefully examine how to communicate his/her message—provides the sender with the opportunity to create a more refined response than an ‘off-the-cuff’ verbal comment.”8

impact. In many instances, the individual personalities of the team members, irrespective of national origin, were shown to be equally as differentiating.

2. “Cultural diversity can positively contribute to people’s professional and personal enjoyment of the project, as well as a project’s outcome.” The team members in the study universally expressed an enhanced experience from working with others of differing cultures. A few fac- tors seemed to lead to this. Genuine curiosity about their fellow team members, learning how to build new types of relationships, and being challenged to think differently were all found to be enjoyable by the employees.

3. “Cultural diversity can indirectly encourage project mem- bers to rethink their usual working habits and expecta- tions, behave with fewer assumptions about the ‘right’ way to address an issue and promote linguistic clarity.” Unexpectedly, the lack of a common first language between team members actually enhanced communica- tion. Employees spent more time ensuring that the con- tent of their communication was clearly understood by the team, and team members reported that they actually found themselves transforming into better listeners.

4. “The dominance of cultural diversity amongst team mem- bers reduces the bias to interact with people who have common characteristics and create a unique bond.” With each employee bringing a different set of perspectives to the table, the playing field among the team members was more level. The employees expressed a sense of synergy, with many stating that they felt better prepared to overcome challenges by having such a diverse set of skills at their disposal. Ironically, the lack of similarities between the employees in the study actually led to greater personal connections to each other, with team members expressing a familial feeling among the group.5

Communication Communicating without face-to-face interaction can have its drawbacks. Being consciously aware of the way that both you and your teammates communicate can increase the chances of success for your team. To help team members gain a better understanding of each other’s communication styles, Deloitte developed “Business Chemistry,” a program that identifies the pre- ferred business behaviors of team members to help build

Likelihood of Message Getting Interpreted Correctly

Source: Adapted from Steven R. Rayner, “The Virtual Team Challenge,” Rayner & Associates, Inc., 1997.

Fax/Letter

LOW HIGH

E-mail Telephone Video

Conferencing Face-to-Face

Interaction

184 Part 2 The Role of Culture

Trust Kirkman and colleagues emphasize that “a specific challenge for virtual teams, compared to face-to-face teams, is the dif- ficulty of building trust between team members who rarely, or never, see each other.”9  Rayner notes that “by some estimates, as much as 30 percent of senior management time is spent in ‘chance’ encounters (such as unplanned hallway, parking lot, and lunch room conversations). . . . In a virtual team setting, these opportunities for relationship building and idea sharing are far more limited.”10

How can managers build trust among virtual team mem- bers? From their research, Kirkman and colleagues discovered that “building trust requires rapid responses to electronic com- munications from team members, reliable performance, and consistent follow-through. Accordingly, team leaders should coach virtual team members to avoid long lags in responding, unilateral priority shifts, and failure to follow up on commit- ments.”11 In addition, Doulton recommends that virtual team members “exchange feedback early” and allow an extra day or two for responses due to time zone differences.12

Team building activities also build trust. According to Kirkman and colleagues, as part of the virtual team launch, it is recom- mended that all members meet face-to-face to “set objectives, clarify roles, build personal relationships, develop team norms, and establish group identity.”13  Picking the right team members can help the teams become more cohesive as well. When Kirk- man and colleagues interviewed 75 team leaders and members in virtual teams, people responded that skills in communication, teamwork, thinking outside the box, and taking initiative were more important than technical skills. This finding was surprising, considering most managers select virtual team members based on technical skills. Having people with the right skills is essential to bring together a successful virtual team.14

At Deloitte, training employees to trust and harness the ben- efits of global, diverse teaming starts at the intern level. Through Deloitte’s Global Project Challenge, interns cross-collaborate with other Deloitte employees across the world to solve real business problems. Employees learn strategies to cope with both the logistical challenges, such as time zone differences, and cultural challenges that arise when working in a virtual team.

Advantages of Global Virtual Teams In addition to its challenges of overcoming cultural and com- munication barriers, global virtual teams have certain advan- tages over face-to-face teams. First, Kirkman and colleagues concluded that “working virtu- ally can reduce team process losses associated with stereotyp- ing, personality conflicts, power politics, and cliques commonly experienced by face-to-face teams. Virtual team members may be unaffected by potentially divisive demographic differences when there is minimal face-to-face contact.” Managers may even give fairer assessments of team members’ work because managers are compelled to rely on objective data rather than being influenced by their perceptual biases.15

Second, Rayner observes that “having members span many different time zones can literally keep a project moving around the clock. . . . Work doesn’t stop—it merely shifts to a different time zone.”16

Third, according to Rayner, “The ability for an organization to bring people together from remote geography and form a cohesive team that is capable of quickly solving complex prob- lems and making effective decisions is an enormous competi- tive advantage.”17

For an international manager, this competitive advantage makes overcoming challenges of managing global teams worth the effort.

As can be seen from Deloitte’s experiences, there are both benefits and challenges inher- ent in multinational, multicultural teams. These teams, which almost always include a diverse group of members with varying functional, geographic, ethnic, and cultural back- grounds, can be an efficient and effective vehicle for tackling increasingly multidimen- sional business problems. At the same time, this very diversity brings challenges that are often exacerbated when the teams are primarily “virtual.” Research has demonstrated the benefits of diversity and has also offered insight on how best to overcome the inherent challenges of global teams, including those that are “virtual.”

In this chapter we will explore the nature and characteristics of organizational culture as it relates to doing business in today’s global context. In addition, strategies and guidelines for establishing a strong organizational culture in the presence of diversity are presented.

■ The Nature of Organizational Culture The chapters in Part One provided the background on the external environment, and the chapters so far in Part Two have been concerned with the external culture. Regardless of whether this environment or cultural context affects the MNC, when individuals join an MNC, not only do they bring their national culture, which greatly affects their learned beliefs, attitudes, values, and behaviors, but they also enter into an organizational culture. Employees of MNCs are expected to “fit in.” For example, at PepsiCo, personnel are

Chapter 6 Organizational Cultures and Diversity 185

expected to be cheerful, positive, and enthusiastic and have committed optimism; at Ford, they are expected to show self-confidence, assertiveness, and machismo.18 Regardless of the external environment or their national culture, managers and employees must under- stand and follow their organization’s culture to be successful. In this section, after first defining organizational culture, we analyze the interaction between national and organi- zational cultures. An understanding of this interaction has become recognized as vital to effective international management.

Definition and Characteristics Organizational culture has been defined in several different ways. In its most basic form, organizational culture can be defined as the shared values and beliefs that enable members to understand their roles in and the norms of the organization. A more detailed definition is offered by organizational cultural theorist Edgar Schein, who defines it as a pattern of shared basic assumptions that the group learned as it solved its problems of external adaptation and internal integration, and that has worked well enough to be considered valid and, therefore, to be taught to new members as the correct way to per- ceive, think, and feel in relation to those problems.19

Regardless of how the term is defined, a number of important characteristics are associated with an organization’s culture. These have been summarized as

1. Observed behavioral regularities, as typified by common language, terminol- ogy, and rituals.

2. Norms, as reflected by things such as the amount of work to be done and the degree of cooperation between management and employees.

3. Dominant values that the organization advocates and expects participants to share, such as high product and service quality, low absenteeism, and high efficiency.

4. A philosophy that is set forth in the MNC’s beliefs regarding how employees and customers should be treated.

5. Rules that dictate the dos and don’ts of employee behavior relating to areas such as productivity, customer relations, and intergroup cooperation.

6. Organizational climate, or the overall atmosphere of the enterprise, as reflected by the way that participants interact with each other, conduct themselves with customers, and feel about the way they are treated by higher-level management.20

This list is not intended to be all-inclusive, but it does help illustrate the nature of organizational culture.21  The major problem is that sometimes an MNC’s organizational culture in one country’s facility differs sharply from organizational cultures in other countries. For example, managers who do well in England may be ineffective in Germany, despite the fact that they work for the same MNC. In addition, the cultures of the English and German subsidiaries may differ sharply from those of the home U.S. location. Effec- tively dealing with multiculturalism within the various locations of an MNC is a major challenge for international management.

A good example is provided by the British-Swedish MNC AstraZeneca PLC, the seventh-largest pharmaceutical company in the world. With operations in over 100 coun- tries on six continents, AstraZeneca’s 13-member senior executive team includes leaders from the United Kingdom, France, Australia, the United States, and the Nether- lands.22 Over 23 percent of the company’s employees work in North America, and about 31 percent are employed in Asia.23 To unite such a diverse set of employees under a common corporate culture, AstraZeneca’s Global Steering Group has focused on three universal cultural pillars: “Leadership and Management Capability,” “Transparency in Talent Management and Career Progression,” and “Work/Life Challenges.”24 Further- more, the company introduced a new cross-cultural mentorship program, called Insight Exchange. By pairing senior- and junior-level employees from different cultural and professional backgrounds, AstraZeneca hopes to create a more open culture.

organizational culture Shared values and beliefs that enable members to understand their roles and the norms of the organization.

186 Part 2 The Role of Culture

In some cases companies have deliberately maintained two different business cul- tures because they do not want one culture influencing the other. A good example is provided by the Tata Group, the giant conglomerate based in India, which has made multiple transnational acquisitions in recent years. When its automobile subsidiary, Tata Motors, bought control of Daewoo, a Korean automaker, it used a strategy that is not very common when one company controls another. Rather than impose its own culture on the chain, Tata’s management took a back seat. To emphasize this approach, Tata Group chairman Ratan Tata publicly stated that “Tata Motors will operate Daewoo as a Korean company, in Korea, managed by Koreans.”25  Tata maintained the Daewoo brand name, appointed a Korean as the new CEO, and operated as a Korean business. The union vice president even remarked that “Though Tata is a foreign company, we were able to confirm that it recognizes and respects Korea in many aspects.” In the first four years after the acquisition, revenue doubled, operating profit grew sevenfold, and trust between the employees’ union and management improved.26   

Tata Chemicals took a similar approach when it purchased British soda ash producer Brunner Mond and its Kenyan subsidy Magadi Soda. To maintain the existing company culture at Brunner Mond and Magadi Soda, Tata Chemicals did not change the companies’ names or logos, kept all existing senior executives in place, and made it clear that all major decisions would be made jointly between Brunner Mond, Magadi Soda, and Tata Chemi- cals. To ensure a smooth ownership transition, executives from all three companies jointly created a plan of action for the first 100 days post-acquisition. Since then, Tata Chemicals has leveraged resources from all three companies to build strong relationships with exter- nal suppliers, expand global growth opportunities, and coordinate sales and operations.27 

■ Interaction between National and Organizational Cultures There is a widely held belief that organizational culture tends to moderate or erase the impact of national culture. The logic of such conventional wisdom is that if a U.S. MNC set up operations in, say, France, it would not be long before the French employees began to “think like Americans.” In fact, evidence is accumulating that just the opposite may be true. Hofstede’s research found that the national cultural values of employees have a significant impact on their organizational performance, and that the cultural values employees bring to the workplace with them are not easily changed by the organization. So, for example, while some French employees would have a higher power distance than Swedes and some a lower power distance, chances are “that if a company hired locals in Paris, they would, on the whole, be less likely to challenge hierarchical power than would the same number of locals hired in Stockholm.”28

Andre Laurent’s research supports Hofstede’s conclusions.29 He found that cultural differences are actually more pronounced among foreign employees working within the same multinational organization than among personnel working for firms in their native lands. Nancy Adler summarized these research findings as follows:

When they work for a multinational corporation, it appears that Germans become more German, Americans become more American, Swedes become more Swedish, and so on. Surprised by these results, Laurent replicated the research in two other multinational cor- porations, each with subsidiaries in the same nine Western European countries and the United States. Similar to the first company, corporate culture did not reduce or eliminate national differences in the second and third corporations. Far from reducing national differ- ences, organization culture maintains and enhances them.30

There often are substantial differences between the organizational cultures of dif- ferent subsidiaries, and, of course, this can cause coordination problems. For example, when Lucent Technologies, Inc., of Murray Hill, New Jersey, merged with Alcatel SA of Paris, France, both parties failed to realize some of the cultural differences between themselves and their new partners. Leadership concerns due to cultural misunderstand- ings arose from the very beginning of the merger. Frenchman Serge Tchuruk was

Chapter 6 Organizational Cultures and Diversity 187

appointed chair of the combined company, while American Patricia Russo was appointed as CEO. In France, the chair is often seen as the company’s leader, while in the United States, the CEO is viewed as the person highest in command. This cultural difference led to confusion as to whether Russo or Tchuruk was actually in charge.31 Additionally, Patricia Russo did not speak French, despite leading a now-French company, resulting in additional confusion.32   

When the combined company faced financial crises, the cultural response differed greatly between the American and French executives, leading to further disagreement. In the United States, jobs are often cut when finances are pressured, whereas in France, companies tend to reach out to the government for assistance. As a result, Alcatel-Lucent was unable to cut costs, but also unable to secure government assistance.33 Local restric- tions, overlooked before the merger, further hindered the combined company’s success and added to the financial strain; in Bonn, Germany, for example, the company was required to keep both Lucent’s and Alcatel’s original offices open, despite employing only a combined 75 employees.34 After just a few years, both top executives were forced to step aside. The merger never did result in profitability for the company; for all seven years that Alcatel-Lucent operated independently before being acquired by Nokia in 2015, the company posted negative cash flows.

In examining and addressing the differences between organizational cultures, Hofstede provided the early database of a set of proprietary cultural-analysis techniques and pro- grams known as DOCSA (Diagnosing Organizational Culture for Strategic Application). This approach identifies the dimensions of organizational culture summarized in Table 6–1.

Table 6–1 Dimensions of Corporate Culture

Motivation

Activities Outputs

To be consistent and precise. To strive for accuracy and To be pioneers. To pursue clear aims and objectives. attention to detail. To refine and perfect. Get it right. To innovate and progress. Go for it.

Relationship

Job Person

To put the demands of the job before the needs of To put the needs of the individual before the needs the individual. of the job.

Identity

Corporate Professional

To identify with and uphold the expectations of the To pursue the aims and ideals of each professional practice. employing organizations.

Communication

Open Closed

To stimulate and encourage a full and free exchange To monitor and control the exchange and accessibility of of information and opinion. information and opinion.

Control

Tight Loose

To comply with clear and definite systems and procedures. To work flexibly and adaptively according to the needs of the situation.

Conduct

Conventional Pragmatic

To put the expertise and standards of the employing To put the demands and expectations of customers first. To organization first. To do what we know is right. do what they ask.

Source: Adapted from a study by the Diagnosing Organizational Culture for Strategic Application (DOCSA) group and reported in Lisa Hoecklin, Managing Cultural Differences: Strategies for Competitive Advantage (Workingham, England: Addison-Wesley, 1995), p. 146.

188 Part 2 The Role of Culture

It was found that when cultural comparisons were made between different subsidiaries of an MNC, different cultures often existed in each one. Such cultural differences within an MNC could reduce the ability of units to work well together. An example is provided in Figure 6–1, which shows the cultural dimensions of a California-based MNC and its Euro- pean subsidiary as perceived by the Europeans. A close comparison of these perceptions reveals some startling differences.

The Europeans viewed the culture in the U.S. facilities as only slightly activities oriented (see Table 6–1 for a description of these dimensions), but they saw their own European operations as much more heavily activities oriented. The U.S. operation was viewed as moderately people oriented, but their own relationships were viewed as very job oriented. The Americans were seen as having a slight identification with their own organization, while the Europeans had a much stronger identification. The Americans were perceived as being very open in their communications; the Europeans saw them- selves as moderately closed. The Americans were viewed as preferring very loose control, while the Europeans felt they preferred somewhat tight control. The Americans were seen as somewhat conventional in their conduct, while the Europeans saw themselves as somewhat pragmatic. If these perceptions are accurate, then it obviously would be neces- sary for both groups to discuss their cultural differences and carefully coordinate their activities to work well together.

This analysis is relevant to multinational alliances. It shows that even though an alliance may exist, the partners will bring different organizational cultures with them.

Figure 6–1 Europeans’ Perception of the Cultural Dimensions of U.S. Operations (A) and European Operations (B) of the Same MNC

Source: Adapted from a study by the Diagnosing Organizational Culture for Strategic Application (DOCSA) group and reported in Lisa Hoecklin, Managing Cultural Differences: Strategies for Competitive Advantage (Workingham, England: Addison-Wesley, 1995), pp. 147–148.

30 31 32 33 34 35 36 37 38 39 40 41 42

Activities

Job

Corporate

Open

Tight

Conventional

Outputs

Person

Professional

Closed

Loose

Pragmatic

30 31 32 33 34 35 36 37 38 39 40 41 42

Activities

Job

Corporate

Open

Tight

Conventional

Outputs

Person

Professional

Closed

Loose

Pragmatic

(A)

(B)

Chapter 6 Organizational Cultures and Diversity 189

Lessem and Neubauer, who have portrayed Europe as offering four distinct ways of deal- ing with multiculturalism (based on the United Kingdom, French, German, and Italian characteristics), provide an example in Table 6–2, which briefly describes each of these sets of cultural characteristics. A close examination of the differences highlights how difficult it can be to do business with two or more of these groups because each group perceives things differently from the others. Another example is the way in which nego- tiations occur between groups; here are some contrasts between French and Spanish negotiators:35

French Spanish

Look for a meeting of minds. Look for a meeting of people. Intellectual competence is very important. Social competence is very important. Persuasion through carefully prepared and Persuasion through emotional appeal is skilled rhetoric is employed. employed. Strong emphasis is given to a logical Socialization always precedes negotiations, presentation of one’s position coupled which are characterized by an exchange of with well-reasoned, detailed solutions. grand ideas and general principles. A contract is viewed as a well-reasoned A contract is viewed as a long-lasting transaction. relationship. Trust emerges slowly and is based on the Trust is developed on the basis of frequent evaluation of perceived status and and warm interpersonal contact and intellect. transaction.

Such comparisons also help explain why it can be difficult for an MNC with a strong organizational culture to break into foreign markets where it is not completely familiar with divergent national cultures. The International Management in Action “Doing Things the Walmart Way” provides an illustration. When dealing with these challenges, MNCs must work hard to understand the nature of the country and institutional practices to both moderate and adapt their operations in a way that accommodates the company and cus- tomer base.

Table 6–2 European Management Characteristics

Characteristic

Western Northern Eastern Southern Dimension (United Kingdom) (France) (Germany) (Italy)

Corporate Commercial Administrative Industrial Familial Management attributes Behavior Experiential Professional Developmental Convivial Attitude Sensation Thought Intuition Feeling Institutional models Function Salesmanship Control Production Personnel Structure Transaction Hierarchy System Network Societal ideas Economics Free market Dirigiste Social market Communal Philosophy Pragmatic Rational Holistic Humanistic Cultural images Art Theatre Architecture Music Dance Culture (Anglo-Saxon) (Gallic) (Germanic) (Latin)

Source: Adapted from Ronald Lessen and Fred Neubauer, European Management Systems (McGraw-Hill, London, 1994), and reported in Lisa Hoecklin, Managing Cultural Differences: Strategies for Competitive Advantage (Workingham, England: Addison-Wesley, 1995), p. 149.

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International Management in Action

Doing Things the Walmart Way; Germans Say, “Nein, vielen Dank”

Across the globe, Walmart employees engage in the “Walmart cheer” to start their day. It is a way to show inclusivity and express their pride in the company, and can be heard in many different languages. Walmart not only operates in more than two dozen countries but is also a leader in diversity in the workplace. In 2015, Walmart was named a noteworthy company for diversity by DiversityInc magazine, and, in 2012, then- CEO Mike Duke was inducted into the CPG/Retail Diversity Hall of Fame. However, despite Walmart’s multinational presence and representation, its internal culture proved to be less than satisfactory to the German market. Walmart has experienced a fair share of negative PR over the years, so it is no surprise that some may have adverse reactions to news of Walmart moving into the neighborhood. Before the unflattering buzz, Walmart sometimes discovers that even the best intentions can fall flat. Walmart entered the German market in 1997 and stressed the idea of friendly service with a smile, where the customers always come first. Even before the employees walked onto the sales room floor, employee dissatisfaction became clear. The pamphlet that outlined the workplace code of ethics was simply translated from English to German, but the message was not expressed the way Walmart had intended. It warned employees of potential supervisor- employee relationships, implying sexual harassment, and encouraged reports of “improper behavior,” which spoke more to legal matters. The Germans interpreted this to mean that there was a ban on any romantic relationships in the workplace and saw the  reporting methods as more of a way to rat out co-workers than benefit the company. As we saw in  Chapter 3, ethical values in one country may not be  the same as in another, and Walmart experienced this firsthand. Another employee relations issue that arose dealt with local practices. Walmart has never been open to unionized employees, so when the German operations began dealing with workers’ councils and adhering to

co-determination rules, a common practice there, Walmart was less than willing to listen to suggestions as to how to improve employee working conditions. As if this was not enough, Walmart soon experienced problems with customer relations as well. Doing things the Walmart way included smiling at customers and assisting them by bagging their grocer- ies at the Supercenter locations. This policy presented problems in the German environment. Male employees who were ordered to smile at customers were often seen as flirtatious to male customers, and Germans do not like strangers handling their groceries. These are just a few reasons that customers did not enjoy their shopping experience. This does not mean that every- thing Walmart attempted was wrong. Products that are popular in Germany were available on the shelves in place of products that would be common in other countries. Enhanced distribution processes guaranteed availability of most requested items, and efficiency was pervasive. Despite some successes and good intentions and numerous attempts to improve the German stores, the Walmart culture proved to be a poor fit for the German market, and Walmart vacated Germany in 2006. Unfor- tunately, Walmart learned the hard way that in the retail or service industry, local customs are often more important than a strong, unyielding organizational cul- ture. The challenge to incorporate everyone into the Walmart family certainly fell short of expectations. If the Walmart culture does not become more flexible, or locally relevant, it may be chastised from numerous global markets, and the company could hear, “no, thank you” in even more languages than German as it continues to expand. (See In-Depth Integrative Case 2.2 at the end of Part Two for more detail on Walmart’s experiences around the world.)

Source: Mark Landler and Michael Barbaro, “Wal-Mart Finds That Its For- mula Doesn’t Fit Every Culture,” New York Times, August 2, 2006, http:// www.nytimes.com/2006/08/02/business/worldbusiness/02walmart.html.

■ Organizational Cultures in MNCs Organizational cultures of MNCs are shaped by a number of factors, including the cul- tural preferences of the leaders and employees. In the international arena, some MNCs have subsidiaries that, except for the company logo and reporting procedures, would not be easily recognizable as belonging to the same multinational.36

Given that many recent international expansions are a result of mergers or acquisi- tion, the integration of these organizational cultures is a critical concern in international

Chapter 6 Organizational Cultures and Diversity 191

management. Numeroff and Abrahams have suggested that there are four steps that are critical in this process:

1. The two groups have to establish the purpose, goal, and focus of their merger. 2. Then they have to develop mechanisms to identify the most important organi-

zational structures and management roles. 3. They have to determine who has authority over the resources needed for get-

ting things done. 4. They have to identify the expectations of all involved parties and facilitate

communication between both departments and individuals in the structure.37

Companies all over the world are finding out firsthand that there is more to an international merger or acquisition than just sharing resources and capturing greater market share. Differences in workplace cultures sometimes temporarily overshadow the overall goal of long-term success of the newly formed entity. With the proper manage- ment framework and execution, successful integration of cultures is not only possible, but also the most preferable paradigm in which to operate. It is the role of the sponsors and managers to keep sight of the necessity to create, maintain, and support the notion of a united front. It is only when this assimilation has occurred that an international merger or acquisition can truly be labeled a success.38

In addition, there are three aspects of organizational functioning that seem to be especially important in determining MNC organizational culture: (1) the general relationship between the employees and their organization; (2) the hierarchical sys- tem of authority that defines the roles of managers and subordinates; and (3) the general views that employees hold about the MNC’s purpose, destiny, goals, and their place in them.39

When examining these dimensions of organizational culture, Trompenaars sug- gested the use of two continua: One distinguishes between equity and hierarchy; the other examines orientation to the person and the task. Along these continua, which are shown in Figure 6–2, he identifies and describes four different types of organizational cultures: family, Eiffel Tower, guided missile, and incubator.40

In practice, of course, organizational cultures do not fit neatly into any of these four, but the groupings can be useful in helping examine the bases of how individuals relate to each other, think, learn, change, are motivated, and resolve conflict. The fol- lowing discussion examines each of these cultural types.

Fulfillment-oriented culture

INCUBATOR

Project-oriented culture

GUIDED MISSILE

EIFFEL TOWER

Role-oriented culture

FAMILY

Power-oriented culture

Person Emphasis

Task Emphasis

Equity

Hierarchy

Figure 6–2 Organizational Cultures

Source: Adapted from Fons Trompenaars, Riding the Waves of Culture: Understanding Diversity in Global Business (Burr Ridge, IL: Irwin, 1994), p. 154.

192 Part 2 The Role of Culture

Family Culture Family culture is characterized by a strong emphasis on hierarchy and orientation to the person. The result is a family-type environment that is power-oriented and headed by a leader who is regarded as a caring parent and one who knows what is best for the per- sonnel. Trompenaars found that this organizational culture is common in countries such as Turkey, Pakistan, Venezuela, China, Hong Kong, and Singapore.41

In this culture, personnel not only respect the individuals who are in charge but look to them for both guidance and approval as well. In turn, management assumes a paternal relationship with personnel, looks after employees, and tries to ensure that they are treated well and have continued employment. Family culture also is characterized by traditions, customs, and associations that bind together the personnel and make it difficult for outsiders to become members. When it works well, family culture can catalyze and multiply the energies of the personnel and appeal to their deepest feelings and aspirations. When it works poorly, members of the organization end up supporting a leader who is ineffective and drains their energies and loyalties.

This type of culture is foreign to most managers in the United States, who believe in valuing people based on their abilities and achievements, not on their age or position in the hierarchy. As a result, many managers in U.S.-based MNCs fail to understand why senior-level managers in overseas subsidiaries might appoint a relative to a high-level, sensitive position even though that individual might not appear to be the best qualified for the job. They fail to realize that family ties are so strong that the appointed relative would never do anything to embarrass or let down the family member who made the appointment. Here is an example:

A Dutch delegation was shocked and surprised when the Brazilian owner of a large manufacturing company introduced his relatively junior accountant as the key coordina- tor of a $15 million joint venture. The Dutch were puzzled as to why a recently qualified accountant had been given such weighty responsibilities, including the receipt of their own money. The Brazilians pointed out that the young man was the best possible choice among 1,200 employees since he was the nephew of the owner. Who could be more trustworthy than that? Instead of complaining, the Dutch should consider themselves lucky that he was available.42

Eiffel Tower Culture Eiffel Tower culture is characterized by strong emphasis on hierarchy and orientation to the task. Under this organizational culture, jobs are well defined, employees know what they are supposed to do, and everything is coordinated from the top. As a result, this culture—like the Eiffel Tower itself—is steep, narrow at the top, and broad at the base. Unlike family culture, where the leader is revered and considered to be the source of all power, the person holding the top position in the Eiffel Tower culture could be replaced at any time, and this would have no effect on the work that organization members are doing or on the organization’s reasons for existence. In this culture, rela- tionships are specific, and status remains with the job. Therefore, if the boss of an Eiffel Tower subsidiary were playing golf with a subordinate, the subordinate would not feel any pressure to let the boss win. In addition, these managers seldom create off-the-job relationships with their people because they believe this could affect their rational judgment. In fact, this culture operates very much like a formal hierarchy— impersonal and efficient.

Each role at each level of the hierarchy is described; rated for its difficulty, com- plexity, and responsibility; and has a salary attached to it. Then follows a search for a person to fill it. In considering applicants for the role, the personnel department will treat everyone equally and neutrally, match the person’s skills and aptitudes with the job requirements, and award the job to the best fit between role and person. The same pro- cedure is followed in evaluations and promotions.43

family culture A culture that is characterized by a strong emphasis on hierarchy and orientation to the person.

Eiffel Tower culture A culture that is characterized by strong emphasis on hierarchy and orientation to the task.

Chapter 6 Organizational Cultures and Diversity 193

Eiffel Tower culture most commonly is found in northwestern European countries. Examples include Denmark, Germany, and the Netherlands. The way that people in this culture learn and change differs sharply from that in the family culture. Learning involves the accumulation of skills necessary to fit a role, and organizations will use qualifications in deciding how to schedule, deploy, and reshuffle personnel to meet their needs. The organization also will employ such rational procedures as assessment centers, appraisal systems, training and development programs, and job rotation in man- aging its human resources. All these procedures help ensure that a formal hierarchic or bureaucracy-like approach works well. When changes need to be made, however, the Eiffel Tower culture often is ill-equipped to handle things. Manuals must be rewritten, procedures changed, job descriptions altered, promotions reconsidered, and qualifica- tions reassessed.

Because the Eiffel Tower culture does not rely on values that are similar to those in most U.S. MNCs, U.S. expatriate managers often have difficulty initiating change in this culture. As Trompenaars notes:

An American manager responsible for initiating change in a German company described to me the difficulties he had in making progress, although the German managers had discussed the new strategy in depth and made significant contributions to its formulation. Through informal channels, he had eventually discovered that his mistake was not having formalized the changes to structure or job descriptions. In the absence of a new organization chart, this Eiffel Tower company was unable to change.44

Guided Missile Culture Guided missile culture is characterized by strong emphasis on equality in the work- place and orientation to the task. This organizational culture is oriented to work, which typically is undertaken by teams or project groups. Unlike the Eiffel Tower culture, where job assignments are fixed and limited, personnel in the guided missile culture do whatever it takes to get the job done. This culture gets its name from high-tech orga- nizations such as the National Aeronautics and Space Administration (NASA), which pioneered the use of project groups working on space probes that resembled guided missiles. In these large project teams, more than a hundred different types of engineers often were responsible for building, say, a lunar landing module. The team member whose contribution would be crucial at any given time in the project typically could not be known in advance. Therefore, all types of engineers had to work in close harmony and cooperate with everyone on the team.

To be successful, the best form of synthesis must be used in the course of working on the project. For example, in a guided missile project, formal hierarchical considerations are given low priority, and individual expertise is of greatest importance. Additionally, all team members are equal (or at least potentially equal) because their relative contri- butions to the project are not yet known. All teams treat each other with respect because they may need the other for assistance. This egalitarian and task-driven organizational culture fits well with the national cultures of the United States and United Kingdom, which helps explain why high-tech MNCs commonly locate their operations in these countries.

Unlike family and Eiffel Tower cultures, change in guided missile culture comes quickly. Goals are accomplished, and teams are reconfigured and assigned new objec- tives. People move from group to group, and loyalties to one’s profession and project often are greater than loyalties to the organization itself.

Trompenaars found that the motivation of those in guided missile cultures tends to be more intrinsic than just concern for money and benefits. Team members become enthusiastic about, and identify with, the struggle toward attaining their goal. For example, a project team that is designing and building a new computer for the Asian market may be highly motivated to create a machine that is at the leading edge of

guided missile culture A culture that is characterized by strong emphasis on equality in the workplace and orientation to the task.

194 Part 2 The Role of Culture

technology, user-friendly, and likely to sweep the market. Everything else is second- ary to this overriding objective. Thus, both intragroup and intergroup conflicts are minimized and petty problems between team members set aside; everyone is so com- mitted to the project’s main goal that no one has time for petty disagreements. As Trompenaars notes:

This culture tends to be individualistic since it allows for a wide variety of differently spe- cialized persons to work with each other on a temporary basis. The scenery of faces keeps changing. Only the pursuit of chosen lines of personal development is constant. The team is a vehicle for the shared enthusiasm of its members, but is itself disposable and will be discarded when the project ends. Members are garrulous, idiosyncratic, and intelligent, but their mutuality is a means, not an end. It is a way of enjoying the journey. They do not need to know each other intimately, and may avoid doing so. Management by objectives is the language spoken, and people are paid for performance.45

Incubator Culture Incubator culture is the fourth major type of organizational culture that Trompenaars identified, and it is characterized by strong emphasis on equality and personal orientation. This culture is based heavily on the existential idea that organizations per se are second- ary to the fulfillment of the individuals within them. This culture is based on the prem- ise that the role of organizations is to serve as incubators for the self-expression and self-fulfillment of their members; as a result, this culture often has little formal structure. Participants in an incubator culture are there primarily to perform roles such as confirm- ing, criticizing, developing, finding resources for, or helping complete the development of an innovative product or service. These cultures often are found among start-up firms in Silicon Valley, California, or Silicon Glen, Scotland. These incubator-type organiza- tions typically are entrepreneurial and often founded and made up by a creative team who left larger, Eiffel Tower-type employers. They want to be part of an organization where their creative talents will not be stifled.

Incubator cultures often create environments where participants thrive on an intense, emotional commitment to the nature of the work. For example, the group may be in the process of gene splitting that could lead to radical medical break- throughs and extend life. Often, personnel in such cultures are overworked, and the enterprise typically is underfunded. As breakthroughs occur and the company gains stability, however, it starts moving down the road toward commercialization and profit. In turn, this engenders the need to hire more people and develop formalized procedures for ensuring the smooth flow of operations. In this process of growth and maturity, the unique characteristics of the incubator culture begin to wane and disap- pear, and the culture is replaced by one of the other types (family, Eiffel Tower, or guided missile).

As noted, change in the incubator culture often is fast and spontaneous. All par- ticipants are working toward the same objective. Because there may not yet be a customer who is using the final output, however, the problem itself often is open to redefinition, and the solution typically is generic, aimed at a universe of applications. Meanwhile, motivation of the personnel remains highly intrinsic and intense, and it is common to find employees working 70 hours a week—and loving it. The participants are more concerned with the unfolding creative process than they are in gathering power or ensur- ing personal monetary gain. In sharp contrast to the family culture, leadership in this incubator culture is achieved, not gained by position.

The four organizational cultures described by Trompenaars are “pure” types and seldom exist in practice. Rather the types are mixed and, as shown in Table 6–3, overlaid with one of the four major types of culture dominating the corporate scene. Recently, Trompenaars and his associates have created a questionnaire designed to identify national patterns of corporate culture, as shown in Figure 6–3.

incubator culture A culture that is characterized by strong emphasis on equality and orientation to the person.

Chapter 6 Organizational Cultures and Diversity 195

Table 6–3 Summary Characteristics of the Four Corporate Cultures

Corporate Culture

Family

Diffuse relationships to organic whole to which one is bonded.

Status is ascribed to parent figures who are close and powerful.

Intuitive, holistic, lateral, and error correcting.

Family members.

“Father” changes course. Intrinsic satisfaction in  being loved and respected. Management by subjectives. Turn other cheek, save other’s face, do not lose power game.

Eiffel Tower

Specific role in mechanical system of required interaction.

Status is ascribed to superior roles that are distant yet powerful.

Logical, analytical, vertical, and rationally efficient.

Human resources.

Change rules and procedures. Promotion to greater position, larger role.

Management by job description. Criticism is accusation of irrationalism unless there are procedures to arbitrate conflicts.

Guided Missile

Specific tasks in cybernetic system targeted on shared objectives. Status is achieved by project group members who con- tribute to targeted goal. Problem centered, professional, practical, and cross- disciplinary. Specialists and experts. Shift aim as target moves. Pay or credit for performance and problems solved. Management by objectives.

Constructive task- related only, then admit error and correct fast.

Incubator

Diffuse, spontaneous relationships growing out of shared creative process. Status is achieved by individuals exempli- fying creativity and growth.

Process oriented, creative, ad hoc, and inspirational.

Co-creators.

Improvise and attune.

Participation in the process of creating new realities. Management by enthusiasm. Improve creative idea, not negate it.

Characteristic

Relationships between employees

Attitude toward authority

Ways of thinking and learning

Attitudes toward people Ways of changing

Ways of motivating and rewarding

Criticism and conflict resolution

Source: Adapted from Fons Trompenaars and Charles Hampden-Turner, Riding the Waves of Culture: Understanding Diversity in Global Business, 2nd ed. (New York: McGraw-Hill, 1998), p. 183.

Source: Adapted from Fons Trompenaars and Charles Hampden-Turner, Riding the Waves of Culture: Understanding Diversity in Global Business, 2nd ed. (New York: McGraw-Hill, 1998), p. 184.

Switzerland Sweden

Norway

Ireland

Hungary New Zealand

Mexico Finland

Italy Venezuela

NigeriaAustralia Greece

Belgium

Israel

Spain India

South Korea

Germany France

Canada UK

USA

Egalitarian

Hierarchical

Person Task

Denmark

Figure 6–3 National Patterns of Corporate Culture

196

■ Managing Multiculturalism and Diversity As the International Management in Action box on Matsushita indicates, success in the international arena often is greatly determined by an MNC’s ability to manage both multiculturalism and diversity.46 Both domestically and internationally, organizations find themselves leading workforces that have a variety of cultures (and subcultures) and con- sist of a largely diverse population of women, men, young and old people, blacks, whites, Latins, Asians, Arabs, Indians, and many others.

Phases of Multicultural Development The effect of multiculturalism and diversity will vary depending on the stage of the firm in its international evolution. Figure 6–4  depicts the characteristics of the major phases in this evolution. For example, Adler has noted that international cultural diversity has minimal impact on domestic organizations, although domestic multiculturalism has a highly significant impact. As firms begin exporting to foreign clients, however, and become what she calls “international corporations” (Phase II in Figure 6–4), they must

International Management in Action

Matsushita Goes Global www.panasonic.com

In recent years, growing numbers of multinationals have begun to expand their operations, realizing that if they do not increase their worldwide presence now, they likely will be left behind in the near future. In turn, this has created a number of different challenges for these MNCs, including making a fit between their home orga- nizational culture and the organizational cultures at local levels in the different countries where the MNC oper- ates. Matsushita provides an excellent example of how to handle this challenge with its macromicro approach. This huge, Japanese MNC has developed a number of guidelines that it uses in setting up and operating its more than 150 industrial units. At the same time, the company complements these macro guidelines with on- site micro techniques that help create the most appro- priate organizational culture in the subsidiary. At the macro level, Matsushita employs six overall guidelines that are followed in all locales: (1) Be a good corporate citizen in every country by, among other things, respecting cultures, customs, and languages. (2)  Give overseas operations the best manufacturing technology the company has available. (3) Keep the expa- triate head count down, and groom local management to take over. (4) Let operating plants set their own rules, fine-tuning manufacturing processes to match the skills of the workers. (5) Create local research and develop- ment to tailor products to markets. (6) Encourage com- petition between overseas outposts and plants back home. Working within these macro guidelines, Matsu- shita then allows each local unit to create its own cul- ture. The Malaysian operations are a good example. Matsushita has erected 23 subsidiaries in Malaysia that collectively consist of about 30,000 employees. Less than 1 percent of the employee population, however, is Japanese. From these Malaysian operations, Matsushita has been producing more than 1.3 million televisions

and 1.8 million air conditioners annually, and 75 percent of these units are shipped overseas. To produce this output, local plants reflect Malaysia’s cultural mosaic of Muslim Malays, ethnic Chinese, and Indians. To accom- modate this diversity, Matsushita cafeterias offer Malay- sian, Chinese, and Indian food, and to accommodate Muslim religious customs, Matsushita provides special prayer rooms at each plant and allows two prayer ses- sions per shift. How well does this Malaysian workforce perform for the Japanese MNC? In the past, the Malaysian plants’ slogan was “Let’s catch up with Japan.” Today, how- ever, these plants frequently outperform their Japa- nese counterparts in both quality and efficiency. The comparison with Japan no longer is used. Additionally, Matsushita has found that the Malaysian culture is very flexible, and the locals are able to work well with almost any employer.  Today, Matsushita faces a number of important challenges, including remaining profitable in a slow- growth, high-cost Japanese economy. Fortunately, this MNC is doing extremely well overseas, which is buy- ing it time to get its house in order back home. A great amount of this success results from the MNC’s ability to nurture and manage overseas organizational cul- tures (such as in Malaysia) that are both diverse and highly productive.

Source: P. Christopher Earley and Harbir Singh, “International and Intercultural Management Research: What’s Next,” Academy of Man- agement Journal, June 1995, pp. 327–340; Karen Lowry Miller, “Siemens Shapes Up,” BusinessWeek, May 1, 1995, pp. 52–53; Christine M. Riordan and Robert J. Vandenberg, “A Central Question in Cross- Cultural Research: Do Employees of Different Cultures Interpret Work- Related Measures in an Equivalent Manner?” Journal of Management 20, no. 3 (1994), pp. 643–671; Brenton R. Schlender, “Matsushita Shows How to Go Global,” Fortune, July 11, 1994, pp. 159–166.

Chapter 6 Organizational Cultures and Diversity 197

adapt their approach and products to those of the local market. For these international firms, the impact of multiculturalism is highly significant. As companies become what she calls “multinational corporations” (Phase III), they often find that price tends to dominate all other considerations and the direct impact of culture may lessen slightly. For those who continue this international evolution and become full-blown “global corporations” (Phase IV), the impact of culture again becomes extremely important.47

As shown in Figure 6–5, international cultural diversity traditionally affects neither the domestic firm’s organizational culture nor its relationship with its customers

Phase I: Domestic

Corporations

Orientation: Product/Service

Profit Margin: High

Perspective: Ethnocentric

Structure: Functional Divisions

Competitive Strategy: Domestic

Market: Small/Domestic

R&D Sales: High

Exports: None

Technology: Proprietary

Competitors: None

Phase II: International Corporations

Orientation: Market

Profit Margin: Decreasing

Perspective: Polycentric

Structure: Functional Divisions

Competitive Strategy: Multidomestic

Market: Large/

Multidomestic

R&D Sales: Decreasing

Exports: Growing

Technology: Shared

Competitors: Few

Phase III: Multinational Corporations

Orientation: Price

Profit Margin: Very Low

Perspective: Multinational

Structure: Multinational Lines

Competitive Strategy: Multinational

Market: Large/Multinational

R&D Sales: Very Low

Exports: Large/Saturated

Technology: Widely Shared

Competitors: Many

Phase IV: Global

Corporations

Orientation: Strategy

Profit Margin: High, But

Decreasing

Perspective: Multicentric

Structure: Global Alliances/

Hierarchy

Competitive Strategy: Global

Market: Largest/Global

R&D Sales: Very High

Exports: Imports & Exports

Technology: Instantly Shared

Competitors: Significant

Source: Original graphic by Ben Littell under supervision of Professor Jonathan Doh based on data from Nancy J. Adler, International Dimensions of Organizational Behavior, 5th ed. © 2008 South-Western, a part of Cengage Learning, Inc.

Figure 6–4 International Corporation Evolution

Phase 1

Domestic firms

Phase 2

International firms

Phase 3

Multinational firms

Phase 4

Global firms

Source: From Nancy J. Adler, International Dimensions of Organizational Behavior, 5th ed. © 2008 South-Western, a part of Cengage Learning, Inc. Reproduced by permission. www.cengage.com/permissions.

Figure 6–5 Locations of International Cross-Cultural Interaction

198 Part 2 The Role of Culture

or clients. These firms work domestically, and only domestic multiculturalism has a  direct impact on their dynamics as well as on their relationship to the external environment.

Conversely, among international firms, which focus on exporting and producing abroad, cultural diversity has a strong impact on their external relationships with poten- tial buyers and foreign employees. In particular, these firms rely heavily on expatriate managers to help manage operations; as a result, the diversity focus is from the inside out. This is the reverse of what happens in multinational firms, where there is less emphasis on managing cultural differences outside the firm and more on managing cul- tural diversity within the company. This is because multinational firms hire personnel from all over the world. As shown in Figure 6–5, this results in a diversity focus that is primarily internal.

Global firms need both an internal and an external diversity focus (again see Figure 6–5). To be effective, everyone in the global organization needs to develop cross- cultural skills that allow them to work effectively with internal personnel as well as external customers, clients, and suppliers.

Types of Multiculturalism For the international management arena, there are several ways of examining multicul- turalism and diversity. One is to focus on the domestic multicultural and diverse work- force that operates in the MNC’s home country. In addition to domestic multiculturalism, there is the diverse workforce in other geographic locales, and increasingly common are the mix of domestic and overseas personnel found in today’s MNCs. The following discussion examines both domestic and group multiculturalism and the potential prob- lems and strengths.

Domestic Multiculturalism It is not necessary for today’s organizations to do busi- ness in another country to encounter people with diverse cultural backgrounds. Cultur- ally distinct populations can be found within organizations almost everywhere in the world. In Singapore, for example, there are four distinct cultural and linguistic groups: Chinese, Eurasian, Indian, and Malay. In Switzerland, there are four distinct ethnic communities: French, German, Italian, and Romansch. In Belgium, there are two linguistic groups: French and Flemish. In the United States, millions of first-generation immigrants have brought both their languages and their cultures. In Los Angeles, for example, there are more Samoans than on the island of Samoa, more Israelis than in any other city outside Israel, and more first- and second-generation Mexicans than in any other city except Mexico City. In Miami, over one-half the population is Latin, and most residents speak Spanish fluently. More Puerto Ricans live in New York City than in Puerto Rico.

It is even possible to examine domestic multiculturalism within the same ethnic groups. For example, Lee, after conducting research in Singapore among small Chinese family businesses, found that the viewpoints of the older generation differ sharply from those of the younger generation.48  Older generations tend to stress hierarchies, ethics, group dynamics, and the status quo, while the younger generations focus on worker responsibility, strategy, individual performance, and striving for new horizons. These differences can slow organizational processes as one generation considers the other to be ineffective in its methods. Managers, therefore, need to consider employees on an individual basis and try to compile techniques that convey a common message, ultimately maximizing productivity while satisfying everyone across the ages. In short, there is considerable multicultural diversity domestically in organizations throughout the world, and this trend will continue. For example, the U.S. civilian labor force of the next decade will change dramatically in ethnic composition. In particular, there will be a significantly lower percentage of white males in the workforce and a growing percentage of women, African Americans, Hispanics, and Asians.

Chapter 6 Organizational Cultures and Diversity 199

Group Multiculturalism There are a number of ways that diverse groups can be cat- egorized. Four of the most common include

1. Homogeneous groups, in which members have similar backgrounds and gen- erally perceive, interpret, and evaluate events in similar ways. An example would be a group of male German bankers who are forecasting the economic outlook for a foreign investment.

2. Token groups, in which all members but one have the same background. An example would be a group of Japanese retailers and a British attorney who are looking into the benefits and shortcomings of setting up operations in Bermuda.

3. Bicultural groups, in which two or more members represent each of two distinct cultures. An example would be a group of four Mexicans and four Canadians who have formed a team to investigate the possibility of investing in Russia.

4. Multicultural groups, in which there are individuals from three or more different ethnic backgrounds. An example is a group of three American, three German, three Uruguayan, and three Chinese managers who are looking into mining operations in Chile.

As the diversity of a group increases, the likelihood of all members perceiving things in the same way decreases sharply. Attitudes, perceptions, and communication in general may be a problem. On the other hand, there also are significant advantages associated with the effective use of multicultural, diverse groups. Sometimes, local laws require a certain level of diversity in the workplace. More and more, people are moving to other countries to find the jobs that match their skills. International managers need to be cognizant of the likelihood that they will oversee a group that represents many cul- tures, not just the pervasive culture associated with that country. The following sections examine the potential problems and the advantages of workplace diversity.

Potential Problems Associated with Diversity Overall, diversity may cause a lack of cohesion that results in the unit’s inability to take concerted action, be productive, and create a work environment that is conducive to both efficiency and effectiveness. These potential problems are rooted in people’s attitudes. An example of an attitudinal problem in a diverse group may be the mistrust of others. For example, many U.S. managers who work for Japanese operations in the United States complain that Japanese managers often huddle together and discuss matters in their native language. The U.S. managers wonder aloud why the Japanese do not speak English. What are they talking about that they do not want anyone else to hear? In fact, the Japanese often find it easier to communicate among themselves in their native language, and because no Americans are present, the Japanese managers ask why they should speak English. If there is no reason for anyone else to be privy to our conversation, why should we not opt for our own language? Nevertheless, such practices do tend to promote an atmosphere of mistrust.

Another potential problem may be perceptual. Unfortunately, when culturally diverse groups come together, they often bring preconceived stereotypes with them. In initial meetings, for example, engineers from economically advanced countries often are perceived as more knowledgeable than those from less advanced countries. In turn, this perception can result in status-related problems because some of the group initially are regarded as more competent than others and likely are accorded status on this basis. As the diverse group works together, erroneous perceptions often are corrected, but this takes time. In one diverse group consisting of engineers from a major Japanese firm and a world-class U.S. firm, a Japanese engineer was assigned a technical task because of his stereotyped technical educational background. The group soon realized that this particular

homogeneous group A group in which members have similar backgrounds and generally perceive, interpret, and evaluate events in similar ways.

token groups A group in which all members but one have the same background, such as a group of Japanese retailers and a British attorney.

bicultural group A group in which two or more members represent each of two distinct cultures, such as four Mexicans and four Taiwanese who have formed a team to investigate the possibility of investing in a venture.

multicultural group A group in which there are individuals from three or more different ethnic backgrounds, such as three American, three German, three Uruguayan, and three Chinese managers who are looking into mining operations in South Africa.

200 Part 2 The Role of Culture

Japanese engineer was not capable of doing this job because for the last four years, he had been responsible for coordinating routine quality and no longer was on the techno- logical cutting edge. His engineering degree from the University of Tokyo had resulted in the other members perceiving him as technically competent and able to carry out the task; this perception proved to be incorrect.

A related problem is inaccurate biases. For example, it is well known that Japanese companies depend on groups to make decisions. Entrepreneurial behavior, individualism, and originality are typically downplayed.49  However, in a growing number of Japanese firms, this stereotype is proving to be incorrect.50  Here is an example.

Mr. Uchida, a 28-year-old executive in a small software company, dyes his hair brown, keeps a sleeping bag by his desk for late nights in the office and occasionally takes the day off to go windsurfing. “Sometimes I listen to soft music to soothe my feelings, and sometimes I listen to hard music to build my energy,” said Mr. Uchida, who manages the technology development division of the Rimnet Corporation, an Internet access provider. “It’s important that we always keep in touch with our sensibilities when we want to generate ideas.” The creative whiz kid, a business personality often prized by corporate America, has come to Japan Inc. Unlikely as it might seem in a country renowned for its deference to authority and its devotion to group solidarity, freethinkers like Mr. Uchida are popping up all over the workplace. Nonconformity is suddenly in.51

Still another potential problem with diverse groups is miscommunication or inaccurate communication, which can occur for a number of reasons. Misunderstandings can be caused by a speaker using words that are not clear to other members. For example, in a diverse group in which one of the authors was working, a British manager told her U.S. colleagues, “I will fax you this report in a fortnight.” When the author asked the Americans when they would be getting the report, most of them believed it would be arriving in four days. They did not know that the common British word fortnight (14 nights) means two weeks.

Another contribution to miscommunication may be the way in which situations are interpreted. Many Japanese nod their heads when others talk, but this does not mean that they agree with what is being said. They are merely being polite and attentive. In many societies, it is impolite to say no, and if the listener believes that the other person wants a positive answer, the listener will say yes even though this is incorrect. As a result, many U.S. managers find out that promises made by individuals from other cultures cannot be taken at face value—and in many instances, the other individual assumes that the American realizes this!

Diversity also may lead to communication problems because of different percep- tions of time. For example, many Japanese will not agree to a course of action on the spot. They will not act until they have discussed the matter with their own people because they do not feel empowered to act alone. Many Latin managers refuse to be held to a strict timetable because they do not have the same time urgency that U.S. managers do. Here is another example, as described by a European manager:

In attempting to plan a new project, a three-person team composed of managers from Britain, France, and Switzerland failed to reach agreement. To the others, the British representative appeared unable to accept any systematic approach; he wanted to discuss all potential prob- lems before making a decision. The French and Swiss representatives agreed to examine everything before making a decision, but then disagreed on the sequence and scheduling of operations. The Swiss, being more pessimistic in their planning, allocated more time for each suboperation than did the French. As a result, although everybody agreed on its valid- ity, we never started the project. If the project had been discussed by three Frenchmen, three Swiss, or three Britons, a decision, good or bad, would have been made. The project would not have been stalled for lack of agreement.52

Advantages of Diversity While there are some potential problems to overcome when using culturally diverse groups in today’s MNCs, there are also very many benefits to be gained.53 In particular,

Chapter 6 Organizational Cultures and Diversity 201

there is growing evidence that culturally diverse groups can enhance creativity, lead to better decisions, and result in more effective and productive performance.54

One main benefit of diversity is the generation of more and better ideas. Because group members come from a variety of cultures, they often are able to create a greater number of unique (and thus creative) solutions and recommendations. For example, a U.S. MNC recently was preparing to launch a new software package aimed at the mass consumer market. The company hoped to capitalize on the upcoming Christmas season with a strong advertising campaign in each of its international markets. A meeting of the sales managers from these markets in Spain, the Middle East, and Japan helped the company revise and better target its marketing effort. The Spanish manager suggested that the company focus its campaign around the coming of the Magi (January 6) and not Christmas (December 25) because in Latin cultures, gifts typically are exchanged on the date that the Magi brought their gifts. The Middle Eastern manager pointed out that most of his customers were not Christians, so a Christmas campaign would not have much meaning in his area. Instead, he suggested the company focus its sales campaign around the value of the software and how it could be useful to customers and not worry about getting the product shipped by early December at all. The Japanese manager concurred with his Middle Eastern colleague but further suggested that some of the colors being proposed for the sales brochure be changed to better fit with Japanese culture. Thanks to these diverse ideas, the sales campaign proved to be one of the most effective in the company’s history.

A second major benefit is that culturally diverse groups can prevent groupthink, which is caused by social conformity and pressures on individual members of a group to conform and reach consensus. When groupthink occurs, group participants come to believe that their ideas and actions are correct and that those who disagree with them are either uninformed or deliberately trying to sabotage their efforts. Multicultural diverse groups often are able to avoid this problem because the members do not think similarly or feel pressure to conform. As a result, they typically question each other, offer opinions and suggestions that are contrary to those held by others, and must be persuaded to change their minds. Therefore, unanimity is achieved only through a careful process of deliberation. Unlike homogeneous groups, where everyone can be “of one mind,” diverse groups may be slower to reach a general consensus, but the decision may be more effec- tive and free of “groupthink.”

Diversity in the workplace enhances more than just the internal operations—it enhances relationships to customers as well. It is commonly held that anyone will have insight into and connect better with others of the same nationality or cultural background, resulting in more quickly building trust and understanding of one another’s preferences. Therefore, if the customer base is composed of many cultures, it may benefit the com- pany to have representatives from corresponding nationalities. The U.S. multinational cosmetic firm Avon adopted this philosophy over a decade ago. When Avon observed an increase in the number of Korean shoppers at one of its U.S. locations, it quickly employed Korean sales staff.55 The external environment, even in the MNC home coun- try, can encompass many cultures that managers should bear in mind. Expanding diver- sity in the workplace to better serve the customer means that even local managers have an international exposure, further emphasizing the importance of learning about the multicultural surroundings.

Building Multicultural Team Effectiveness Multiculturally diverse teams have a great deal of potential, depending on how they are managed. As shown in Figure 6–6, Dr. Carol Kovach, who conducted research on the importance of leadership in managing cross-cultural groups, reports that if cross-cultural groups are led properly, they can indeed be highly effective; unfortunately, she also found that if they are not managed properly, they can be highly ineffective. In other words, diverse groups are more powerful than single-culture groups. They can hurt the organization, but

groupthink Social conformity and pressures on individual members of a group to conform and reach consensus.

202 Part 2 The Role of Culture

if managed effectively, they can be the best.56 The following sections provide the conditions and guidelines for managing diverse groups in today’s organizations effectively.

Understanding the Conditions for Effectiveness Multicultural teams are most effec- tive when they face tasks requiring innovativeness. They are far less effective when they are assigned to routine tasks.57  To achieve the greatest effectiveness from diverse teams, the focus of attention must be determined by the stage of team development (e.g., entry, working, and action stages). In the entry stage, the focus should be on building trust and developing team cohesion, as we saw in The World of International Management at the opening of the chapter. This can be difficult for diverse teams, whose members are ac- customed to working in different ways. For example, Americans, Germans, and Swiss typically spend little time getting to know each other; they find out the nature of the task and set about pursuing it on their own without first building trust and cohesion. This contrasts sharply with individuals from Latin America, Southern Europe, and the Middle East, where team members spend a great deal of initial time getting to know each other. This contrast between task-oriented and relationship-oriented members of a diverse team may slow progress due to communication and strategic barriers. To counteract this prob- lem, it is common in the entry stage of development to find experienced multicultural managers focusing attention on the team members’ equivalent professional qualifications and status. Once this professional similarity and respect are established, the group can begin forming a collective unit. In the work stage of development, attention may be di- rected more toward describing and analyzing the problem or task that has been assigned. This stage often is fairly easy for managers of multicultural teams because they can draw on the diversity of the members in generating ideas. As noted earlier, diverse groups tend to be most effective when dealing with situations that require innovative approaches.

In the action stage, the focus shifts to decision making and implementation. This can be a difficult phase because it often requires consensus building among the members. In achieving this objective, experienced managers work to help the diverse group recog- nize and facilitate the creation of ideas with which everyone can agree. In doing so, it is common to find strong emphasis on problem-solving techniques such as the nominal group technique (NGT), where the group members individually make contributions before group interaction takes place and consensus is reached.

Using the Proper Guidelines Some specific guidelines have proved to be helpful as a quick reference for managers when setting out to manage a culturally diverse team. Here are some of the most useful ideas:

1. Team members must be selected for their task-related abilities and not solely based on ethnicity. If the task is routine, homogeneous membership often is preferable; if the task is innovative, multicultural membership typically is best.

Highly ine�ective

Average e�ectiveness

Highly e�ective

Cross-cultural groups

Single culture groups Figure 6–6 Group Effectiveness and Culture

Source: From Nancy J. Adler. International Dimensions of Organizational Behavior, 5th ed. © 2008 South-Western, a part of Cengage Learning, Inc. Reproduced by permission. www.cengage.com/permissions.

Chapter 6 Organizational Cultures and Diversity 203

2. Team members must recognize and be prepared to deal with their differences. The goal is to facilitate a better understanding of cross-cultural differences and generate a higher level of performance and rapport. In doing so, members need to become aware of their own stereotypes, as well as those of the others, and use this information to better understand the real differences that exist between them. This can then serve as a basis for determining how each indi- vidual member can contribute to the overall effectiveness of the team.

3. Because members of diverse teams tend to have more difficulty agreeing on their purpose and task than members of homogeneous groups, the team leader must help the group to identify and define its overall goal. This goal is most useful when it requires members to cooperate and develop mutual respect in carrying out their tasks.

4. Members must have equal power so that everyone can participate in the pro- cess; cultural dominance always is counterproductive. As a result, managers of culturally diverse teams distribute power according to each person’s ability to contribute to the task, not according to ethnicity.

5. It is important that all members have mutual respect for each other. This is often accomplished by managers choosing members of equal ability, making prior accomplishments and task-related skills known to the group, and mini- mizing early judgments based on ethnic stereotypes.

6. Because teams often have difficulty determining what is a good or a bad idea or decision, managers must give teams positive feedback on their process and output. This feedback helps the members see themselves as a team, and it teaches them to value and celebrate their diversity, recognize contributions made by the individual members, and trust the collective judgment of the group.

The World of International Management—Revisited Our discussion in The World of International Management at the outset of the chapter introduced the challenges and the benefits of diverse, multicultural teams. These teams have become commonplace in organizations around the world as work becomes more flexible and less geographically bound. In addition, companies are looking to such teams to solve intractable problems and bring creativity and fresh thinking to their organiza- tions. Using what you have learned from this chapter, answer the following: (1) What steps should organizations take to get the most out of their global virtual teams? (2) What types of organizational culture (family, Eiffel Tower, guided missile, incubator) would be best for leveraging global teams? (3) What advantages and problems associated with diversity have been experienced by global teams? How might they be overcome? (4) What features of multicultural teams are most critical for successful global team col- laboration?

1. Organizational culture is a pattern of basic assump- tions developed by a group as it learns to cope with its problems of external adaptation and internal integration and taught to new members as the cor- rect way to perceive, think, and feel in relation to these problems. Some important characteristics of organizational culture include observed behavioral

regularities, norms, dominant values, philosophy, rules, and organizational climate.

2. Organizational cultures are shaped by a number of factors. These include the general relationship between employees and their organization; the hier- archic system of authority that defines the roles of managers and subordinates; and the general views

SUMMARY OF KEY POINTS

204 Part 2 The Role of Culture

that employees hold about the organization’s pur- pose, destiny, and goals and their place in the orga- nization. When examining these differences, Trompenaars suggested the use of two continua: equity-hierarchy and person-task orientation, result- ing in four basic types of organizational cultures: family, Eiffel Tower, guided missile, and incubator.

3. Family culture is characterized by strong emphasis on hierarchic authority and orientation to the per- son. Eiffel Tower culture is characterized by strong emphasis on hierarchy and orientation to the task. Guided missile culture is characterized by strong emphasis on equality in the workplace and orienta- tion to the task. Incubator culture is characterized by strong emphasis on equality and orientation to the person.

4. Success in the international arena often is heavily determined by a company’s ability to manage multiculturalism and diversity. Firms progress through four phases in their international evolution: (1) domestic corporation, (2) international

corporation, (3) multinational corporation, and (4) global corporation.

5. There are a number of ways to examine multicultur- alism and diversity. One is by looking at the domestic multicultural and diverse workforce that operates in the MNC’s home country. Another is by examining the variety of diverse groups that exist in MNCs, including homogeneous groups, token groups, bicultural groups, and multicultural groups. Several potential problems as well as advantages are associated with multicultural, diverse teams. Diverse teams are not only helpful to internal oper- ations but can enhance sales to customers as well, as shown at Avon.

6. A number of guidelines have proved to be particu- larly effective in managing culturally diverse groups. These include careful selection of the mem- bers, identification of the group’s goals, establish- ment of equal power and mutual respect among the participants, and delivering of positive feedback on performance.

KEY TERMS

bicultural group, 199 Eiffel Tower culture, 192 family culture, 192 groupthink, 201

guided missile culture, 193 homogeneous group, 199 incubator culture, 194 multicultural group, 199

organizational culture, 185 token group, 199

REVIEW AND DISCUSSION QUESTIONS

1. Some researchers have found that when Germans work for a U.S. MNC, they become even more German, and when Americans work for a German MNC, they become even more American. Why would this knowledge be important to these MNCs?

2. When comparing the negotiating styles and strate- gies of French versus Spanish negotiators, a number of sharp contrasts are evident. What are three of these, and what could MNCs do to improve their position when negotiating with either group?

3. In which of the four types of organizational cultures— family, Eiffel Tower, guided missile, incubator— would most people in the United States feel comfortable? In which would most Japanese feel comfortable? Based on your answers, what conclu- sions could you draw regarding the importance of

understanding organizational culture for interna- tional management?

4. Most MNCs need not enter foreign markets to face the challenge of dealing with multiculturalism. Do you agree or disagree with this statement? Explain your answer.

5. What are some potential problems that must be overcome when using multicultural, diverse teams in today’s organizations? What are some recognized advantages? Identify and discuss two of each.

6. A number of guidelines can be valuable in helping MNCs to make diverse teams more effective. What are five of these? How do these relate to the guide- lines established by Matsushita, as discussed in the International Management in Action box?

Chapter 6 Organizational Cultures and Diversity 205

Based in China, Lenovo is one of the largest computer brands in the world. Several years ago, Lenovo pur- chased IBM’s PC business and now sells more comput- ers to retail customers and businesses than any other company in the world. From its base in China, it is moving aggressively into global markets, especially emerging countries like India. Visit Lenovo’s website at lenovo.com  and review some of the latest developments. In particular, pay close attention to its product line and international expansion. Using the country/language tab in the bottom right of the screen, choose three different countries where the firm is doing business: one from the Americas, one from Europe, and one from Southeast Asia or India. (The sites are all presented in the local language, so you might want to

make India or Hong Kong your choice because this site is in English.) Compare and contrast the product offer- ings and ways in which HP goes about marketing itself over the web in these locations. What do you see as some of the major differences? Second, using Figure 6–2 and Table 6–3 as your guide, in what way are differences in organizational cultures internationally likely to present significant challenges to Lenovo’s efforts to create a smooth-running international enterprise? Look at the web page showing Lenovo’s leadership team. What do you notice? What would you see as two of the critical issues with which management will have to deal? Third, what are two steps that you think Lenovo will have to take in order to build multicultural team effectiveness? What are two guidelines that can help it do this?

INTERNET EXERCISE: LENOVO’S INTERNATIONAL FOCUS

1. “A Shared Value Around the World,” Deloitte, www2.deloitte.com/bh/en/pages/about-deloitte/ articles/shared-value.html.

2. Bradley L. Kirkman, Benson Rosen, Cristina Gibson, and Paul E. Tesluk, “Five Challenges to Virtual Team Success: Lessons from Sabre, Inc.,” Academy of Management Executive 16, no. 3 (August 2002), pp. 67–79, retrieved from EBSCOhost: http://turbo. kean.edu/~jmcgill/sabre.htm.

3. Ibid. 4. Juliet Bourke, “Working in Multicultural Teams:

A Case Study,” Deloitte, www2.deloitte.com/au/ en/pages/human-capital/articles/working- multicultural-teams.html.

5. Ibid. 6. Deloitte, “Deloitte Celebrates Five-Year Anniversary

of Business Chemistry,”  press release, April 6, 2015,  www2.deloitte.com/us/en/pages/about-deloitte/ articles/press-releases/deloitte-business-chemistry- relationships-teamwork.html.

7. Melanie Doulton, “Tips for Working in Global Teams,” The Institute (IEEE), January 5, 2007.

8. Steven R. Rayner, “The Virtual Team Challenge,” Rayner & Associates, Inc., 1997.

9. Kirkman, Rosen, Gibson, and Tesluk, “Five Challenges to Virtual Team Success.”

10. Rayner, “The Virtual Team Challenge.” 11. Kirkman, Rosen, Gibson, and Tesluk, “Five

Challenges to Virtual Team Success.” 12. Doulton, “Tips for Working in Global Teams.”

13. Kirkman, Rosen, Gibson, and Tesluk, “Five Challenges to Virtual Team Success.”

14. Ibid. 15. Ibid. 16. Rayner, “The Virtual Team Challenge.” 17. Ibid. 18. Lisa Hoecklin, Managing Cultural Differences:

Strategies for Competitive Advantage (Workingham, England: Addison-Wesley, 1995), p. 146.

19. Edgar H. Schein, Organizational Culture and Lead- ership, 2nd ed. (San Francisco: Jossey-Bass, 1997), p. 12.

20. Fred Luthans, Organizational Behavior, 10th ed. (New York: McGraw-Hill/Irwin, 2005), pp. 110–111.

21. In addition, see W. Mathew Jeuchter, Caroline Fisher, and Randall J. Alford, “Five Conditions for High-Performance Cultures,” Training and Develop- ment Journal, May 1998, pp. 63–67.

22. “Our Leadership Team,” AstraZeneca, https://www. astrazeneca.com/our-company/leadership.html#!.

23. AstraZeneca, What Science Can Do: AstraZeneca Annual Report and Form 20-F Information 2014 (March 23, 2015),  https://www.astrazeneca.com/ content/dam/az/our-company/Documents/2014- Annual-report.pdf.

24. AstraZeneca, Health: AstraZeneca Annual Report and Form 20-F Information 2011  (2012),  https:// www.astrazeneca.com/content/dam/az/our-company/ investor-relations/presentations-and-webcast/Annual- Reports/2011-Annual-report.pdf.

ENDNOTES

206 Part 2 The Role of Culture

44. Ibid., p. 167. 45. Ibid., p. 172. 46. For more, see Rose Mary Wentling and Nilda

Palma-Rivas, “Current Status of Diversity Initiatives in Selected Multinational Corporations,” Human Resource Development Quarterly, Spring 2000, pp.  35–60.

47. Adler, International Dimensions of Organizational Behavior, p. 121.

48. Jean Lee, “Culture and Management: A Study of Small Chinese Family Business in Singapore,” Journal of Small Business Management, July 1996, p. 65.

49. Noboru Yoshimura and Philip Anderson, Inside the Kaisha: Demystifying Japanese Business Behavior (Boston: Harvard Business School Press, 1997).

50. Edmund L. Andrews, “Meet the Maverick of Japan, Inc.” New York Times, October 12, 1995, pp. C1, C4.

51. Sheryl WuDunn, “Incubators of Creativity,” New York Times, October 9, 1997, pp. C1, C21.

52. Adler, International Dimensions of Organizational Behavior, p. 132.

53. Adele Thomas and Mike Bendixen, “The Manage- ment Implications of Ethnicity in South Africa,” Journal of International Business Studies, Third Quarter 2000, pp. 507–519.

54. John M. Ivencevich and Jacqueline A. Gilbert, “Diver- sity Management: Time for a New Approach,” Public Personnel Management, Spring 2000, pp. 75–92.

55. “Over the Rainbow,” Economist Online, November 20, 1997, http://www.economist.com/node/106483.

56. See, for example, Betty Jane Punnett and Jason Clemens, “Cross-National Diversity: Implications for International Expansion Decisions,” Journal of World Business 34, no. 2 (1999), pp. 128–138.

57. Adler, International Dimensions of Organizational Behavior, p. 137.

58. CIA, “Nigeria,”  The World Factbook  (2016),  https:// www.cia.gov/library/publications/the-world-factbook/ geos/ni.html.

59. Ibid. 60. CIA. 2016. “The World Factbook,” https://www.cia.

gov/library/publications/the-world-factbook/geos/ ni.html.

61. Ibid. 62. Jim Stenman and Peter Guest, “The Man Who

Wants to Make Hollywood Move to Nigeria,”  CNN. com, October 25, 2015,  www.cnn.com/2015/10/23/ africa/nollywood-hits-london-mpkaru-abudu/.

63. Ibid.

25. Prashant Kale, Harbir Singh, and Anand Raman, “Don’t Integrate Your Acquisitions, Partner with Them,”  Harvard Business Review, December 2009,  https://webcache.googleusercontent.com/searc h?q=cache:lajyv0FdxQQJ:https://hbr.org/2009/12/ dont-integrate-your-acquisitions-partner-with- them+&cd=1&hl=en&ct=clnk&gl=us.

26. Oh Hwa-seok, “Tata Daewoo: An Indian Success Story in Korea,”  Asia-Pacific Business & Technology Report, January 1, 2010,  www.biztechreport.com/ story/378-tata-daewoo-indian-success-story-korea.

27. Kale, Singh, and Raman, “Don’t Integrate Your Acquisitions, Partner with Them.”

28. Hoecklin, Managing Cultural Differences, p. 145. 29. Andre Laurent, “The Cultural Diversity of Western

Conceptions of Management,” International Studies of Management and Organization, Spring–Summer 1983, pp. 75–96.

30. Nancy J. Adler, International Dimensions of Orga- nizational Behavior, 2nd ed. (Boston: PWS-Kent Publishing, 1991), pp. 58–59.

31. William Holstein, “Lucent-Alcatel: Why Cross- Cultural Mergers Are So Tough,”  CBS Money Watch, November 6, 2007,  www.cbsnews.com/news/lucent- alcatel-why-cross-cultural-mergers-are-so-tough/.

32. David Jolly, “Culture Clash Hits Home at Alcatel-Lucent,” New York Times, July 29, 2008, www.nytimes.com/2008/07/29/business/ worldbusiness/29iht-alcatel.4.14867263.html?_r=0.

33. Holstein, “Lucent-Alcatel: Why Cross-Cultural Mergers Are So Tough.”

34. Jolly, “Culture Clash Hits Home at Alcatel-Lucent.” 35. Hoecklin, Managing Cultural Differences, p. 151. 36. Robert Hughes, “Weekend Journal: Futures and

Options: Global Culture,” The Wall Street Journal, October 10, 2003, p. W2.

37. Rita A. Numeroff and Michael N. Abrams, “Integrating Corporate Culture from International M&As,” HR Focus, June 1998, p. 12.

38. Ibid. 39. See Maddy Janssens, Jeanne M. Brett, and Frank J.

Smith, “Confirmatory Cross-Cultural Research: Testing the Viability of a Corporation-Wide Safety Policy,” Academy of Management Journal, June 1995, pp. 364–382.

40. Fons Trompenaars, Riding the Waves of Culture: Understanding Diversity in Global Business (Burr Ridge, IL: Irwin, 1994), p. 154.

41. Ibid. 42. Ibid., p. 156. 43. Ibid., p. 164.

207

You Be the International Management Consultant The Nigerian owner of the Filmhouse Cinemas fran- chise, Kene Mpkaru, has announced a significant expan- sion of his company’s presence in the country. Although the movie industry in Nigeria currently consists of viewers watching movies in their homes, Mpkaru believes there is growth potential for in-theater watch- ing. Mpkaru has some expertise in the movie theater business; prior to owning his Nigerian franchise, he worked for a European franchise and oversaw substan- tial expansion. Currently, Filmhouse has nine movie theaters in Nigeria, and the company plans to open 16  additional locations. The greatest challenge to doing business in the country is the relatively low purchasing power of the consumers, with more than 60 percent of the population living below the poverty line. Prior to Filmhouse, Nigeria’s main movie theater option was a high-end theater that included a full dining experience, costing approximately US$40 per ticket.62 Nigeria has built a film industry of its own in recent years. The country’s movies, generally shot with very small budgets, are often released direct to DVD. This industry, referred to as “Nollywood,” accounts for approx- imately 1.5 percent of the nation’s GDP, or US$7 billion. For Filmhouse, this domestic industry could serve as an attractive expansion vehicle.63

Questions 1. If you were a consultant for Filmhouse, how would

you advise Kene Mpkaru regarding his next moves in Nigeria?

2. What specific aspects of the country would be positive for the company? What factors are negatives?

3. How would you deal with the wealth gap in the country?

4. Would you advise Filmhouse to concentrate on Nollywood productions or would you try to attract Hollywood movies?

Located in western Africa, Nigeria is situated between the countries of Benin and Cameroon on the Gulf of Guinea. The Niger River, perhaps the most important river in western Africa, flows into the country through Niger and empties into the Gulf of Guinea. The total land mass of Nigeria is six times the size of Georgia and slightly larger than twice the size of California. Natural resources include natural gas, petroleum, tin, iron ore, coal, limestone, nio- bium, lead, zinc, and arable land. The climate is tropical in most of the country, although the northern portion of the country is quite arid.58 With over 181,562,000 people and a growth rate of 2.5 percent, Nigeria is Africa’s most populous nation and one of the fastest growing. The official spoken language is English, due to Nigeria’s history as a part of the British Empire. The country is incredibly diverse, with more than 250 ethnic groups. Religiously, Nigeria is split evenly between Muslims and Christians. This spiritual division has led to significant unrest and civil wars from the time of its independence until recent history.59 The country’s population is younger than most. The largest segment of the population (43 percent) is 0–14 years old, and the second largest segment is 25–54 years old (30 percent). Wealth inequality is especially pro- nounced in Nigeria, leaving a large gap between the “haves” and “have nots.” With a GDP per capita in 2014 of US$3,001, 60 percent of the country’s population lives below the poverty line. Nigeria’s total 2014 GDP stood at US$568.5 billion and has been experiencing a strong decade of growth. In 2014, the economy expanded by 6.3  percent.60 The British Empire controlled a majority of Africa and, specifically, Nigeria from the early 19th century until the end of World War II. Nigeria gained its independence in 1960, but its politics consisted of military regimes and numerous coups. Military rule continued until the adop- tion of a new constitution in 1999, which transitioned the country’s government into a civilian one. Since this tran- sition, the political environment has been relatively stable, consisting of legitimate and regular elections. The country is, however, still feeling the effects of the four decades of corruption and mismanagement.61

Nigeria In the International Spotlight

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CROSS-CULTURAL COMMUNICATION AND NEGOTIATION

The World of International Management

Netflix’s Negotiations: China and Russia

T he year 2015 was a break-through year for Netflix. Just eight years after first entering the digital video-streaming industry, the company had evolved into the world’s largest provider of Internet-based content. In 2015 alone, Netflix launched service in 130 new countries, tripling the number of international markets it served.1  By the start of 2016, the com- pany, which originally started as a mail-order DVD rental ser- vice in 1997, had established video-streaming operations in nearly every country in the world. Of its 82 million subscribers, over 40 percent were outside of the U.S.2

Critical to this rapid expansion was Netflix’s entry strategy. As a digital service provider, without physical goods or merchan- dise being imported and exported into the countries in which it operates, Netflix has been able to skip the lengthy, typically required governmental negotiations that most other companies must endure when expanding into foreign markets. For the most part, Netflix’s strategy appears to have worked; the company has been able to operate across North and South America, Africa, and Europe without any governmental challenge. How- ever, in two major markets, Netflix is facing an increasing num- ber of setbacks due to negotiation and communication difficulties: in China, the company has found entry to require a long negotiation process, while in Russia, setbacks implemented by government officials appear to have resulted from Netflix’s lack of communication and negotiation prior to entry.

The Long Road Ahead in China Of the four nations without access to Netflix, China stands out. While Crimea, North Korea, and Syria all suffer from political turmoil or sanctions that prevent Netflix’s entry, China seems like an ideal market for video-streaming services. With one billion consumers—many of whom are ascending into the middle class—the country has the potential to be Netflix’s largest subscription base. Why, then, hasn’t the company commenced operations in the world’s most populous country?

Communication takes on special importance in international management because of the difficulties in conveying meanings between parties from different cultures. The problems of mis- interpretation and error are compounded in the international context. Chapter 7 examines how the communication process in general works, and it looks at the downward and upward communication flows that commonly are used in international communication. Then the chapter examines the major barriers to effective international communication and reviews ways of dealing with these communication problems. Finally, one important dimension of international communication, interna- tional negotiation, is examined, with particular attention to how negotiation approaches and strategies must be adapted to different cultural environments. The specific objectives of this chapter are

1. DEFINE the term communication, examine some examples of verbal communication styles, and explain the importance of message interpretation.

2. ANALYZE the common downward and upward communi- cation flows used in international communication.

3. EXAMINE the language, perception, and culture of com- munication and nonverbal barriers to effective international communications.

4. PRESENT the steps that can be taken to overcome inter- national communication problems.

5. DEVELOP approaches to international negotiations that respond to differences in culture.

6. REVIEW different negotiating and bargaining behaviors that may improve negotiations and outcomes.

209

Russian Troubles Mounting? In January 2016, Netflix successfully launched in Russia to much fanfare and consumer excitement. In the hours after the initial announcement, expatriates and Russians alike took their excite- ment to social media. Despite the successful launch, Netflix has since been saddled with numerous government-initiated setbacks. Culturally, Netflix may have misjudged the regulatory and governmental environment in Russia. The Russian government funds and controls much of the country’s media services, and Netflix’s lack of open communication and disclosure regarding its expansion plans may have resulted in a backlash against the company. Shortly have Netflix’s launch, the Russian gov- ernment insisted that Netflix must approach and initiate discus- sions with government officials if it wishes to continue operating in the country. Russian deputy communications man- ager Alexei Volin warned that “Before entering the market, Netflix should have had consultations with Russian representa- tives, including the regulatory agencies.”8

In February 2016, one month after Netflix’s arrival in Russia, the government increased its demands, directly stat- ing that Netflix must receive broadcasting licenses to operate within the country or face suspension.9  Legislation was also introduced that would create a value-added tax on digital sales, increasing the cost of doing business for Netflix within Russia.10

By March 2016, the Russian government had begun devel- oping new regulations for foreign video-streaming services, like Netflix. Under the new rules, Netflix would be required to partner with a local Russian media provider. Additionally, 80 percent of Netflix’s content would have to be available in the Russian language, and 30 percent would have to be produced in Russia.11

Netflix may have been able to avoid these setbacks if it had fully understood the cultural differences between the gov- ernments in Russia and the U.S. Though its entry strategy worked in more democratic nations, Netflix’s lack of communi- cation with the regulatory agencies in Russia resulted in swift restrictions and increased taxes. Whether or not Netflix decides to continue its operations in Russia remains to be seen. Decreasing interest from Russian consumers, coupled with additional headache from regulators, may ultimately result in a withdrawal from Russia altogether.12

Unlike in other markets, Netflix must have specific govern- mental approval to operate in China. Negotiations in China have notoriously taken long periods of time to complete; Apple spent years negotiating with Chinese officials to receive permis- sion to sell its iPhone within the country.3  Additionally, Chinese regulators exert heavy control over content. All shows, includ- ing original programming produced by Netflix, would undergo censoring prior to inclusion on the Chinese Netflix platform.4

Domestic streaming services, though lacking the infrastruc- ture and content selection that Netflix boasts, add an addi- tional layer of complexity to negotiations. Most of the domestic streaming services are free to the public and funded by the government, giving the Chinese government a stake in Net- flix’s competitors. Netflix may be required to partner with one of these local providers to gain a media license, resulting in a loss of some control over its operations.5    To ensure success in China, Netflix will first have to man- age the negotiation process with government officials. Any misunderstanding will likely result in further setbacks for Netf- lix. According to Harvard Business Review, there are multiple cultural differences when negotiating in China of which com- panies like Netflix should be aware, a few of which include

∙ Formality in business dealings is critical in China, whereas informality is commonplace in the U.S. Failure to address Chinese business partners by their rank or importance could be seen as insulting, ultimately lead- ing to a deterioration of negotiations.

∙ The presence of a high-level company official, like the CEO, at the bargaining table is culturally seen as increas- ing the level of seriousness and can significantly improve the outcome of the negotiations for the company.

∙ Chinese negotiators tend to require a longer period of relationship-building than their U.S. counterparts. It is not uncommon for several months of vetting to be required before discussions become more serious and detailed. Rushing a deal may be perceived as culturally rude.6

Netflix appears prepared for a long period of continued negotiations in China. Early in 2016, Netflix CEO Reed Hastings stated that the company has “a very long term look” regarding China. “It could be a many years discussion or it could happen faster than that.”7

210 Part 2 The Role of Culture

The opening World of International Management illustrates how cultural differences between a U.S. multinational company, like Netflix, and foreign governments can result in long or troublesome negotiations, and how the misjudgment of culture can result in difficulties for a company attempting to expand into new markets. Netflix’s lack of understanding in regards to the operation of the Russian government resulted in setbacks after launching service in the country, and Netflix’s ongoing negotiations with China will likely take many years to complete. Though fast expansion, like Netflix was able to achieve, can result in profits and high success, the cultural differences in communication and negotiations can lead to financial setbacks.

In this chapter, we explore communication and negotiation styles across cultures, emphasizing the importance of understanding different approaches to the development of effective international communication and negotiation strategies.

■ The Overall Communication Process Communication is the process of transferring meanings from sender to receiver. On the surface, this appears to be a fairly straightforward process. On analysis, however, there are a great many problems in the international arena that can result in the failure to transfer meanings correctly.

In addition, as suggested in the opening World of International Management, the means and modes of communication have changed dramatically in recent decades. For example, the advent of the telephone, then Internet, and most recently personal communication devices (“smartphones”) has influenced how, when, and why people communicate. These trends have both benefits and disadvantages. On the plus side, we have many more opportunities to com- municate rapidly, without delays or filters, and often can incorporate rich content, such as photos, videos, and links to other information, in our exchanges. On the other hand, some are concerned that these devices are rendering our communication less meaningful and per- sonal. In a recent book, Nicholas Carr argues that when we go online, “we enter an environ- ment that promotes cursory reading, hurried and distracted thinking, and superficial learning.” Mr. Carr calls the web “a technology of forgetfulness.” Web pages draw us into a myriad of embedded links while we are assaulted by other messages via e-mail, RSS, and Twitter and Facebook accounts. He suggests that greater access to knowledge is not the same as greater knowledge and that an ever-increasing plethora of facts and data is not the same as wisdom.13

Despite these concerns, communication—verbal and otherwise—remains an impor- tant dimension of international management. In this chapter, we survey different com- munication styles, how communication is processed and interpreted, and how culture and language influence communication (and miscommunication).

Verbal Communication Styles One way of examining the ways in which individuals convey information is by looking at their communication styles. In particular, as has been noted by Hall, context plays a key role in explaining many communication differences.14 Context is information that surrounds a communication and helps convey the message. In high-context societies, such as Japan and many Arab countries, messages are often highly coded and implicit. As a result, the receiver’s job is to interpret what the message means by correctly filtering through what is being said and the way in which the message is being conveyed. This approach is in sharp contrast to low-context societies such as the United States and Canada, where the message is explicit and the speaker says precisely what he or she means. These contextual factors must be considered when marketing messages are being developed in disparate societies. For example, promotions in Japan should be subtle and convey a sense of community (high context). Similar segments in the United States, a low-context envi- ronment, should be responsive to expectations for more explicit messages. Figure 7–1 provides an international comparison of high-context and low-context societies. In addi- tion, Table 7–1 presents some of the major characteristics of communication styles.

communication The process of transferring meanings from sender to receiver.

context Information that surrounds a communication and helps convey the message.

Chapter 7 Cross-Cultural Communication and Negotiation 211

Ty p

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Canada Finland Germany Iceland Norway Sweden Switzerland United Kingdom United States

Afghanistan Brazil China Egypt India Iran Italy

Japan Korea

Pakistan Russia

Saudi Arabia Spain

Source:  Original graphic by Ben Littell under supervision of Professor Jonathan Doh based on data from Terence Brake, Danielle Medina Walker, and Thomas D. Walker, Doing Business Internationally: The Guide to Cross-Cultural Success  (Burr Ridge, IL: Irwin, 1994), and Sarah Griffith, “Intercultural Business Communication: High Context vs. Low Context Communication,” HubPages, 2011, http://hubpages.com/business/Intercultural-Business-Communication-High-Context-vs-Low-Context-Communication. 

Figure 7–1 High-/Low-Context Communication: An International Comparison

Table 7–1 Major Characteristics of Verbal Styles

Cultures in Which Major Interaction Focus Characteristic Verbal Style Variation and Content Is Found

Indirect vs. direct Indirect Implicit messages Collective, high context Direct Explicit messages Individualistic, low context Succinct vs. Elaborate High quantity of talk Moderate uncertainty elaborate avoidance, high context Exacting Moderate amount Low uncertainty of talk avoidance, low context Succinct Low amount of talk High uncertainty avoidance, high context Contextual vs. Contextual Focus on the High power distance, personal speaker and role collective, high context relationships Personal Focus on the Low power distance, speaker and personal individualistic, low relationships context Affective vs. Affective Process-oriented and Collective, high context Instrumental receiver-focused language Instrumental Goal-oriented and Individualistic, low sender-focused context language

212 Part 2 The Role of Culture

Indirect and Direct Styles In high-context cultures, messages are implicit and indirect. One reason is that those who are communicating—family, friends, co-workers, clients— tend to have both close personal relationships and large information networks. As a result, each knows a lot about others in the communication network; they do not have to rely on language alone to communicate. Voice intonation, timing, and facial expressions can all play roles in conveying information.

In low-context cultures, people often meet only to accomplish objectives. Since they do not know each other very well, they tend to be direct and focused in their com- munications.

One way of comparing these two kinds of culture—high context and low context— is by finding out what types of questions are typically asked when someone is contacted and told to attend a meeting. In a high-context culture, it is common for the person to ask, “Who will be at this meeting?” so he or she knows how to prepare for appropriate personal interactions. In contrast, in a low-context culture, the individual is likely to ask, “What is the meeting going to be about?” so he or she knows how to properly organize for the engagement. In the high-context society, the person focuses on the environment in which the meeting will take place. In the low-context society, the individual is most interested in the objectives that are to be accomplished at the meeting.

Elaborate to Succinct Styles There are three degrees of communication quantity— elaborate, exacting, and succinct. In high-context societies, the elaborate style is often very common. There is a great deal of talking, description includes much detail, and people often repeat themselves. This elaborate style is widely used in Arabic countries.

The exacting style is more common in nations such as England, Germany, and Sweden. This style focuses on precision and the use of the right amount of words to convey the message. If a person uses too many words, this is considered exaggeration; if the individual relies on too few, the result is an ambiguous message.

The succinct style is most common in Asia, where people tend to say few words and allow understatements, pauses, and silence to convey meaning. In particular, in unfamiliar situations, communicators are succinct in order to avoid risking a loss of face.

Researchers have found that the elaborating style is more popular in high-context cultures that have a moderate degree of uncertainty avoidance. The exacting style is more common in low-context, low-uncertainty-avoidance cultures. The succinct style is more common in high-context cultures with considerable uncertainty avoidance.

Contextual and Personal Styles A contextual style is one that focuses on the speaker and relationship of the parties. For example, in Asian cultures people use words that reflect the role and hierarchical relationship of those in the conversation. As a result, in an organizational setting, speakers will choose words that indicate their status relative to the status of the others. Commenting on this idea, Yoshimura and Anderson have noted that white-collar, middle-management employees in Japan, commonly known as salary- men, quickly learn how to communicate with others in the organization by understanding the context and reference group of the other party:

A salaryman can hardly say a word to another person without implicitly defining the refer- ence groups to which he thinks both of them belong. . . . [This is because] failing to use proper language is socially embarrassing, and the correct form of Japanese to use with someone else depends not only on the relationship between the two people, but also on the relationship between their reference groups. Juniors defer to seniors in Japan, but even this relationship is complicated when the junior person works for a much more prestigious organization (for example, a government bureau) than the senior. [As a result, it is] likely that both will use the polite form to avoid social embarrassment.15

A personal style focuses on the speaker and the reduction of barriers between the parties. In the United States, for example, it is common to use first names and to address others informally and directly on an equal basis.

Chapter 7 Cross-Cultural Communication and Negotiation 213

Researchers have found that the contextual style is often associated with high- power-distance, collective, high-context cultures. Examples include Japan, India, and Ghana. In contrast, the personal style is more popular in low-power-distance, individu- alistic, low-context cultures. Examples include the United States, Australia, and Canada.

Affective and Instrumental Styles The affective style is characterized by language that requires the listener to carefully note what is being said and to observe how the sender is presenting the message. Quite often the meaning that is being conveyed is nonverbal and requires the receiver to use his or her intuitive skills in deciphering what is being said. The part of the message that is being left out may be just as important as the part that is being included. In contrast, the instrumental style is goal-oriented and focuses on the sender. The individual clearly lets the other party know what he or she wants the other party to know.

The affective style is common in collective, high-context cultures such as the Mid- dle East, Latin America, and Asia. The instrumental style is more commonly found in individualistic, low-context cultures such as Switzerland, Denmark, and the United States.

Table 7–2 provides a brief description of the four verbal styles that are used in select countries. A close look at the table helps explain why managers in Japan can have great difficulty communicating with their counterparts in the United States and vice versa: The verbal styles do not match in any context.

Interpretation of Communications The effectiveness of communication in the international context often is determined by how closely the sender and receiver have the same meaning for the same message.16,17 If this meaning is different, effective communication will not occur. A good example is the U.S. firm that wanted to increase worker output among its Japanese personnel. This firm put an individual incentive plan into effect, whereby workers would be given extra pay based on their work output. The plan, which had worked well in the United States, was a total flop. The Japanese were accustomed to working in groups and to being rewarded as a group. In another case, a U.S. firm offered a bonus to anyone who would provide suggestions that resulted in increased productivity. The Japanese workers rejected this idea because they felt that no one working alone is responsible for increased pro- ductivity. It is always a group effort. When the company changed the system and began rewarding group productivity, it was successful in gaining support for the program.

Table 7–2 Verbal Styles Used in 10 Select Countries

Indirect vs. Elaborate vs. Contextual vs. Affective vs. Country Direct Succinct Personal Instrumental

Australia Direct Exacting Personal Instrumental Canada Direct Exacting Personal Instrumental Denmark Direct Exacting Personal Instrumental Egypt Indirect Elaborate Contextual Affective England Direct Exacting Personal Instrumental Japan Indirect Succinct Contextual Affective Korea Indirect Succinct Contextual Affective Saudi Arabia Indirect Elaborate Contextual Affective Sweden Direct Exacting Personal Instrumental United States Direct Exacting Personal Instrumental

Source: Anne Marie Francesco and Barry Allen Gold, International Organizational Behavior: Text, Readings, Cases, and Skills, 1st ed. (Upper Saddle River, NJ: Prentice Hall, 1998). © 1998. Reproduced by permission of Barry Allen Gold.

214 Part 2 The Role of Culture

A related case occurs when both parties agree on the content of the message, but one party believes it is necessary to persuade the other to accept the message. Here is an example:

Motorola University recently prepared carefully for a presentation in China. After consider- able thought, the presenters entitled it “Relationships do not retire.” The gist of the presen- tation was that Motorola had come to China in order to stay and help the economy to create wealth. Relationships with Chinese suppliers, subcontractors and employees would constitute a permanent commitment to building Chinese economic infrastructure and earning hard currency through exports. The Chinese audience listened politely to this presentation but was quiet when invited to ask questions. Finally one manager put up his hand and said: “Can you tell us about pay for performance?”18

Quite obviously, the Motorola presenter believed that it was necessary to convince the audience that the company was in China for the long run. Those in attendance, how- ever, had already accepted this idea and wanted to move on to other issues.

Still another example has been provided by Adler, who has pointed out that people doing business in a foreign culture often misinterpret the meaning of messages. As a result, they arrive at erroneous conclusions, as in the following story of a Canadian doing business in the Middle East. The Canadian was surprised when his meeting with a high- ranking official was not held in a closed office and was constantly interrupted:

Using the Canadian-based cultural assumptions that (a) important people have large private offices with secretaries to monitor the flow of people into the office, and (b) important business takes precedence over less important business and is therefore not interrupted, the Canadian interprets the . . . open office and constant interruptions to mean that the official is neither as high ranking nor as interested in conducting the business at hand as he had previously thought.19

■ Communication Flows Communication flows in international organizations move both down and up. However, there are some unique differences in organizations around the world.

Downward Communication Downward communication is the transmission of information from manager to subor- dinate. The primary purpose of the manager-initiated communication flow is to convey orders and information. Managers use this channel to let their people know what is to be done and how well they are doing. The channel facilitates the flow of information to those who need it for operational purposes.

Communicating with subordinates can be both challenging and difficult, especially if the manager delivering the news does not believe in the decision. Some suggest that managers should consider pushing back with superiors to gauge whether there is some flexibility. If you haven’t fully bought into it, “your employees will be able to tell in the tone of your voice or your body language that you do not believe in what you are doing,” says Ray Skiba, director of human resources at Streck, a manufacturer of clinical labora- tory products in Omaha, Nebraska. Whether or not this is successful, sending a mixed signal is never helpful.

“Once you’ve done your internal work, prepare yourself to deliver the message. If there was team involvement in the decision, ask one of the team members to listen to how you plan to address your employees. The more prepared you are, the better the outcome,” says Mr. Skiba. Next, consider your communication strategy. “Explain why the decision is important to the business, how the decision was made, and why it is important that the plan be exe- cuted,” says Kimberly Bishop, founder of a career management and leadership services consulting firm in New York. Give your employees ample time to digest the message. Since it took you some time to accept the information, realize that your employees will need time as well. “When the message has been delivered, be available to answer questions, be visible and approachable to help individuals get to the point of acceptance,” says Mr. Skiba.20

downward communication The transmission of information from manager to subordinate.

Chapter 7 Cross-Cultural Communication and Negotiation 215

In the international context, downward communication poses special challenges. For example, in Asian countries, as noted earlier, downward communication is less direct than in the United States. Orders tend to be implicit in nature. Conversely, in some European countries, downward communication is not only direct but extends beyond business matters. For example, one early study surveyed 299 U.S. and French managers regarding the nature of downward communication and the managerial authority they perceived themselves as having. This study found that U.S. managers basically used downward communication for work-related matters. A follow-up study investigated mat- ters that U.S. and French managers felt were within the purview of their authority.21 The major differences involved work-related and nonwork-related activities: U.S. managers felt that it was within their authority to communicate or attempt to influence their peo- ple’s social behavior only if it occurred on the job or it directly affected their work. For example, U.S. managers felt that it was proper to look into matters such as how much an individual drinks at lunch, whether the person uses profanity in the workplace, and how active the individual is in recruiting others to join the company. The French manag- ers were not as supportive of these activities. The researcher concluded that “the Amer- icans find it as difficult [as] or more difficult than the French to accept the legitimacy of managerial authority in areas unrelated to work.”22

Upward Communication Upward communication is the transfer of information from subordinate to superior. The primary purpose of this subordinate-initiated upward communication is to provide feed- back, ask questions, or obtain assistance from higher-level management. In recent years, there has been a call for and a concerted effort to promote more upward communication in the United States. In other countries, such as in Japan, Hong Kong, and Singapore, upward communication has long been a fact of life. Managers in these countries have extensively used suggestion systems and quality circles to get employee input and always are available to listen to their people’s concerns.

Here are some observations from the approach the Japanese firm Matsushita uses in dealing with employee suggestions:

Matsushita views employee recommendations as instrumental to making improvements on the shop floor and in the marketplace. [It believes] that a great many little people, paying attention each day to how to improve their jobs, can accomplish more than a whole head- quarters full of production engineers and planners. Praise and positive reinforcement are an important part of the Matsushita philosophy. . . . Approximately 90 percent of . . . sugges- tions receive rewards; most only a few dollars per month, but the message is reinforced constantly: “Think about your job; develop yourself and help us improve the company.” The best suggestions receive company-wide recognition and can earn substantial monetary rewards. Each year, many special awards are also given, including presidential prizes and various divisional honors.23

Matsushita has used the same approach wherever it has established plants world- wide, and the strategy has proved very successful. The company has all its employees begin the day by reciting its basic principles, beliefs, and values, which are summarized in Table 7–3, to reinforce in all employees the reason for the company’s existence and to provide a form of spiritual fabric to energize and sustain them. All employees see themselves as important members of a successful team, and they are willing to do what- ever is necessary to ensure the success of the group.

Outside these Asian countries, upward communication is not as popular. For example, in South America, many managers believe that employees should follow orders and not ask a lot of questions. German managers also make much less use of this form of communication. In most cases, however, evidence shows that employees prefer to have downward communication at least supplemented by upward channels. Unfortu- nately, such upward communication does not always occur because of a number of communication barriers.

upward communication The transfer of meaning from subordinate to superior.

216 Part 2 The Role of Culture

■ Communication Barriers A number of common communication barriers are relevant to international management. The more important barriers involve language, perception, culture, and nonverbal communication.

Language Barriers Knowledge of the home country’s language (the language used at the headquarters of the MNC) is important for personnel placed in a foreign assignment. If managers do not under- stand the language that is used at headquarters, they likely will make a wide assortment of errors. Additionally, many MNCs now prescribe English as the common language for inter- nal communication, so that managers can more easily convey information to their counter- parts in other geographically dispersed locales.24 Despite such progress, however, language training continues to lag in many areas, including in the United States, where only 8 percent of college students study a foreign language. However, in an increasing number of European countries, more and more young people are becoming multilingual.25 Table 7–4 shows the

Table 7–3 Matsushita’s Philosophy Basic Business Principles

To recognize our responsibilities as industrialists, to foster progress, to promote the general welfare of society, and to devote ourselves to the further development of world culture.

Employees Creed Progress and development can be realized only through the combined efforts and coopera- tion of each member of the company. Each of us, therefore, shall keep this idea constantly in mind as we devote ourselves to the continuous improvement of our company.

The Seven Spiritual Values 1. National service through industry 2. Fairness 3. Harmony and cooperation 4. Struggle for betterment

5. Courtesy and humility 6. Adjustment and assimilation 7. Gratitude

Table 7–4 Multilingualism in the EU Classroom 2015

Percentage of Pupils in General Secondary Education Learning English, French, or German as a Foreign

Language, 2015

English French German

European Union 94.5 23.6 20.9 Finland 99.6 16.7 24.8 Germany 94.7 26.3 — Denmark 91.1 9.0 33.5 Spain 97.7 22.3 1.2 France 99.7 — 22.1 Greece 94.1 4.4 2.1 Italy 95.5 18.0 8.0 Romania 99.9 85.0 12.0 Britain — 27.3 9.4 Ireland — 54.5 14.9 Poland 93.7 8.2 48.8

Source: Eurostat (2015),  http://ec.europa.eu/eurostat/web/education-and-training/data/main-tables.

Chapter 7 Cross-Cultural Communication and Negotiation 217

Table 7–5 Multilingualism in the U.S. College Classroom 2015

Number of Percentage of Total Language Studied Students Enrolled Student Population

Spanish 790,756 4.2% French 197,757 1.1% American Sign Language 109,577 0.6% German 86,700 0.5% Italian 71,285 0.4% Japanese 66,740 0.4% Chinese 61,055 0.3% Arabic 32,286 0.2% Total students studying any foreign language 1,522,070 8.1%

Source: Modern Language Association, Table 4, “Enrollments in Languages Other Than English in United States Institutions of Higher Education Fall 2013,” February 2015.

percentage of European students who are studying English, French, or German, and Table 7–5 shows the percentage of U.S. college students studying various foreign languages.

Language education is a good beginning, but it is also important to realize that the ability to speak the language used at MNC headquarters is often not enough to ensure that the personnel are capable of doing the work. Stout recently noted that many MNCs worldwide place a great deal of attention on the applicant’s ability to speak English without considering if the person has other necessary skills, such as the ability to inter- act well with others and the technical knowledge demanded by the job.26  Additionally, in interviewing people for jobs, he has noted that many interviewers fail to take into account the applicant’s culture. As a result, interviewers misinterpret behaviors such as quietness or shyness and use them to conclude that the applicant is not sufficiently con- fident or self-assured. Still another problem is that nonnative speakers may know the language but not be fully fluent, so they end up asking questions or making statements that convey the wrong message. After studying Japanese for only one year, Stout began interviewing candidates in their local language and made a number of mistakes. In one case, he reports, “a young woman admitted to having an adulterous affair—even though this was not even close to the topic I was inquiring about—because of my unskilled use of the language.”27

Written communication has been getting increased attention because poor writing is proving to be a greater barrier than poor talking. For example, Hildebrandt has found that among U.S. subsidiaries studied in Germany, language was a major problem when subsidiaries were sending written communications to the home office. The process often involved elaborate procedures associated with translating and reworking the report. Typ- ical steps included (1) holding a staff conference to determine what was to be included in the written message, (2) writing the initial draft in German, (3) rewriting the draft in German, (4) translating the material into English, (5) consulting with bilingual staff members regarding the translation, and (6) rewriting the English draft a series of addi- tional times until the paper was judged to be acceptable for transmission. The German managers admitted that they felt uncomfortable with writing because their command of written English was poor. As Hildebrandt noted:

All German managers commanding oral English stated that their grammatical competence was not sufficiently honed to produce a written English report of top quality. Even when professional translators from outside the company rewrote the German into English, German middle managers were unable to verify whether the report captured the substantive intent or included editorial alterations.28

218 Part 2 The Role of Culture

Problems associated with the translation of information from one language to another have been made even clearer by Schermerhorn, who conducted research among 153 Hong Kong Chinese bilinguals who were enrolled in an undergraduate management course at a major Hong Kong university. The students were given two scenarios, written in either English or Chinese. One scenario involved a manager who was providing some form of personal support or praise for a subordinate. The research used the following procedures:

[A] careful translation and back-translation method was followed to create the Chinese language versions of the research instruments. Two bilingual Hong Kong Chinese, both highly fluent in English and having expertise in the field of management, shared roles in the process. Each first translated one scenario and the evaluation questions into Chinese. Next they translated each other’s Chinese versions back into English, and dis- cussed and resolved translation differences in group consultation with the author. Finally, a Hong Kong professor read and interpreted the translations correctly as a final check of equivalency.29

The participants were asked to answer eight evaluation questions about these sce- narios. A significant difference between the two sets of responses was found. Those who were queried in Chinese gave different answers from those who were queried in English. This led Schermerhorn to conclude that language plays a key role in conveying information between cultures and that in cross-cultural management research, bilingual individuals should not be queried in their second language.

Cultural Barriers in Language Geographic distance poses challenges for international managers, but so do cultural and institutional distance. Previous research has conceptualized and measured cross-national differences primarily in terms of dyadic cultural distance; that is, comparing the “distance” of one culture to another. Some, however, have suggested that distance is a multidimensional construct that includes economic, financial, political, admin- istrative, cultural, demographic, knowledge, and global connectedness as well as geographic distance and cannot be summarized in one “score.”30 Nowhere does such cultural distance show up more vividly than in challenges to accurate communications.

As one dimension of such distance, cultural barriers have significant ramifica- tions for international communications. For example, research by Sims and Guice compared 214 letters of inquiry written by native and nonnative speakers of English to test the assumption that cultural factors affect business communication. Among other things, the researchers found that nonnative speakers used exaggerated polite- ness, provided unnecessary professional and personal information, and made inap- propriate requests of the other party. Commenting on the results and implications of their study, the researchers noted that their investigation indicated that the deviations from standard U.S. business communication practices were not specific to one or more nationalities. The deviations did not occur among specific nationalities but were spread throughout the sample of nonnative letters used for the study. Therefore, we can speculate that U.S. native speakers of English might have similar difficulties in international settings. In other words, a significant number of native speakers in the U.S. might deviate from the standard business communication practices of other cul- tures. Therefore, these native speakers need specific training in the business com- munication practices of the major cultures of the world so they can communicate successfully and acceptably with readers in those cultures.31

Research by Scott and Green has extended these findings, showing that even in English-speaking countries, there are different approaches to writing letters. In the United States, for example, it is common practice when constructing a bad-news letter to start out “with a pleasant, relevant, neutral, and transitional buffer statement; give the reasons for the unfavorable news before presenting the bad news; present the refusal in a positive manner; imply the bad news whenever possible; explain how the refusal is in the reader’s best interest; and suggest positive alternatives that build

Chapter 7 Cross-Cultural Communication and Negotiation 219

goodwill.”32  In Great Britain, however, it is common to start out by referring to the situation, discussing the reasons for the bad news, conveying the bad news (often quite bluntly), and concluding with an apology or statement of regret (something that is frowned on by business-letter experts in the United States) designed to keep the reader’s goodwill. Here is an example:

Lord Hanson has asked me to reply to your letter and questionnaire of February 12 which we received today. As you may imagine, we receive numerous requests to complete questionnaires or to participate in a survey, and this poses problems for us. You will appreciate that the time it would take to complete these requests would represent a full-time job, so we decided some while ago to decline such requests unless there was some obvious benefit to Hanson PLC and our stockholders. As I am sure you will understand, our prime responsibility is to look after our stockholders’ interests. I apologize that this will not have been the response that you were hoping for, but I wish you success with your research study.33

U.S. MNC managers would seldom, if ever, send that type of letter; it would be viewed as blunt and tactless. However, the indirect approach that Americans use would be viewed by their British counterparts as overly indirect and obviously insincere.

On the other hand, when compared to Asians, many American writers are far more blunt and direct. For example, Park, Dillon, and Mitchell reported that there are pro- nounced differences between the ways in which Americans and Asians write business letters of complaint. They compared the approach used by American managers for whom English is a first language, who wrote international business letters of complaint, with the approach of Korean managers for whom English is a second language, who wrote the same types of letters. They found that American writers used a direct organizational pattern and tended to state the main idea or problem first before sharing explanatory details that clearly related to the stated problem. In contrast, the standard Korean pattern was indirect and tended to delay the reader’s discovery of the main point. This led the researchers to conclude that the U.S.-generated letter might be regarded as rude by Asian readers, while American readers might regard the letter from the Korean writer as vague, emotional, and accusatory.34

Perceptual Barriers Perception is a person’s view of reality. How people see reality can vary and will influence their judgment and decision making.35  Examples abound, of course, of how perceptions play an important role in international management. Japanese stockbrokers who perceived that the chances of improving their career would be better with U.S. firms have changed jobs. Hong Kong hoteliers bought U.S. properties because they had the perception that if they could offer the same top-quality hotel service as back home, they could dominate the U.S. markets. Unfortunately, misperceptions can become a barrier to effective communication and thus decision making. For example, when the Clinton administration decided to allow Taiwan President Lee Tenghui to visit the United States, the Chinese (PRC) government perceived this as a threatening gesture and took actions of its own. Besides conducting dangerous war games very near Taiwan’s border as a warning to Taiwan not to become too bold in its quest for rec- ognition as a sovereign nation, the PRC also snubbed U.S. car manufacturers and gave a much-coveted $1 billion contract to Mercedes-Benz of Germany.36,37,38 In interna- tional incidents such as this, perception is critical, and misperceptions may get out of hand. The following sections provide examples of perceptual barriers and their results in the international business arena.

Advertising Messages One way that perception can prove to be a problem in inter- national management communication is the very basic misunderstandings caused when one side uses words or symbols that simply are misinterpreted by others. Many firms

perception A person’s view of reality.

220 Part 2 The Role of Culture

have found to their dismay that a failure to understand home-country perceptions can result in disastrous advertising programs, for instance. Here are two examples:

Ford . . . introduced a low cost truck, the “Fiera,” into some Spanish-speaking countries. Unfortunately, the name meant “ugly old woman” in Spanish. Needless to say, this name did not encourage sales. Ford also experienced slow sales when it introduced a top-of-the-line automobile, the “Comet,” in Mexico under the name “Caliente.” The puzzling low sales were finally understood when Ford discovered that “caliente” is slang for a street walker.39 One laundry detergent company certainly wishes now that it had contacted a few locals before it initiated its promotional campaign in the Middle East. All of the company’s adver- tisements pictured soiled clothes on the left, its box of soap in the middle, and clean clothes on the right. But, because in that area of the world people tend to read from the right to the left, many potential customers interpreted the message to indicate the soap actually soiled the clothes.40

There have been countless other such advertising blunders. Some speak to the political context, such as when Mercedes-Benz introduced its Grand Sports Tourer, or Mercedes GST, in Canada. Canadians were not very impressed because they used the letters GST to refer to Canadian socialism. Other times, the advertising is simply offen- sive. Bacardi, for example, advertised the fruity drink “Pavian” in Germany, believing that it was tres chic. “Pavian” to the German population, however, meant “baboon.” Needless to say, sales did not exceed expectations. The food and beverage industry may have experienced the worst string of bloopers. The Coors slogan “Turn It Loose” dis- mayed the Spanish, who thought it would cause intestinal problems. In Taiwan, Pepsi’s “Come alive with Pepsi” frightened consumers because it literally meant “Pepsi will bring your ancestors back from the grave.” Finally, even though Kentucky Fried Chicken is performing better in the Chinese market than in America, its catchphrase “Finger- licking good” was originally translated as “Eat your fingers off.”41

Managers must be very careful when they translate messages. As mentioned, some common phrases in one country will not mean the same thing in others. Evidently from the many examples, errors in translation occur frequently, but MNCs can still come out on top with care and persistence, always remembering that perception may create new reality.

View of Others Perception influences how individuals “see” others. A good example is provided by the perception of foreigners who reside in the United States by Americans and the perception of Americans by the rest of the world. Most Americans see themselves as extremely friendly, outgoing, and kind, and they believe that others also see them in this way. At the same time, many are not aware of the negative impressions they give to others. This has become especially salient in light of Americans’ reaction to the September 11, 2001, terror attacks and their conduct of the Iraq War, which have at times shaken the world view of the United States. It becomes a trying exercise to sort through truth and error in such circumstances.

An example in the business world where perception is all important and mispercep- tion may abound is the way in which people act, or should act, when initially meeting others. The International Management in Action feature “Doing It Right the First Time” provides some insight regarding how to conduct oneself when doing business in Japan.

Perceptions of others obviously may play a major role in the context of interna- tional management in the effects of the ways that international managers perceive their subordinates and their peers. For example, a study examined the perceptions that German and U.S. managers had of the qualifications of their peers (those on the same level and status), managers, and subordinates in Europe and Latin America.42 The findings showed that both the German and the U.S. respondents perceived their subordinates to be less qualified than their peers. However, although the Germans perceived their managers to have more managerial ability than their peers, the Americans felt that their South Amer- ican peers in many instances had qualifications equal to or better than the qualifications of their own managers. Quite obviously, these perceptions will affect how German and

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International Management in Action

Doing It Right the First Time

Like other countries of the world, Japan has its own business customs and culture. And when someone fails to adhere to tradition, the individual runs the risk of being perceived as ineffective or uncaring. The follow- ing addresses three areas that are important in being correctly perceived by one’s Japanese counterparts.

Business Cards The exchange of business cards is an integral part of Japanese business etiquette, and Japanese business- people exchange these cards when meeting someone for the first time. Additionally, those who are most likely to interface with non-Japanese are supplied with busi- ness cards printed in Japanese on one side and a for- eign language, usually English, on the reverse side. This is aimed at enhancing recognition and pronunciation of Japanese names, which are often unfamiliar to foreign businesspeople. Conversely, it is advisable for foreign businesspeople to carry and exchange with their Japanese counterparts a similar type of card printed in Japanese and in their native language. These cards can often be obtained through business centers in major hotels. When receiving a card, it is considered common courtesy to offer one in return. In fact, not returning a card might convey the impression that the manager is not committed to a meaningful business relationship in the future. Business cards should be presented and received with both hands. When presenting one’s card, the pre- senter’s name should be facing the person who is receiving the card so the receiver can easily read it. When receiving a business card, it should be handled with care, and if the receiver is sitting at a conference or other type of table, the card should be placed in front of the individual for the duration of the meeting. It is considered rude to put a prospective business partner’s card in one’s pocket before sitting down to discuss busi- ness matters.

Bowing Although the handshake is increasingly common in Japan, bowing remains the most prevalent formal method of greeting, saying goodbye, expressing gratitude, or apologizing to another person. When meeting foreign businesspeople, however, Japanese will often use the handshake or a combination of both a handshake and a bow, even though there are different forms and styles of bowing, depending on the relationship of the parties involved. Foreign businesspeople are not expected to be familiar with these intricacies, and therefore a deep nod of the head or a slight bow will suffice in most cases. Many foreign businesspeople are unsure whether to use a handshake or to bow. In these situations, it is best to wait and see if one’s Japanese counterpart offers a hand or prefers to bow and then to follow suit.

Attire Most Japanese businesspeople dress in conservative dark or navy blue suits, although slight variations in style and color have come to be accepted in recent years. As a general rule, what is acceptable business attire in virtually any industrialized country is usually regarded as good business attire in Japan as well. Although there is no need to conform precisely to the style of dress of the Japanese, good judgment should be exercised when selecting attire for a business meeting. If unsure about what constitutes appropriate attire for a particular situation, it is best to err on the conservative side.

Source: Japan: The Official Guide. Japan National Tourism Organiza- tion. http://www.jnto.go.jp/eng/indepth/exotic/lifestyle/bow.html (Accessed October 6, 2016).  Alan Rugman and Richard M. Hodgetts, International Business, 2nd ed. (London: Pearson, 2000), chapter 17; Philip R. Harris and Robert T. Moran, Managing Cultural Differences, 3rd ed. (Houston: Gulf Publishing, 1991), pp. 393–406; Sheida Hodge, Global Smarts (New York: Wiley, 2000), p. 76; Richard D. Lewis, When Cultures Collide (London: Nicholas Brealey, 1999), pp. 414–415.

U.S. expatriates communicate with their South American and other peers and subordi- nates, as well as how the expatriates communicate with their bosses.

Another study found that Western managers have more favorable attitudes toward women as managers than do Asian or Saudi managers.43 Japanese managers, according to one survey, also still regard women as superfluous to the effective running of their organizations and generally continue to not treat women as equals.44 Such perceptions obviously affect the way these managers interact and communicate with their female counterparts.

The Impact of Culture Besides language and perception, another major barrier to communication is culture, a topic that was given detailed attention in Chapter 4. Culture can affect communication in a number of ways, and one way is through the impact of cultural values.

222 Part 2 The Role of Culture

Cultural Values One expert on Middle Eastern countries notes that people there do not relate to and communicate with each other in a loose, general way as do those in the United States. Relationships are more intense and binding in the Middle East, and a wide variety of work-related values influence what people in the Middle East will and will not do.

In North American society, the generally professed prevalent pattern is one of nonclass-consciousness, as far as work is concerned. Students, for example, make extra pocket money by taking all sorts of part-time jobs—manual and otherwise—regardless of the socioeconomic stratum to which the individual belongs. The attitude is uninhibited. In the Middle East, the overruling obsession is how the money is made and via what kind of job.45

These types of values indirectly, and in many cases directly, affect communication between people from different cultures. For example, one would communicate differently with a “rich college student” from the United States than with one from Saudi Arabia. Similarly, when negotiating with managers from other cultures, knowing the way to handle the deal requires an understanding of cultural values.46

Another cultural value is the way that people use time. In the United States, people believe that time is an asset and is not to be wasted. This is an idea that has limited meaning in some other cultures. Various values are reinforced and reflected in proverbs that Americans are taught from an early age. These proverbs help to guide people’s behavior. Table 7–6 lists some examples.

Misinterpretation Cultural differences can cause misinterpretations both in how others see expatriate managers and in how the latter see themselves. For example, U.S. manag- ers doing business in Austria often misinterpret the fact that local businesspeople always address them in formal terms. They may view this as meaning that they are not friends or are not liked, but in fact, this formal behavior is the way that Austrians always conduct business. The informal, first-name approach used in the United States is not the style of the Austrians.

Culture even affects day-to-day activities of corporate communications.47 For exam- ple, when sending messages to international clients, American managers have to keep in mind that there are many things that are uniquely American and overseas managers may not be aware of them. As an example, daylight saving time is known to all Americans, but many Asian managers have no idea what the term means. Similarly, it is common for American managers to address memos to their “international office” without realizing that the managers who work in this office regard the American location as the

Table 7–6 U.S. Proverbs Representing Cultural Values

Proverb Cultural Value

A penny saved is a penny earned. Thriftiness Time is money. Time thriftiness Don’t cry over spilt milk. Practicality Waste not, want not. Frugality Early to bed, early to rise, makes one healthy, wealthy, and wise. Diligence; work ethic A stitch in time saves nine. Timeliness of action If at first you don’t succeed, try, try again. Persistence; work ethic Take care of today, and tomorrow will take care of itself. Preparation for future

Source: Adapted from Nancy J. Adler (with Allison Gunderson), International Dimensions of Organizational Behavior, 5th ed. (Mason, OH: South-Western, 2008), p. 84.

Chapter 7 Cross-Cultural Communication and Negotiation 223

“international” one! Other suggestions that can be of value to American managers who are engaged in international communications include

∙ Be careful not to use generalized statements about benefits, compensation, pay cycles, holidays, or policies in your worldwide communications. Work hours, vacation accrual, general business practices, and human resource issues vary widely from country to country.

∙ Because most of the world uses the metric system, be sure to include con- verted weights and measures in all internal and external communications.

∙ Keep in mind that even in English-speaking countries, words may have dif- ferent meanings. Not everyone knows what is meant by “counterclockwise” or “quite good.”

∙ Remember that letterhead and paper sizes differ worldwide. The 8½ × 11-inch page is a U.S. standard, but most countries use an A4 (8¼ × 11½ inch) size for their letterhead, with envelopes to match.

∙ Dollars are not unique to the United States. There are Australian, Bermudian, Canadian, Hong Kong, Taiwanese, and New Zealand dollars, among others. So when referring to American dollars, it is important to use “US$.”

Many Americans also have difficulty interpreting the effect of national values on work behavior. For example, why do French and German workers drink alcoholic bever- ages at lunchtime? Why are many European workers unwilling to work the night shift? Why do overseas affiliates contribute to the support of the employees’ work council or donate money to the support of kindergarten teachers in local schools? These types of actions are viewed by some people as wasteful, but those who know the culture of these countries realize that such actions promote the long-run good of the company. It is the outsider who is misinterpreting why these culturally specific actions are happening, and such misperceptions can become a barrier to effective communication.

Nonverbal Communication Another major source of communication and perception problems is nonverbal com- munication, which is the transfer of meaning through means such as body language and use of physical space. Table 7–7 summarizes a number of dimensions of nonverbal com- munication. The general categories that are especially important to communication in international management are kinesics, proxemics, chronemics, and chromatics.

nonverbal communication The transfer of meaning through means such as body language and the use of physical space.

Table 7–7 Common Forms of Nonverbal Communication

1. Facial expressions, including expressions such as a smile or a frown, which can convey a variety of emotions including happiness, anger, fear, or sadness.

2. Gestures, including waving, eye-rolling, and pointing. 3. Paralinguistics, which includes non-language-based vocal factors such as tone, loudness,

and inflection. 4. Body language and posture, such as arm-crossing and slouching. 5. Proxemics, which refers to the personal space between two communicating people. 6. Eye gaze, which can determine interest in the conversation, openness, hostility, and even

the level of honesty. 7. Haptics, which refers to communication through touching. 8. Appearance, including hairstyle, color, clothing, and hygiene. 9. Artifacts, such as tools, charts, images, and other objects.

Source:  Adapted from Kendra Cherry, “Types of Non-Verbal Communication,” VeryWell, December 17, 2015,  https://www. verywell.com/types-of-nonverbal-communication-2795397.

224 Part 2 The Role of Culture

Kinesics Kinesics is the study of communication through body movement and facial expression. Primary areas of concern include eye contact, posture, and gestures. For ex- ample, when one communicates verbally with someone in the United States, it is good manners to look the other person in the eye. This area of communicating through the use of eye contact and gaze is known as oculesics. In some areas of the world, oculesics is an important consideration because of what people should not do, such as stare at others or maintain continuous eye contact, because it is considered impolite to do these things.

Another area of kinesics is posture, which can also cause problems. For example, when Americans are engaged in prolonged negotiations or meetings, it is not uncommon for them to relax and put their feet up on a chair or desk, but this is insulting behavior in the Middle East. Here is an example from a classroom situation:

In the midst of a discussion of a poem in the sophomore class of the English Department, the professor, who was British, took up the argument, started to explain the subtleties of the poem, and was carried away by the situation. He leaned back in his chair, put his feet up on the desk, and went on with the explanation. The class was furious. Before the end of the day, a demonstration by the University’s full student body had taken place. Petitions were submitted to the deans of the various facilities. The next day, the situation even made the newspaper headlines. The consequences of the act, that was innocently done, might seem ridiculous, funny, baffling, incomprehensible, or even incredible to a stranger. Yet, to the native, the students’ behavior was logical and in context. The students and their supporters were outraged because of the implications of the breach of the native behavioral pattern. In the Middle East, it is extremely insulting to have to sit facing two soles of the shoes of somebody.48

Gestures are also widely used and take many different forms. For example, Cana- dians shake hands, Japanese bow, and Middle Easterners of the same sex kiss on the cheek. Communicating through the use of bodily contact is known as haptics, and it is a widely used form of nonverbal communication.

Sometimes gestures present problems for expatriate managers because these behav- iors have different meanings depending on the country. For example, in the United States, putting the thumb and index finger together to form an “O” is the sign for “okay.” In Japan, this is the sign for money; in southern France, the gesture means “zero” or “worthless”; and in Brazil, it is regarded as a vulgar or obscene sign. In France and Belgium, snapping the fingers of both hands is considered vulgar; in Brazil, this gesture is used to indicate that something has been done for a long time. In Britain, the “V for victory” sign is given with the palm facing out; if the palm is facing in, this roughly means “shove it”; in non-British countries, the gesture means two of something and often is used when placing an order at a restaurant.49 Gibson, Hodgetts, and Blackwell found that many foreign students attending school in the United States have trouble communi- cating because they are unable to interpret some of the most common nonverbal gestures.50 A survey group of 44 Jamaican, Venezuelan, Colombian, Peruvian, Thai, Indian, and Japanese students at two major universities were given pictures of 20 universal cultural gestures, and each was asked to describe the nonverbal gestures illustrated. In 56 percent of the choices, the respondents either gave an interpretation that was markedly different from that of Americans or reported that the nonverbal gesture had no meaning in their culture. These findings help to reinforce the need to teach expatriates about local non- verbal communication.

Proxemics Proxemics is the study of the way that people use physical space to convey messages. For example, in the United States, there are four “distances” people use in com- municating on a face-to-face basis (see Figure 7–2). Intimate distance is used for very confidential communications. Personal distance is used for talking with family and close friends. Social distance is used to handle most business transactions. Public distance is used when calling across the room or giving a talk to a group.

One major problem for Americans communicating with people from the Middle East or South America is that the intimate or personal distance zones are violated.

kinesics The study of communication through body movement and facial expression.

oculesics The area of communication that deals with conveying messages through the use of eye contact and gaze.

haptics Communicating through the use of bodily contact.

proxemics The study of the way people use physical space to convey messages.

intimate distance Distance between people that is used for very confidential communications.

personal distance In communicating, the physical distance used for talking with family and close friends.

social distance In communicating, the distance used to handle most business transactions.

public distance In communicating, the distance used when calling across the room or giving a talk to a group.

Chapter 7 Cross-Cultural Communication and Negotiation 225

Americans often tend to be moving away in interpersonal communication with their Middle Eastern or Latin counterparts, while the latter are trying to physically close the gap. The American cannot understand why the other is standing so close; the latter can- not understand why the American is being so reserved and standing so far away. The result is a breakdown in communication.

Office layout is another good example of proxemics. In the United States, the more important the manager, the larger the office, and often a secretary screens visitors and keeps away those whom the manager does not wish to see. In Japan, most managers do not have large offices, and even if they do, they spend a great deal of time out of the office and with the employees. Thus, the Japanese have no trouble communicating directly with their superiors. A Japanese manager staying in his office would be viewed as a sign of distrust or anger toward the group.

Another way that office proxemics can affect communication is that in many Euro- pean companies, no wall separates the space allocated to the senior-level manager from that of the subordinates. Everyone works in the same large room. These working condi- tions often are disconcerting to Americans, who tend to prefer more privacy.

Chronemics Chronemics refers to the way in which time is used in a culture. When examined in terms of extremes, there are two types of time schedules: monochronic and polychronic. A monochronic time schedule is one in which things are done in a linear fashion. A manager will address Issue A first and then move on to Issue B. In individu- alistic cultures such as the United States, Great Britain, Canada, and Australia, as well as many of the cultures in Northern Europe, managers adhere to monochronic time schedules. In these societies, time schedules are very important, and time is viewed as something that can be controlled and should be used wisely.

This is in sharp contrast to polychronic time schedules, which are characterized by people tending to do several things at the same time and placing higher value on personal involvement than on getting things done on time. In these cultures, schedules are subordinated to personal relationships. Regions of the world where polychronic time schedules are common include Latin America and the Middle East.

When doing business in countries that adhere to monochronic time schedules, it is important to be on time for meetings. Additionally, these meetings typically end at the appointed time so that participants can be on time for their next meeting. When doing business in countries that adhere to polychronic time schedules, it is common to find business meetings starting late and finishing late.

Chromatics Chromatics is the use of color to communicate messages. Every society uses chromatics, but in different ways. Colors that mean one thing in the United States may mean something entirely different in Asia. For example, in the United States it is common to wear black when one is in mourning, while in some locations in India people wear white when they are in mourning. In Hong Kong red is used to signify

chronemics The way in which time is used in a culture.

monochronic time schedule A time schedule in which things are done in a linear fashion.

polychronic time schedule A time schedule in which people tend to do several things at the same time and place higher value on personal involvement than on getting things done on time.

chromatics The use of color to communicate messages.

Public distance

Social distance

Personal distance

Intimate distance

8' to 10'

4' to 8'

18" to 4'

18" Figure 7–2 Personal Space Categories for Those in the United States

Source: Adapted from Richard M. Hodgetts and Donald F. Kuratko, Management, 2nd ed. (San Diego, CA: Harcourt Brace Jovanovich, 1991), p. 384.

226 Part 2 The Role of Culture

happiness or luck and traditional bridal dresses are red; in the United States it is common for the bride to wear white. In many Asian countries shampoos are dark in color because users want the soap to be the same color as their hair and believe that if it were a light color, it would remove color from their hair. In the United States shampoos tend to be light in color because people see this as a sign of cleanliness and hygiene. In Chile a gift of yellow roses conveys the message “I don’t like you,” but in the United States it says quite the opposite.

Knowing the importance and the specifics of chromatics in a culture can be very helpful because, among other things, such knowledge can help you avoid embarrassing situations. A good example is the American manager in Peru who, upon finishing a one- week visit to the Lima subsidiary, decided to thank the assistant who was assigned to him. He sent her a dozen red roses. The lady understood the faux pas, but the American manager was somewhat embarrassed when his Peruvian counterpart smilingly told him, “It was really nice of you to buy her a present. However, red roses indicate a romantic interest!”

■ Achieving Communication Effectiveness A number of steps can be taken to improve communication effectiveness in the interna- tional arena. These include improving feedback systems, providing language and cultural training, and increasing flexibility and cooperation.

Improve Feedback Systems One of the most important ways of improving communication effectiveness in the inter- national context is to open up feedback systems. Feedback is particularly important between parent companies and their affiliates. There are two basic types of feedback systems: personal (e.g., face-to-face meetings, telephone conversations, and personalized e-mail) and impersonal (e.g., reports, budgets, and plans). Both systems help affiliates keep their home office aware of progress and, in turn, help the home office monitor and control affiliate performance as well as set goals and standards.

At present, there seem to be varying degrees of feedback between the home offices of MNCs and their affiliates. For example, one study evaluated the communication feed- back between subsidiaries and home offices of 63 MNCs headquartered in Europe, Japan, and North America.51 A marked difference was found between the way that U.S. com- panies communicated with their subsidiaries and the way that European and Japanese firms did. Over one-half of the U.S. subsidiaries responded that they received monthly feedback from their parent companies, in contrast to less than 10 percent for the subsid- iaries of European and Japanese firms. In addition, the Americans were much more inclined to hold regular management meetings on a regional or worldwide basis. Seventy- five percent of the U.S. companies had annual meetings for their affiliate top managers, compared with less than 50 percent for the Europeans and Japanese. These findings may help explain why many international subsidiaries and affiliates are not operating as effi- ciently as they should. The units may not have sufficient contact with the home office. They do not seem to be getting continuous assistance and feedback that are critical to effective communication.

Provide Language Training Besides improving feedback systems, another way to make communication more effective in the international arena is through language training. Many host-country managers cannot communicate well with their counterparts at headquarters. Because English has become the international language of business, those who are not native speakers of English should learn the language well enough so that face-to-face and telephone con- versations and e-mail are possible. If the language of the home office is not English, this

Chapter 7 Cross-Cultural Communication and Negotiation 227

other language also should be learned. As a U.S. manager working for a Japanese MNC recently told one of the authors, “The official international language of this company is English. However, whenever the home-office people show up, they tend to cluster together with their countrymen and speak Japanese. That’s why I’m trying to learn Japanese. Let’s face it. They say all you need to know is English, but if you want to really know what’s going on, you have to talk their language.”

Written communication also is extremely important in achieving effectiveness. As noted earlier, when reports, letters, and e-mail messages are translated from one language to another, preventing a loss of meaning is virtually impossible. Moreover, if the com- munications are not written properly, they may not be given the attention they deserve. The reader will allow poor grammar and syntax to influence his or her interpretation and subsequent actions. Moreover, if readers cannot communicate in the language of those who will be receiving their comments or questions about the report, their messages also must be translated and likely will further lose meaning. Therefore, the process can con- tinue on and on, each party failing to achieve full communication with the other. Hil- debrandt has described the problems in this two-way process when an employee in a foreign subsidiary writes a report and then sends it to his or her boss for forwarding to the home office:

The general manager or vice president cannot be asked to be an editor. Yet they often send statements along, knowingly, which are poorly written, grammatically imperfect, or generally unclear. The time pressures do not permit otherwise. Predictably, questions are issued from the States to the subsidiary and the complicated bilingual process now goes in reverse, ultimately reaching the original . . . staff member, who receives the English questions retranslated.52

Language training would help to alleviate such complicated communication problems.

Provide Cultural Training It is very difficult to communicate effectively with someone from another culture unless at least one party has some understanding of the other’s culture.53 Otherwise, communi- cation likely will break down. This is particularly important for multinational companies that have operations throughout the world.54 Although there always are important differ- ences between countries, and even between subcultures of the same country, firms that operate in South America find that the cultures of these countries have certain com- monalities. These common factors also apply to Spain and Portugal. Therefore, a basic understanding of Latin cultures can prove to be useful throughout a large region of the world. The same is true of Anglo cultures, where norms and values tend to be somewhat similar from one country to another. When a multinational has operations in South America, Europe, and Asia, however, multicultural training becomes necessary. The International Management in Action  box “Communicating in Europe” provides some specific examples of cultural differences.

As Chapter 4 pointed out, it is erroneous to generalize about an “international” culture because the various nations and regions of the globe are so different. Training must be conducted on a regional or country-specific basis. Failure to do so can result in continuous communication breakdown.55 Many corporations are investing in pro- grams to help train their executives in international communication. Such training has become more common since it began in the 1970s as many Americans returned from the Peace Corps with increased awareness of cultural differences. And this training is not limited to those who travel themselves but is increasingly important for employees who frequently interact with individuals from other cultures in their workplace or in their communication.

“Whether a multinational or a start-up business out of a garage, everybody is global these days,” said Dean Foster, president of Dean Foster Associates, an intercultural con- sultancy in New York. “In today’s economy, there is no room for failure. Companies have

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Communicating in Europe

In Europe, many countries are within easy commuting distance of their neighbors, so an expatriate who does business in France on Monday may be in Germany on Tuesday, Great Britain on Wednesday, Italy on Thursday, and Spain on Friday. Each country has its own etiquette regarding how to greet others and conduct oneself dur- ing social and business meetings. The following sec- tions examine some of the things that expatriate managers need to know to communicate effectively.

France When one is meeting with businesspeople in France, promptness is expected, although tardiness of 5 to 10 minutes is not considered a major gaffe. The French prefer to shake hands when introduced, and it is correct to address them by title plus last name. When the meet- ing is over, a handshake again is proper manners. French executives try to keep their personal and pro- fessional lives separate. As a result, most business entertaining is done at restaurants or clubs. When gifts are given to business associates, they should appeal to intellectual or aesthetic pursuits as opposed to being something that one’s company produces for sale on the world market. In conversational discussions, topics such as politics and money should be avoided. Also, humor should be used carefully during business meetings.

Germany German executives like to be greeted by their title, and one should never refer to someone on a first-name basis unless invited to do so. When introducing yourself, do not use a title, just state your last name. Business appoint- ments should be made well in advance, and punctuality is important. Like the French, the Germans usually do not entertain clients at home, so an invitation to a German manager’s home is a special privilege and always should be followed with a thank-you note. Additionally, as is the case in France, one should avoid using humor during business meetings. They are very serious when it comes to business, so be as prepared as possible and keep light-hearted banter to the German hosts’ discretion.

Great Britain In Britain, it is common to shake hands on the first meet- ing, and to be polite one should use last names and appropriate titles when addressing the host, until invited to use their first name. Punctuality again is important to the British, so be prepared to be on time and get down to business fairly quickly. The British are quite warm, though, and an invitation to a British home is more likely than in most other areas of Europe. You should always bring a gift if invited to the host’s house; flowers, chocolates, or books are acceptable.

During business meetings, suits and ties are common dress; however, striped ties should be avoided if they appear to be a copy of those worn by alumni of British universities and schools or by members of military or social clubs. Additionally, during social gatherings it is a good idea not to discuss politics, religion, or gossip about the monarchy unless the British person brings the topic up first.

Italy In traditional companies, executives are referred to by title plus last name. It is common to shake hands when being introduced, and if the individual is a university graduate, the professional title dottore should be used. Business appointments should be made well in advance, and if you expect to be late, call the host and explain the situation. In most cases, business is done at the office, and when someone is invited to a restaurant, this invitation is usually done to socialize and not to con- tinue business discussions. If an expatriate is invited to an Italian home, it is common to bring a gift for the host, such as a bottle of wine or a box of chocolates. Flowers are also acceptable, but be sure to send an uneven num- ber and avoid chrysanthemums, a symbol of death, and red roses, a sign of deep passion. Be sure to offer high- quality gifts with the wrapping done well, as the Italians are very generous when it comes to gifts. It is not a com- mon practice to exchange them during business, but it is recommended that you are prepared. During the dinner conversation, there are a wide variety of acceptable top- ics, including business, family matters, and soccer.

Spain It is common to use first names when introducing or talking to people in Spain, and close friends typically greet each other with an embrace. Appointments should be made in advance, but punctuality is not essential. If one is invited to the home of a Spanish executive, flowers or chocolates for the host are acceptable gifts. If the invitation includes dinner, any business discus- sions should be delayed until after coffee is served. Dur- ing the social gathering, some topics that should be avoided include religion, family, and work. Additionally, humor rarely is used during formal occasions.

Source: Rosalie J. Tung, “How to Negotiate with the Japanese,” Cali- fornia Management Review, Summer 1984, pp. 62–77; Carla Rapo- port, “You Can Make Money in Japan,” Fortune, February 12, 1990, pp. 85–92; Margaret A. Neale and Max H. Bazerman, “Negotiating Rationally,” Academy of Management Executive, August 1992, pp. 42–51; Martin J. Gannon, Understanding Global Cultures, 2nd ed. (Thousand Oaks, CA: Sage, 2001), pp. 35–56; Sheida Hodge, Global Smarts (New York: Wiley, 2000), chapter 14; Richard D. Lewis, When Cultures Collide (London: Nicholas Brealey, 1999), pp. 400–415.

Chapter 7 Cross-Cultural Communication and Negotiation 229

to understand the culture they are working in from Day 1.” Mr. Foster recounted how an American businessman recently gave four antique clocks wrapped in white paper to a prospective client in China. What the man did not realize, he said, was that the words in Mandarin for clock and the number four are similar to the word for death, and white is a funeral color in many Asian countries. “The symbolism was so powerful,” Mr. Foster said, that the man lost the deal.56 Chapter 14 will give considerable attention to cultural training as part of selection for overseas assignments and human resource development.

Increase Flexibility and Cooperation Effective international communications require increased flexibility and cooperation by all parties.57 To improve understanding and cooperation, each party must be prepared to give a little.58 Take the case of International Computers Ltd., a mainframe computer firm that does a great deal of business in Japan. This firm urges its people to strive for suc- cessful collaboration in their international partnerships and ventures. At the heart of this process is effective communication. As Kenichi Ohmae put it:

We must recognize and accept the inescapable subtleties and difficulties of intercompany relationships. This is the essential starting point. Then we must focus not on contractual or equity-related issues but on the quality of the people at the interface between organizations. Finally, we must understand that success requires frequent, rapport-building meetings by at least three organizational levels: top management, staff, and line management at the working level.59

■ Managing Cross-Cultural Negotiations Closely related to communications but deserving special attention is managing negotia- tions.60,61 Negotiation is the process of bargaining with one or more parties to arrive at a solution that is acceptable to all. It has been estimated that managers can spend 50 percent or more of their time on negotiation processes.62  Therefore, it is a learnable skill that is imperative not only for the international manager but for the domestic manager as well because more and more domestic businesses are operating in multicultural envi- ronments (see Chapter 6). Negotiation often follows assessing political environments and is a natural approach to conflict management. Often, the MNC must negotiate with the host country to secure the best possible arrangements. The MNC and the host country will discuss the investment the MNC is prepared to make in return for certain guarantees or concessions. The initial range of topics typically includes critical areas such as hiring practices, direct financial investment, taxes, and ownership control. Negotiation also is used in creating joint ventures with local firms and in getting the operation off the ground. After the firm is operating, additional areas of negotiation include expansion of facilities, use of more local managers, additional imports or exports of materials and finished goods, and recapture of profits.

On a more macro level of international trade are the negotiations conducted between countries. The current balance-of-trade problem between the United States and China is one example. The massive debt problems of less developed countries and the opening of trade with Eastern European and newly emerging economies are other current examples.

Types of Negotiation People enter into negotiations for a multitude of reasons, but the nature of the goal deter- mines what kind of negotiation will take place. There are two types of negotiations that we will discuss here: distributive and integrative negotiations. Distributive negotiations occur when two parties with opposing goals compete over a set value.63 Consider a person who passes a street vendor and sees an item he likes but considers the price, or set value, a bit steep. The goal of the buyer is to procure the item at the lowest price, getting more

negotiation Bargaining with one or more parties for the purpose of arriving at a solution acceptable to all.

distributive negotiations Bargaining that occurs when two parties with opposing goals compete over a set value.

230 Part 2 The Role of Culture

value for his money, while the goal of the seller is to collect as much as possible to maximize profits. Both are trying to get the best deal, but what translates into a gain by one side is usually experienced as a loss by the other, otherwise known as a win-lose situation. The relationship is focused on the individual and based on a short-term interac- tion. More often than not, the people involved are not friends, or at least their personal relationship is put aside in the matter. Information also plays an important role because you do not want to expose too much and be vulnerable to counterattack.

Research has shown that first offers in a negotiation can be good predictors of outcomes, which is why it is important to have a strong initial offer.64 This does not imply that overly greedy or aggressive behavior is acceptable; this could be off-putting to the other negotiator, causing her or him to walk away. In addition to limiting the amount of information you disclose, it can be advantageous to know a little about the other side.

Integrative negotiation involves cooperation between the two groups to integrate interests, create value, and invest in the agreement. Both groups work toward maximiz- ing benefits for both sides and distributing those benefits. This method is sometimes called the win-win scenario, which does not mean that everyone receives exactly what they wish for, but instead that the compromise allows both sides to keep what is most important and still gain on the deal. The relationship in this instance tends to be more long term since both sides take time to really get to know the other side and what moti- vates them. The focus is on the group, reaching for a best-case outcome where everyone benefits. This is the most useful tactic when dealing with business negotiation, so from this point on, we assume the integrative approach. Table 7–8 provides a summary of the two types of negotiation.

The Negotiation Process Several basic steps can be used to manage the negotiation process. Regardless of the issues or personalities of the parties involved, this process typically begins with planning.

Planning Planning starts with the negotiators identifying the objectives they would like to attain. Then they explore the possible options for reaching these objectives. Research shows that the greater the number of options, the greater the chances for successful negotiations. While this appears to be an obvious statement, research also reveals that many negotiators do not alter their strategy when negotiating across cultures.65,66 Next, consideration is given to areas of common ground between the parties. Other major areas include (1) the setting of limits on single-point objectives, such as deciding to pay no more than $10 million for the factory and $3 million for the land; (2) dividing issues into short- and long-term considerations and deciding how to handle each; and (3) determining the sequence in which to discuss the various issues.

Interpersonal Relationship Building The second phase of the negotiation process involves getting to know the people on the other side. This “feeling out” period is

integrative negotiation Bargaining that involves cooperation between two groups to integrate interests, create value, and invest in the agreement.

Table 7–8 Negotiation Types and Characteristics

Characteristic Distributive Negotiations Integrative Negotiations

Objective Claim maximum value Create and claim value Motivation Individual-selfish benefit Group-cooperative benefit Interests Divergent Overlapping Relationship Short term Long term Outcome Win-lose Win-win

Source: Adapted from Harvard Business Essentials: Negotiation (Boston: Harvard Business School Press, 2003), pp. 2–6.

Chapter 7 Cross-Cultural Communication and Negotiation 231

characterized by the desire to identify those who are reasonable and those who are not. In contrast to negotiators in many other countries, those in the United States often give little attention to this phase; they want to get down to business immediately, which often is an ineffective approach. Adler notes:

Effective negotiators view luncheon, dinner, reception, ceremony, and tour invitations as times for interpersonal relationship building and therefore as key to the negotiating process. When American negotiators, often frustrated by the seemingly endless formalities, ceremo- nies, and “small talk,” ask how long they must wait before beginning to “do business,” the answer is simple: wait until your counterparts bring up business (and they will). Realize that the work of conducting a successful negotiation has already begun, even if business has yet to be mentioned.67

Exchanging Task-Related Information In this part of the negotiation process, each group sets forth its position on the critical issues. These positions often will change later in the negotiations. At this point, the participants are trying to find out what the other party wants to attain and what it is willing to give up.

Persuasion This step of negotiations is considered by many to be the most important. No side wants to give away more than it has to, but each knows that without giving some concessions, it is unlikely to reach a final agreement. The success of the persuasion step often depends on (1) how well the parties understand each other’s position, (2) the abil- ity of each to identify areas of similarity and difference, (3) the ability to create new options, and (4) the willingness to work toward a solution that allows all parties to walk away feeling they have achieved their objectives.

Agreement The final phase of negotiations is the granting of concessions and hammer- ing out a final agreement. Sometimes, this phase is carried out piecemeal, and concessions and agreements are made on issues one at a time. This is the way negotiators from the United States like to operate. As each issue is resolved, it is removed from the bargaining table and interest is focused on the next. Asians and Russians, on the other hand, tend to negotiate a final agreement on everything, and few concessions are given until the end.

Once again, as in all areas of communication, to negotiate effectively in the inter- national arena, it is necessary to understand how cultural differences between the parties affect the process.

Cultural Differences Affecting Negotiations In international negotiations, participants tend to orient their approach and interests around their home culture and their group’s needs and aspirations. This is natural. Yet, to negotiate effectively, it is important to have a sound understanding of the other side’s culture and position to better empathize and understand what they are about.68  The cul- tural aspects managers should consider include communication patterns, time orientation, and social behaviors.69 A number of useful steps can help in this process of understand- ing. One negotiation expert recommends the following:

1. Do not identify the counterpart’s home culture too quickly. Common cues (e.g., name, physical appearance, language, accent, location) may be unreli- able. The counterpart probably belongs to more than one culture.

2. Beware of the Western bias toward “doing.” In Arab, Asian, and Latin groups, ways of being (e.g., comportment, smell), feeling, thinking, and talking can shape relationships more powerfully than doing.

3. Try to counteract the tendency to formulate simple, consistent, stable images. 4. Do not assume that all aspects of the culture are equally significant. In Japan,

consulting all relevant parties to a decision is more important than presenting a gift.

232 Part 2 The Role of Culture

5. Recognize that norms for interactions involving outsiders may differ from those for interactions between compatriots.

6. Do not overestimate your familiarity with your counterpart’s culture. An American studying Japanese wrote New Year’s wishes to Japanese contacts in basic Japanese characters but omitted one character. As a result, the message became “Dead man, congratulations.”70

Other useful examples have been offered by Trompenaars and Hampden-Turner, who note that a society’s culture often plays a major role in determining the effectiveness of a negotiating approach. This is particularly true when the negotiating groups come from decidedly different cultures such as an ascription society and an achievement soci- ety. As noted in Chapter 4, in an ascription society, status is attributed based on birth, kinship, gender, age, and personal connections. In an achievement society, status is deter- mined by accomplishments. As a result, each side’s cultural perceptions can affect the outcome of the negotiation. Here is an example:

Sending whiz-kids to deal with people 10–20 years their senior often insults the ascriptive culture. The reaction may be: “Do these people think that they have reached our own level of experience in half the time? That a 30-year-old American is good enough to negotiate with a 50-year-old Greek or Italian?” Achievement cultures must understand that some ascriptive cultures, the Japanese especially, spend much on training and in-house education to ensure that older people actually are wiser for the years they have spent in the corporation and for the sheer number of subordinates briefing them. It insults an ascriptive culture to do anything which prevents the self-fulfilling nature of its beliefs. Older people are held to be important so that they will be nourished and sustained by others’ respect. A stranger is expected to facilitate this scheme, not challenge it.71

U.S. negotiators have a style that often differs from that of negotiators in many other countries. Americans believe it is important to be factual and objective. In addition, they often make early concessions to show the other party that they are flexible and reasonable. Moreover, U.S. negotiators typically have authority to bind their party to an agreement, so if the right deal is struck, the matter can be resolved quickly. This is why deadlines are so important to Americans. They have come to do business, and they want to get things resolved immediately.

A comparative example would be the Arabs, who in contrast to Americans, with their logical approach, tend to use an emotional appeal in their negotiation style. They analyze things subjectively and treat deadlines as only general guidelines for wrapping up negotiations. They tend to open negotiations with an extreme initial position. How- ever, the Arabs believe strongly in making concessions, do so throughout the bargaining process, and almost always reciprocate an opponent’s concessions. They also seek to build a long-term relationship with their bargaining partners. For these reasons, Americans typically find it easier to negotiate with Arabs than with representatives from many other regions of the world.

Another interesting comparative example is provided by the Chinese. In initial nego- tiation meetings, it is common for Chinese negotiators to seek agreement on the general focus of the meetings. The hammering out of specific details is postponed for later get- togethers. By achieving agreement on the general framework within which the negotiations will be conducted, the Chinese seek to limit and focus the discussions. Many Westerners misunderstand what is happening during these initial meetings and believe the dialogue consists mostly of rhetoric and general conversation. They are wrong and quite often are surprised later on when the Chinese negotiators use the agreement on the framework and principles as a basis for getting agreement on goals—and then insist that all discussions on concrete arrangements be in accord with these agreed-upon goals. Simply put, what is viewed as general conversation by many Western negotiators is regarded by the Chinese as a formulation of the rules of the game that must be adhered to throughout the nego- tiations. So in negotiating with the Chinese, it is important to come prepared to ensure that one’s own agenda, framework, and principles are accepted by both parties.

Chapter 7 Cross-Cultural Communication and Negotiation 233

Before beginning any negotiations, negotiators should review the negotiating style of the other parties. (Table 7–9 provides some insights regarding negotiation styles of the United States, Japanese, Arabians, and Mexicans.) This review should help to answer certain questions: What can we expect the other side to say and do? How are they likely to respond to certain offers? When should the most important matters be introduced? How quickly should concessions be made, and what type of reciprocity should be expected? These types of questions help effectively prepare the negotiators. In addition, the team will work on formulating negotiation tactics. The International Management in Action “Negotiating with the Japanese” demonstrates such tactics, and the following discussion gets into some of the specifics.

Sometimes, simply being familiar with the culture is still falling short of being aptly informed. We discussed in Chapter 2 how the political and legal environment of a country can have an influence over an MNC’s decision to open operations, and those external factors are good to bear in mind when coming to an agreement. Both parties may believe that the goals have been made clear, and on the surface a settlement may deliver positive results. However, the subsequent actions taken by either company could prove to exhibit even more barriers. Take Pirelli, an Italian tire maker that acquired Continental Gummiwerke, its German competitor. Pirelli purchased the majority holdings of Continental’s stock, a transaction that would translate into Pirelli having control of the company if it occurred in the United States. When Pirelli attempted to make key managerial decisions for its Continental unit, it discovered that in Germany, the corporate governance in place allows German companies to block such actions, regardless of the shareholder position. Furthermore, the labor force has quite a bit of leverage with its

Table 7–9 Negotiation Styles from a Cross-Cultural Perspective

Element United States Japanese Arabians Mexicans

Group composition Marketing oriented Function oriented Committee of specialists Friendship oriented

Number involved 2–3 4–7 4–6 2–3

Space orientation Confrontational; competitive

Display harmonious relationship

Status Close, friendly

Establishing rapport Short period; direct to task

Longer period; until harmony

Long period; until trusted Longer period; discuss family

Exchange of information

Documented; step by step; multimedia

Extensive; concentrate on receiving side

Less emphasis on technol- ogy, more on relationship

Less emphasis on technol- ogy, more on relationship

Persuasion tools Time pressure; loss of saving/making money

Maintain relationship references; intergroup connections

Go-between; hospitality Emphasis on family and on social concerns; goodwill measured in generations

Use of language Open, direct, sense of urgency

Indirect, appreciative, cooperative

Flattery, emotional, religious

Respectful, gracious

First offer Fair ±5 to 10% ±10 to 20% ±20 to 50% Fair

Second offer Add to package; sweeten the deal

−5% −10% Add an incentive

Final offer package Total package Makes no further concessions

−25% Total

Decision-making process

Top management team

Collective Team makes recommen- dation

Senior manager and secretary

Decision maker Top management team

Middle line with team consensus

Senior manager Senior manager

Risk taking Calculated personal responsibility

Low group responsibility

Religion based Personally responsible

Source: Lillian H. Chaney and Jeanette S. Martin, International Business Communication, 3rd Edition © 2004. Electronically reproduced by permission of Pearson Education, Inc., Upper Saddle River, New Jersey.

234

ability to elect members of the supervisory board, which in turn chooses the management board.72  Pirelli essentially lost on an investment; that is, unless Continental can be prof- itable under its current management. If Pirelli had known that this was going to happen, it probably would have reconsidered. One solution could be for Pirelli’s management to begin some positive rapport with the labor force to try to sway viewpoints internally. The better option, though, would be for international managers to be as informed as possible and avoid trouble before it occurs.

Negotiation Tactics A number of specific tactics are used in international negotiation. The following discus- sion examines some of the most common.

Location Where should negotiations take place? If the matter is very important, most businesses will choose a neutral site. For example, U.S. firms negotiating with companies from the Far East will meet in Hawaii, and South American companies negotiating with European firms will meet halfway, in New York City. A number of benefits derive from using a neutral site. One is that each party has limited access to its home office for re- ceiving a great deal of negotiating information and advice and thus gaining an advantage on the other. A second is that the cost of staying at the site often is quite high, so both sides have an incentive to conclude their negotiations as quickly as possible. (Of course, if one side enjoys the facilities and would like to stay as long as possible, the negotia- tions could drag on.) A third is that most negotiators do not like to return home with nothing to show for their efforts, so they are motivated to reach some type of agreement.

Time Limits Time limits are an important negotiation tactic when one party is under a time constraint. This is particularly true when this party has agreed to meet at the home

International Management in Action

Negotiating with the Japanese

Some people believe that the most effective way of get- ting the Japanese to open up their markets to the United States is to use a form of strong-arm tactics, such as putting the country on a list of those to be targeted for retaliatory action. Others believe that this approach will not be effective because the interests of the United States and Japan are intertwined and we would be hurt- ing ourselves as much as them. Regardless of which group is right, one thing is certain: U.S. MNCs must learn how to negotiate more effectively with the Japanese. What can they do? Researchers have found that besides patience and a little table pounding, a number of important steps warrant consideration. First, business firms need to prepare for their negotia- tions by learning more about Japanese culture and the “right” ways to conduct discussions. Those companies with experience in these matters report that the two best ways of doing this are to read books on Japanese busi- ness practices and social customs and to hire experts to train the negotiators. Other steps that are helpful include putting the team through simulated negotiations and hiring Japanese to assist in the negotiations. Second, U.S. MNCs must learn patience and sincer- ity. Negotiations are a two-way street that require the

mutual cooperation and efforts of both parties. The U.S. negotiators must understand that many times, Japanese negotiators do not have full authority to make on-the-spot decisions. Authority must be given by someone at the home office, and this failure to act quickly should not be interpreted as a lack of sincerity on the part of the Japanese negotiators. Third, the MNC must have a unique good or service. So many things are offered for sale in Japan that unless the company has something that is truly different, per- suading the other party to buy it is difficult. Fourth, technical expertise often is viewed as a very important contribution, and this often helps to win con- cessions with the Japanese. The Japanese know that the Americans, for example, still dominate the world when it comes to certain types of technology and that Japan is unable to compete effectively in these areas. When such technical expertise is evident, it is very influ- ential in persuading the Japanese to do business with the company. These four criteria are critical to effective nego- tiations with the Japanese. MNCs that use them report more successful experiences than those that do not.

Chapter 7 Cross-Cultural Communication and Negotiation 235

site of the other party. For example, U.S. negotiators who go to London to discuss a joint venture with a British firm often will have a scheduled return flight. Once their hosts find out how long these individuals intend to stay, the British can plan their strategy accordingly. The “real” negotiations are unlikely to begin until close to the time that the Americans must leave. The British know that their guests will be anxious to strike some type of deal before returning home, so the Americans are at a disadvantage.

Time limits can be used tactically even if the negotiators meet at a neutral site. For example, most Americans like to be home with their families for Thanksgiving, Christmas, and the New Year holiday. Negotiations held right before these dates put Americans at a disadvantage because the other party knows when the Americans would like to leave.

Buyer-Seller Relations How should buyers and sellers act? As noted earlier, Americans believe in being objective and trading favors. When the negotiations are over, Americans walk away with what they have received from the other party, and they expect the other party to do the same. This is not the way negotiators in many other countries think, however.

The Japanese, for example, believe that the buyers should get most of what they want. On the other hand, they also believe that the seller should be taken care of through reciprocal favors. The buyer must ensure that the seller has not been “picked clean.” For example, when many Japanese firms first started doing business with large U.S. firms, they were unaware of U.S. negotiating tactics. As a result, the Japanese thought the Americans were taking advantage of them, whereas the Americans believed they were driving a good, hard bargain.

The Brazilians are quite different from both the Americans and Japanese. Research- ers have found that Brazilians do better when they are more deceptive and self-interested and their opponents more open and honest than they are.73,74 Brazilians also tend to make fewer promises and commitments than their opponents, and they are much more prone to say no. However, Brazilians are more likely to make initial concessions. Overall, Brazilians are more like Americans than Japanese in that they try to maximize their advantage, but they are unlike Americans in that they do not feel obligated to be open and forthright in their approach. Whether they are buyer or seller, they want to come out on top.

Negotiating for Mutual Benefit When managers enter a negotiation with the intent to win and are not open to flexible compromises, it can result in a stalemate. Ongoing discussion with little progress can increase tensions between the two groups and create an impasse where groups become more frustrated and aggressive, and no agreement can be reached.75  Ultimately, too much focus on the plan with little concern for the viewpoint of the other group can lead to missed opportunities. It is important to keep objectives in mind and at the forefront, but it should not be a substitute for constructive discussions. Fisher and Ury, authors of the book Getting to Yes, present five general principles to help avoid such disasters: (1) separate the people from the problem, (2) focus on interests rather than positions, (3) generate a variety of options before settling on an agreement (as mentioned earlier in this section), (4) insist that the agreement be based on objective criteria, and (5) stand your ground.76

Separating the People from the Problem Often, when managers spend so much time getting to know the issue, many become personally involved. Therefore, responses to a particular position can be interpreted as a personal affront. In order to preserve the per- sonal relationship and gain a clear perspective on the issue, it is important to distinguish the problem from the individual.

When dealing with people, one barrier to complete understanding is the negotiating parties’ perspectives. Negotiators should try to put themselves in the other’s shoes. Avoid blame, and keep the atmosphere positive by attempting to alter proposals to better

236 Part 2 The Role of Culture

translate the objectives. The more inclusive the process, the more willing everyone will be to find a solution that is mutually beneficial.

Emotional factors arise as well. Negotiators often experience some level of an emotional reaction during the process, but it is not seen by the other side. Recognize your own emotions and be open to hearing and accepting emotional concerns of the other party. Do not respond in a defensive manner or give in to intense impulses. Ignoring the intangible tension is not recommended; try to alleviate the situation through sympathetic gestures such as apologies.

As mentioned earlier, good communication is imperative to reaching an agreement. Talk to each other, instead of just rehashing grandiose aspects of the proposal. Listen to responses and avoid passively sitting there while formulating a response. When appropri- ate, summarize the key points by vocalizing your interpretation to the other side to ensure correct evaluation of intentions.

Overall, don’t wait for issues to arise and react to them. Instead, go into discussion with these guidelines already in play.

Focusing on Interests over Positions The position one side takes can be expressed through a simple outline, but still does not provide the most useful information. Focusing on interests gives one insight into the motivation behind why a particular position was chosen. Digging deeper into the situation by both recognizing your own interests and becoming more familiar with others’ interests will put all active partners in a better position to defend their proposal. Simply stating, “This model works, and it is the best option,” may not have much leverage. Discussing your motivation, such as, “I believe our collaboration will enhance customer satisfaction, which is why I took on this project,” will help others see the why, not just the what.

Hearing the incentive behind the project will make both sides more sympathetic, and may keep things consistent. Be sure to consider the other side, but maintain focus on your own concerns.

Generating Options Managers may feel pressured to come to an agreement quickly for many reasons, especially if they hail from a country that puts a value on time. If negotiations are with a group that does not consider time constraints, there may be temptation to have only a few choices to narrow the focus and expedite decisions. It turns out, though, that it is better for everyone to have a large number of options in case some proposals prove to be unsatisfactory.

How do groups go about forming these proposals? First, they can meet to brainstorm and formulate creative solutions through a sort of invention process. This includes shifting thought focus among stating the problem, analyzing the issue, pondering general approaches, and strategizing the actions. After creating the proposals, the groups can begin evaluating the options and discuss improvements where necessary. Try to avoid the win-lose approach by accentuating the points of parity. When groups do not see eye to eye, find options that can work with both viewpoints by “look[ing] for items that are of low cost to you and high benefit to them, and vice versa.”77  By offering proposals that the other side will agree to, you can pinpoint the decision makers and tailor future suggestions toward them. Be sure to support the validity of your proposal, but not to the point of being overbearing.

Using Objective Criteria In cases where there are no common interests, avoid tension by looking for objective options. Legitimate, practical criteria could be formed by using reliable third-party data, such as legal precedent. If both parties would accept being bound to certain terms, then chances are the suggestions were derived from objective criteria. The key is to emphasize the communal nature of the process. Inquire about why the other group chose its particular ideas. It will help you both see the other side and give you a springboard from which you can argue your views, which can be very per- suasive. Overall, effective negotiations will result from international managers being flexible but not folding to external pressures.

Chapter 7 Cross-Cultural Communication and Negotiation 237

These are just general guidelines to abide by to try and reach a mutual agreement. The approaches will be more effective if the group adhering to the outline was the one with more power. Fisher and Ury also looked at what managers should do if the other party has the power.

Standing Ground Every discussion will have some imbalance of power, but there is something negotiators can do to defend themselves. It may be tempting to create a “bot- tom line,” or lowest possible set of options that one will accept, but it does not neces- sarily accomplish the objective. When negotiators make a definitive decision before engaging in discussion, they may soon find out that the terms never even surface. That is not to say that their bottom line is below even the lowest offer, but instead that with- out working with the other negotiators, they cannot accurately predict the proposals that will be devised. So what should the “weaker” opponent do?

The reason two parties are involved in a negotiation is because they both want a situation that will leave them better off than before. Therefore, no matter how long nego- tiations drag on, neither side should agree to terms that will leave it worse off than its best alternative to a negotiated agreement, or BATNA. Clearly defining and understanding the BATNA will make it easier to know when it is time to leave a negotiation and empower that side. An even better scenario would be if the negotiator learns of the other side’s BATNA. As Fisher and Ury say: “Developing your BATNA thus not only enables you to determine what is a minimally acceptable agreement, it will probably raise that minimum.”78

Even the most prepared manager can walk into a battle zone. At times, negotiators will encounter rigid, irritable, caustic, and selfish opponents. A positional approach to bargaining can cause tension, but the other side can opt for a principled angle. This entails a calm demeanor and a focus on the issues. Instead of counterattacking, redirect the con- versation to the problem and do not take any outbursts as personal attacks. Inquire about their reasoning and try to take any negative statements as constructive. If no common ground is reached, a neutral third party can come in to assess the desires of each side and compose an initial proposal. Each group has the right to suggest alternative approaches, but the third-party person has the last word in what the true “final draft” is. If the parties decide it is still unacceptable, then it is time to walk away from negotiations.

Fisher and Ury compiled a comprehensive guide as to how to approach negotia- tions. While no guideline has a 100 percent effective rate, their method helps gain a position where both sides win.

Bargaining Behaviors Closely related to the discussion of negotiation tactics are the different types of bargaining behaviors, including both verbal and nonverbal behaviors. Verbal behaviors are an impor- tant part of the negotiating process because they can improve the final outcome. Research shows that the profits of the negotiators increase when they make high initial offers, ask a lot of questions, and do not make many verbal commitments until the end of the nego- tiating process. In short, verbal behaviors are critical to the success of negotiations.

Use of Extreme Behaviors Some negotiators begin by making extreme offers or requests. The Chinese and Arabs are examples. Some negotiators, however, begin with an initial posi- tion that is close to the one they are seeking. The Americans and Swedes are examples here.

Is one approach any more effective than the other? Research shows that extreme positions tend to produce better results. Some of the reasons relate to the fact that an extreme bargaining position (1) shows the other party that the bargainer will not be exploited, (2) extends the negotiation and gives the bargainer a better opportunity to gain information on the opponent, (3) allows more room for concessions, (4) modifies the opponent’s beliefs about the bargainer’s preferences, (5) shows the opponent that the bar- gainer is willing to play the game according to the usual norms, and (6) lets the bargainer gain more than would probably be possible if a less extreme initial position had been taken.

238 Part 2 The Role of Culture

Although the use of extreme position bargaining is considered to be “un-American,” many U.S. firms have used it successfully against foreign competitors. When Peter Ueber- roth managed the Olympic Games in the United States in 1984, he turned a profit of well over $100 million—and that was without the participation of Soviet-bloc countries, which would have further increased the market potential of the games. In most other Olympiads, sponsoring countries have lost hundreds of millions of dollars. How did Ueberroth do it? One way was by using extreme position bargaining. For example, the Olympic Committee felt that the Japanese should pay $10 million for the right to televise the games in the country, so when the Japanese offered $6 million for the rights, the Olympic Committee countered with $90 million. Eventually, the two sides agreed on $18.5 million. Through the effective use of extreme position bargaining, Ueberroth got the Japanese to pay over three times their original offer, an amount well in excess of the committee’s budget.

Promises, Threats, and Other Behaviors Another approach to bargaining is the use of promises, threats, rewards, self-disclosures, and other behaviors that are designed to influence the other party. These behaviors often are greatly influenced by the culture. Graham conducted research using Japanese, U.S., and Brazilian businesspeople and found that they employed a variety of different behaviors during a buyer-seller negotia- tion simulation.79  Table 7–10  presents the results.

Table 7–10 Cross-Cultural Differences in Verbal Behavior of Japanese, U.S., and Brazilian Negotiators

Number of Times Tactic Was Used in a Half-Hour Bargaining Session

Behavior and Definition Japanese United States Brazilian Promise. A statement in which the source indicated an intention to provide the target with a reinforcing consequence that the source anticipates the target will evaluate as pleasant, positive, or rewarding.

7 8 3

Threat. Same as promise, except that the reinforcing consequences are thought to be noxious, unpleasant, or punishing.

4 4 2

Recommendation. A statement in which the source predicts that a pleasant environmental consequence will occur to the target. Its occurrence is not under the source’s control.

7 4 5

Warning. Same as recommendation except that the consequences are thought to be unpleasant.

2 1 1

Reward. A statement by the source that is thought to create pleasant consequences for the target.

1 2 2

Punishment. Same as reward, except that the consequences are thought to be unpleasant. 1 3 3

Positive normative appeal. A statement in which the source indicates that the target’s past, present, or future behavior was or will be in conformity with social norms.

1 1 0

Negative normative appeal. Same as positive normative appeal, except that the tar- get’s behavior is in violation of social norms.

3 1 1

Commitment. A statement by the source to the effect that its future bids will not go below or above a certain level.

15 13 8

Self-disclosure. A statement in which the source reveals information about itself. 34 36 39

Question. A statement in which the source asks the target to reveal information about itself.

20 20 22

Command. A statement in which the source suggests that the target perform a certain behavior.

8 6 14

First offer. The profit level associated with each participant’s first offer. 61.5 57.3 75.2

Initial concession. The differences in profit between the first and second offer. 6.5 7.1 9.4

Number of no’s. Number of times the word “no” was used by bargainers per half-hour. 5.7 9.0 83.4

Source: Adapted from John L. Graham, “The Influence of Culture on the Process of Business Negotiations in an Exploratory Study,” Journal of International Business Studies, Spring 1983, p. 88. Reprinted by permission from Macmillan Publishers Ltd., Journal of International Business Studies, March 1, 1985. Published by Palgrave Macmillan. 

Chapter 7 Cross-Cultural Communication and Negotiation 239

The table shows that Americans and Japanese make greater use of promises than do Brazilians. The Japanese also rely heavily on recommendations and commitment. The Brazilians use a discussion of rewards, commands, and self-disclosure more than Americans and Japanese. The Brazilians also say no a great deal more and make first offers that have higher-level profits than those of the others. Americans tend to oper- ate between these two groups, although they do make less use of commands than either of their opponents and make first offers that have lower profit levels than their opponents’.

Nonverbal Behaviors Nonverbal behaviors also are very common during negotia- tions. These behaviors refer to what people do rather than what they say. Nonverbal behaviors sometimes are called the “silent language.” Typical examples include silent periods, facial gazing, touching, and conversational overlaps. As seen in Figure 7–3, the Japanese tend to use silent periods much more often than either Americans or Brazilians during negotiations. In fact, in this study, the Brazilians did not use them at all. The Brazilians did, however, make frequent use of other nonverbal behaviors. They employed facial gazing almost four times more often than the Japanese and almost twice as often as the Americans. In addition, although the Americans and Japanese did not touch their opponents, the Brazilians made wide use of this nonver- bal tactic. They also relied heavily on conversational overlaps, employing them more than twice as often as the Japanese and almost three times as often as Americans.

Figure 7–3 Cross-Cultural Differences in Nonverbal Behavior of Japanese, U.S., and Brazilian Negotiators

BrazilianUnited StatesJapanese

28.6

The number of times (per 10 minutes) that both parties to the negotiation

would talk at the same time

10.3 12.6

BrazilianUnited StatesJapanese

5.2

The number of minutes negotiators spend looking at their opponent’s

face per 10-minute period

3.3

1.3

BrazilianUnited StatesJapanese

0

3.5

5.5

Number of 10-second gaps per 30 minutes of conversation

BrazilianUnited StatesJapanese

4.7

Incidents of negotiators’ touching one another per half-hour

00

Source: Original graphic by Ben Littell under supervision of Professor Jonathan Doh based on data from John L. Graham, “The Influence of Culture on the Process of Business Negotiations in an Exploratory Study,” Journal of International Business Studies, Spring 1983, p. 88. Reprinted by permission from Macmillan Publishers Ltd., Journal of International Business Studies, March 1, 1985. Published by Palgrave Macmillan.

240 Part 2 The Role of Culture

Quite obviously, the Brazilians rely very heavily on nonverbal behaviors in their negotiating.

The important thing to remember is that in international negotiations, people use a wide variety of tactics, and the other side must be prepared to counter or find a way of dealing with them. The response will depend on the situation. Managers from differ- ent cultures will employ different tactics. Table 7–11 suggests some characteristics needed in effective negotiators, as exemplified by various cultures. To the extent that international managers have these characteristics, their success as negotiators should increase.

Table 7–11 Culture-Specific Characteristics Needed by International Managers for Effective Negotiations

U.S. managers • Preparation and planning skill Ability to think under pressure Judgment and intelligence Verbal expressiveness Product knowledge Ability to perceive and exploit power Integrity

Japanese managers • Dedication to job Ability to perceive and exploit power Ability to win respect and confidence Integrity Listening skill Broad perspective Verbal expressiveness

Chinese managers (Taiwan)

• Persistence and determination Ability to win respect and confidence Preparation and planning skill Product knowledge Interesting Judgment and intelligence

Brazilian managers • Preparation and planning skill Ability to think under pressure Judg- ment and intelligence Verbal expressiveness Product knowledge Ability to perceive and exploit power Competitiveness

Source: Adapted from Nancy J. Adler, International Dimensions of Organizational Behavior, 2nd ed. (Boston: PWS-Kent Publishing, 1991), p. 187; and from material provided by Professor John Graham, School of Business Administration, University of Southern California, 1983.

The World of International Management—Revisited The chapter’s opening World of International Management explored some of the inter- national communication and negotiation challenges that Netflix has faced when expand- ing into Russia and attempting to enter China. Despite an entry strategy that proved successful in markets in Europe and the Americas, Netflix encountered a longer and more complex negotiation process in China than expected. And in Russia, Netflix’s lack of communication and its failure to recognize the necessary involvement of government officials in its expansion plans resulted in a political backlash. As this chapter revealed, understanding the communication styles of different cultures is a critical variable in entering foreign markets, managing relationships among employees and customers, man- agers and subordinates, and in all business relationships.

A key to success in today’s global economy is being able to communicate effec- tively within and across national boundaries and to engage in effective negotiations across cultures. Considering the communication challenges faced by offshoring firms, along with what you have read in this chapter, answer the following questions: (1) How is communication in India similar to that of Europe and North America? How is it differ- ent? (2) What kind of managerial relationships could you assume exist between an American financial services firm and its employees in India? (3) What kind of negotia- tions could help engage Indian employees and overcome some of the cultural problems encountered? How might culture play a role in the approach the Indian employees take in their negotiation with the financial firm?

Chapter 7 Cross-Cultural Communication and Negotiation 241

1. Communication is the transfer of meaning from sender to receiver. The key to the effectiveness of communication is how accurately the receiver inter- prets the intended meaning.

2. Communicating in the international business context involves both downward and upward flows. Down- ward flows convey information from superior to subordinate; these flows vary considerably from country to country. For example, the downward sys- tem of organizational communication is much more prevalent in France than in Japan. Upward commu- nication conveys information from subordinate to superior. In the United States and Japan, the upward system is more common than in South America or some European countries.

3. The international arena is characterized by a num- ber of communication barriers. Some of the most important are intrinsic to language, perception, culture, and nonverbal communication. Language, particularly in written communications, often loses considerable meaning during interpretation. Perception and culture can result in people’s see- ing and interpreting things differently, and as a result, communication can break down. Nonverbal communication such as body language, facial expressions, and use of physical space, time, and even color often varies from country to country and, if improper, often results in communication problems.

4. A number of steps can be taken to improve com- munication effectiveness. Some of the most impor- tant include improving feedback, providing language and cultural training, and encouraging flexibility and cooperation. These steps can be particularly helpful in overcoming communication barriers in the international context and can lead to more effective international management.

5. Negotiation is the process of bargaining with one or more parties to arrive at a solution that is accept- able to all. There are two basic types of negotia- tion: distributive negotiation involves bargaining over opposing goals while integrative negotiation involves cooperation aimed at integrating interests. The negotiation process involves five basic steps: planning, interpersonal relationship building, exchanging task-related information, persuasion, and agreement. The way in which the process is carried out often will vary because of cultural differences, and it is important to understand them.

6. There are a wide variety of tactics used in interna- tional negotiating. These include location, time lim- its, buyer-seller relations, verbal behaviors, and nonverbal behaviors.

7. Negotiating for mutual benefit is enhanced by sepa- rating the people from the problem, focusing on interests rather than positions, generating a variety of options, insisting that the agreement be based on objective criteria, and standing one’s ground.

SUMMARY OF KEY POINTS

KEY TERMS

chromatics, 225 chronemics, 225 communication, 210 context, 210 distributive negotiations, 229 downward communication, 214 haptics, 224

integrative negotiation, 230 intimate distance, 224 kinesics, 224 monochronic time schedule, 225 negotiation, 229 nonverbal communication, 223 oculesics, 224

perception, 219 personal distance, 224 polychronic time schedule, 225 proxemics, 224 public distance, 224 social distance, 224 upward communication, 215

REVIEW AND DISCUSSION QUESTIONS

1. How does explicit communication differ from implicit communication? Which is one culture that makes wide use of explicit communication? Implicit communication? Describe how one would go about conveying the following message in each of the two cultures you identified: “You are trying very hard, but you are still making too many mistakes.”

2. One of the major reasons that foreign expatriates have difficulty doing business in the United States is that they do not understand American slang. A business executive recently gave the authors the fol- lowing three examples of statements that had no direct meaning for her because she was unfamiliar with slang: “He was laughing like hell.” “Don’t

242 Part 2 The Role of Culture

6. For U.S. companies going abroad for the first time, which form of nonverbal communication barrier would be the greatest, kinesics or proxemics? Why? Defend your answer.

7. If a company new to the international arena was negotiating an agreement with a potential partner in an overseas country, what basic steps should it be prepared to implement? Identify and describe them.

8. Which elements of the negotiation process should be done with only your group? Which events should take place with all sides present? Why?

9. An American manager is trying to close a deal with a Brazilian manager but has not heard back from him for quite some time. The American is getting very nervous that if he waits too long, he is going to miss out on any backup options lost while wait- ing for the Brazilian. What should the American do? How can the American tell it is time to drop the deal? Give some signs that suggest negotiations will go no further.

10. Wilsten Inc. has been approached by a Japanese firm that wants exclusive production and selling rights for one of Wilsten’s new high-tech products. What does Wilsten need to know about Japanese bargaining behaviors to strike the best possible deal with this company? Identify and describe five.

worry; it’s a piece of cake.” “Let’s throw these ideas up against the wall and see if any of them stick.” Why did the foreign expat have trouble understanding these statements, and what could be said instead?

3. Yamamoto Iron & Steel is considering setting up a minimill outside Atlanta, Georgia. At present, the company is planning to send a group of executives to the area to talk with local and state officials regarding this plant. In what way might mispercep- tion be a barrier to effective communication between the representatives for both sides? Identify and discuss two examples.

4. Diaz Brothers is a winery in Barcelona. The com- pany would like to expand operations to the United States and begin distributing its products in the Chicago area. If things work out well, the com- pany then will expand to both coasts. In its busi- ness dealings in the Midwest, how might culture prove to be a communication barrier for the com- pany’s representatives from Barcelona? Identify and discuss two examples.

5. Why is nonverbal communication a barrier to effec- tive communication? Would this barrier be greater for Yamamoto Iron & Steel (question 3) or Diaz Brothers (question 4)? Defend your answer.

For 11 straight years, the Toyota Camry has been the best-selling car in the United States, and the firm’s share of the American automobile market was solid. However, the company is not resting on its laurels. Toyota has expanded worldwide and is now doing business in scores of countries. Visit the firm’s website and find out what it has been up to lately. The address is www.toyota.com. Then take a tour of the company’s products and services including cars, air services, and sports vehicles. Next, go to the jobs section site and see what types of career opportunities there are at Toyota. Finally, find out what Toyota is doing in your particular locale. Then, drawing upon this information and the material you read in the chapter, answer these

three questions: (1) What type of communication and negotiation challenges do you think you would face if you worked for Toyota and were in constant communi- cation with home-office personnel in Japan? (2) What type of communication training do you think the firm would need to provide to you to ensure that you were effective in dealing with senior-level Japanese manag- ers in the hierarchy? (3) Using Table 7–1 as your guide, what conclusions can you draw regarding com- municating with the Japanese managers, and what guidelines would you offer to a non-Japanese employee who just entered the firm and is looking for advice and guidance regarding how to communicate and nego- tiate more effectively?

INTERNET EXERCISE: WORKING EFFECTIVELY AT TOYOTA

1. Adam Levine-Weinberg, “Netflix, Inc. Completes Its Global Expansion (with 1 Big Asterisk),”  The Motley Fool, January 10, 2016,  www.fool.com/ investing/general/2016/01/10/netflix-inc-completes- its-global-expansion-with-on.aspx.

2. Julia Greenberg, “Netflix Expects to Add Fewer US Users, So It’s Looking Abroad,”  Wired, April 18, 2016,  www.wired.com/2016/04/netflix-expects-add- fewer-us-users-looking-abroad/.

ENDNOTES

Chapter 7 Cross-Cultural Communication and Negotiation 243

21. Giorgio Inzerilli, “The Legitimacy of Managerial Authority: A Comparative Study,” National Acad- emy of Management Proceedings (Detroit, 1980), pp. 58–62.

22. Ibid., p. 62. 23. Richard Tanner Pascale and Anthony G. Athos, The

Art of Japanese Management (New York: Warner Books, 1981), pp. 82–83.

24. Justin Fox, “The Triumph of English,” Fortune, September 18, 2000, pp. 209–212.

25. See “Double or Quits,” The  Economist, February 25, 1995, pp. 84–85.

26. Brock Stout, “Interviewing in Japan,” HR Magazine, June 1998, p. 73.

27. Ibid., p. 75. 28. H. W. Hildebrandt, “Communication Barriers

between German Subsidiaries and Parent American Companies,” Michigan Business Review, July 1973, p. 9.

29. John R. Schermerhorn Jr., “Language Effects in Cross-Cultural Management Research: An Empirical Study and a Word of Caution,” National Academy of Management Proceedings (New Orleans, 1987), p. 103.

30. Heather Berry, Mauro F. Guillén, and Nan Zhou, “An Institutional Approach to Cross-national Dis- tance,” Journal of International Business Studies  41 (2010), pp. 1460–1480. doi: 10.1057/jibs.2010.28.

31. Brenda R. Sims and Stephen Guice, “Differences between Business Letters from Native and Non- Native Speakers of English,” Journal of Business Communication, Winter 1991, p. 37.

32. James Calvert Scott and Diana J. Green, “British Perspectives on Organizing Bad-News Letters: Organizational Patterns Used by Major U.K. Com- panies,” The Bulletin, March 1992, p. 17.

33. Ibid., pp. 18–19. 34. Mi Young Park, W. Tracy Dillon, and Kenneth L.

Mitchell, “Korean Business Letters: Strategies for Effective Complaints in Cross-Cultural Communica- tion,” Journal of Business Communication, July 1998, pp. 328–345.

35. As an example, see Jeremiah Sullivan, “What Are the Functions of Corporate Home Pages?” Journal of World Business 34, no. 2 (1999), pp. 193–211.

36. Joseph Kahn, “Fraying U.S.-Sino Ties Threaten Busi- ness,” The Wall Street Journal, July 7, 1995, p. A6.

37. Nathaniel C. Nash, “China Gives Big Van Deal to Mercedes,” New York Times, July 13, 1995, pp. C1, C5.

38. Seth Faison, “China Times a Business Deal to Make a Point to America,” New York Times, July 16, 1995, pp. 1, 6.

3. Julia Greenberg, “Netflix Is in ‘No Hurry’ to Go to China,”  Wired, January 19, 2016,  www.wired. com/2016/01/netflix-is-in-no-hurry-to-go-to-china/.

4. Julia Greenberg, “Netflix May Never Break into China,”  Wired, January 12, 2016,  www.wired. com/2016/01/netflix-may-never-break-into-china/.

5. Ibid. 6. John L. Graham and N. Mark Lam, “The Chinese

Negotiation,”  Harvard Business Review, October 1, 2013.

7. Greenberg, “Netflix Is in ‘No Hurry’ to Go to China.” 8. Vladimir Kozlov, “Netflix May Have to Suspend

Operations in Russia, Says Government Minister,” Hollywood Reporter, February 10, 2016, www.hollywoodreporter.com/news/netflix-may- have-suspend-operations-864130.

9. Ibid. 10. Vladimir Kozlov, “Netflix Faces More Restrictions

in Russia,”  Hollywood Reporter,  March 2, 2016,  www.hollywoodreporter.com/news/netflix- faces-more-restrictions-russia-872455.

11. Ibid. 12. Nathan McAlone, “Netflix Seems to Be Tanking in

Russia, but India and Other International Markets Are Going Strong,”  Business Insider, April 5, 2016,  www.businessinsider.com/how-netflix-is- doing-internationally-2016-4.

13. Nicholas Carr, The Shallows (New York: Norton, 2010).

14. E. T. Hall and E. Hall, “How Cultures Collide,” in Culture, Communication, and Conflict: Readings in Intercultural Relations, ed. G. R. Weaver (Needham Heights, MA: Ginn Press, 1994).

15. Noboru Yoshimura and Philip Anderson, Inside the Kaisha: Demystifying Japanese Business Behavior (Boston: Harvard Business School Press, 1997), p. 59.

16. William C. Byham and George Dixon, “Through Japanese Eyes,” Training and Development Journal, March 1993, pp. 33–36.

17. Linda S. Dillon, “West Meets East,” Training and Development Journal, March 1993, pp. 39–43.

18. Fons Trompenaars and Charles Hampden-Turner, Riding the Waves of Culture: Understanding Diver- sity in Global Business, 2nd ed. (New York: McGraw-Hill, 1998), p. 204.

19. Nancy J. Adler (with Allison Gunderson), Interna- tional Dimensions of Organizational Behavior, 5th ed. (Mason, OH: South-Western, 2008), p. 80.

20. Toddi Gutner, “Delivering Unpopular News—When You Haven’t Bought In,” The Wall Street Journal, June 14, 2010, www.wsj.com/articles/SB100014240 52748703303904575293212841558170.

244 Part 2 The Role of Culture

Top Management Teams of MNCs,” Journal of International Business Studies, Third Quarter 2000, pp. 471–487.

55. Also see Linda Beamer, “Bridging Business Cultures,” China Business Review, May–June 1998, pp. 54–58.

56. Tanya Mohn, “Going Global, Stateside,” New York Times, March 9, 2010, p. B9.

57. Michael D. Lord and Annette L. Ranft, “Organiza- tional Learning about New International Markets: Exploring the Internal Transfer of Local Market Knowledge,” Journal of International Business Studies, Fourth Quarter 2000, pp. 573–589.

58. Jennifer W. Spencer, “Knowledge Flows in the Global Innovation System: Do U.S. Firms Share More Scientific Knowledge Than Their Japanese Rivals?” Journal of International Business Studies, Third Quarter 2000, pp. 521–530.

59. Kenichi Ohmae, “The Global Logic of Strategic Alliances,” Harvard Business Review, March–April 1989, p. 154.

60. See Hildy Teegen and Jonathan P. Doh, “U.S./ Mexican Alliance Negotiations: Cultural Impacts on Trust, Authority and Performance,” Thunderbird International Business Review 44, no. 6 (2002), pp. 749–775.

61. See also Elise Campbell and Jeffrey J. Reuer, “International Alliance Negotiations: Legal Issues for General Managers,” Business Horizons, January–February 2001, pp. 19–26.

62. Nina Reynolds, Antonis Simintiras, and Efi Vlachou, “International Business Negotiations: Present Knowledge and Direction for Future Research,” International Marketing Review 20, no. 3 (2003), p. 236.

63. Harvard Business Essentials: Negotiation (Boston: Harvard Business School Press, 2003), p. 2.

64. Ibid., p. 4. 65. David K. Tse, June Francis, and Ian Walls, “Cul-

tural Differences in Conducting Intra- and Inter- Cultural Negotiations: A Sino-Canadian Comparison,” Journal of International Business Studies, Third Quarter 1994, pp. 537–555.

66. Teegen and Doh, “U.S./Mexican Alliance Negotia- tions,” pp. 749–775.

67. Adler and Gundersen, International Dimensions of Organizational Behavior, p. 241.

68. Daniel Druckman, “Group Attachments in Negotia- tion and Collective Action,” International Negotia- tion 11 (2006), pp. 229–252.

69. Jeanne M. Brett, Debra L. Shapiro, and Anne L. Lytle, “Breaking the Bonds of Reciprocity in

39. David A. Ricks, Big Business Blunders: Mistakes in Multinational Marketing (Homewood, IL: Dow Jones/Irwin, 1983), p. 39.

40. Ibid., p. 55. 41. John Kass, “Some Bright Ideas Get Lost in Transla-

tion,” Chicago Tribune online, April 20, 2007, http://articles.chicagotribune.com/2007-04-20/ news/0704190692_1_gst-blunders-hungarian.

42. Edwin Miller, Bhal Bhatt, Raymond Hill, and Julian Cattaneo, “Leadership Attitudes of American and German Expatriate Managers in Europe and Latin America,” National Academy of Management Pro- ceedings (Detroit, 1980), pp. 53–57.

43. Abdul Rahim A. Al-Meer, “Attitudes Towards Women as Managers: A Comparison of Asians, Saudis and Westerners,” Arab Journal of the Social Sciences, April 1988, pp. 139–149.

44. Sheryl WuDunn, “In Japan, Still Getting Tea and No Sympathy,” New York Times, August 27, 1995, p. E3.

45. Fathi S. Yousef, “Cross-Cultural Communication: Aspects of the Contrastive Social Values between North Americans and Middle Easterners,” Human Organization, Winter 1974, p. 385.

46. Peter McKiernan and Chris Carter, “The Millen- nium Nexus: Strategic Management at the Cross- roads,” European Management Review 1, no. 1 (Spring 2004), p. 3.

47. R. Bruce Money, “Word-of-Mouth Referral Sources for Buyers of International Corporate Financial Ser- vices,” Journal of World Business 35, no. 3 (2000), pp. 314–329.

48. Yousef, “Cross-Cultural Communication,” p. 383. 49. See Roger E. Axtell, ed., Do’s and Taboos around

the World (New York: Wiley, 1990), chapter 2. 50. Jane Whitney Gibson, Richard M. Hodgetts, and

Charles W. Blackwell, “Cultural Variations in Nonverbal Communication,” 55th Annual Business Communication Proceedings, San Antonio, November 8–10, 1990, pp. 211–229.

51. William K. Brandt and James M. Hulbert, “Patterns of Communications in the Multinational Corpora- tion: An Empirical Study,” Journal of International Business Studies, Spring 1976, pp. 57–64.

52. Hildebrandt, “Communication Barriers,” p. 9. 53. See, for example, George Ming-Hong Lai, “Know-

ing Who You Are Doing Business with in Japan: A Managerial View of Keiretsu and Keiretsu Business Groups,” Journal of World Business 34, no. 4 (1999), pp. 423–449.

54. Nicholas Athanassiou and Douglas Nigh, “Internationalization, Tacit Knowledge and the

Chapter 7 Cross-Cultural Communication and Negotiation 245

78. Ibid., p. 111. 79. Graham, “The Influence of Culture on the Process

of Business Negotiations in an Exploratory Study,” pp. 84, 88.

80. CIA, “China,”  The World Factbook  (2016),  https:// www.cia.gov/library/publications/the-world-factbook/ geos/ch.html.

81. Ibid. 82. Neil  Gough, “China G.D.P. Growth at Slowest Pace

Since 2009, Data Shows,”  New York Times, January 18, 2016,  www.nytimes.com/2016/01/19/business/ international/china-gdp-economy.html?_r=0.

83. Hao  Li, “Doing Business in China: Cultural Differ- ences to Watch for,”  International Business Times, February 16, 2012,  www.ibtimes.com/doing- business-china-cultural-differences-watch-411996.

84. Jason  Kirby, “Why China Is So Worried about Labour Unrest,”  Maclean’s, June 10, 2015, www.macleans.ca/economy/economicanalysis/why- china-is-so-worried-about-labour-unrest/.

85. Shaun Rein, “What Coca-Cola Did Wrong, and Right, in China,”  Forbes.com, March 24, 2009,  www.forbes.com/2009/03/24/coca-cola-china- leadership-citizenship-huiyuan.html.

86. Ibid.

Negotiations,” Academy of Management Journal, August 1998, pp. 410–424.

70. Stephen E. Weiss, “Negotiating with ‘Romans’— Part 2,” Sloan Management Review, Spring 1994, p. 89.

71. Trompenaars and Hampden-Turner, Riding the Waves of Culture, p. 112.

72. James K. Sebenius, “The Hidden Challenge of Cross-Border Negotiations,” Harvard Business Review, March 2002, pp. 4–12.

73. John L. Graham, “Brazilian, Japanese, and American Business Negotiations,” Journal of Inter- national Business Studies, Spring–Summer 1983, pp. 47–61.

74. John L. Graham, “The Influence of Culture on the Process of Business Negotiations in an Exploratory Study,” Journal of International Business Studies, Spring 1983, pp. 81–96.

75. William Zartman, “Negotiating Internal, Ethnic and Identity Conflicts in a Globalized World,” Interna- tional Negotiation 11 (2006), pp. 253–272.

76. Roger Fisher and William Ury, Getting to Yes: Negotiating Agreement Without Giving In (New York: Penguin Books, 1983), p. 11.

77. Ibid., p. 79.

246

to be more accustomed to flexibility, while Chinese employees tend to be more comfortable in structured and hierarchical work environments.83 China operates under a communist political system. While the country continues to address criticisms regard- ing corruption, censorship, and a lack of transparency, political unrest remains evident. In 2014, the number of reported labor strikes reached 1,300. Chinese officials have attempted to control labor protests by banning inde- pendent labor unions, requiring any organization that wishes to unionize to register with the government. In addition, relations between the U.S. and China have some- times been strained, fueled by allegations that the Chinese government has orchestrated security hacks of U.S. pri- vate firms and government agencies.84 In addition to the environmental pollution challenges mentioned above, China has been facing several geopo- litical challenges. First, the government is seeking to take a more prominent role in global security and economic issues. Second, China has faced challenges in controlling its real estate and stock market. After a dramatic increase in real estate values in the 2010–2015 period and a tur- bulent stock market in 2016, Chinese officials are attempt- ing to address concerns about excessive liquidity and lack of market transparency. Some foreign investors have become somewhat leery, adopting a “wait and see” attitude for the time being.

You Be the International Management Consultant In 2009, the Chinese government rejected a proposed acquisition of Huiyuan Juice by Coca Cola. As part of the deal, worth US$2.3 billion, Coke would have invested a further US$2 billion in its Chinese operations in addition to the purchase price of Huiyan. The Chinese government nonetheless scotched the deal, due to concerns of poten- tial monopolization of the fruit juice and beverage indus- try by the combined company. The rejection of the deal caused other foreign investors to wonder if the Chinese government was sending a signal that it intended to scru- tinize foreign investment projects more closely in the future.85 Retail sales in China continue to grow at double-digit rates despite the global financial crisis and the overall slowdown of China’s economy. Indeed, when it comes to certain durable and nondurable goods, some economists

China Located in the eastern portion of Asia, China’s main waterways are the East China Sea, Korean Bay, Yellow Sea, and South China Sea. China shares a border with many important economies in East, South, and Central Asia, including India, North Korea, Pakistan, Russia, and Vietnam. The country has an extremely diverse cli- mate, ranging from subarctic in the north to tropical in the south. Natural resources are extensive and include coal, iron ore, petroleum, natural gas, mercury, tin, tungsten, antimony, manganese, molybdenum, vana- dium, magnetite, aluminum, lead, zinc, rare earth ele- ments, uranium, hydropower potential (world’s largest), and arable land.80 The current population is estimated at 1.37 billion people, making China, for now, the most populous country in the world. With 56 separate ethnic groups recognized within the country, China is much more diverse than many assume. The citizens in China speak one of three main languages: Mandarin, which is the official language; Cantonese; and Shanghainese. Reli- gion is divided among Buddhism, Christianity, and a smaller segment of “folk religions.” China is a fairly average-aged nation. The largest age group is made up of those between the ages of 25 and 54 years old, which is estimated at around 50 percent of the population. The median age is 36.8 years old. Once a largely agricultural country, urban centers of China now account for slightly more than half the population.81 China’s GDP for 2014 was US$10.36 trillion. How- ever, having experienced annual GDP growth rates of between 7 and 14 percent for more than 15 years, China’s economic expansion of 6.8 percent in 2015 was perceived by economists as dangerously slow. China, like many countries, faces issues stemming from pollution. Air pol- lution (greenhouse gases) and acid rain are common. Today, the country is the world’s largest single emitter of carbon dioxide from the burning of fossil fuels.82 China ranks 84th out of 185 nations in the World Bank’s survey of “Ease of Doing Business.” Foreign com- panies can find it difficult to compete on an equal playing field with domestic competitors, often based on either real or perceived favoritism from the government. Associated with this issue is a perceived lack of transparency from the government and relatively poor intellectual property rights enforcement. Culturally, Western companies often find it difficult to manage Chinese employees due to stark differences between the two countries. U.S. managers tend

In the International Spotlight

can bring positive economic development to the country?

3. Is the prospect of China’s sheer volume of potential customers too good to pass up? Or do the actions of the government and the country’s recent stock market woes indicate a signal that investment should be reconsidered?

Source: “China’s Economy: After the Stimulus,” China Business Review, July 2010, pp. 30–33; Tran Van Hoa, “Impact of the WTO Membership, Regional Economic Integration, and Structural Change on China’s Trade and Growth,” Review of Development Economics, August 2010, pp. 577–591; James Miles, “After the Olympics,” Economist, December 21, 2008, p. 58; “The Next China,” Economist, July 31, 2010, pp. 48–50; “China Revises Up 2010 GDP Expansion,” People’s Daily Online, September 8, 2011, english.peopledaily.com.cn/.

believe China should no longer be considered an emerging market. The country is now the largest market for cars globally and, despite its own recent setbacks, Yum! Brands generates about a third of its revenue from its KFC and Pizza Hut sales within China. The country remains an especially attractive host for foreign direct investment, given its large market and continued growth.86

Questions 1. If you are working as a consultant for Coca Cola,

how does the dismissal of the deal by the Chinese government affect your continued investment in the country?

2. What more could private business, like Coca Cola, do to convince the government that new enterprise

Chapter 7 Cross-Cultural Communication and Negotiation 247

248

Brief Integrative Case 2.1

Coca-Cola in India

attractive market.5 From 2003–2006, foreign investment doubled to $6 billion. Imported goods have become a sta- tus symbol for the burgeoning middle class.6

Coca-Cola has been targeting India for potential growth, as Indians consume an average of 12 eight-ounce beverages per year. In comparison, Brazil consumers drink roughly 240 beverages per year on average. Despite the relatively low amount of beverages consumed by India on average, India has been one of Coke’s best emerging market plays. In 2014, India surpassed Germany as Coca- Cola’s sixth largest market. During the January to March period of 2014, sales volumes in India increased 6 per- cent. This growth is on par with Coca-Cola’s other emerg- ing market operations in China (12 percent growth over the same period) and Brazil (4 percent growth over the same period).7 As part of its investment plan, Coca-Cola plans to expand capacity at all 13 of its bottling plants, which should help expand the company’s distribution throughout the country. Coca-Cola is aiming to double both revenue and volume in India by the year 2020.8

In 2014 FDI in India stood at $33.9 billion.9 In 2015, India overtook the United States and China as the top destination for FDI, according to a report by the Financial Times.10  A  2015 survey of Japanese manufacturers con- ducted by the Japan Bank for International Cooperation ranked India as the most promising country for overseas business operations.11

India’s GDP grew at the impressive average annual rate of 8.5 percent during the six years spanning 2003–2008. Even the global financial crisis, which began in Septem- ber 2008, only cut the rate of growth by  2–3 percentage points, and the economy has continued to grow at the annual rate of 6–7 percent in the years since the crisis.12,13  But the country needs more investment in manufacturing if it hopes to improve the lives of the 350 million people living in poverty.14

Coca-Cola and Other Soft Drink Investment in India Coca-Cola had experienced previous confrontations with the Indian government. In 1977, Coke had pulled out of India when the government demanded its secret formula.15

Circumstances have dramatically improved over the years for soft drink providers of India. Coke and Pepsi have invested nearly $2 billion in India over the years. They employ about 12,500 people directly and support

Coca-Cola is a brand name known throughout the entire world. With stagnant soft drink sales in markets like Europe and North America, Coca-Cola has aggressively looked to new, expanding markets to continue to grow its brand. India, with 1.2 billion consumers, has been a pri- mary target for Coca-Cola; through acquisitions and clever marketing, the company now covers  60 percent of India’s $1 billion soft drink market. 

Coca-Cola’s expansion in India has not been without minor setbacks, however. In 2006–2007, Coca-Cola faced some difficult challenges in the region of Kerala, India, after it was accused of using water that contained pesti- cides in its bottling plants. An environmental group, the Center for Science and Environment (CSE), found 57 bottles of Coke and Pepsi products from 12 Indian states that contained unsafe levels of pesticides.1  The Kerala minister of health, R. Ashok, imposed a ban on the manufacture and sale of Coca-Cola products in the region. Coca-Cola then arranged to have its drinks tested in a British lab, and the report found that the amount of pesticides found in Pepsi and Coca-Cola drinks was harm- less to the body.2 Coca-Cola then ran numerous ads to regain consumers’ confidence in its products and brand. However, these efforts did not satisfy the environmental groups or the minister of health.

India’s Changing Marketplace During the 1960s and 1970s, India’s economy faced many challenges, growing only an average of 3–3.5 per- cent per year. Numerous obstacles hindered foreign com- panies from investing in India, and many restrictions on economic activity caused huge difficulties for Indian firms and a lack of interest among foreign investors. For many years the government had problems implementing reform and overcoming bureaucratic and political divi- sions. Business activity has traditionally been underval- ued in India; leisure is typically given more value than work. Stemming from India’s colonial legacy, Indians are highly suspicious of foreign investors. Indeed, there have been a few well-publicized disputes between the Indian government and foreign investors.3

More recently, however, many Western companies are finding an easier time doing business in India.4 In 1991, political conditions had changed, many restrictions were eased, and economic reforms came into force. With more than 1 billion consumers, India has become an increasingly

Brief Integrative Case 2.1 Coca-Cola in India 249

“Pepsi and Coke are doing our work for us. Now the whole nation knows that there is a pesticide problem.”23

Coca-Cola fought back against the accusations. “No Indian soft drink makers have been tested for similar vio- lations even though pesticides could be in their products such as milk and bottled teas. If pesticides are in the groundwater, why isn’t anyone else being tested? We are continuously being challenged because of who we are,” said Atul Singh, CEO of Coca-Cola India.24

Some believe that Coca-Cola was targeted to bring the subject of pesticides in consumer products to light. “If you target multinational corporations, you get more publicity,” adds Arvind Kumar, a researcher at the watchdog group Toxic Links. “Pesticides are in everything in India.”25

India’s Response to the Allegations After CSE’s discovery of the unsafe levels of pesti- cides,26  some suggested the high levels of pesticides came from sugar, which is 10 percent of the soft drink content. However, laboratories found the sugar samples to be pesticide free.27

Kerala is run by a communist government and a chief minister who still claims to have a revolutionary objec- tion to the evils of capitalism.28  Defenders of Coca-Cola claim that this is a large reason for the pesticide findings in Coca-Cola products. After the ban was placed on all Coca-Cola and PepsiCo products in the region of Kerala, Coca-Cola took its case to the state court to defend its products and name. The court said that the state govern- ment had no jurisdiction to impose a ban on the manu- facture and sale of products.29  Kerala then lifted the statewide ban on Coke products.30

In March 2010, after several years of tense battles, the Indian unit of Coca-Cola Company was asked to pay $47 million in compensation for causing environmental dam- age at its bottling plant in the southern Indian state of Kerala. A state government panel said Coca-Cola’s sub- sidiary, Hindustan Coca-Cola Beverages Pvt Ltd (HCBPL), was responsible for depleting groundwater and dumping toxic waste around its Palakkad plant between 1999 and 2004. Protests by farmers, complaining about the alleged pollution, forced Coca-Cola to close down the plant in 2005. Coca-Cola responded that HCBPL was not respon- sible for pollution in Palakkad, but the final decision on the compensation will be taken by the state government.31

Pepsi’s Experience in India PepsiCo has had an equally noticeable presence in India, and it is not surprising that the company has weathered the same storms as its rival Coca-Cola. In addition to claims of exces- sive water use, a CSE pesticide study, performed in August 2006, accused Pepsi of having 30 times the “unofficial” pes- ticide limit in its beverages (Coke was claimed to be 27 times

200,000 indirectly through their purchases of sugar, pack- aging material, and shipping services. Coke is India’s number-one consumer of mango pulp for its local soft drink offerings.16  Coca-Cola in India is also the largest domestic buyer of sugar and green coffee beans.17  From 1994 to 2003, Coca-Cola sales in India more than doubled.

In 2008–2009 Coca-Cola announced its plans to invest more than $250 million in India over the next three years. The money would be used for everything from expanding bottling capacity to buying delivery trucks and refrigera- tors for small retailers. The new money meant around a 20 percent increase in the total Coca-Cola has invested in India.18  Coca-Cola’s sales in India climbed 31 percent in the three months ended March 31, 2009, compared to a year earlier. That’s the highest volume growth of any of Coke’s markets.19

Furthermore, Coca-Cola announced plans in 2012 to invest upwards of US$5 billion in India by 2020. This investment marks a 150 percent increase over the announced plans from 2011 to invest up to US$2 billion in India over the next five years. Putting this investment in perspective, Coca-Cola has invested a total of just over US$2 billion in its India operations over the past 20 years. Despite the large investment in India, Coca-Cola will see serious competition from Pepsi in this market. Together Coke and Pepsi make up 97 percent of the market for carbonated soft drinks in India, where soda sales overall are estimated to be US$1.05 billion. Coke accounted for 60 percent of all sales while Pepsi received 37 percent of the market share.20

Royal Crown Cola (RC Cola) is the world’s third larg- est brand of soft drinks. The brand was purchased in 2001 by Cott Beverages and entered the Indian market in 2003. For production in India, the company hired three licensing and franchising bottlers. In order to ensure that it was not associated with the pesticide accusations against Pepsi and Coke, RC Cola immediately had its groundwater tested by the testing institute SGS India Pvt Ltd.21

The Charges against Coke The pesticide issue began in 2002 in Plachimada, India. Villagers thought that water levels had sunk and the drinking water was contaminated by Coke’s plant. They launched a vigil at the plant, and two years later, Coke’s license was canceled. Coca-Cola’s most recent pesticide issue began at a bottling plant in Mehdiganj. The plant was accused of exploiting the groundwater and polluting it with toxic metals.22  Karnataka R. Ashok, the health minister of Kerala, India, banned the sale of all Coca-Cola and PepsiCo products, claiming that the drinks contained unsafe levels of pesticides.

The alleged contamination of the water launched a debate on everything from pesticide-polluted water to the Indian middle-class’s addiction to unhealthy, processed foods. “It’s wonderful,” said Sunita Narin, director of CSE.

250 Part 2 The Role of Culture

severe water shortages, locating water-extracting plants in “drought prone” areas, further limiting water access by contaminating the surrounding land and groundwater, and irresponsibly disposing of toxic waste. Colleges and uni- versities throughout the United States, U.K., and Canada have joined in holding the company accountable for its overseas business practices by banning Coca-Cola prod- ucts on their campuses until more positive results are reported. However, critics have argued that TERI’s assess- ment would undoubtedly be biased because the organiza- tion has been largely funded by the Coca-Cola Company.36

Coca-Cola stands behind the safety of its products. “Multinational corporations provide an easy target,” says Amulya Ganguli, a political analyst in New Delhi. “These corporations are believed to be greedy, devoted solely to profit, and uncaring about the health of the consumers.” There is also a deeply rooted distrust of big business, and particularly foreign big business, in India.37  This is a reminder that there will continue to be obstacles, as there were in the past, to foreign investments in India.

In order to reaffirm their presence in India, Coke and Pepsi have run separate ads insisting that their drinks are safe. Coke’s ad said, “Is there anything safer for you to drink?” and invited Indians to visit its plants to see how the beverage is made.38  Nevertheless, in July 2006, Coke reported a 12 percent decline in sales.39

Coca-Cola has undertaken various initiatives to improve the drinking water conditions around the world. It has formally pledged support for the United Nations Global Compact and co-founded the Global Water Challenge, which improves water access and sanitation in countries in critical need. It is improving energy efficiency through the use of hydrofluorocarbon-free insulation for 98 per- cent of new refrigerator sales and marketing equipment. Specifically, in India, Coke has stated, “More than one- third of the total water that is used in operations is renewed and returned to groundwater systems.”40  Among its first water renewal projects was installation of 270 rainwater

the limit in this study).32  These findings, coupled with the original 2003 CSE study that first tarnished the cola compa- nies’ image, have prompted numerous consumers to stop their cola consumption. Some have even taken to the streets, burning pictures of Pepsi bottles in protest.

Indra Nooyi, CEO of PepsiCo Inc. and a native of India, is all too familiar with the issues of water con- tamination and water shortages. Yet, in light of the recent claims made against Pepsi, she has expressed frustration with the exaggerated CSE findings (local tea and coffee have thousands of times the alleged pesticide level found in Pepsi products) and the disproportionate reaction to Pepsi’s water-use practices (pointing out that soft drinks and bottled water account for less than 0.04 percent of industrial water usage in India).33

In order to reaffirm the safety and popularity of its products, Pepsi has taken on a celebrity-studded ad cam- paign across India, as well as continued its legacy of cor- porate social responsibility (CSR). Some of Pepsi’s CSR efforts have involved digging village wells, “harvesting” rainwater, and teaching better techniques for growing rice and tomatoes.34  Pepsi has also initiated efforts to reduce water waste at its Indian facilities.

Although Pepsi sales are back on the rise, Nooyi real- izes that she should have acted sooner to counteract CSE’s claims about Pepsi products. From here on out, the com- pany must be more attentive to its water-use practices; but Nooyi also notes, “We have to invest, too, in educating communities in how to farm better, collect water, and then work with industry to retrofit plants and recycle.”35

Coke’s Social Responsibility Commitments Coca-Cola has recently employed The Energy and Resources Institute (TERI) to assess its operations in India. The investigations have been conducted because of claims that Coca-Cola has engaged in unethical production practices in India. These alleged practices include causing

Table 1 A Timeline of Coca-Cola in Kerala, India 1977 Coca-Cola pulls out of India when the government demands its secret formula. 1991 Restrictions are eased in India for easier international business development. 1999 A report is published by the All-Indian Coordinated Research Program stating that 20% of all Indian food commod-

ities exceed the maximum pesticide residue level and 43% of milk exceeds the maximum residue levels of DDT. 2002 Villagers in Plachimada, India, make the accusation that Coke’s bottling plant is contaminating their drinking water. 2003 The Center for Science and Environment produces a study that finds unsafe levels of pesticides in Coca-Cola

products in India. January 2004 Parliament in India forms a Joint Parliamentary Committee to investigate the charges by the CSE. March 2004 A Coca-Cola bottling facility is shut down in Plachimada, India. 2004 Indian government announces new regulations for carbonated soft drinks based on European Union standards. 2005 Coca-Cola co-founds the Global Water Challenge, develops the Global Community-Watershed Partnership, and

establishes the Ethics and Compliance Committee. August 2006 The CSE produces another report finding 57 Coke and Pepsi products from 12 Indian states that contain unsafe

pesticide levels. September 2006 India’s high court overturns the ban on the sale of Coke products in Kerala. March 2010 Indian unit of Coca-Cola Co. asked by state government to pay $47 million compensation for causing environmen-

tal damage at its bottling plant in Kerala.

Brief Integrative Case 2.1 Coca-Cola in India 251

beverages and their production. For us that means reduc- ing the amount of water used to produce our beverages, recycling water used for manufacturing processes so it can be returned safely to the environment, and replenishing water in communities and nature through locally relevant projects.” Coca-Cola hopes to spread these practices to other members of its supply chain, particularly the sugar cane industry. The Coca-Cola–WWF partnership is also focused on climate protection and protection of seven of the world’s “most critical freshwater basins,” including the Yangtze in China. Although Coca-Cola’s corporate social responsibility efforts have included other projects with the WWF in the past, it hopes that this official part- nership will help achieve larger-scale results.44

As a part of its 2013 goals, Coca-Cola and the WWF committed to achieve 100 percent replenishment of all water used, 75 percent recycling rate in developing mar- kets, 30 percent plant-based packaging by 2020, and 25 percent improvement to water efficiency by 2020.45 Figures 1 and 2 highlight Coca-Cola’s rapidly declining water use on a per-plant and systemwide basis that occurred between 2002 and 2005.

catching devices.41  Later, Coca-Cola expanded the num- ber of rainwater harvesting projects by partnering with the Central Ground Water Authority (CGWA), State Ground Water Boards, schools, colleges, NGOs, and local com- munities to combat water scarcity. According to Coca- Cola India’s 2007–2008 Environment Report, the company was actively engaged in 400 rainwater harvesting projects running across 17 states. These efforts were contributing to the company’s eventual target of being a “net zero” user of groundwater, a goal that it achieved in 2009.42

Having inspected its own water-use habits, Coca-Cola has vowed to reduce the amount of water it uses in its bottling operations. As of 2014, Coca-Cola had reduced the amount of water needed to make one liter of Coke to 2.03 liters (compared with 2.70 liters a decade before).43

At the June 2007 annual meeting of the World Wildlife Fund (WWF) in Beijing, Coca-Cola announced its multi- year partnership with the organization “to conserve and protect freshwater resources,” and in 2013, the partnership was expanded to include new goals. E. Neville Isdell, chair and CEO of the Coca-Cola Company, said, “Our goal is to replace every drop of water we use in our

3.2

2002 2003 2004 2005

2.6

2.72

2.9

3.12

Average Plant Ratios

Years

W at

er U

se R

at io

li te

rs /l

it er

o f

p ro

d u

ct

2.3

2.4

2.5

2.6

2.7

2.8

2.9

3

3.1

Figure 1 Coca-Cola’s Water Use: Historical Average Plant Ratios

Source: The Coca-Cola Company, 2005 Environmental Report, www.thecocacolacompany.com/citizenship/environmental_report2005.pdf.

Figure 2 Coca-Cola’s Water Use: Systemwide Total

2002 2003 2004 2005 Years

305

310

260

265

270

275

280

285

290

295

300

278

283

297

307

Systemwide Total

W at

er U

se To

ta l i

n b

ill io

n li

te rs

Source: The Coca-Cola Company, 2005 Environmental Report, www.thecocacolacompany.com/citizenship/environmental_report2005.pdf.

252 Part 2 The Role of Culture

focused too much on the charges instead of winning back the support of its customers. “Here people interpret silence as guilt,” said Mr. Seth, Coke’s Indian public rela- tions expert.

Ms. Bjorhus, the Coke communications director, said she could now see how the environmental group had picked Coca-Cola as a way of attracting attention to the broader problem of pesticide contamination in Indian food products. Coca-Cola stands behind its products as being pesticide free. It is now up to the Indian consumer to decide the success of Coca-Cola in future years.

Nevertheless, Coca-Cola has been optimistic about its future in India. While India was still among the countries with the lowest per capita consumption of Coke, in 2014 it was the second-fastest-growing region in terms of Coca- Cola unit case volume growth.  Coca-Cola recorded a 2 percent growth in sales in 2014 and most of it came from India, Russia, Brazil, and China, even as the com- pany faced hard economic times elsewhere in the world.49

The Global Water Challenge A decade ago in 2007, one out of every five people glob- ally lacked access to clean drinking water.50  In August 2006, an international conference was held in Stockholm, Sweden, to discuss global water issues. A UN study reported that many large water corporations have decreased their investments in developing countries because of high political and financial risks. Even nations that have had abundant water supplies are experiencing significant reductions. These reductions are believed to be caused by two factors: the decline in rainfall and increased evapora- tion of water due to global warming and the loss of wet- lands. Water is something that affects every person each and every day. The executive director of the Stockholm Water Institute, Anders Berntell, noted that water affects the areas of agriculture, energy, transportation, forestry, trade, financing, and social and political security. The Food and Agriculture Organization points out, “Agriculture is the world’s largest water consumer. Any water crisis will therefore also create a food crisis.”

There have been attempts to improve the water condi- tions around the world. The United Nations recently released the World Water Development Report. This report was com- piled by 24 UN agencies and claimed that, in actuality, only 12 percent of the funds targeted for water and sanitation improvement reached those most in need. The United Nations stated that more than 1.1 billion people still lack access to improved water resources. Nearly two-thirds of the 1.1 billion live in Asia.51  In China, nearly a quarter of the population is unable to access clean drinking water. Over half of China’s major waterways are also polluted. The Insti- tute of Public and Environmental Affairs reported that 34 foreign-owned or joint-venture companies, including Pepsi, have caused water pollution problems in China. Ma Jun, the

Coca-Cola has also established EthicsLine, which is a global web and telephone information and reporting ser- vice that allows anyone to report confidential information to a third party. Service is toll free—24 hours a day—and translators are available. Coca-Cola is currently focusing on improving standards through the global water chal- lenge and enhancing global packaging to make it more environmentally friendly. It is also working on promoting nutrition and physical education by launching programs throughout the world. For example, in January 2009, Coca-Cola India announced a partnership with the Bharat Integrated Social Welfare Agency (BISWA) to build awareness regarding micro-nutrient malnutrition (or “hid- den hunger”) in the “bottom of the socio-economic pyra- mid” population in India. The two partners will work together to establish a successful income-generation model for communities through self-help groups in Sam- balpur in Odisha and also provide them with affordable alternatives to alleviate “hidden hunger.” The first product developed by Coca-Cola India to address the issue of “hidden hunger” is Vitingo, a tasty, affordable, and refreshing orange-flavored beverage fortified with micro- nutrients.

During the past decade, the Coca-Cola Company has invested more than US$1 billion in India, making it one of India’s top international investors. By 2020, the com- pany will have invested over US$5 billion. Almost all the goods and services required to produce and market Coca- Cola are made in India. The Coca-Cola Company directly employs approximately 5,500 local people in India; and indirectly, its business in India creates employment for more than 150,000 people.46 Hindustan Coca-Cola Bever- ages Pvt Ltd operates 22 bottling plants, some of which are located in economically underdeveloped areas of the country. The Coca-Cola system also includes 23 franchise- operated plants and has one facility that manufactures concentrates or beverage bases.47

Lessons Learned Yet Coca-Cola was caught off guard by its experience in India. Coke did not fully appreciate how quickly local politicians would attack Coke in light of the test results, nor did it respond quickly enough to the anxieties of its consumers. The company failed to realize how fast news travels in modern India. India represents only about 1 per- cent of Coca-Cola’s global volume, but it is central to the company’s long-term growth strategy. The company needed to take action fast.48

In what Coke thought to be a respectful and immediate time frame, it formed committees in India and the United States. The committees worked on rebuttals and had their own labs commission the tests, and then they commented in detail. Coke also directed reporters to Internet blogs full of entries that were pro-Coke. Critics say that Coke

Brief Integrative Case 2.1 Coca-Cola in India 253

Questions for Review

1. What aspects of U.S. culture and of Indian culture may have been causes of Coke’s difficulties in India?

2. How might Coca-Cola have responded differently when this situation first occurred, especially in terms of responding to negative perceptions among Indians of Coke and other MNCs?

3. If Coca-Cola wants to obtain more of India’s soft drink market, what changes does it need to make?

4. How might companies like Coca-Cola and PepsiCo demonstrate their commitment to working with different countries and respecting the cultural and natural environments of those societies?

Source: This case was prepared by Jaclyn Johns of Villanova University under the supervision of Professor Jonathan Doh as the basis for class discussion. Additional research assistance was provided by Courtney Asher, Tetyana Azarova, and Ben Littell. It is not intended to illustrate either effective or ineffective managerial capability or administrative responsibility.

institute’s founder, said, “We’re not talking about very high standards. These companies are known for their commit- ment to the environment.”52

According to the 2016 UN World Water Development Report, the world’s population will grow by 33 percent by 2050, resulting in over 2 billion more people living in water-stressed areas. An estimated one-third of the global population does not have access to safe drinking water or adequate sanitation. By 2050, the population living in urban environments will double.53

With businesses expanding globally, water is a crucial resource, and water issues will increasingly affect all indus- tries. With water conditions improving at a slower rate than business development, businesses will have to take on the responsibility of not only finding an adequate supply of the diminishing resource but also making sure the water is safe for all to consume. This responsibility is going to be an additional cost to companies, but a necessary one that will prevent loss of sales in the future. Coca-Cola’s specific situation in India is a reminder for all global corporations.

1. Peter Wonacott and Chad Terhune, “Politics & Eco- nomics: Path to India’s Market Dotted with Pot- holes; Savvy Cola Giants Stumble over Local Agendas; KFC Climbs Back from Abyss,”  The  Wall Street Journal,  September 12, 2006, p. A6.

2. “CSE Report on Pesticide Residue Inconclu- sive,”  Businessline,  August 27, 2006, p. 1.

3. Rajesh Kumar and Verner Worm, “Institutional Dynamics and the Negotiation Process: Comparing India and China,”  International  Journal of Conflict Management  15, no. 3 (2004), p. 304.

4. Wonacott and Terhune, “Politics & Economics.” 5. Archna Shukla, “Message Will Always Be More

Important Than Medium,”  Business Today,  August 27, 2006, p. 102.

6. Mark Sappenfield, “India’s Cola Revolt Taps into Old Distrust: Behind Contradictory Reports of Pes- ticides in Coke and Pepsi Is an Underlying Wari- ness of Foreign Companies,”  The Christian  Science Monitor,  September 1, 2006, p. 6.

7. Siddharth Cavale, “Coca-Cola Sales Beat Estimates as China Volumes Soar,”  Reuters, April 15, 2014,  www.reuters.com/article/us-cocacola-results- idUSBREA3E0R220140415.

8. Nikhil Gulati and Runman Ahmed, “India Has 1.2 Billion People but Not Enough Drink Coke,”  The Wall Street  Journal Online, July 13, 2012,  http://

www.wsj.com/articles/SB1000142405270230487030 4577490092413939410.

9. “Foreign Direct Investment, Net Inflows (BoP, cur- rent US$),” World Bank,  http://data.worldbank.org/ indicator/BX.KLT.DINV.CD.WD.

10. Courtney Fingar, “India Grabs Investment League Pole Position,”  Financial Times, September 29, 2915,  www.ft.com/intl/cms/s/3/fdd0e3c2-65fc-11e5- 97d0-1456a776a4f5.html#axzz45LofBnIo.

11. “Survey Shows India as the Favorite Investment Target,”  Nikkei Asian Review, December 9, 2015,  http://asia.nikkei.com/Business/Trends/Survey- shows-India-as-the-favorite-investment-target.

12. Arvind Panagariya, “Building a Modern India,”  Business Standard India  2010.

13. “GDP Growth (annual %),”  World Bank,  http://data. worldbank.org/indicator/NY.GDP.MKTP.KD.ZG.

14. Brian Bremner, Nandini Lakshman, and Diane Brady, “India: Behind the Scare over Pesticides in Pepsi and Coke,”  BusinessWeek,  September 4, 2006, p. 43.

15. Sappenfield, “India’s Cola Revolt Taps into Old Distrust.”

16. Bremner, Lakshman, and Brady, “India: Behind the Scare over Pesticides in Pepsi and Coke.”

17. Coca-Cola India, “Environment Report 2007–2008.” Accessed 2008.

ENDNOTES

254 Part 2 The Role of Culture

39. Wonacott and Terhune, “Politics & Economics.” 40. “CSR Initiatives: Strengthening Communities

through Water Conservation,”  CSR News,  October 2007,  http://newsletters.cii.in/newsletters/csr/ october07/spot_lite.html.

41. Ibid. 42. Coca-Cola India, “Environment Report 2007–2008.” 43. “Improving Our Water  Efficiency,”  Coca-Cola

Company,  www.coca-colacompany.com/stories/ setting-a-new-goal-for-water-efficiency/.

44. Coca-Cola Company, “The Coca-Cola Company Pledges to Replace the Water It Uses in Its Bever- ages and Their Production,” press release, June 5, 2007,  http://www.worldwildlife.org/press-releases/ the-coca-cola-company-pledges-to-replace-the-water- it-uses-in-its-beverages-and-their-production.

45. Jay Moye, “Beyond Water: Coca-Cola Expands Partnership with WWF, Announces Ambitious Environmental Goals,”  Coca-Cola Company, July 9, 2013,  www.coca-colacompany.com/ stories/beyond-water-coca-cola-expands-partnership- with-wwf-announces-ambitious-environmental- goals/.

46. Coca-Cola India, “Environment Report 2007–2008.”

47. Ibid. 48. Gentleman, “For 2 Giants of Soft Drinks, a Crisis

in Crucial Market.” 49. Cavale, “Coca-Cola Sales Beat Estimates as China

Volumes Soar.” 50. Kenneth E. Behring, “Water Research; Researchers

Are Raising Awareness of the Global Drinking Water Crisis,”  Health  &  Medicine Week,  October 16, 2006, p. 1339.

51. Thalif Deen, “Development: Water, Water Every- where Is Thing of the Past,”  Global Information Network, August 22, 2006, p. 1.

52. Loretta Chao and Shai Oster, “China Study Says Foreigners Violate Clean-Water Rules,”  The Wall Street  Journal,  October 30, 2006, p. B7.

53. United Nations, World Water Development Report 2016: Water and Jobs (March 22, 2016), http://unesdoc.unesco.org/images/0024/002439/ 243938e.pdf.

18. Eric Bellman, “Coke Sees Strong Demand across India, Plans Investment,”  The  Wall Street Journal, June 30, 2009,  http://online.wsj.com/article/ SB124055692273452331.html?mod= googlenews_wsj.

19. Ibid. 20. Gulati and Ahmed, “India Has 1.2 Billion People

but Not Enough Drink Coke.” 21. Ratna Bhushan, “RC Cola Comes to India,”

Businessline, October 7, 2003, p. 1. 22. “India: Reports of Contaminated Soda Dry up

Coke, Pepsi Sales,”  Global Information Network, September 7, 2006, p. 1.

23. Aryn Baker, “India’s Storm in a Cola Cup,”  Time  International,  August 21, 2006, p. 8.

24. Bremner, Lakshman, and Brady, “India: Behind the Scare over Pesticides in Pepsi and Coke.”

25. Sappenfield, “India’s Cola Revolt Taps into Old Distrust.”

26. Wonacott and Terhune, “Politics & Economics.” 27. “India: Reports of Contaminated Soda Dry up

Coke, Pepsi Sales.” 28. Sappenfield, “India’s Cola Revolt Taps into Old

Distrust.” 29. “Coca-Cola Co.: India’s Kerala State Cancels Ban

on Coke, Pepsi Drinks,”  The  Wall Street Journal, September 25, 2006, p. A11.

30. Ibid. 31. “Coca-Cola India Unit Asked to Pay $47 Million

Damages,”  Reuters,  March 23, 2010,  www.reuters. com/article/idUSSGE62M0AV20100323.

32. Diane Brady, “Pepsi: Repairing a Poisoned Reputa- tion in India,”  BusinessWeek,  June 11, 2007.

33. Ibid. 34. Ibid. 35. Ibid. 36. Amit Srivastava, “Coca-Cola Funded Group Investi-

gates Coca-Cola in India,”  India Resource Center, April 16, 2007,  www.indiaresource.org/campaigns/ coke/2007/coketeri.html.

37. Sappenfield, “India’s Cola Revolt Taps into Old Distrust.”

38. Amelia Gentleman, “For 2 Giants of Soft Drinks, a Crisis in Crucial Market,”  New  York Times,  August 23, 2006, p. C3.

255

Dannon became the first company to sell perishable dairy products coast to coast in the U.S.5

In 1967, Danone merged with leading French fresh cheese producer Gervais to become Gervais Danone. In 1973, Gervais Danone merged with Boussois-Souchon- Neuvesel (BSN), a company that had also acquired the Alsacian brewer Kronenbourg and Evian mineral water.6 In 1987, Gervais Danone acquired European biscuit man- ufacturer Général Biscuit, owners of the LU brand, and in 1989, it bought out the European biscuit operations of Nabisco.

In 1994, BSN changed its name to Groupe Danone, adopting the name of the Group’s best-known international brand. Under its current CEO, Franck Riboud, the com- pany has pursued its focus on the three product groups: dairy, beverages, and cereals.7 Today, Danone’s mission is to produce healthy, nutritious, and affordable food and beverage products for as many people as possible.

Danone’s Global Growth Danone, with 160 plants and nearly 100,000 employees, has a presence in all five continents and over 120 coun- tries. In 2015, Danone recorded €21.1 billion in sales, a nearly 30 percent increase from its €15.2 billion in sales in 2008. Danone enjoys leading positions in healthy food:8

∙ No. 1 worldwide in fresh dairy products ∙ No. 2 worldwide in bottled water ∙ No. 2 worldwide in baby nutrition ∙ No. 1 in Europe in medical nutrition

Its portfolio of brands and products includes Activia, a probiotic dairy product line; Danette, a brand of cream desserts; Nutricia, an infant product line; Danonino, a brand of yogurts; and Evian, a brand of bottled water.9

Listed on Euronext Paris, Danone is also ranked among the main indexes of social responsibility: Dow Jones Sus- tainability Index Stoxx and World, ASPI Eurozone (Advanced Sustainable Performance Indices), and Ethibel Sustainability index. Danone has ranked number 51 in top 100 international brands according to Interbrand 2015 Best Global Brand valuation, with the brand value of $8.6 billion.10

In 2014, Danone recorded an organic growth rate of 4.7 percent despite a weak European economy, further strengthening its global standing. The group’s perfor- mance is the result of a balanced strategy that builds on

In 1996, Danone Group and Wahaha Group combined forces in a joint venture (JV) to form the largest beverage company in China. A longstanding trademark dispute between the JV members, embedded within a broader clash of national and organizational cultures, came to a head. Valuable lessons can be learned from this dispute for investors considering joint ventures in China.

The Wahaha Joint Venture was established in 1996 by Hangzhou Wahaha Food Group Co. Ltd., Danone Group, and Bai Fu Qin Ltd. In 1997, Danone bought the interests of Bai Fu Qin and gained legal control of the JV with 51 percent of the shares. While members of the JV are entitled to use the JV’s Wahaha trademark, in 2000, the Wahaha Group developed companies outside of the JV that sold products similar to those of the JV and used the JV’s trademark. The Danone Group objected and sought to purchase those non-JV companies.1

In April 2007, Danone offered RMB4 billion to acquire 51 percent of the shares of Wahaha’s five non-JV companies. Wahaha Group rejected the offer. Subse- quently, Danone filed more than 30 lawsuits against Wahaha for violating the contract and illegally using the JV’s Wahaha trademark in countries such as France, Italy, the U.S., and China.2

Danone’s Background Danone traces its routes to Europe in the early 20th century. In 1919, Isaac Carasso opened a small yogurt stand in Spain. He named it “Danone,” meaning “Little Daniel,” after his son. Carasso was aware of new methods of milk fermentation conducted at the Pasteur Institute in Paris. He decided to merge these new techniques with traditional prac- tices for making yogurt. The first industrial manufacturer of yogurt was started.3

Following his success in Europe, Carasso immigrated to the U.S. to expand his market. He changed the Danone name to Dannon Milk products, Inc., and founded the first American yogurt company in 1942 in New York. Distri- bution began on a small scale. When Dannon introduced the “fruit on the bottom” line in 1947, sales soared. The following year, he sold his company’s interest and returned to Spain to manage his family’s original business.4

By 1950, Dannon had expanded to other U.S. states in the Northeast. It also broadened the line by introducing low-fat yogurt that targeted the health-conscious con- sumer. Sales continued to rise. Dannon expanded across the country throughout the 1960s and 1970s. In 1979,

Brief Integrative Case 2.2

Danone’s Wrangle with Wahaha

256 Part 2 The Role of Culture

Danone Strategy in China Danone entered the Chinese market in the late 1980s. Since then, it has invested heavily in China, building fac- tories and expanding production. Today, Danone has 70 factories in China, including Danone Biscuits, Robust, Wahaha, and Health. Ten percent of Danone’s workforce is located in China. Danone sells primarily yogurt, bis- cuits, and beverages in the Chinese market.16  By 2014, Danone’s Asia-Pacific division employed 28,000 people in the Asia-Pacific area, which was almost 30 percent of Danone’s total employees. 

In the early 2000s, Danone’s Wahaha was China’s larg- est beverage company. In 2008, 57 percent of Danone’s Asian sales were in China. Two billion liters of Wahaha were sold in 2004, making it the market leader in China with a 30 percent market share.17 In Asia, in 2007, Danone Group was the market leader with a 20 percent share of a 34-billion-liter market. In comparison, rivals Coca-Cola and Nestlé had a 7 percent and 2 percent share, respec- tively. Evian, its global brand, was sold alongside of local brands such as China’s Wahaha.

In the past 20 years, Danone has purchased shares of many of the top beverage companies in China: 51 percent of the shares of the companies owned by Wahaha Group, 98 percent of Robust Group, 50 percent of Shanghai Mal- ing Aquarius Co., Ltd., 54.2 percent of Shenzhen Yili Mineral Water Company, 22.18 percent of China Huiyuan Group, 50 percent of Mengniu, and 20.01 percent of Bright dairy. These companies, leaders in their industry, all own trademarks that are well-known in China.18

However, while expanding into the Chinese market, Danone faced challenges due to lack of market knowl- edge. In 2000, Danone purchased Robust, the then- second- largest company in the Chinese beverage industry. Sales of Robust had reached RMB2 billion in 1999. After the purchase, Danone dismissed the original management and managed Robust directly. Because its new management was not familiar with the Chinese beverage market, Robust struggled. Its tea and milk products almost disappeared from the market. During 2005–2006, the company lost RMB 150 million.19

Wahaha Company The Wahaha company was established in 1987 by a retired teacher, Mr. Zong Qinghou. In 1989, the enterprise opened its first plant, Wahaha Nutritional Food Factory, to pro- duce “Wahaha Oral Liquid for Children,” a nutritional drink for kids. The name Wahaha was meant to evoke a laughing child, combining the character for baby (wa) with the sound of laughter.20  After its launch, Wahaha won a rapid public acceptance. By 1991, the company’s sales revenue grew beyond 100 million renminbi (¥).21

In 1991, with the support of the Hangzhou local district government, Wahaha Nutritional Food Factory merged

international expansion, a growing commitment to inno- vation, and strengthening health-oriented brands. Danone invests heavily in research and development—€276 mil- lion in 2015. One hundred percent of projects currently in the pipeline focus on health and nutrition.11

As of 2014, Danone is the world’s second largest pro- ducer of bottled water. Danone owns the world’s top- selling brand of packaged water, Aqua, which recorded sales of 11 billion liters in 2014. With Evian and Volvic, Danone also owns two of the five worldwide brands of bottled water.12 Its revenue from water products amounted to €4.2 billion in 2014: China, France, Indonesia, and Mexico accounted for the most sales. Growth is strongest in China, Indonesia, and Argentina, with emerging mar- kets accounting for 70 percent of all of Danone’s bottled water sales.13

In the mid-1990s, Danone did 80 percent of its busi- ness in Western Europe. Until 1996, the company was present in about a dozen markets including pasta, confec- tionery, biscuits, ready-to-serve meals, and beer. The company realized that it is difficult to achieve simultane- ous growth in all these markets. Therefore, they decided to concentrate on the few markets that showed the most growth potential and were consistent with Danone’s focus on health. Starting in 1997, the Group decided to focus on three business lines worldwide (Fresh Dairy Products, Beverages, as well as Biscuits and Cereal Products), and the rest of the business lines were divested. This freed the company’s financial and human resources and allowed for quick expansion into new markets in Asia, Africa, Eastern Europe, and Latin America. In less than 10 years, the contribution of emerging markets to sales rose from zero to 40 percent while that of Western Europe went below 50 percent.14  By 2014, emerging markets accounted for 60 percent of all growth, with over 60 percent of all employees working outside of Europe.15

In 2007, the same year that it attempted to acquire 51 percent of the shares of Wahaha’s five non-JV com- panies, Danone marked the end of a 10-year refocusing strategy period during which the Group’s activities were refocused in the area of health. That year, the Group sold nearly all of its Biscuits and Cereal Products busi- ness to the Kraft Foods group, while adding Baby Nutrition and Medical Nutrition to its portfolio by acquiring Numico.

Danone is now centered on 4 business lines:

1. Fresh Dairy Products, representing approximately 53 percent of consolidated sales for 2014.

2. Waters, representing approximately 20 percent of consolidated sales for 2014.

3. Baby Nutrition, representing approximately 21 per- cent of consolidated sales for 2014.

4. Medical Nutrition, representing approximately 7 per- cent of consolidated sales for 2014.

Brief Integrative Case 2.2 Danone’s Wrangle with Wahaha 257

Association, Wahaha contributed 55.57 percent to the Association Top 10’s overall production, 65.84 percent to its revenue, and 73.16 percent to its profit tax. According to Zong Qinghou, the president of Wahaha: “As China becomes the world’s largest food and beverage market, we’ll be a major player in the global market.” Wahaha implements a strategy of “local production and local dis- tribution’’ and has built an excellent production-distribu- tion network. Its Wahaha R&D center and Analysis Center provide guarantees for high product quality.26

Danone-Wahaha Joint Venture Conflict The Wahaha joint venture (JV) was formed in 1996 with three participants: Hangzhou Wahaha Food Group (Wahaha Group); Danone Group, a French corporation (Danone); and Bai Fu Qin, a Hong Kong corporation (Baifu). Danone and Baifu did not invest directly in the JV. Instead, Danone and Baifu formed Jin Jia Investment, a Singapore corporation (Jinjia). Upon the formation of the JV, Wahaha Group owned 49 percent of the shares of the JV and Jinjia owned 51 percent of the shares of the JV. This structure led to immediate misunderstandings between the participants. From Wahaha Group’s point of view—with the division of ownership at 49 percent Wahaha Group, 25.5 percent Danone, and 25.5 percent Baifu—it was the majority shareholder in the JV. Figure 1 shows the initial structure of the JV. Since Wahaha Group felt it controlled the JV, it was relatively unconcerned when it transferred its trademark to the JV.27

In 1998, Danone bought out the interest of Baifu in Jinjia, becoming 100 percent owner of Jinjia and effec- tively the 51 percent owner of the JV. This gave it legal control over the JV because of its right to elect the board of directors. For the first time, the Wahaha Group and Zong realized two things: (1) They had given complete

with Hangzhou Canning Food Factory, a state-owned enterprise, to form the Hangzhou Wahaha Group Corpo- ration. After mergers with three more companies, Wahaha became the biggest corporation of its district.22

Since 1997, Wahaha has set up many new subsidiaries. It was aided by state and local government because its continuous expansion helped create new jobs and its increased profits led to more tax revenues.

In 1996, the Hangzhou Wahaha Group Corporation began a joint venture with Danone Group and formed five new subsidiaries, which attracted a $45 million foreign investment and then added another $26.2 million invest- ment. With the investment funds, Wahaha brought world- class advanced production lines from Germany, America, Italy, Japan, and Canada into its sites. The terms of the Danone-Wahaha joint venture allowed Wahaha to retain all managerial and operating rights as well as the brand name Wahaha. In the next eight years, the company established 40 subsidiaries in China, and in 1998 launched its own brand, “Future Cola,” to compete against Coke and Pepsi.23

In 2000, the company produced 2.24 million tons of bev- erages with sales revenue of $5.4 billion. The production accounted for 15 percent of the Chinese output of beverages. The group became the biggest company in the beverage industry of China with total assets of $4.4 billion.24

Back in 2007, it produced 6.89 million tons of bever- age with a sales revenue of $25.8 billion. Today, Hang- zhou Wahaha Group Co., Ltd., is still a leading beverage producer in China with over 60,000 employees and 150 subsidiaries, though sales have dropped since 2013 due to the shrinking carbonated beverage market. The company product category contains more than 100 varieties, such as milk drinks, drinking water, carbonated drinks, tea drinks, canned food, and health care products.25

According to a report on the “Top 10 Beverage Companies” released by the China Beverage Industry

The Wahaha Joint Venture

Jin Jia Investment Co. Ltd.

51%

WAHAHA G ROUP

Bai Fu Qin Ltd 50%

Danone Group 50%

Wahaha Group (led by Chairman Zong Qinghou)

40%

Hierarchy of the Initial Wahaha Joint Venture Figure 1 Structure of Initial Wahaha Joint Venture

Source: Steven M. Dickinson, “Danone v. Wahaha,”  China Economic Review,  September 1, 2007,  http://www.chinaeconomicreview.com/ node/24126.

258 Part 2 The Role of Culture

appear to have been owned in part by Wahaha Group and in part by an offshore British Virgin Islands company controlled by Zong’s daughter and wife. Neither Danone nor Wahaha Group receives any benefits from the profits of these non-JV companies. According to press reports in China, products from the non-JV companies and the JV were sold by the same sales staff working for the same sales company, all ultimately managed by Zong.33

In 2005, Danone realized the situation and insisted it be given a 51 percent ownership interest in the non-JV companies. Wahaha Group and Zong, who by this time was one of the richest men in China, refused.34

Details of the Dispute In April 2006, Wahaha was informed by its 10-year JV partner Danone that it had breached the contract by estab- lishing nonjoint ventures that had infringed upon the interests of Danone. Danone proposed to purchase 51 per- cent of the shares of Wahaha’s nonjoint ventures.35 The move was opposed by Wahaha. In May 2007, Danone formally initiated a proceeding, claiming that Wahaha’s establishment of nonjoint ventures as well as the illegal use of the “Wahaha” trademark had seriously violated the noncompete clause. The two parties carried on 10 lawsuits in and out of China, and all the ruled cases between Wahaha and Danone have ended in Wahaha’s favor.36

On February 3, 2009, a California court in the United States dismissed Danone’s accusation against the wife and daughter of Zong Qinghou and ruled that the dispute between Danone and Wahaha should be settled in China. In addition, Danone’s lawsuits against Wahaha were rejected by courts in Italy and France; and a series of lawsuits brought by Danone in China against Zong Qing- hou and Wahaha’s nonjoint ventures all ended in failure.37

The rationality of the existence of the nonjoint ven- tures, the ownership of the “Wahaha” trademark, and the noncompete clause issue were the key points of the Danone-Wahaha dispute.38 In 1996, Wahaha offered a list of 10 subsidiaries to Danone, which, after evaluation, selected four. Jinja Investments Pte Ltd. (a Singapore- based joint venture between Danone Asia Pte Ltd. and Hong Kong Peregrine Investment, of which Danone is the controlling shareholder); Hangzhou Wahaha Group Co., Ltd.; and Zhejiang Wahaha Industrial Holdings Ltd. jointly invested to form five joint venture enterprises, with shareholdings of 51 percent, 39 percent, and 10 percent, respectively. In 1998, Hong Kong Peregrine sold its stake in Jinja Investments to Danone, which makes Danone the sole shareholder of Jinja Investments, giving it the control of over 51 percent of the joint ventures. Wahaha and Danone cooperated on the basis of joint venture enter- prises, rather than the complete acquisition of Wahaha by Danone. As a result, Wahaha was always independent, and its nonjoint ventures have existed and developed since

control over their trademark to the JV and (2) a foreign company was now in control of the JV. From a legal standpoint, this result was implied by the structure of the JV from the very beginning. However, it is clear from public statements that the Wahaha Group did not under- stand the implications when they entered into the venture. The Danone “takeover” in 1998 therefore produced sig- nificant resentment on the part of Wahaha Group. Rightly or not, Wahaha felt that Danone misled them from the very beginning.28

When the JV was formed, Wahaha Group was a state- owned enterprise owned by the Hangzhou city govern- ment. After formation of the JV, it was converted into a private corporation, effectively controlled by Zong. This set the stage for Wahaha Group’s decision to take back control of the trademark it felt had been unfairly trans- ferred to Danone. Zong and his employees now viewed the transferred trademark as their personal property.29

When the JV was formed, Wahaha Group obtained an appraisal of its trademark valuing it at RMB100 million (US$13.2 million). The trademark was its sole contribu- tion to the JV, while Jinjia contributed RMB500 million (US$66.1 million) in cash. Wahaha Group also agreed not to use the trademark for any independent business activity or allow it to be used by any other entity. However, the trademark transfer was rejected by China’s Trademark Office. It took the position that, as the well-known mark of a state-owned enterprise, the trademark belonged to the state and Wahaha Group did not have the right to transfer it to a private company.30

Rather than terminate the JV, the shareholders (now Danone and Wahaha Group) decided to work around the approval issue by entering into an exclusive license agree- ment for the trademark in 1999. Because the license agreement was intended to be the functional equivalent of a sale of the trademark, they were concerned the Trade- mark Office would refuse to register the license. There- fore, they only registered an abbreviated license. This was accepted by the Trademark Office, which never saw the full license. As a result, Wahaha Group never transferred ownership of the Wahaha trademark to the JV, just the exclusive license. Thus, Wahaha Group never complied with its basic obligation for capitalization of the JV. It does not appear that any of the JV documents were revised to deal with this changed situation.31

Although Danone was the majority shareholder and maintained a majority interest on the board of directors, day-to-day management of the JV was delegated entirely to Zong. He filled management positions with his family members and employees of the Wahaha Group. Under Zong’s management, the JV became the largest Chinese bottled water and beverage company.32

Beginning in 2000, the Wahaha Group created a series of companies that sold the same products as the JV and used the Wahaha trademark. The non-JV companies

Brief Integrative Case 2.2 Danone’s Wrangle with Wahaha 259

received a profit of RMB3.554 billion as of 2007. On the other hand, Danone acquired several strong competitors of Wahaha including Robust, Huiyuan, and Shanghai Maling Aquariust. Wahaha saw Robust as its biggest rival. Wahaha was disappointed that Danone failed to hold up its end of the bargain of “jointly exploring markets in and out of China” listed in the JV contract.46

Through the influence of the Chinese and French gov- ernments, Danone and Wahaha reached a peaceful settle- ment in late 2007. However, Danone’s proposal to sell its shares in the joint ventures to Wahaha for RMB50 billion (finally reduced to approximately RMB20 billion) was rejected by Wahaha.47

After the negotiations were suspended, the two parties again turned to legal action. All the ruled cases, both in China and abroad, have ruled against Danone.48

Conflict Resolution In late September 2009, France’s Groupe Danone SA agreed to accept a cash settlement to relinquish claims to the name Wahaha. In a joint statement issued September 30, 2009, Danone announced a settlement with China’s Hangzhou Wahaha Group Co. by saying its 51 percent share in joint ventures that make soft drinks and related products will be sold to the businesses’ Chinese partners. “The completion of this settlement will put an end to all legal proceedings related to the disputes between the two parties,” the statement said.49

The feud over control of the Wahaha empire offered a glimpse into the breakup of a major Asian–foreign joint venture. Danone’s strategy to publicly confront its partner and Wahaha’s strategy to respond with its own accusa- tions marked a break with prevailing business practice in China, where problems have usually been settled with face-saving, private negotiations.50

Analysts said the case served to reinforce how difficult it is to operate a partnership in China. “That’s a key lesson: To build a [brand] business in China you need to build from the ground up,” said Jonathan Chajet, China manag- ing director for consultancy Interbrand.51 Foreign firms such as Procter & Gamble, Starbucks, and General Motors have operated wholly or in part through joint ventures in China. But executives involved say the expectations of for- eign and local parties can conflict in a JV; for instance, when an international company is striving for efficiencies and profits that match its global goals while the local partner—sometimes an arm of the Chinese government— strives to maximize employment or improve technology. At other times, partners have stolen corporate secrets or cheated and otherwise sabotaged a venture, while legal avenues have had little effect on disputes over operations.52

Danone, which reported the Wahaha business gener- ated about 10 percent of its global revenue in 2006 but has since adjusted how it accounted for Wahaha, said it

1996. Relevant transactions of Wahaha’s nonjoint ven- tures and joint ventures were disclosed fully and frankly by the auditing reports of PricewaterhouseCoopers, an accounting firm appointed by Danone. Meanwhile, during the 11-year cooperation, Danone assigned a finance direc- tor to locate in the headquarters of Wahaha Group to audit the latter’s financial information.39

Danone and Wahaha had signed in succession three rel- evant agreements concerning the ownership of the “Wahaha” brand name. In 1997, the two parties signed a trademark transfer agreement, with an intention to transfer the “Wahaha” trademark to the joint ventures. The move, however, was not approved by the State Trademark Office.40 For this reason, the two parties signed in 1999 the trademark licensing con- tract. According to law, the same subject cannot be synchro- nously transferred and licensed for use to others by the same host. Therefore, the signing and fulfillment of the trademark licensing contract showed that the two parties had agreed to the invalidation of the transfer agreement. The “Wahaha” brand should belong to the Wahaha Group, while the joint ventures only have the right of use.41

In October 2005, the two parties signed the No. 1 amendment agreement to the trademark licensing con- tract, in which it confirmed Party A (Hangzhou Wahaha Group Co., Ltd.) as owner of the trademark. In addition, the second provision of the amendment agreement clearly stated that the several Wahaha subsidiaries listed in the fifth annex of the licensing contract as well as other Wahaha subsidiaries (referred to as “licensed Wahaha enterprises”) established by Party A or its affiliates fol- lowing the signing of the licensing contract also have the right granted by one party to use the trademark. The “licensed Wahaha enterprises” involved in the amendment agreement refer to the nonjoint ventures.42 According to related files, Wahaha maintains the ownership of the “Wahaha” trademark, while its nonjoint ventures have the right to use the trademark.43 The Wahaha brand is among the most famous in China. It ranked No. 16 among domes- tic brands and is worth US$2.2 billion, according to a recent report by Shanghai research firm Hurun Report. Wahaha doesn’t publicly disclose financial figures.44

Ventures and Acquisitions Several years ago, as Wahaha sought to expand its market, Wahaha suggested adding online new production lines by increasing investment, while Danone requested Wahaha outsource to product processing suppliers for its joint ven- tures. Wahaha saw the shortcomings in using product pro- cessing suppliers, so it set up nonjoint ventures to meet production needs. Wahaha believed that the existence and operation of the nonjoint ventures did not adversely affect the interest of Danone.45

During the 11 years that followed 1996, Danone invested less than RMB1.4 billion in Wahaha’s joint ventures but

260 Part 2 The Role of Culture

Questions for Review

1. When and how did Danone expand into the Chinese market? What problems did Danone Group encoun- ter while operating in China?

2. How was the Danone and Wahaha JV formed? What was its structure? Why did Danone decide to form a joint venture rather than establish a 100 percent-owned subsidiary?

3. What was the problem of the Danone-Wahaha joint venture that triggered the conflict between the com- panies? What were the differences in Danone’s and Wahaha’s understanding of their own respective roles and responsibilities in this venture? What aspects of national and organizational culture affected this perspective?

4. Was Danone successful in proving its claims in court? How was the conflict between the two com- panies resolved? What were the key lessons for Danone about doing business in China?

5. Did Danone follow the advice regarding JVs in China mentioned in the list just above? Which aspects did it follow and which did it not?

Source: This case was prepared by Tetyana Azarova of Villanova University under the supervision of Professor Jonathan Doh as the basis for class discussion. Additional research assistance was provided by Kelley Bergsma and Ben Littell. It is not intended to illustrate either effective or ineffective managerial capability or administrative responsibility.

expects no impact on its income statement from the settle- ment. In China, it will be left with a much smaller foot- print and is essentially starting over.53 Danone’s CEO Franck Riboud stated: “Danone has a long-standing com- mitment to China, where it has been present since 1987, and we are keen to accelerate the success of our Chinese activities.” China is Danone’s fourth-largest market after France, Spain, and the U.S., contributing about €1bn, or 8 percent, of Danone’s revenues.54

Lessons Learned55

What can potential foreign investors learn from this dis- pute? Although JVs in China can be quite difficult, with proper planning and management, they can be successful. In the case of the Wahaha–Danone JV, many basic rules of JV operations in China were violated, virtually guar- anteeing the JV’s destruction. According to Steve Dickin- son, lawyer at Harris Moure PLC, the primary rules violated are as follows:56

1. Don’t use technical legal techniques to assert or gain control in a JV.

2. Do not expect that a 51 percent ownership interest in a JV will necessarily provide effective control.

3. Do not proceed with a JV formed on a weak or uncertain legal basis.

4. The foreign party must actively supervise or partici- pate in the day-to-day management of the JV.

1. Patti Waldmeir and Sundeep Tucker, “Danone to Quit Joint Venture with Wahaha  French Group to Focus on Expanding Own Units in China,”  Finan- cial Times, September 30, 2009,  https://www.ft. com/content/849e7eda-ad87-11de-bb8a- 00144feabdc0.

2. Wahaha Group, “Danone Encounters Continuous Frustration in China and a Murky Future Due to Unsuccessful Litigations,” press release,  PR News- wire, September 9, 2008,  www.prnewswire.co.uk/ news-releases/danone-encounters-continuous- frustration-in-china-and-a-murky-future-due-to- unsuccessful-litigations-152564955.html.

3. “Our Heritage,”  Danone,  www.danone.com/en/for- all/our-mission-in-action/our-heritage/.

4. Ibid. 5. Ibid. 6. Bill Bruce, “Danone Celebrates Its 90th Birthday,”

April 14, 2009,  www.foodbev.com/news/danone- celebrates-its-90th-birthday/.

7. Ibid. 8. Danone, 2014 Annual Report, February 20, 2015. 9. Danone,  www.danone.com/en. 10. “Rankings,”  Interbrand,  http://interbrand.com/

best-brands/best-global-brands/2015/ranking/. 11. “Research at Danone,”  Danone,  www.danone.com/

en/for-all/research-innovation/our-research-at-a- glance/.

12. “Waters,”  Danone,  www.danone.com/en/brands/ business/beverages.html.

13. Ibid. 14. Danone 2008 Annual Report:  Economic and Social

Report.

15. Danone 2014 Annual Report:  Economic and Social Report.

16. Shangguan Zhoudong, “Danone’s Quick Expansion in China,”  China Daily,  June 15, 2007,  www. chinadaily.com.cn/bizchina/2007–06/15/content_ 895462.htm.

ENDNOTES

Brief Integrative Case 2.2 Danone’s Wrangle with Wahaha 261

http://www.journalist-association.eu/archive/news. php?newsid=19477.

36. Ibid. 37. Ibid. 38. Ibid. 39. Ibid. 40. Ibid. 41. Ibid. 42. Ibid. 43. Ibid. 44. Ibid. 45. Ibid. 46. Ibid. 47. Ibid. 48. Ibid. 49. J. T. Areddy, “Danone Pulls Out of Disputed

China Venture,” The Wall  Street Journal, October 1, 2009, http://online.wsj.com/article/ SB125428911997751859.html.

50. Ibid. 51. Ibid. 52. Ibid. 53. Ibid. 54. Waldmeir and Tucker, “Danone to Quit Joint Ven-

ture with Wahaha.” 55. Dickinson, “Danone v. Wahaha.” 56. Ibid.

17. T. C. Melewar, E. Badal, and J. Small, “Danone Branding Strategy in China,”  Brand Manage- ment  13, no. 6 (July 2006), pp. 407–417.

18. “Danone Encounters Continuous Frustration in China.”

19. Ibid. 20. Vivian Wai-yin Kwok, “A Pyrrhic Victory for

Danone in China,”  Forbes,  August 6, 2007,  www. forbes.com/2007/06/08/wahaha-danone-zong-mar- kets-equity-cx_vk_0608markets2.html.

21. Wahaha,  http://en.wahaha.com.cn/aboutus/index.htm. 22. Ibid. 23. Ibid. 24. Ibid. 25. Ibid. 26. Ibid. 27. Steven M. Dickinson, “Danone v. Wahaha,” China

Economic Review, September 1, 2007, www. chinaeconomicreview.com/node/24126.

28. Dickinson, “Views You Can Use.” 29. Dickinson, “Danone v. Wahaha.” 30. Ibid. 31. Ibid. 32. Ibid. 33. Ibid. 34. Ibid. 35. Baoxiu Ye, “Wahaha Reviews 21:0 Whitewash

Against Danone,”  PR Newswire,  April 13, 2009,

262

Despite the frustrations, Eisner was tirelessly upbeat about the project. “Instant hits are things that go away quickly, and things that grow slowly and are part of the culture are what we look for,” he said. “What we created in France is the biggest private investment in a foreign country by an American company ever. And it’s gonna pay off.”

In the Beginning Disney’s story is the classic American rags-to-riches story, which started in a small Kansas City advertising office where Mickey was a real mouse prowling the unknown Walt Disney floor. Originally, Mickey was named Mortimer, until a dissenting Mrs. Disney stepped in. How close Mickey was to Walt Disney is evidenced by the fact that when filming, Disney himself dubbed the mouse’s voice. Only in later films did Mickey get a dif- ferent voice. Disney made many sacrifices to promote his hero-mascot, including selling his first car, a beloved Moon Cabriolet, and humiliating himself in front of Louis B. Mayer. “Get that mouse off the screen!” was the movie mogul’s reported response to the cartoon character. Then, in 1955, Disney had the brainstorm of sending his movie characters out into the “real” world to mix with their fans, and he battled skeptics to build the very first Disneyland in Anaheim, California.

When Disney died in 1966, the company went into virtual suspended animation. Its last big hit of that era was 1969’s The Love Bug, about a Volkswagen named Herbie. Today, Disney executives trace the problem to a tyrannical CEO named E. Cardon Walker, who ruled the company from 1976 to 1983, and to his successor, Ronald W. Miller. Walker was quick to ridicule underlings in pub- lic and impervious to any point of view but his own. He made decisions according to what he thought Walt would have done. Executives clinched arguments by quoting Walt like the Scriptures or Marx, and the company even- tually supplied a little book of the founder’s sayings. Mak- ing the wholesome family movies Walt would have wanted formed a key article of Walker’s creed. For example, a poster advertising the unremarkable Condorman featured actress Barbara Carrera in a slit skirt. Walker had the slit painted over. With this as the context, studio producers ground out a thin stream of tired, formulaic movies that fewer and fewer customers would pay to see. In mid-1983, a similar low-horsepower approach to television production

On January 18, 1993, Euro Disneyland chair Robert Fitzpatrick announced he would leave that post on April 12 to begin his own consulting company. Quitting his position exactly one year after the grand opening of Euro Disneyland, Fitzpatrick with his resignation removed U.S. management from the helm of the French theme park and resort.

Fitzpatrick’s position was taken by a Frenchman, Philippe Bourguignon, who had been Euro Disneyland’s senior vice president for real estate. Bourguignon, 45 years old, faced a net loss of FFr 188 million for Euro Disneyland’s fiscal year, which ended September 1992. Also, between April and September 1992, only 29 percent of the park’s total visitors were French. Expectations were that closer to half of all visitors would be French.

It was hoped that the promotion of Philippe Bourgui- gnon would have a public relations benefit for Euro Disneyland—a project that had been a publicist’s night- mare from the beginning. One of the low points was at a news conference prior to the park’s opening when protest- ers pelted Michael Eisner, CEO of the Walt Disney Com- pany, with rotten eggs. Within the first year of operation, Disney had to compromise its “squeaky clean” image and lift the alcohol ban at the park. Wine is now served at all major restaurants.

Euro Disneyland, 49 percent owned by Walt Disney Company, Burbank, California, originally forecasted 11 million visitors in the first year of operation. In January 1993 it appeared attendance would be closer to 10 mil- lion. In response, management temporarily slashed prices at the park for local residents to FFr 150 ($27.27) from FFr 225 ($40.91) for adults and to FFr 100 from FFr 150 for children in order to lure more French during the slow, wet winter months. The company also reduced prices at its restaurants and hotels, which registered occupancy rates of just 37 percent.

Bourguignon also faced other problems, such as the second phase of development at Euro Disneyland, which was expected to start in September 1993. It was unclear how the company planned to finance its FFr 8–10 billion cost. The company had steadily drained its cash reserves (FFr 1.9 billion in May 1993) while piling up debt (FFr 21 billion in May 1993). Euro Disneyland admitted that it and the Walt Disney Company were “exploring poten- tial sources of financing for Euro Disneyland.” The com- pany was also talking to banks about restructuring its debts.

In-Depth Integrative Case 2.1a

Euro Disneyland

In-Depth Integrative Case 2.1a Euro Disneyland 263

“I knew that would hang a ‘For Sale’ sign over the com- pany,” said Gold.

By resigning, Roy pushed over the first of a train of dominoes that ultimately led to the result he most desired. The company was raided, almost dismantled, greenmailed, raided again, and sued left and right. But it miraculously emerged with a skilled new top management with big plans for a bright future. Roy Disney proposed Michael Eisner as the CEO, but the board came close to rejecting Eisner in favor of an older, more buttoned-down candidate. Gold stepped in and made an impassioned speech to the directors. “You see guys like Eisner as a little crazy . . . but every studio in this country has been run by crazies. What do you think Walt Disney was? The guy was off the goddamned wall. This is a creative institution. It needs to be run by crazies again.”

Meanwhile Eisner and Wells staged an all-out lobbying campaign, calling on every board member except two, who were abroad, to explain their views about the com- pany’s future. “What was most important,” said Eisner, “was that they saw I did not come in a tutu, and that I was a serious person, and I understood a P&L, and I knew the investment analysts, and I read Fortune.”

In September 1984, Michael Eisner was appointed CEO and Frank Wells became president. Jeffrey Katzen- berg, the 33-year-old, maniacal production chief, followed Fisher from Paramount Pictures. He took over Disney’s movie and television studios. “The key,” said Eisner, “is to start off with a great idea.”

Disneyland in Anaheim, California For a long time, Walt Disney had been concerned about the lack of family-type entertainment available for his two daughters. The amusement parks he saw around him were mostly filthy traveling carnivals. They were often unsafe and allowed unruly conduct on the premises. Disney envi- sioned a place where people from all over the world would be able to go for clean and safe fun. His dream came true on July 17, 1955, when the gates first opened at Disneyland in Anaheim, California.

Disneyland strives to generate the perfect fantasy. But magic does not simply happen. The place is a marvel of modern technology. Literally dozens of computers, huge banks of tape machines, film projectors, and electronic controls lie behind the walls, beneath the floors, and above the ceilings of dozens of rides and attractions. The philosophy is that “Disneyland is the world’s biggest stage, and the audience is right here on the stage,” said Dick Hollinger, chief industrial engineer at Disneyland. “It takes a tremendous amount of work to keep the stage clean and working properly.”

Cleanliness is a primary concern. Before the park opens at 8 a.m., the cleaning crew will have mopped, hosed, and dried every sidewalk, street, floor, and counter.

led to CBS’s cancellation of the hour-long program The Wonderful World of Disney, leaving the company without a regular network show for the first time in 29 years. Like a reclusive hermit, the company lost touch with the contemporary world.

Ron Miller’s brief reign was by contrast a model of decentralization and delegation. Many attributed Miller’s ascent to his marrying the boss’s daughter rather than to any special gift. To shore Miller up, the board installed Raymond L. Watson, former head of the Irvine Co., as part-time chair. He quickly became full time.

Miller sensed the studio needed rejuvenation, and he managed to produce the hit film Splash, featuring an apparently (but not actually) bare-breasted mermaid, under the newly devised Touchstone label. However, the reluctance of freelance Hollywood talent to accommodate Disney’s narrow range and stingy compensation often kept his sound instincts from bearing fruit. “Card [Cardon Walker] would listen but not hear,” said a former executive. “Ron [Ron Miller] would listen but not act.”

Too many box office bombs contributed to a steady erosion of profit. Profits of $135 million on revenues of $915 million in 1980 dwindled to $93 million on revenues of $1.3 billion in 1983. More alarmingly, revenues from the company’s theme parks, about three-quarters of the company’s total revenues, were showing signs of leveling off. Disney’s stock slid from $84.375 a share to $48.75 between April 1983 and February 1984.

Through these years, Roy Disney Jr. simmered while he watched the downfall of the national institution that his uncle, Walt, and his father, Roy Disney Sr., had built. He had long argued that the company’s constituent parts all worked together to enhance each other. If movie and tele- vision production weren’t revitalized, not only would that source of revenue disappear, but the company and its activities would also grow dim in the public eye. At the same time, the stream of new ideas and characters that kept people pouring into the parks and buying toys, books, and records would dry up. Now his dire predictions were coming true. His own personal shareholding had already dropped from $96 million to $54 million. Walker’s treat- ment of Ron Miller as the shining heir apparent and Roy Disney as the idiot nephew helped drive Roy to quit as Disney vice president in 1977 and to set up Shamrock Holdings, a broadcasting and investment company.

In 1984, Roy teamed up with Stanley Gold, a tough- talking lawyer and a brilliant strategist. Gold saw that the falling stock price was bound to flush out a raider and afford Roy Disney a chance to restore the company’s for- tunes. They asked Frank Wells, vice chair of Warner Bros., if he would take a top job in the company in the event they offered it. Wells, a lawyer and a Rhodes scholar, said yes. With that, Roy knew that what he would hear in Disney’s boardroom would limit his freedom to trade in its stock, so he quit the board on March 9, 1984.

264 Part 2 The Role of Culture

complexes: Future World, a series of pavilions designed to show the technological advances of the next 25 years, and World Showcase, a collection of foreign “villages.”

Tokyo Disneyland It was Tokyo’s nastiest winter day in four years. Arctic winds and 8 inches of snow lashed the city. Roads were clogged and trains slowed down. But the bad weather didn’t keep 13,200 hardy souls from Tokyo Disneyland. Mikki Mausu, better known outside Japan as Mickey Mouse, had taken the country by storm.

Located on a fringe of reclaimed shoreline in Urayasu City on the outskirts of Tokyo, the park opened to the pub- lic on April 15, 1983. In less than one year, over 10 million people had passed through its gates, an attendance figure that has been bettered every single year. On August 13, 1983, 93,000 people helped set a one-day attendance record that easily eclipsed the old records established at the two parent U.S. parks. Four years later, records again toppled as the turnstiles clicked. The total this time: 111,500. By 1988, approximately 50 million people, or nearly half of Japan’s population, had visited Tokyo Disneyland since its opening. The steady cash flow pushed revenues for fiscal year 1989 to $768 million, up 17 percent from 1988.

The 204-acre Tokyo Disneyland is owned and operated by Oriental Land under license from the Walt Disney Co. The 45-year contract gives Disney 10 percent of admis- sions and 5 percent of food and merchandise sales, plus licensing fees. Disney opted to take no equity in the proj- ect and put no money down for construction. “I never had the slightest doubt about the success of Disneyland in Japan,” said Masatomo Takahashi, president of Oriental Land Company. Oriental Land was so confident of the success of Disney in Japan that it financed the park entirely with debt, borrowing ¥180 billion ($1.5 billion at February 1988 exchange rates). Takahashi added, “The debt means nothing to me,” and with good reason. Accord- ing to Fusahao Awata, who co-authored a book on Tokyo Disneyland: “The Japanese yearn for [American culture].”

Soon after Tokyo Disneyland opened in April 1983, five Shinto priests held a solemn dedication ceremony near Cinderella’s castle. It is the only overtly Japanese ritual seen so far in this sprawling theme park. What visitors see is pure Americana. All signs are in English, with only small katakana (a phonetic Japanese alphabet) translations. Most of the food is American style, and the attractions are cloned from Disney’s U.S. parks. Disney also held firm on two fundamentals that strike the Japanese as strange—no alcohol is allowed and no food may be brought in from outside the park.

However, in Disney’s enthusiasm to make Tokyo a brick- by-brick copy of Anaheim’s Magic Kingdom, there were a few glitches. On opening day, the Tokyo park discovered that almost 100 public telephones were placed too high for Japanese guests to reach them comfortably. And many

More than 350 of the park’s 7,400 employees come on duty at 1 a.m. to begin the daily cleanup routine. The thousands of feet that walk through the park each day and chewing gum do not mix; gum has always presented major cleanup problems. The park’s janitors found long ago that fire hoses with 90 pounds of water pressure would not do the job. Now they use steam machines, razor scrapers, and mops towed by Cushman scooters to literally scour the streets and sidewalks daily.

It takes one person working a full eight-hour shift to polish the brass on the Fantasyland merry-go-round. The scrupulously manicured plantings throughout the park are treated with growth-retarding hormones to keep the trees and bushes from spreading beyond their assigned spaces and destroying the carefully maintained five-eighths scale modeling that is utilized in the park. The maintenance supervisor of the Matterhorn bobsled ride personally walks every foot of track and inspects every link of tow chain every night, thus trusting his or her own eyes more than the $2 million in safety equipment that is built into the ride.

Eisner himself pays obsessive attention to detail. Walk- ing through Disneyland one Sunday afternoon, he peered at the plastic leaves on the Swiss Family Robinson tree house, noting that they periodically wear out and need to be replaced leaf by leaf at a cost of $500,000. As his family strolled through the park, he and his eldest son Breck stooped to pick up the rare piece of litter that the cleanup crew had somehow missed. This old-fashioned dedication has paid off. Since opening day in 1955, Disneyland has been a consistent moneymaker.

Disney World in Orlando, Florida By the time Eisner arrived, Disney World in Orlando was already on its way to becoming what it is today—the most popular vacation destination in the United States. But the company had neglected a rich niche in its business: hotels. Disney’s three existing hotels, probably the most profit- able in the United States, registered unheard-of occupancy rates of 92 percent to 96 percent versus 66 percent for the industry. Eisner promptly embarked on an ambitious $1 billion hotel expansion plan. Two major hotels, Disney’s Grand Floridian Beach Resort and Disney’s Caribbean Beach Resort, were opened during 1987–89. Disney’s Yacht Club and Beach Resort along with the Dolphin and Swan Hotels, owned and operated by Tishman Realty & Construction, Metropolitan Life Insurance, and Aoki Cor- poration, opened during 1989–90. Adding 3,400 hotel rooms and 250,000 square feet of convention space made it the largest convention center east of the Mississippi.

In October 1982, Disney made a new addition to the theme park—the Experimental Prototype Community of Tomorrow, or EPCOT Center. E. Cardon Walker, then president of the company, announced that EPCOT would be a “permanent showcase, industrial park, and experimen- tal housing center.” This new park consists of two large

In-Depth Integrative Case 2.1a Euro Disneyland 265

James B. Cora and his team of some 150 operations experts did a little calculating and pointed out that it would take 100,000 pigs to do the job. And then there would be the smell . . .

The Japanese relented. The Japanese were also uneasy about a rustic-looking

Westernland, Tokyo’s version of Frontierland. “The Japa- nese like everything fresh and new when they put it in,” said Cora. “They kept painting the wood and we kept saying, ‘No, it’s got to look old.’” Finally the Disney crew took the Japanese to Anaheim to give them a firsthand look at the Old West.

Tokyo Disneyland opened just as the yen escalated in value against the dollar, and the income level of the Japanese registered a phenomenal improvement. During this era of affluence, Tokyo Disneyland triggered an inter- est in leisure. Its great success spurred the construction of “leisurelands” throughout the country. This created an increase in the Japanese people’s orientation toward leisure. But demographics are the real key to Tokyo Disneyland’s success. Thirty million Japanese live within 30 miles of the park. There are three times more than the number of people in the same proximity to Anaheim’s Disneyland. With the park proven such an unqualified hit, and nearing capacity, Oriental Land and Disney mapped out plans for a version of the Disney-MGM studio tour next door. This time, Disney talked about taking a 50 percent stake in the project.

Building Euro Disneyland On March 24, 1987, Michael Eisner and Jacques Chirac, the French prime minister, signed a contract for the build- ing of a Disney theme park at Marne-la-Vallee. Talks between Disney and the French government had dragged on for more than a year. At the signing, Robert Fitzpat- rick, fluent in French, married to the former Sylvie Blondet, and the recipient of two awards from the French government, was introduced as the president of Euro Disneyland. He was expected to be a key player in wooing

hungry customers found countertops above their reach at the park’s snack stands.

“Everything we imported that worked in the United States works here,” said Ronald D. Pogue, managing director of Walt Disney Attractions Japan Ltd. “American things like McDonald’s hamburgers and Kentucky Fried Chicken are popular here with young people. We also wanted visitors from Japan and Southeast Asia to feel they were getting the real thing,” said Toshiharu Akiba, a staff member of the Oriental Land publicity department.

Still, local sensibilities dictated a few changes. A Jap- anese restaurant was added to please older patrons. The Nautilus submarine is missing. More areas are covered to protect against rain and snow. Lines for attractions had to be redesigned so that people walking through the park did not cross in front of patrons waiting to ride an attrac- tion. “It’s very discourteous in Japan to have people cross in front of somebody else,” explained James B. Cora, managing director of operations for the Tokyo project. The biggest differences between Japan and America have come in slogans and ad copy. Although English is often used, it’s “Japanized” English—the sort that would have native speakers shaking their heads while the Japanese nod happily in recognition. “Let’s Spring” was the motto for one of their highly successful ad campaigns.

Pogue, visiting frequently from his base in California, supervised seven resident American Disney managers who work side by side with Japanese counterparts from Oriental Land Co. to keep the park in tune with the Dis- ney doctrine. American it may be, but Tokyo Disneyland appeals to such deep-seated Japanese passions as cleanli- ness, order, outstanding service, and technological wiz- ardry. Japanese executives are impressed by Disney’s detailed training manuals, which teach employees how to make visitors feel like VIPs. Most worth emulating, say the Japanese, is Disney’s ability to make even the lowliest job seem glamorous. “They have changed the image of dirty work,” said Hakuhodo Institute’s Sekizawa.

Disney Company did encounter a few unique cultural problems when developing Tokyo Disneyland:

The problem: how to dispose of some 250 tons of trash that would be generated weekly by Tokyo Disneyland visitors? The standard Disney solution: trash compactors. The Japanese proposal: pigs to eat the trash and be slaughtered and sold at a profit.

Exhibit 1 How the Theme Parks Grew 1955 Disneyland 1966 Walt Disney’s death 1971 Walt Disney World in Orlando 1982 Epcot Center 1983 Tokyo Disneyland 1992 Euro Disneyland

Source: Stephen Koepp, “Do You Believe in Magic?” Time, April 25, 1988, pp. 66–73.

Exhibit 2 Investor’s Snapshot: The Walt Disney Company (December 1989)

Sales (latest four quarters) $4.6 billion Change from year earlier Up 33.6% Net profit $703.3 million Change Up 34.7% Return on common stockholders’ equity 23.4% Five-year average 20.3% Stock price average (last 12 months) $60.50–$136.25 Recent share price $122.75 Price/Earnings Multiple 27 Total return to investor (12 months to 11/3/89) 90.6%

Source: Fortune, December 4, 1989.

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40 percent foreign, with Disney taking 16.67 percent. Euro Disneyland was expected to bring $600 million in foreign investment into France each year.

As soon as the contract had been signed, individuals and businesses began scurrying to somehow plug into the Mickey Mouse money machine—all were hoping to ben- efit from the American dream without leaving France. In fact, one Paris daily, Liberation, actually sprouted mouse ears over its front-page flag.

The $1.5 to $2 billion first-phase investment would involve an amusement complex including hotels and res- taurants, golf courses, and an aquatic park in addition to a European version of the Magic Kingdom. The second phase, scheduled to start after the gates opened in 1992, called for the construction of a community around the park, including a sports complex, technology park, confer- ence center, theater, shopping mall, university campus, villas, and condominiums. No price tag had been put on the second phase, although it was expected to rival, if not surpass, the first-phase investment. In November 1989, Fitzpatrick announced that the Disney–MGM Studios, Europe, would also open at Euro Disneyland in 1996, resembling the enormously successful Disney–MGM Stu- dios theme park at Disney World in Orlando. The new studios would greatly enhance the Walt Disney Compa- ny’s strategy of increasing its production of live action and animated filmed entertainment in Europe for both the European and world markets.

“The phone’s been ringing here ever since the announcement,” said Marc Berthod of EpaMarne, the government body that oversees the Marne-la-Vallee region. “We’ve gotten calls from big companies as well as small—everything from hotel chains to language inter- preters all asking for details on Euro Disneyland. And the individual mayors of the villages around here have been swamped with calls from people looking for jobs,” he added.

Euro Disneyland was expected to generate up to 28,000 jobs, providing a measure of relief for an area that had suffered a 10 percent–plus unemployment rate for the pre- vious year. It was also expected to light a fire under France’s construction industry, which had been particularly hard hit by France’s economic problems over the previous year. Moreover, Euro Disneyland was expected to attract many other investors to the depressed outskirts of Paris. International Business Machines (IBM) and Banque National de Paris were among those already building in the area. In addition one of the new buildings going up was a factory that would employ 400 outside workers to wash the 50 tons of laundry expected to be generated per day by Euro Disneyland’s 14,000 employees.

The impact of Euro Disneyland was also felt in the real estate market. “Everyone who owns land around here is holding on to it for the time being, at least until they know what’s going to happen,” said Danny Theveno, a

support from the French establishment for the theme park. As one analyst put it, Disney selected him to set up the park because he is “more French than the French.”

Disney had been courted extensively by Spain and France. The prime ministers of both countries ordered their governments to lend Disney a hand in its quest for a site. France set up a five-person team headed by Special Advisor to Foreign Trade and Tourism Minister Edith Cresson, and Spain’s negotiators included Ignacio Vasallo, Director-General for the Promotion of Tourism. Disney pummeled both governments with requests for detailed information. “The only thing they haven’t asked us for is the color of the tourists’ eyes,” moaned Vasallo.

The governments tried other enticements too. Spain offered tax and labor incentives and possibly as much as 20,000 acres of land. The French package, although less generous, included spending of $53 million to improve highway access to the proposed site and perhaps speeding up a $75 million subway project. For a long time, all that smiling Disney officials would say was that Spain had better weather while France had a better population base.

Officials explained that they picked France over Spain because Marne-la-Vallee is advantageously close to one of the world’s tourism capitals, while also being situated within a day’s drive or train ride of some 30 million peo- ple in France, Belgium, England, and Germany. Another advantage mentioned was the availability of good trans- portation. A train line that serves as part of the Paris Metro subway system ran to Torcy, in the center of Marne-la-Vallee, and the French government promised to extend the line to the actual site of the park. The park would also be served by A-4, a modern highway that runs from Paris to the German border, as well as a freeway that runs to Charles de Gaulle airport.

Once a letter of intent had been signed, sensing that the French government was keen to not let the plan fail, Disney held out for one concession after another. For example, Disney negotiated for VAT (value-added tax) on ticket sales to be cut from a normal 18.6 percent to 7 percent. A quarter of the investment in building the park would come from subsidized loans. Additionally, any dis- putes arising from the contract would be settled not in French courts but by a special international panel of arbi- trators. But Disney did have to agree to a clause in the contract that would require it to respect and utilize French culture in its themes.

The park was built on 4,460 acres of farmland in Marne-la-Vallee, a rural corner of France 20 miles east of Paris known mostly for sugar beets and Brie cheese. Opening was planned for early 1992, and planners hoped to attract some 10 million visitors a year. Approximately $2.5 billion was needed to build the park, making it the largest single foreign investment ever in France. A French “pivot” company was formed to build the park with start- ing capital of FFr 3 billion, split 60 percent French and

In-Depth Integrative Case 2.1a Euro Disneyland 267

problems to their countryside. Such a public relations pro- gram was a rarity in France, where businesses make little effort to establish good relations with local residents. Dis- ney invited 400 local children to a birthday party for Mickey Mouse, sent Mickey to area hospitals, and hosted free trips to Disney World in Florida for dozens of local officials and children.

“They’re experts at seduction, and they don’t hide the fact that they’re trying to seduce you,” said Vincent Guar- diola, an official with Banque Indosuez, one of the 17 banks wined and dined at Orlando and subsequently one of the venture’s financial participants. “The French aren’t used to this kind of public relations—it was unbeliev- able.” Observers said that the goodwill efforts helped dis- sipate initial objections to the project.

Financial Structuring at Euro Disneyland Eisner was so keen on Euro Disneyland that Disney kept a 49 percent stake in the project, while the remaining 51 percent of stock was distributed through the London, Paris, and Brussels stock exchanges. Half the stock under the offer was going to the French, 25 percent to the Eng- lish, and the remainder distributed in the rest of the Euro- pean community. The initial offer price of FFr 72 was considerably higher than the pathfinder prospectus esti- mate because the capacity of the park had been slightly extended. Scarcity of stock was likely to push up the price, which was expected to reach FFr 166 by opening day in 1992. This would give a compound return of 21 percent.

Walt Disney Company maintained management control of the company. The U.S. company put up $160 million of its own capital to fund the project, an investment that soared in value to $2.4 billion after the popular stock offering in Europe. French national and local authorities, by compari- son, were providing about $800 million in low-interest loans and poured at least that much again into infrastructure.

Other sources of funding were the park’s 12 corporate sponsors, and Disney would pay them back in kind. The “autopolis” ride, where kids ride cars, features coupes emblazoned with the “Hot Wheels” logo. Mattel Inc., sponsor of the ride, was grateful for the boost to one of its biggest toy lines.

The real payoff would begin once the park opened. The Walt Disney Company would receive 10 percent of admis- sion fees and 5 percent of food and merchandise revenue, the same arrangement as in Japan. But in France, it would also receive management fees, incentive fees, and 49 per- cent of the profits.

A Saloman Brothers analyst estimated that the park would pull in 3 to 4 million more visitors than the 11 mil- lion the company expected in the first year. Other Wall Street analysts cautioned that stock prices of both Walt Disney Company and Euro Disney already contained all the Euro optimism they could absorb. “Europeans visit

spokesperson for the town of Villiers on the western edge of Marne-la-Vallee. Disney expected 11 million visitors in the first year. The break-even point was estimated to be between 7 and 8 million. One worry was that Euro Disneyland would cannibalize the flow of European vis- itors to Walt Disney World in Florida, but European travel agents said that their customers were still eagerly signing up for Florida, lured by the cheap dollar and the promise of sunshine.

Protests of Cultural Imperialism Disney faced French communists and intellectuals who protested the building of Euro Disneyland. Ariane Mnouchkine, a theater director, described it as a “cultural Chernobyl.” “I wish with all my heart that the rebels would set fire to Disneyland,” thundered a French intel- lectual in the newspaper La Figaro. “Mickey Mouse,” sniffed another, “is stifling individualism and transform- ing children into consumers.” The theme park was damned as an example of American “neoprovincialism.”

Farmers in the Marne-la-Vallee region posted protest signs along the roadside featuring a mean-looking Mickey Mouse and touting sentiments such as “Disney go home,” “Stop the massacre,” and “Don’t gnaw away our national wealth.” Farmers were upset partly because under the terms of the contract, the French government would expropriate the necessary land and sell it without profit to the Euro Disneyland development company.

While local officials were sympathetic to the farmers’ position, they were unwilling to let their predicament inter- fere with what some called “the deal of the century.” “For many years these farmers have had the fortune to cultivate what is considered some of the richest land in France,” said Berthod. “Now they’ll have to find another occupation.”

Also less than enchanted about the prospect of a magic kingdom rising among its midst was the communist- dominated labor federation, the Confédération Générale du Travail (CGT). Despite the job-creating potential of Euro Disney, the CGT doubted its members would benefit. The union had been fighting hard to stop the passage of a bill that would give managers the right to establish flexible hours for their workers. Flexible hours were believed to be a prerequisite to the profitable operation of Euro Disneyland, especially considering seasonal variations.

However, Disney proved to be relatively immune to the anti-U.S. virus. In early 1985, one of the three state- owned television networks signed a contract to broadcast two hours of dubbed Disney programming every Saturday evening. Soon after, Disney Channel became one of the top-rated programs in France.

In 1987, the company launched an aggressive com- munity relations program to calm the fears of politicians, farmers, villagers, and even bankers that the project would bring traffic congestion, noise, pollution, and other

268 Part 2 The Role of Culture

In Fantasyland, designers strived to avoid competing with the nearby European reality of actual medieval towns, cathedrals, and chateaux. While Disneyland’s castle is based on Germany’s Neuschwanstein and Disney World’s is based on a Loire Valley chateau, Euro Disney’s Le Château de la Belle au Bois Dormant, as the French insisted Sleeping Beauty be called, is more cartoonlike with stained glass windows built by English craftspeople and depicting Disney characters. Fanciful trees grow inside as well as a beanstalk.

The park is criss-crossed with covered walkways. Eisner personally ordered the installation of 35 fireplaces in hotels and restaurants. “People walk around Disney World in Florida with humidity and temperatures in the 90s and they walk into an air-conditioned ride and say, ‘This is the greatest,’” said Eisner. “When it’s raining and miserable, I hope they will walk into one of these lobbies with the fireplace going and say the same thing.”

Children all over Europe were primed to consume. Even one of the intellectuals who contributed to Le Figaro’s Disney-bashing broadsheet was forced to admit with resignation that his 10-year-old son “swears by Michael Jackson.” At Euro Disneyland, under the name “Captain EO,” Disney just so happened to have a Michael Jackson attraction awaiting him.

Food Service and Accommodations at Euro Disneyland Disney expected to serve 15,000 to 17,000 meals per hour, excluding snacks. Menus and service systems were devel- oped so that they varied in both style and price. There is a 400-seat buffeteria, 6 table service restaurants, 12 counter service units, 10 snack bars, 1 Discovery food court seating 850, 9 popcorn wagons, 15 ice-cream carts, 14 specialty food carts, and 2 employee cafeterias. Restaurants were, in fact, to be a showcase for American foods. The only excep- tion to this is Fantasyland, which recreates European fables. Here, food service will reflect the fable’s country of origin: Pinocchio’s facility having German food; Cinderella’s, French; Bella Notte’s, Italian; and so on.

Of course recipes were adapted for European tastes. Because many Europeans don’t care much for very spicy food, Tex-Mex recipes were toned down. A special coffee blend had to be developed that would have universal appeal. Hot dog carts would reflect the regionalism of American tastes. There would be a ball park hot dog (mild, steamed, a mixture of beef and pork), a New York hot dog (all beef, and spicy), and a Chicago hot dog (Vienna-style, similar to bratwurst).

Euro Disneyland has six theme hotels, which would offer nearly 5,200 rooms on opening day; a campground (444 rental trailers and 181 camping sites); and single-family homes on the periphery of the 27-hole golf course. Exhibit 4 provides an overview of the size, and main features of Euro Disneyland. Exhibit 5 compares daily pass and accommoda- tion prices of Euro Disneyland with Disney World Orlando.

Disney World in Florida as part of an ‘American experi- ence,’” said Patrick P. Roper, marketing director of Alton Towers, a successful British theme park near Manchester. He doubted they would seek the suburbs of Paris as eagerly as America and predicted attendance would trail Disney projections. Exhibit 3 summarizes the history and major milestones of Euro Disneyland.

The Layout of Euro Disneyland Euro Disneyland is determinedly American in its theme. There was an alcohol ban in the park despite the attitude among the French that wine with a meal is a God-given right. Designers presented a plan for a Main Street USA based on scenes of America in the 1920s because research indicated that Europeans loved the Prohibition era. Eisner decreed that images of gangsters and speakeasies were too negative. Though made more ornate and Victorian than Walt Disney’s idealized Midwestern small town, Main Street remained Main Street. Steamships leave from Main Street through the Grand Canyon Diorama en route to Frontierland.

The familiar Disney Tomorrowland, with its dated images of the space age, was jettisoned entirely. It was replaced by a gleaming brass and wood complex called Discoverland, which was based on themes of Jules Verne and Leonardo da Vinci. Eisner ordered $8 or $10 million in extras to the “Visionarium” exhibit, a 360-degree movie about French culture that was required by the French in their original contract. French and English are the official languages at the park, and multilingual guides are available to help Dutch, German, Spanish, and Italian visitors.

With the American Wild West being so frequently cap- tured on film, Europeans have their own idea of what life was like back then. Frontierland reinforces those images. A runaway mine train takes guests through the canyons and mines of Gold Rush country. There is a paddle-wheel steamboat reminiscent of Mark Twain, Indian explorer canoes, and a phantom manor from the Gold Rush days.

Exhibit 3 Chronology of the Euro Disneyland Deal 1984–85 Disney negotiates with Spain and France to cre-

ate a European theme park. Chooses France as the site.

1987 Disney signs letter of intent with the French government.

1988 Selects lead commercial bank lenders for the senior portion of the project. Forms the Société en Nom Collectif (SNC). Begins planning for the equity offering of 51% of Euro Disneyland as required in the letter of intent.

1989 European press and stock analysts visit Walt Disney World in Orlando. Begin extensive news and television campaign. Stock starts trading at 20–25 percent premium from the issue price.

Source: Geraldine E. Willigan, “The Value-Adding CFO: An Interview with Disney’s Gary Wilson,” Harvard Business Review, January–February 1990, pp. 85–93.

In-Depth Integrative Case 2.1a Euro Disneyland 269

with the earring’s diameter no more than three-quarters of an inch. Neither men nor women can wear more than one ring on each hand. Further, women were required to wear appropriate undergarments and only transparent panty hose, not black or anything with fancy designs. Though a daily bath was not specified in the rules, the applicant’s video depicted a shower scene and informed applicants that they were expected to show up for work “fresh and clean each day.” Similar rules are in force at Disney’s three other theme parks in the United States and Japan.

In the United States, some labor unions representing Dis- ney employees have occasionally protested the company’s strict appearance code, but with little success. French labor unions began protesting when Disneyland opened its “casting center” and invited applicants to “play the role of [their lives]” and to take a “unique opportunity to marry work and magic.” The CGT handed out leaflets in front of the center to warn applicants of the appearance code, which they believed rep- resented “an attack on individual liberty.” A more mainstream union, the Confédération Française Démocratique du Travail (CFDT), appealed to the Labor Ministry to halt Disney’s vio- lation of “human dignity.” French law prohibits employers from restricting individual and collective liberties unless the restrictions can be justified by the nature of the task to be accomplished and are proportional to that end.

Degelmann, however, said that the company was “well aware of the cultural differences” between the United States and France and as a result had “toned down” the wording in the original American version of the guidebook. He pointed out that many companies, particularly airlines, maintained appearance codes just as strict. “We happened to put ours in writing,” he added. In any case, he said that he knew of no one who had refused to take the job because of the rules and that no more than 5 percent of the people showing up for interviews had decided not to proceed after watching the video, which also detailed transportation and salary.

Fitzpatrick also defended the dress code, although he conceded that Disney might have been a little naive in presenting things so directly. He added, “Only in France is there still a communist party. There is not even one in Russia any more. The ironic thing is that I could fill the park with CGT requests for tickets.”

Another big challenge lay in getting the mostly French “cast members,” as Disney calls its employees, to break their ancient cultural aversions to smiling and being consistently polite to park guests. The individualistic French had to be molded into the squeaky-clean Disney image. Rival theme parks in the area, loosely modeled on the Disney system, had already encountered trouble keep- ing smiles on the faces of the staff, who sometimes took on the demeanor of subway ticket clerks.

The delicate matter of hiring French citizens as opposed to other nationals was examined in the more than two-year- long preagreement negotiations between the French govern-

Disney’s Strict Appearance Code Antoine Guervil stood at his post in front of the l,000- room Cheyenne Hotel at Euro Disneyland, practicing his “Howdy!” When Guervil, a political refugee from Haiti, said the word, it sounded more like “Audi.” Native French speakers have trouble with the aspirated “h” sound in words like “hay” and “Hank” and “howdy.” Guervil had been given the job of wearing a cowboy costume and booming a happy, welcoming howdy to guests as they entered the Cheyenne, styled after a Western movie set.

“Audi,” said Guervil, the strain of linguistic effort showing on his face. This was clearly a struggle. Unless things got better, it was not hard to imagine objections from Renault, the French car company that was one of the corporate sponsors of the park. Picture the rage of a French auto executive arriving with his or her family at the Renault-sponsored Euro Disneyland, only to hear the doorman of a Disney hotel advertising a German car.

Such were the problems Disney faced while hiring some 12,000 people to maintain and populate its Euro Disney- land theme park. A handbook of detailed rules on accept- able clothing, hairstyles, and jewelry, among other things, embroiled the company in a legal and cultural dispute. Crit- ics asked how the brash Americans could be so insensitive to French culture, individualism, and privacy. Disney offi- cials insisted that a ruling that barred them from imposing a squeaky-clean employment standard could threaten the image and long-term success of the park.

“For us, the appearance code has a real effect from a product identification standpoint,” said Thor Degelmann, vice president for human resources for Euro Disneyland. “Without it we wouldn’t be presenting the Disney product that people would be expecting.”

The rules, spelled out in a video presentation and detailed in a guide handbook, went beyond height and weight standards. They required men’s hair to be cut above the collar and ears with no beards or mustaches. Any tat- toos must be covered. Women must keep their hair in one “natural color” with no frosting or streaking, and they may make only limited use of makeup like mascara. False eye- lashes, eyeliners, and eye pencil were completely off lim- its. Fingernails can’t pass the end of the fingers. As for jewelry, women can wear only one earring in each ear,

Exhibit 4 The Euro Disneyland Resort 5,000 acres in size 30 attractions 12,000 employees 6 hotels (with 5,184 rooms) 10 theme restaurants 414 cabins 181 camping sites

Source: Roger Cohen, “Threat of Strikes in Euro Disney Debut,” New York Times, April 10, 1992, p. 20.

270 Part 2 The Role of Culture

below 25,000, less than half the park’s capacity and way below expectations. Many people may have heeded the advice to stay home or, more likely, were deterred by a one-day strike that cut the direct rail link to Euro Disney- land from the center of Paris. Queues for the main rides, such as Pirates of the Caribbean and Big Thunder Moun- tain railroad, were averaging around 15 minutes less than on an ordinary day at Disney World, Florida.

Disney executives put on a brave face, claiming that attendance was better than at first days for other Disney theme parks in Florida, California, and Japan. However, there was no disguising the fact that after spending thou- sands of dollars on the preopening celebrations, Euro Dis- ney would have appreciated some impressively long traffic jams on the auto route.

Other Operating Problems When the French government changed hands in 1986, work ground to a halt, as the negotiator appointed by the Conser- vative government threw out much of the groundwork pre- pared by his Socialist predecessor. The legalistic approach taken by the Americans also bogged down talks, as it meant planning ahead for every conceivable contingency. At the same time, right-wing groups who saw the park as an inva- sion of “chewing-gum jobs” and U.S. pop culture also fought hard for a greater “local cultural context.”

On opening day, English visitors found the French reluctant to play the game of queuing. “The French seem to think that if God had meant them to queue, He wouldn’t have given them elbows,” they commented. Different cul- tures have different definitions of personal space, and Disney guests faced problems of people getting too close or pressing around those who left too much space between themselves and the person in front.

Disney placed its first ads for work bids in English, leaving small- and medium-sized French firms feeling like foreigners in their own land. Eventually, Disney set up a data bank with information on over 20,000 French and European firms looking for work, and the local Chamber of Commerce developed a video text information bank with Disney that small- and medium-sized companies

ment and Disney. The final agreement called for Disney to make a maximum effort to tap into the local labor market. At the same time, it was understood that for Euro Disneyland to work, its staff must mirror the multicountry makeup of its guests. “Casting centers” were set up in Paris, London, Amsterdam, and Frankfurt. “We are concentrating on the local labor market, but we are also looking for workers who are German, English, Italian, Spanish, or other nationalities and who have good communication skills, are outgoing, speak two European languages—French plus one other— and like being around people,” said Degelmann.

Stephane Baudet, a 28-year-old trumpet player from Paris, refused to audition for a job in a Disney brass band when he learned he would have to cut his ponytail. “Some people will turn themselves into a pumpkin to work at Euro Disneyland,” he said. “But not me.”

Opening Day at Euro Disneyland A few days before the grand opening of Euro Disneyland, hundreds of French visitors were invited to a preopening party. They gazed perplexed at what was placed before them. It was a heaping plate of spare ribs. The visitors were at the Buffalo Bill Wild West Show, a cavernous theater featuring a panoply of “Le Far West,” including 20 imported buffaloes. And Disney deliberately didn’t provide silverware. “There was a moment of consternation,” recalls Fitzpatrick. “Then they just kind of said, ‘The hell with it,’ and dug in.” There was one problem. The guests couldn’t master the art of gnawing ribs and applauding at the same time. So Disney planned to provide more napkins and teach visitors to stamp with their feet.

On April 12, 1992, the opening day of Euro Disney- land, France-Soir enthusiastically predicted Disney dementia. “Mickey! It’s Madness” read its front-page headline, warning of chaos on the roads and suggesting that people might have to be turned away. A French gov- ernment survey indicated that half a million might turn up with 90,000 cars trying to get in. French radio warned traffic to avoid the area.

By lunchtime on opening day, the Euro Disneyland car park was less than half full, suggesting an attendance of

Exhibit 5 What Price Mickey? Euro Disneyland Disney World, Orlando

Peak Season Hotel Rates

4-person room $97–$345 $104–$455

Campground Space

$48 $30–$49 One-Day Pass

Children $26 $26

Adults $40 33

Source: BusinessWeek, March 30, 1992.

In-Depth Integrative Case 2.1a Euro Disneyland 271

thought about these and other problems, the previous year’s losses and the prospect of losses again in the cur- rent year, with their negative impact on the company’s stock price, weighed heavily on his mind.

Questions for Review 1. Using Hofstede’s four cultural dimensions as a

point of reference, what are some of the main cul- tural differences between the United States and France?

2. In what way has Trompenaars’s research helped explain cultural differences between the United States and France?

3. In managing its Euro Disneyland operations, what are three mistakes that the company made? Explain.

4. Based on its experience, what are three lessons the company should have learned about how to deal with diversity? Describe each.

Source: This case was prepared by Research Assistant Sonali Krishna under the direc- tion of Professors J. Stewart Black and Hal B. Gregersen as the basis for class discus- sion. It is not intended to illustrate either effective or ineffective managerial capability or administrative responsibility. J. S. Black, and H. B. Gregersen, “EuroDisneyland,” in Cases in International Organizational Behavior, ed. G. Oddou and M. Mendenhall (Malden, MA: Blackwell Publishers, 1998). Copyright © 1998 by J. Stewart Black and Hal B. Gregersen. All rights reserved. Used with permission.

through France and Europe would be able to tap into. “The work will come, but many local companies have got to learn that they don’t simply have the right to a chunk of work without competing,” said a chamber official.

Efforts were made to ensure that sooner, rather than later, European nationals take over the day-to-day running of the park. Although there were only 23 U.S. expatriates among the employees, they controlled the show and held most of the top jobs. Each senior manager had the task of choosing his or her European successor.

Disney was also forced to bail out 40 subcontractors who were working for the Gabot-Eremco construction contracting group, which had been unable to honor all of its commitments. Some of the subcontractors said they faced bankruptcy if they were not paid for their work on Euro Disneyland. A Disney spokesperson said that the payments would be less than $20.3 million and the com- pany had already paid Gabot-Eremco for work on the park. Gabot-Eremco and 15 other main contractors demanded $157 million in additional fees from Disney for work that they said was added to the project after the initial contracts were signed. Disney rejected the claim and sought government intervention. Disney said that under no circumstances would it pay Gabot-Eremco and accused its officers of incompetence. As Bourguignon

A Further Look at Euro Disneyland in Recent Years: As discussed in In-Depth Integrative Case 2.1a, Euro Disneyland faced major hurdles in its early years. In May 1992, roughly 25 percent of Euro Disney’s work- force (approximately 3,000 people) resigned from their jobs citing unacceptable working conditions. As a result, the Euro Disney Company stock price declined and Euro Disney announced an expected net loss in its first year of operation of approximately 300 million French francs in July of 1992.1 Since then, Euro Dis- neyland has enacted some major changes—many with great success. In an effort to improve attendance, Disney began serving alcoholic beverages with meals inside the Euro Disneyland Park in June of 1993.2 In March of 1994, Disney offered the banks a deal: Disney would provide additional capital to ensure that it continues to operate if the banks agreed to restructure the US$1 billion of debt. If the banks did not agree, Disney was prepared to close the park and default on the loans. Disney put additional pressure on the banks by publicly announc- ing the possible closure of the park unless the debt was restructured. The banks agreed to Disney’s demands and wrote off the next two years of interest payments along with a three-year period where loan repayments

would be postponed. In return, The Walt Disney Com- pany agreed to restructure its own loan arrangements at the new park valued at US$210 million.3

A turnaround began to blossom shortly after restruc- turing. In 1995, Disney reported that attendance had increased 21 percent from 8.8 million to 10.7 million year over year with hotel occupancy also increasing from 60 percent to 68.5 percent.4 The Euro Disney Resort was renamed to Disneyland Paris in 1994 and, in July of 1995, the company reported its first quarterly profit of US$35.3 million. Disneyland Paris ended 1995 with a profit of US$22.8 million. Disney opened a sec- ond theme park in France, Walt Disney Studios Park, in March of 2002.5 The two combined parks had a total attendance in 2015 of over 14.8 million, making it Europe’s most visited themed attraction.6

In January 2015, Euro Disney S.C.A. shareholders approved a one billion euro recapitalization plan. Funded by the Walt Disney Company, the plan aims to improve the long-term cash position of Disneyland Paris, putting an end to the reoccurring debt crises that have plagued Euro Disney S.C.A. over its two-decade history. Per the terms of the deal, the existing debt held by Walt Disney Company will be converted to equity, further increasing the American company’s investment in the European operations.7

272 Part 2 The Role of Culture

1. Anna Willard, James Mackenzie, James Grubel, Wayne Cole, Tova Cohen, Alan Raybould, and Jon- athan Thatcher. “FACTBOX: Who’s Next? Coun- tries at Risk of Recession,”  Reuters,  March 3, 2009,  www.reuters.com/article/financial-recession- risk-idUSSP40009620090304.

2. “Euro Disney Adding Alcohol,”  New York Times, June 12, 1993,  www.nytimes.com/1993/06/12/ business/euro-disney-adding-alcohol.html.

3. “The History of DisneyLand Paris,”  Solarius, July 4, 2006.  www.solarius.com/dvp/dlp/dlp-history.htm.

4. Christian Sylt, “Magic Results: Euro Disney Plans New Hotels,” August 17, 2008,  www.independent. co.uk/news/business/news/magic-results-euro-disney- plans-new-hotels-899529.html.

5. Euro Disney S.C.A., “Euro Disney S.C.A. Reports Fiscal Year 2011 Results,” November 9, 2011,  http://corporate.disneylandparis.com/CORP/ EN/Neutral/Images/uk-2011-11-09-euro-disney-sca- reports-annual-results-for-fiscal-year-2011.pdf.

6. “Disneyland Paris Visitor Numbers Down Since Attacks,”  RFI,  February 10, 2016,  http://en.rfi.fr/ france/20160210-disneyland-paris-visitor-numbers- down-attacks.

7. Euro Disney S.C.A.,  First Quarter Announcement, January 16, 2015,  http://disneylandparis-news.com/ wp-content/uploads/2015/01/uk-2015-01-16-cp-Q1- revenues.pdf.

ENDNOTES

273

36,000 jobs. The first phase of the park was to include a 10-million-annual-visitor Disneyland-based theme park; 2,100 hotel rooms; and a 300,000-square-foot retail, dining, and entertainment complex.2

In order to make the park “culturally sensitive,” Jay Rasulo, president of Walt Disney Parks & Resorts, announced that Hong Kong Disneyland would be trilin- gual with English, Cantonese, and Mandarin. The park would also include a fantasy garden for taking pictures with the Disney characters (popular among Asian tour- ists), as well as more covered and rainproof spaces to accommodate the “drizzly” climate.3

Unfortunately, Disney soon realized that its attempts at cultural sensitivity had not gone far enough. For instance, the decision to serve shark fin soup, a local favorite, greatly angered environmentalists. The park ultimately had to remove the dish from its menus. Park executives also failed to plan for the large influx of visitors around the Chinese New Year in early 2006, forcing them to turn away numerous patrons who had valid tickets. Unsurpris- ingly, this led to customer outrage and negative media coverage of the relatively new theme park.

Other criticisms of the park have included its small scale and slow pace of expansion. Hong Kong Disneyland opened with only 16 attractions and “one classic Disney thrill ride, Space Mountain, compared to 52 at Disneyland Resort Paris [formerly Euro Disneyland].”4  However, the government has made plans to increase the size of the park by acquiring land adjacent to the existing facilities. Likely due to its small size and fewer attractions, Hong Kong Disneyland pulled in only 5.2 million guests during its first 12 months, less than the estimated 5.6 million.5 In the years since, additional attractions have been added into the existing park, helping to increase attendance; however, the park is still facing financial pressure. In 2015, the park posted a US$19 million loss.6

Battle over Hong Kong Park Expansion Expanding the size of the theme park in Hong Kong by about a third has always been a part of Disney’s long-term plan. In 2007, Disney began the process of trying to obtain the local government’s financial support for these plans. At that time, however, the park had been performing well below its projected sales number, and the government, which is 57 percent stockholder in this business, expressed serious doubts in the need to fund the further expansion. Hong Kong Disneyland attracted about 15 million visitors

After its success with Tokyo Disneyland in the 1980s, Disney began to realize the vast potential of the Asian market. The theme park industry throughout Asia has been very successful in recent years, with a range of regional and international companies all trying to enter the market. Disney has been one of the major participants, opening Hong Kong Disneyland in 2005 and Shanghai Disney Resort in 2016, and discussing future operations in other Asian cities.

Disney’s Push into China After Disney’s success in Tokyo, China became a serious option for its next theme park venture in light of the coun- try’s impressive population and economic growth through- out the 1990s and 2000s. Successful sales associated with the Disney movie The Lion King, in 1996, also convinced Disney officials that China was a promising location. However, consumer enthusiasm for theme parks in China was at a low in the late 1990s. “Between 1993 and 1998, more than 2,000 theme parks had been opened in China,” and “many projects were swamped by excessive competi- tion, poor market projections, high costs, and relentless interference from local officials,” forcing several hundred to be closed.1 Nevertheless, Disney continued to pursue plans for two parks in China, focusing efforts on both Hong Kong and Shanghai.

Hong Kong Disneyland Plans in Hong Kong, which culminated in the opening of Hong Kong Disneyland in September 2005, began after the 1997–1998 Asian financial crisis. Despite the poor economic condition of Hong Kong in the late 1990s, Dis- ney was still optimistic about prospects for a theme park in the “city of life.” Hong Kong, already an international tourist destination, would draw Disneyland patrons pri- marily from China, Taiwan, and Southeast Asia.

The official park plans were announced in November 1999 as a joint venture between the Walt Disney Company and the Hong Kong SAR Government. Unlike its experi- ence in Tokyo, where Disney handed the reins over com- pletely to a foreign company (the Oriental Land Company), Disney decided to take more direct control over this new park. The park was built on Lantau Island at Penny’s Bay, within the six-mile stretch separating the international airport and downtown. Hong Kong Disneyland was esti- mated to create 18,000 jobs upon opening and ultimately

In-Depth Integrative Case 2.1b

Disney in Asia

274 Part 2 The Role of Culture

credit facility of about US$40 million. Hong Kong, which shouldered much of the $3.5 billion original construction cost, did not add any new capital. “Disney is making a substantial investment in this important project,” Leslie Goodman, a Disney vice president, said in a state- ment.13 Groundbreaking on three new “lands” for the park commenced later that year, with “Toy Story Land” opening in 2011, “Grizzly Gulch” opening in 2012, and “Mystic Point” opening in 2013. The three new lands increased the overall size of Hong Kong Disneyland by 25 percent, and there are now more than 100 attractions within the park.14  If these expansions will be enough to bring profitability to Hong Kong Disneyland remains yet to be seen, as future expansion at the park beyond these three new lands remains uncertain.

Uncertainty in Mainland China Shanghai, known as the “Paris of the Orient,” was an attractive site for a second Chinese park to Disney offi- cials because of its growing commercialization and indus- trialization and its already extant transportation access. A Disney theme park in Shanghai would be mutually ben- eficial for the company and the nation of China. From Disney’s perspective, it would gain access to one of the world’s largest potential markets (and also compete with Universal Studios’ new theme park). From the perspective of Chinese government officials, Disney’s mainland Shanghai park would be a long-awaited mark of interna- tional success for a communist nation.15

Initially planners hoped to have a Disneyland operating in Shanghai prior to the World Expo in 2010. However, a series of delays plagued the Shanghai park’s progress. The Chinese government, fearing that a Shanghai park would damper the success of the newly opened Hong Kong park, intentionally delayed the park’s construction in the mid 2000s.16 Additionally, in the wake of a corrup- tion scandal within the Communist Party in Beijing in 2005, the necessary government approvals for the project stalled to a halt. For a time, it appeared as though the plans for the Shanghai park would not come to fruition, leaving Disney to consider other options for the construc- tion of its new park.17

Disney Gets Green Light for Shanghai Park After a few years, Walt Disney Co. revisited its plans to build a park in Shanghai, China. In January 2009, Disney presented a $3.59 billion proposal to the Chinese central government, outlining plans for a jointly owned park, hotel, and shopping development.18  The timing could not have been better for Disney to seek approval; in the wake of the global economic crisis, the prospective creation of 50,000 new jobs amid a cooling Chinese economy was especially attractive to the Chinese government.19

total in its first three and a half years, or about 4.3 million a year. That figure fell short of the original projection of more than 5 million a year.7  Although Disney did not release financial figures to the public, Euromonitor esti- mated the park had an operating loss of $46 million in its first year, and lost $162 million the following year.8

By 2008, Disney’s officials were publicly stressing the importance of park expansion for the overall viability of the project. At that time, the park occupied 126 hectares and had only four “lands”—Fantasyland, Tomorrowland, Adventureland, and Main Street USA—and two hotels. Hong Kong Disneyland Managing Director Andrew Kam emphasized that expansion would be vital to the park’s success. In a September 2008 release, Kam said the park had plenty of room to grow because it was only using half of the land available: “Expansion is part of the strategy to make this park work for Hong Kong,”9 At the time, an expansion was estimated to cost as much as 3 billion Hong Kong dollars, or US$387 million. In December 2008, the Sing Tao Daily newspaper in Hong Kong reported that Disney, in what was deemed an unusual con- cession, might give the government a greater share in the project in repayment of a cash loan of nearly $800 million that the city had extended previously to the theme park.10

In 2009, unable to come to agreement with the Hong Kong government, Disney put on hold its long-awaited plans to expand the park. In a statement from Disney’s Burbank (Calif.) office, the company said it was laying off employees in Hong Kong after failing to reach an agreement with the Hong Kong government to fund a much-needed expansion. According to Disney, “The uncertainty of the outcome requires us to immediately suspend all creative and design work on the project.” Thirty Hong Kong–based Disney “Imagineers,” who helped to plan and design new parks, would be losing their jobs.11  Business news sources at the time noted that one reason Disney might be willing to end nego- tiations with the Hong Kong government was the com- pany’s progress in negotiations with Shanghai officials to open a theme park there that would be much larger and an arguably more exciting China project. A Shang- hai park would be easier for many Chinese families to visit. However, the possible shift of mainland Chinese visitors away from Hong Kong in favor of Shanghai could mean a drop of as much as 60 percent in visitor numbers to the Hong Kong park, according to Euro- monitor’s estimates.12

In June of 2009 Disney and Hong Kong’s government finally reached a deal to modestly expand the territories of the Disneyland theme park at a cost of about $465 million. Under terms of the deal, the entertainment giant contrib- uted all the necessary new capital for construction as well as sustaining the park’s operation during the building phases. It also converted about $350 million in loans into equity to help with funding, and agreed to keep open a

In-Depth Integrative Case 2.1b Disney in Asia 275

said Christopher Marangi, senior analyst with Gabelli and Co. in New York.27

Disney has implemented unique approaches to ticket pricing at its Shanghai park in an effort to maximize attendance and profit. Unlike other theme parks, where the cost of entry remains the same regardless of the day, Shanghai Disneyland features “demand pricing.” On days that are more crowded, such as weekends and dur- ing the summer, “peak” prices are enacted. Though ticket prices start much lower at the Shanghai park than at the Hong Kong park, the peak pricing structure results in admission price increases of over 25 percent on certain days.28

There are certain public concerns that the new Shanghai park, which is Disney’s sixth, will inevitably affect the Hong Kong park. The main concern is that the Hong Kong park’s revenue may be cannibalized, worsening the financial perspectives of the already- underperforming Hong Kong park.29  However, Disney thinks that both parks will complement each other rather than be competitors. Disney’s main points are that Shanghai is close to a number of other major cities within easy driving distance, including Nanjing, Suzhou, and Hangzhou, and that Shanghai’s own population of around 19 million, combined with tens of millions more within a three-hour driving radius, would provide a more-than-ample base of local users for the park. There are analysts, like Paul Tang, chief economist at Bank of East Asia, who share this optimism, projecting that “visitors from Guangdong and southern China will still find Hong Kong more convenient, while Shanghai will attract visitors from nor ther n and easter n China.”30 Indeed, Disney reported a 36 percent increase in profit at its Hong Kong park in early 2015.31

The critics of the Shanghai park, on the other hand, are convinced that this project is a bigger threat to the Hong Kong park than anybody can imagine. According to Parita Chitakasem, research manager at Euromonitor International in Singapore, who specializes in theme parks, “Disneyland Shanghai will have two big features which will make it more attractive than its Hong Kong counterpart: Although it is still early days, Disneyland in Shanghai will probably offer a much better experience for your money than Disneyland in Hong Kong—Shanghai’s Disneyland is three times bigger than Hong Kong Disney- land. Also, for visitors from mainland China, it will be much easier to travel to Disneyland in Shanghai, as there are no visa/cross border concerns to take care of.”32 Though only one phase of Shanghai Disneyland has opened, its true impact on Hong Kong Disneyland will not be known for several years; stagnant growth in atten- dance at the Hong Kong park validates the concerns that many have expressed; in 2015, a year before Shanghai Disneyland even opened, the Hong Kong park only saw a one percent increase in attendance.33

The preliminary agreement was signed in January 2009. According to the proposal, Disney would take a 43 percent equity stake in Shanghai Disneyland, with 57 percent owned by the Shanghai government, forming a joint-venture company.20  The preliminary agreement out- lined a six-year construction period for the first phase, with the projected opening of the park scheduled for 2014. Disney would pay $300 million to $600 million in capital expenses for the park in exchange for 5 percent of the ticket sales and 10 percent of the concessions.21 According to the preliminary agreement, Shanghai Disneyland, the first park at the resort, would incorporate Chinese cultural features as well as attractions built around traditional Disney characters and themes. Additionally, the ownership structure would contain some aspects of Disney’s Hong Kong joint venture agreement. According to The Wall Street Journal, a newly formed Shanghai company named Shendi would hold the local government’s interest in the park. Shendi is owned by two business entities under dis- trict governments in Shanghai, as well as a third company owned by the municipal government’s propaganda bureau.22 After almost a year of negotiation, in November 2009, Disney finally received an approval from the Chinese government to proceed with its Shanghai park plan.23 

Disney acted quickly to gather all other necessary approvals and documents that were needed for the park construction. In April 2010, the land needed for the park was approved. In 2010, over 2,000 households and nearly 300 companies were relocated to clear the way for the first phase of construction. In an effort to keep the public informed, the head of Pudong New District, where the park is sited, announced that the first phase of the project will span four square kilometers, with the theme park itself covering a square kilometer.24  Con- struction on the first phase, which includes the Shang- hai Disneyland Park and two hotels, broke ground in 2011.25  Despite the initial difficulties that Disney faced throughout the early 2000s in gaining approval for the Shanghai park, the five-year construction phase pro- ceeded relatively smoothly.

As the 2016 opening neared, public excitement for the park grew. More than five million people flooded the park’s official website following its March 2016 launch. Tickets for the park’s opening two weeks sold out months in advance, and, on a single weekend in May, more than 100,000 people traveled to the still-unopened park just to peer through the gates and shop at stores on the perimeter.26  The park officially opened to the public on June 16, 2016.

Analysts see the move as an important step forward for Disney and other Western media firms to make inroads into the vast and untapped Chinese media and entertainment market. “They’ve been laying the ground- work for a park for many years by exposing the popula- tion to Disney properties, film, TV and merchandising,”

276 Part 2 The Role of Culture

be innovative and strategic in order to maintain sales. Existing theme parks in the region have proven that a carefully crafted strategy can lead to increased sales; after a 20 percent drop in attendance in the early 2000s, Uni- versal Studios in Japan was able to rebound to record growth in 2015 by introducing new innovative attractions, including a Harry Potter-themed area within the park and a multiple-month-long Anime event.36

In spite of underperformance of some theme parks, Asia is still viewed by many as the most attractive region for the entertainment industry. Attendance may be stag- nating in some parts of the world, but a growing middle class with disposable incomes to match is making the Asia-Pacific region a prime target for investors and theme park owners. “China will lead the way,” said Kelven Tan, Southeast Asia’s representative for the International Asso- ciation of Amusement Parks and Attractions, an industry group. “The critical mass really came about with the resurgence of China. You need a good source of people; you also need labor and you need cheap land.”37

That’s what the people behind the Universal Studios in Singapore are betting. Developers aim to tap the wallets of Singapore’s 4.6 million residents and 9.7 million tour- ists a year and its proximity to populous areas of Indone- sia and southern Malaysia. Opening in spring of 2010, it became the island nation’s first bona fide amusement park. Outside this and other foreign brands like Legoland, which opened parks in Johor, Malaysia, in 2012 and in Dubai, UAE, in 2016, home-grown companies like Genting in Malaysia and OTC Enterprise Corp. in China are aggressively looking to take advantage of the burgeon- ing market in their backyards.38

Overall spending on entertainment and media in Asia Pacific is set to increase to over US$700 billion by 2019, doubling the amount spent just ten years earlier, according to a 2015 report by McKinsey. By 2019, Asia Pacific will account for over 40 percent of global spending on enter- tainment and media.39 “It’s an up-and-coming market, and growing quite fast,” said Christian Aaen, Hong Kong– based regional director for AECOM Economics, a con- sulting firm that specializes in the entertainment and leisure industries. MGM Studios and Paramount, too, are scouting around Asia for future projects.

In light of these optimistic projections, it is reasonable to assume that Disney may consider expansion to other Asian countries such as Malaysia, South Korea, or Singa- pore, where Disney appeared to have seriously considered a park. Given that the Hong Kong and Shanghai park future expansions are on track, Disney now has the expe- rience and motivation to further penetrate the Asian region. In this regard, Disney has opened English language learn- ing centers across China.40 This could constitute a broader push by Disney to establish a strong Asian presence across its businesses and brands, a move that would undoubtedly involve the theme park operations as a central component.

Other Asian Ventures The Walt Disney Company has also looked into building other theme parks and resorts in Asia. Based on its suc- cessful operation of two theme parks in the United States (at Anaheim and Orlando), Disney believes that it can have more than one park per region. Another strategically located park in Asia, officials agreed, would not compete with Tokyo Disneyland, Hong Kong Disneyland, or Shanghai Disneyland, but rather bring in a new set of customers.

One such strategic location is the state of Johor in Malaysia. Malaysian officials wanted to develop Johor in order to rival its neighbor, Singapore, as a tourist attrac- tion. (Two large casinos were built in Singapore in 2006.) However, Disney claimed to have no existing plans or discussions for building a park in Malaysia. Alannah Goss, a spokeswoman for Disney’s Asian operations based in Hong Kong, said, “We are constantly evaluating strategic markets in the world to grow our park and resort business and the Disney brand. We continue to evaluate markets but at this time, we have no plans to announce regarding a park in Malaysia.”34

Singapore, in its effort to expand its tourism industry, had also expressed interest in being host to the next Dis- neyland theme park. Although rumors of a Singapore Disneyland were quickly dismissed, some reports sug- gested there were exploratory discussions of locations at either Marina East or Seletar. Residents of Singapore expressed concern that the park would not be competitive, even against the smaller-scale Hong Kong Disneyland. Their primary fears included limited attractions (based on size and local regulations), hot weather, and high ticket prices.

Disney’s Future in Asia Although Disney is wise to enter the Asian market with its new theme parks, it still faces many obstacles. One is finding the right location. Lee Hoon, professor of tourism management at Yanyang University in Seoul, noted, “Often, more important than content is whether a venue is located in a metropolis, whether it’s easily accessible by public transportation.” Often tied to issues of location is the additional threat of competition, both from local attractions and from those of other international corpora- tions. It seems that Asian travelers are loyal to their local attractions, evidenced by the success of South Korea’s Everland theme park and Hong Kong’s own Ocean Park (which brought in more visitors than Hong Kong Disney- land in 2006).35  The stiff competition of the theme park industry in Asia will center on not only which park can create a surge of interest in its first year but also which can build a loyal base of repeat customers.

Despite its already large size, the Asian theme park industry is still developing. Disney officials will need to

In-Depth Integrative Case 2.1b Disney in Asia 277

project? What do you think is the likelihood that it will “cannibalize” the Hong Kong park?

4. What location would you recommend for Disney’s next theme park in Asia? Why?

Source: This case was prepared by Courtney Asher under the supervision of Professor Jonathan Doh of Villanova University as the basis for class discussion. Additional research assistance was provided by Benjamin Littell. It is not intended to illustrate either effective or ineffective managerial capability or administrative responsibility.

Questions for Review

1. What cultural challenges are posed by Disney’s expansion into Asia? How are these different from those in Europe?

2. How do cultural variables influence the location choice of theme parks around the world?

3. Why was Disney’s Shanghai theme park so contro- versial? What are the risks and benefits of this

1. Raymond H. Lopez, “Disney in Asia, Again?” March 2002,  http://appserv.pace.edu/emplibrary/ FINAL.Asiacasestudy.doc.

2. Ibid. 3. Thomas Crampton, “Disney’s New Hong Kong Park

to Be ‘Culturally Sensitive’: Mickey Mouse Learns Chinese,”  International Herald Tribune,  January 13, 2003,  www.iht.com/articles/2003/01/13/disney_ ed3__0.php.

4. Michael Schuman, “Disney’s Hong Kong Head- ache,”  Time, May 8, 2006,  www.time.com/time/mag- azine/article/0,9171,501060515-1191881,00.html.

5. Kim Soyoung and George Chen, “Hollywood Chases Asia Theme Park Rainbow,”  Reuters Busi- nessNews,  May 23, 2007,  www.reuters.com/article/ businesspro-hollywood-studios-asia-dc-idUS- SEO35257720070523.

6. Chuan Xu and Nicole Liu, “Hong Kong Disneyland Reports Loss for 2015 as Number of Visitors Drops,”  Los Angeles Times, February 16, 2016,  www.latimes.com/entertainment/envelope/ cotown/la-et-ct-hong-kong-disneyland-loss- 20160216-story.html.

7. “Cuts Cloud Hong Kong Disneyland Expansion,” Financial Times,  March 17, 2009,  https://www.ft. com/content/c59c5a72-12bb-11de-9848- 0000779fd2ac.

8. “Hong Kong Disneyland’s Future Is in Dan- ger,”  BusinessWeek,  March 17, 2009,  http://www. bloomberg.com/news/articles/2009-03-17/hong- kong-disneylands-future-is-in-danger.

9. Ibid. 10. “Disney Puts Hong Kong Expansion on

Hold,”  Reuters,  March 16, 2009,  www.reuters.com/ article/industryNews/idUSTRE52G0I120090317.

11. “Hong Kong Disneyland’s Future Is in Danger.” 12. Ibid. 13. “Disney, Hong Kong Reach $465m Expansion

Deal,”  China Daily,  June 30, 2009,  www.chinadaily. com.cn/china/2009–06/30/content_8338445.htm.

14. Ricky Brigante, “Mystic Point Grand Opening Cel- ebrated at Hong Kong Disneyland with Debut of Groundbreaking Mystic Manor Dark Ride,”  Inside the Magic, May 16, 2013,  www.insidethemagic. net/2013/05/mystic-point-grand-opening-celebrated- at-hong-kong-disneyland-with-debut-of-groundbreak- ing-mystic-manor-dark-ride/.

15. Lopez, “Disney in Asia, Again?” 16. Tammy Tam, “China’s Two Disneylands: Competi-

tors or Complementary Attractions?"  South China Morning Post, January 31, 2016,  www.scmp.com/ news/hong-kong/economy/article/1907607/chinas- two-disneylands-competitors-or-complementary.

17. “Disney’s Shanghai Park Plan in Doubt: Company Mulls Move to Another Location in China,”  NBC- News.com,  December 11, 2006,  www.nbcnews.com/ id/16153207/ns/business-world_business/t/disneys- shanghai-park-plan-doubt/#.WDJZb-YrKUk.

18. J. T. Areddy and P. Sanders, “Disney’s Shanghai Park Plan Advances,”  The  Wall Street Journal,  Jan- uary 12, 2009, p. A1.

19. Ibid. 20. “The Speculation Ends—Shanghai Disney Ready to

Roll,” January 13, 2009,  CN News,  www.china.org. cn/business/news/2009-01/13/content_17101032.htm.

21. “Walt Disney, Shanghai Propose New Theme Park in China (Update 1),”  Bloomberg,  January 9, 2009,  www.bloomberg.com/apps/news?pid=2060108 0&sid=atGa2ymXAMM8&refer=asia.

22. Areddy and Sanders, “Disney’s Shanghai Park Plan Advances.”

23. Samuel Shen and Sue Zeidler, “Disney Takes China Stride as Shanghai Park Gets Nod,” Reuters, November 4, 2009,  www.reuters.com/article/ idUSTRE5A31TC20091104.

24. “Shanghai Disney to Get Approved Land in July,”  China Daily, April 4, 2010,  www.chinadaily. com.cn/china/2010–04/14/content_9730662.htm.

25.   Thomas Smith, “Shanghai Disney Resort Ground- breaking Ceremony Marks Historic Day,”  Disney,

ENDNOTES

278 Part 2 The Role of Culture

33. Sung, “Hong Kong Disneyland Profits Up 36pc Despite Slowdown in Visitor Growth.”

34. “Malaysia Discussing Building Disney Park: Would Be First Such Attraction in Southeast Asia,” Associ- ated Press, May 30, 2006,  www.msnbc.msn.com/ id/13045465/.

35. Soyoung and Chen, “Hollywood Chases Asia Theme Park Rainbow.”

36. “Visitors Hit Record at USJ, Fall at Tokyo Disney Resort,”  Japan Times, October 1, 2015,  www. japantimes.co.jp/news/2015/10/01/business/ corporate-business/visitors-hit-record-usj-fall-tokyo- disney-resort/#.VtIJ8_krLRY.

37. Hana R. Alberts, “Tokyo Disneyland? Asia’s Top 12 Amusement Parks,” February 13, 2010, www.ctvnews.ca/tokyo-disneyland-asia-s-top- 12-amusement-parks-1.483175.

38. Ibid. 39. McKinsey,  Global Media Report 2015  (December

2015). 40. “FAQ,”  Disney English,  http://disneyenglish.

disneycareers.com/en/faq/general/.

April 8, 2011,  https://disneyparks.disney.go.com/ blog/2011/04/shanghai-disney-resort-groundbreak- ing-ceremony-marks-historic-day/.

26. David Barboza and Brooks Barnes, “How China Won the Keys to Disney’s Magic Kingdom,”  New York Times, June 14, 2016,  www.nytimes.com/2016/ 06/15/business/international/china-disney.html.

27. Shen and Zeidler, “Disney Takes China Stride as Shanghai Park Gets Nod.”

28. Mandy Zuo and Nikki Sun, “How Shanghai Dis- neyland’s Tickets Will Cost More (and Less) Than Hong Kong’s,”  South China Morning Post, Febru- ary 3, 2016,  www.scmp.com/news/china/money- wealth/article/1908881/how-shanghai-disneylands- tickets-will-cost-more-and-less.

29. Tam, “China’s Two Disneylands.” 30. Shen and Zeidler, “Disney Takes China Stride as

Shanghai Park Gets Nod.” 31. Timmy Sung, “Hong Kong Disneyland Profits Up

36pc Despite Slowdown in Visitor Growth,”  South China Morning Post, February 10, 2015,  www. scmp.com/news/hong-kong/article/1708237/hong- kong-disneyland-profits-36pc-despite-slowdown-visi- tor-number.

32. Frederik Balfour, “Disney Shanghai: Good for China, Bad for Hong Kong,”  BusinessWeek, November 5, 2009.

279

operations, with 6,300 stores and more than 900,000 asso- ciates in 27 countries outside the continental U.S.5 (See Exhibit 1.) According to international chief C. Douglas McMillon, Walmart is “progressing from being a domes- tic company with an international division to being a global company.” In two decades Walmart International has become a $100 billion business. If it were a stand- alone company, it would rank among the top five global retailers.6 (See Exhibit 2.) Walmart International’s

Introduction In 1991, Walmart became an international company when it opened a Sam’s Club near Mexico City. Just two years later, Walmart International was created. Since venturing into Mexico in 1991, Walmart International has grown somewhat erratically. During the 1990s, the retailer exported its big-box, low-price model, an approach the company expected to be as successful in foreign markets as it was in the United States. Although Walmart has had success in several overseas markets, this success has been far from universal. For example, in Mexico, China, and the U.K., the company’s efforts to offer the lowest price to customers backfired because of resistance from established retailers. And in Germany, Walmart could not seem to fit its model to local tastes and preferences. In Japan, its joint venture had a series of setbacks, many related to buying habits for which the Walmart model did not respond well. In Mexico, three of the largest domestic retailers con- structed a joint buying and operational alliance solely to compete with Walmart.1 Its presence in Hong Kong ended after only two years during the 1990s, and it shuttered operations in Indonesia in the mid-1990s after rioting inci- dents in Jakarta. Walmart also owned approximately 16 stores in South Korea and 85 in Germany; however, it sold off these operations in 2006 after merchandise failed to match consumer tastes, distribution and re-bagging prob- lems arose, and strong loyalties to other brands made attracting customers difficult and expensive.2

In addition, labor advocates and environmentalists have created headaches for the U.S. behemoth, making contin- ued expansion both cumbersome and expensive. For instance, in 2006, Walmart faced a strong public relations campaign from the All-China Federation of Trade Unions (ACFTU) over Walmart’s refusal to let its workers in China unionize. Walmart was eventually forced to con- cede, perhaps because the Chinese government also lent its weight to the ACFTU’s campaign in its effort to estab- lish unions in all foreign-funded enterprises throughout the country.3 Despite its public battle with the ACFTU, Walmart China received the Howard Award for “Most Respectable Foreign Enterprise in China” in 2014.4 As Walmart continues to expand its global operations, ana- lysts are curious to see how the company is received and whether consumers’ opinions in fragmented market set- tings are a match with Walmart’s low-price model.

Notwithstanding these challenges, today Walmart International is a fast-growing part of Walmart’s overall

In-Depth Integrative Case 2.2

Walmart’s Global Strategies

Exhibit 1 Walmart International Operations, June 2015 Retail Units Market (June 2015) Date of Entry

Mexico 2,360 November 1991 Canada     400 November 1994 Brazil 499 May 1995 Argentina 108 August 1995 China 433 August 1996 United Kingdom 621 July 1999 Japan 346 March 2002 Costa Rica 225 September 2005 El Salvador 91 September 2005 Guatemala 223 September 2005 Honduras 82 September 2005 Nicaragua 88 September 2005 Chile 399 January 2009 India 21 May 2009

Source: “Where in the World Is Walmart?”  Walmart,  http://corporate.walmart.com/our- story/our-locations  (last visited March 3, 2016).

Exhibit 2 The Largest Global Retailers, 2014 Walmart $476bn

$105bn Costco

$99bn Carrefour

$99bn

$99bn

Lidl

Tesco

$98bn Kroger

$86bn Metro Ag

$81bn Aldi

$79bn Home Depot

$73bn Target

Source: Original graphic created based on information from Deloitte (www2.deloitte. com/an/en/pages/about-deloitte/articles/consumerbusiness.html).

280 Part 2 The Role of Culture

Walmart Early Internationalization In venturing beyond its large domestic market, Walmart had a number of regional options, including entering Europe, Asia, or other countries in the Western hemi- sphere. (See Exhibits 3 and 4.) At the time, however, Walmart lacked the requisite financial, organizational, and managerial resources to pursue multiple countries simul- taneously. Instead, it opted for a logically sequenced approach to market entry that would allow it to apply the learning gained from its initial entries to subsequent ones. In the end, during the first five years of its globalization (1991 to 1995), Walmart decided to concentrate heavily on establishing a presence in the Americas: Mexico, Brazil, Argentina, and Canada. Obviously, Canada had the business environment closest to the U.S. and appeared to be the easiest entry destination. The other countries that Walmart chose as its first global points of entry—

business represents a solid chunk of Walmart’s overall $482 billion in revenue for the fiscal year 2015.7

With a market capitalization of more than $200 billion in 2016, Walmart is worth as much as the gross domestic product of Algeria. Four of America’s 10 richest indi- viduals are from Walmart’s low-profile Walton family, which still owns a 40 percent controlling stake. The com- pany’s portfolio ranges from superstores in the U.S. to neighborhood markets in Brazil, bodegas in Mexico, the ASDA supermarket chain in Britain, Japan’s nationwide network of Seiyu shops, and a controlling stake in South African retailer Massmart. Walmart sources many of its products from low-cost Chinese suppliers. The pressure group China Labour Watch estimates that if it were a country, Walmart would rank as China’s seventh largest trading partner, just ahead of the U.K., spending more than $18 billion annually on Chinese goods.8

Exhibit 3 Walmart International Retail Unit Count (2001–2006) Country 2001 2002 2003 2004 2005 2006

Argentina 11 11 11 11 11 11 Brazil 20 22 22 25 149 295 Canada 174 196 213 235 262 278 China 11 19 26 34 43 56 Germany 94 95 94 92 91 88 Japan 0 0 0 0 0 398 Mexico 499 551 597 623 679 774 Puerto Rico 15 17 52 53 54 54 UK 241 250 258 267 282 315 South Korea 6 9 15 15 16 16

Total 1,071 1,170 1,288 1,355 1,587 2,285

Source: Walmart Annual Reports for fiscal years 2001, 2002, 2003, 2004, 2005, 2006.

Exhibit 4 Walmart International Retail Unit Count (2006–2015) Country 2007 2008 2009 2010 2011 2012 2013 2014 2015

Argentina 13 21 28 43 63 88 94 104 105 Brazil 299 313 345 434 479 512 558 556 557 Canada 289 305 318 317 325 333 379 389 394 Chile 0 0 197 252 279 316 329 380 404 China 73 202 243 279 328 370 393 405 411 Costa Rica 137 149 164 170 180 200 205 214 217 El Salvador 63 70 77 77 78 79 80 83 89 Guatemala 132 145 160 164 175 200 206 209 217 Honduras 41 47 50 53 56 70 72 75 81 India 0 0 0 1 5 15 20 20 20 Japan 392 394 371 371 414 419 438 438 431 Mexico 889 1,023 1,197 1,469 1,730 2,088 2,353 2,199 2,290 Nicaragua 40 46 51 55 60 73 79 80 86 Puerto Rico 54 54 56 56 55 56 55 56 55 UK 335 352 358 371 385 541 565 576 592 Total 2,757 3,121 3,615 4,112 4,612 5,360 5,826 5,784 5,949

Source: Walmart Annual Reports for fiscal years 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014, 2015.

In-Depth Integrative Case 2.2 Walmart’s Global Strategies 281

business in over 145 cities throughout Mexico. Opening nearly 100 stores in 2015, Wal-Mex has shown no signs of slowing down. As of 2016, it operated over 2,200 stores in Mexico.14

The rapid growth of Wal-Mex over the last decade has not been problem-free. A 2012 report by the New York Times uncovered widespread bribery occurring at the Wal-Mex executive level, resulting in a three-year-long corruption investigation by the U.S. Justice Department. According to the New York Times report, a senior Walmart lawyer was contacted by a former executive at Walmart de Mexico in September 2005. In the e-mail and follow- up conversations, the former executive (later identified as the lawyer in charge of obtaining construction permits for Walmart de Mexico) indicated that Walmart de Mexico had paid bribes for permits throughout the country to fuel growth prospects. In response, Walmart dispatched inves- tigators to Mexico City. Those investigators found over- whelming evidence of bribery and hundreds of suspect payments totaling more than US$24 million. The investi- gation also found that Walmart de Mexico’s top execu- tives had taken steps to conceal the evidence from Walmart’s headquarters.15  Shortly after the investigation commenced, Walmart warned shareholders that its reputa- tion could be affected by the bribery scandal. Shares dropped by 5 percent in April 2015, representing approx- imately US$10 billion in value. Walmart noted that inqui- ries from media and law enforcement could affect the “perception among certain audiences of its role as a cor- porate citizen.”16  Between 2012 and 2015, roughly two dozen representatives from the U.S. Justice Department, FBI, SEC, and IRS became involved in the investigation.17  In the wake of the investigation and bribery charges, Walmart has created a new executive position to ensure that all Walmart employees are complying with the U.S. Foreign Corrupt Practices Act.18 

In late 2006 the company was also approved by Mexico’s Finance Ministry to open its own bank. In a country where 75 percent of citizens have never had a bank account due to high fees, “Banco Walmart de Mexico Adelante” added much-needed competition to the finan- cial services industry and offered consumers lower fees than traditional banks.19 In November 2007, Wal-Mex opened its first consumer bank, Banco Walmart, in Toluca; by December 2014, the company had opened branches in 2,100 stores. Banco Walmart especially targeted the low- income market in a country where just 24 percent of households have savings accounts, compared with 55 per- cent in Chile. In the short term, this strategy included luring newcomers with easy instructions and entry points, like minimum balances of less than $5 and no commis- sions, compared with $100 minimums at competing banks. Long term, Wal-Mex’s plans included boosting sales via debit cards and easing users into more profitable services like insurance. In 2014 alone, credit card sales

Mexico (1991), Brazil (1994), and Argentina (1995)—were those with the three largest populations in Latin America.9

The European market had certain characteristics that made it less attractive to Walmart as a first point of entry. The European retail industry was mature, implying that a new entrant would have to take market share away from an existing player—a very difficult task. Additionally, there were well-entrenched competitors on the scene (e.g., Carrefour in France and Metro A.G. in Germany) that would likely retaliate vigorously against any new player. Further, as with most newcomers, Walmart’s relatively small size and lack of strong local customer relationships would be severe handicaps in the European arena. In addi- tion, the higher growth rates of Latin American and Asian markets would have made a delayed entry into those mar- kets extremely costly in terms of lost opportunities. In contrast, the opportunity costs of delaying acquisition- based entries into European markets appeared to be rela- tively small.10

While the Asian markets had huge potential when Walmart launched its globalization effort in 1991, they were the most distant geographically and different cultur- ally and logistically from the U.S. market. It would have taken considerable financial and managerial resources to establish a presence in Asia.11 However, by 1996, Walmart felt ready to take on the Asian challenge and it targeted China. This choice made sense in that the lower purchas- ing power of the Chinese consumer offered huge potential to a low-price retailer like Walmart. Still, China’s cultural, linguistic, and geographical distance from the United States presented relatively high entry barriers, so Walmart decided to use two beachheads as learning vehicles for establishing an Asian presence.12

During 1992–93, Walmart agreed to sell low-priced products to two Japanese retailers, Ito-Yokado and Yao- han, that would market these products in Japan, Singa- pore, Hong Kong, Malaysia, Thailand, Indonesia, and the Philippines. Then, in 1994, Walmart entered Hong Kong through a joint venture with the C.P. Pokphand Company, a Thailand-based conglomerate, to open three Value Club membership discount stores in Hong Kong.13

Success in Mexico and China Overall, Walmart has had a very successful experience in Mexico. In 1991 Walmart entered into a joint venture with retail conglomerate Cifra and opened a Sam’s Club in Mexico City. In 1997 it gained a majority position in the company and in 2001 changed the store name to Walmart de Mexico, or, more commonly, “Wal-Mex.” In addition to its 256 Walmart Supercenters and 161 Sam’s Club warehouses, Wal-Mex also operates Bodega food and gen- eral merchandise discount stores, Superama supermarkets, and Suburbia apparel stores. The majority of its stores are located in and around Mexico City; however, it does

282 Part 2 The Role of Culture

high-quality general merchandise and food. Germany was seen as the largest single base for retailing in Europe. Wertkauf’s annual sales were about $1.4 billion, and its stores operated similar to the popular Walmart Super- center format in the U.S. Walmart’s executives considered Wertkauf as an “excellent fit” for Walmart and hoped that it would provide the company with an ideal entry into a new market.30

However, Walmart’s operations in Germany quickly turned into a costly struggle. There were a number of critical factors that the company underestimated when it entered the new market. First of all, the stores of the acquired German retail chain were geographically dis- persed and often in poor locations. Also, Walmart had faced some serious cultural differences, which it tried to resolve by making one error after another. For example, the company initially installed American managers, who made some well-intentioned cultural gaffes, like offering to bag groceries for customers (Germans prefer to bag their own groceries) or instructing clerks to smile at cus- tomers (Germans, used to brusque service, were put off).31

Other problems, however, were largely outside Walmart’s control. Two German discounters, Aldi and Lidl, dominated the grocery business, with smaller shops that featured cut-rate, though still good-quality, food. Aldi also heavily promoted one-week sales, featuring deeply discounted merchandise, ranging from wine to garden hoses, that draw customers back. While Walmart’s vast size gave it enormous leverage in purchasing clothing and other goods, it had to buy much of the food for its German stores locally. And there, it lacked the muscle of Aldi, which had 4,100 shops and a presence in nearly every town in the country.32

“Germany is the home of the discounter,” said Mark Josefson, a retail analyst at Kepler Securities in Frankfurt. “Walmart is not competing on price, and that is one of its main attributes in its home market.” Beyond these com- petitive pressures, there was another serious factor to con- sider, namely that the German consumer was one of the most parsimonious and price-conscious in Europe. Profit margins in German retailing were the lowest in Europe.33

Walmart struggled in Germany for almost 8 years. Analysts said that Walmart Germany was losing about €200 million (£137 million) a year on a turnover of about €2 billion, despite several attempts to turn around the business. In 2006 it finally made the decision to withdraw from the German market, by selling its 85 German stores to the rival supermarket chain Metro and taking a pre-tax loss of about $1 billion (£536 million) on the failed ven- ture.34  The decision to sell out to the Metro Group came two months after Walmart sold its 16 stores in South Korea and it appeared a rare retreat by the world’s largest retailer from its breakneck global expansion.35

In contrast, Walmart’s second retail destination in Europe, the United Kingdom, has brought the company

grew by 50 percent, with over a half of a million active credit card users in total. Later that year, Wal-Mex cashed in on the successes of Banco Walmart by selling the busi- ness to Inbursa for US$250 million.20,21

Wal-Mex’s plans for future growth involve more heav- ily targeting the 16–24-year-old age group, which consti- tutes 55 percent of Mexico’s population. In 2016, Mexico ranked as Walmart’s number one international destination with over 2,300 retail outlets, far ahead of its second major international destination, the United Kingdom, which had only 600 stores.22 In 2014, Walmart de Mexico was a top performer globally with a gross margin of 22 percent and 9.7 percent growth in operating income over the previous year.23

Though not as easy as its experience in Mexico, Walmart has also found decent success in China. Walmart entered the Chinese market in 1996 when it opened a Supercenter and Sam’s Club in Shenzen. As of 2016 the company had expanded to 433 stores with over 100,000 employees. In order to cater to its Chinese shoppers, Walmart has introduced “retail-tainment” and attempted to create a more hands-on shopping experience.24 China’s Tourism Bureau even named one underground Walmart store a tourist destination.25

In addition to its own stores, Walmart has had a stake in the Taiwanese Bounteous Company Ltd., which owned the popular chain of Trust-Mart stores.26 In late 2006, The Wall Street Journal publicized a $1 billion deal between Walmart and Bounteous, in which Walmart would acquire Trust-Mart’s 100 stores over the course of three years. In light of Walmart’s slowing U.S. sales and the termination of its operations in Germany and South Korea, the com- pany’s expansion in China is quite timely. Like its opera- tions in Mexico, Walmart has also entered the Chinese financial service industry, by introducing a credit card with Bank of Communications Ltd.27

Walmart’s expansion has not gone unnoticed. Domestic Chinese rivals have also built up their businesses in order to compete. Shanghai Bailan Group purchased four rival supermarkets and department stores nearly a decade ago, now employing over 200,000 and operating over 6,000 stores.28 China Resources Enterprise has hired away man- agers from foreign chains and cut staff in order to increase its profitability.29  While these efforts signal greater com- petition for Walmart in particular, they are necessary for domestic companies to survive in China’s $4 trillion retail market, which has been increasingly competitive ever since the country joined the WTO and dropped restrictions on foreign retailers.

Mixed Results in Europe and Japan In 1998 Walmart entered the European market through Germany by acquiring 21 Wertkauf hypermarkets, one- stop shopping centers that offered a broad assortment of

In-Depth Integrative Case 2.2 Walmart’s Global Strategies 283

the store. Taking a page from Britain’s ASDA, Seiyu instead used its marketing dollars to compare prices against competitors. With the pressure of prolonged reces- sion, Japanese consumers have finally accepted that they can buy quality merchandise for a lower price.41  After spending 100 billion yen (roughly $1.2 billion), Walmart’s situation in Japan had stabilized by 2010, with two years of consistent profits.42 As of 2016, Walmart holds at about 440 Seiyu stores across Japan.

Refocusing on Latin America The year 2005 became another turning point in Walmart’s strategy. Somewhat frustrated by strategic failure in Ger- many, and very slow expansion in the developed countries like Canada and the U.K., the company has turned its focus toward Latin America. Walmart has decided to leverage its positive experience in Mexico toward other South American countries. In 2005 Walmart successfully entered this market with the purchase of a 33-1/3 percent interest in Central American Retail Holding Company (CARHCO) from the Dutch retailer Royal Ahold NV. CARHCO is Central America’s largest retailer, with 363 supermarkets and other stores in the following five countries: Guatemala (120), El Salvador (57), Honduras (32), Nicaragua (30), and Costa Rica (124). CARHCO has approximately 23,000 associates. Its sales during 2004 were approximately $2.0 billion.43

Prior to that, in March 2004, Walmart bought a 118-store supermarket chain, Bompreco, in northeastern Brazil for $300 million, also from Royal Ahold of the Netherlands. This acquisition has significantly increased Walmart’s competitive position in the country. In 2006 the company made another successful deal with Portugal- based Sonae by purchasing its 140 Brazilian stores for $757 million. The Sonae purchase was expected to boost Walmart’s presence in Brazil’s wealthier southern states. With the Sonae acquisition, the Walmart store count increased to 295 units in 17 of Brazil’s 26 states. How- ever, this move made Walmart only the third-largest retailer in Brazil, following Carrefour of France and Com- panhia Brasileira de Distribuio Po de Acar.44

Brazilian operations, however, have struggled in recent years. Frustrated by lackluster operating profit margins, Walmart invested US$22 billion between 2010 and 2015 in capital improvements to spur sales in Brazil. Between 2007 and 2013, the number of Walmart locations across Brazil doubled. Despite the investment, sales growth con- tinued to stall. By 2013, Walmart had posted its fifth con- secutive operating loss in Brazil. In December 2015, Walmart strategically closed 60 stores across Brazil, rep- resenting 10 percent of its operations.45

Another step in the sequence of its strategic moves in Latin America was Walmart’s expansion into Chile. In 2009 Walmart acquired a majority stake of D&S’s (short

much-needed success. Walmart entered the U.K. market in June 1999 by acquiring ASDA Group PLC, Britain’s third-largest food retailer. Walmart offered £6.7 billion ($10.8 billion). The cash deal, which topped a rival bid from the British retail group Kingfisher PLC, was pre- dicted to double Walmart’s international business at a stroke and put it in a position to expand its retailing exper- tise throughout Europe.36

Walmart executives said they hoped to draw upon ASDA’s management talent and experience. ASDA’s stores are a little less than half the size of Walmart’s supercenters of more than 200,000 square feet (18,000 square meters) in the United States, but the lack of space in much of Europe for new out-of-town shopping develop- ments could make ASDA’s formula more relevant as a platform for expansion.37

However, while the chain has been only a moderate success, delivering consistent results, Walmart has been frustrated in its efforts to expand, though competing in Britain’s feverishly competitive supermarket industry has taught Walmart a good deal. Nevertheless, ASDA is now something of a center for excellence for its global grocery sales. The head of global marketing for Walmart is based at ASDA’s head office in Leeds. And, in an example of Walmart’s global distribution muscle, The Wall Street Journal recently reported that the best-selling wine in the whole of Japan is an own-label ASDA Bordeaux.38

The third major strategic step in Walmart’s early 2000s global expansion was entering the Japanese market. In 2002 Walmart set foot in Japan with the purchase of a 6 percent stake in the 371-store Seiyu chain. Despite con- tinued losses, Walmart gradually raised its stake, making Seiyu a wholly owned subsidiary in June 2008. Walmart has had to confront numerous issues in Japan, from long- time Seiyu managers resisting its initiatives to a tendency among Japanese shoppers to equate low prices with infe- rior products. Also, bulk deals did not play well in a coun- try where many lived in small urban apartments, and the country’s grocery distribution system was populated with wholesalers who brokered deals between suppliers and retailers, skimming profits. Even rival Carrefour aban- doned this market.39

Edward J. Kolodzieski was the man in charge of turn- ing Seiyu around. As CEO of Walmart Japan, Kolodzieski has slashed expenses, closed 20 stores, and cut 29 percent of corporate staff. In-store butchers were removed, with most meat now processed in a central facility. With the freed-up floor space, Seiyu bulked up meals-to-go offer- ings. To bypass the middlemen, Seiyu has also boosted the number of products it imports directly from manufac- turers by 25 percent in 2009, and also focused on increas- ing sales of its own private-label brands.40

The biggest change, however, was a shift away from weekly specials to “everyday low prices” in areas like baby care and pet products, and, eventually, throughout

284 Part 2 The Role of Culture

115 new stores, creating 30,000 new jobs. The new stores will increase Walmart China’s total store count to 530. Additionally, Walmart will invest US$60 million to remodel and refresh a portion of the existing Chinese stores that it operates.51

Rather than being the “largest” retailer in China, Walmart is aiming to be the most trusted. This long-term goal includes improving the perceived quality of the goods it sells. Though online retailer Alibaba still holds a dominant lead in online market share, part of Walmart’s strategy includes embracing online sales. In 2012, the company acquired Yihaodian, an online retailer that sells perishable goods, and in 2015, Walmart released a cell phone app to provide consumers with the ability to order products for either home or in-store delivery.52   

India The other attractive growing market from the BRIC group that also drew Walmart’s attention is India. India is widely regarded as one of the world’s fastest-growing retail mar- kets—and one of the most frustrating for foreign retailers. Despite the liberalization of the Indian economy, foreign companies are still prohibited from owning a majority stake in grocery stores. Due to the legal and logistical difficulties of entering the Indian marketplace, Walmart has adopted a strategy of partnering with local companies. Walmart originally joined with the Bharti Group, an Indian conglomerate, to form a joint venture intended to open stores under the Best Price Modern Wholesale brand name. During their five-year partnership, Walmart and the Bharti Group opened 20 stores in urban centers across India. Though the partnership was amicably dissolved in 2013, Walmart remains open to using the joint-venture approach as it expands across the country.53

In the summer of 2015, Walmart announced aggressive expansion plans with a renewed focus on wholesaling stores as opposed to traditional retail. While government restrictions prevent majority ownership of grocery stores by foreigners, there are no restrictions over wholesalers. By 2020, Walmart plans to open 50 new stores, more than tripling its current number. These new stores, acting as a one-stop shop for a variety of grocery-type items, are tar- geting small business owners as customers, rather than everyday consumers. In total, Walmart will invest between US$240 and US$300 million in the Indian market, creat- ing 2,000 permanent jobs.54,55,56

Canada Established in 1994 and headquartered in Mississauga, Ontario, Walmart Canada currently operates 394 stores and serves more than 1 million customers each day across Canada. Walmart is Canada’s third-largest employer with more than 90,000 associates and was recently named one of Canada’s top ten corporate cultures by Waterstone Human Capital.57

for Distribución y Servicio) 224-store chain for $1.6 bil- lion. In acquiring D&S, the nation’s leading grocer and third-largest retailer, Walmart hopes to cement its domi- nance in Latin America, where it is by far the biggest retailer with $38 billion in sales, estimates research firm Planet Retail, double that of its closest rival, Carrefour. In Chile, Walmart enters a market that has long been inhos- pitable to foreign retailers. Home Depot, Carrefour, and JCPenney are among the companies that have tried, and failed, to make it in Chile, a nation of 17 million with the sixth-largest retail market in Latin America.46

Walmart has increased D&S’s expansion budget from $150 million to $250 million, which would go toward opening nearly 70 stores in fiscal year 2010, many of them small stores that cater to lower-income shoppers, according to Vicente Trius, Walmart Latin America’s president and CEO. The appeal of D&S goes well beyond its stores. About 1.7 million Chileans carry a Presto card issued by its financial services unit, up from 1.2 million in 2004. “There is a saying here that large retailers gener- ate sales with [stores] and earnings with their credit cards,” says Rodrigo Rivera, a partner with the Boston Consulting Group in Santiago.47

Indeed, analysts estimate some South American retail chains generate upwards of 70 percent of their profits from financial services. (At D&S that figure is just 17 percent.) Walmart already offers financial services in Mexico and Brazil, though its attempts to launch a bank in the U.S. have failed. The retailer is keen to grow the Presto business by adding more low-risk services such as selling life insurance for outside vendors.48

Walmart’s Plans for 2016 Forward After several years of rapid international growth, Walmart presented revised plans in 2016 aimed at retooling its existing stores while continuing global expansion. Inter- nationally, the company plans to refocus on neighborhood stores and supercenters, which will better meet market demands. Throughout 2016, Walmart identified and closed 115 significantly underperforming international locations, impacting roughly 6,000 employees. More than half of the store closures occurred in Brazil, with the remainder spread across South America.49

Despite the strategic closings, more than 200 new international locations, consisting of supercenters and local neighborhood stores, were opened internationally in 2016. This results in the largest, fastest international expansion in Walmart’s history. In particular, the Indian, Chinese, Canadian, and African markets are key to Walmart’s future international strategy.50

China In 2015, Walmart announced ambitious growth plans for China. By the end of 2017, the company hoped to open

In-Depth Integrative Case 2.2 Walmart’s Global Strategies 285

improve the user interface. Unlike Amazon, which has no physical stores, Walmart sees digital ordering with in- store pickup as a unique niche with potentially high growth. Grocery items, with the need to be refrigerated, are not able to be easily fulfilled by other online retailers, like Amazon, but are well-suited for in-store pickup at a Walmart. Using the Walmart app, customers can order groceries and other fresh food items and quickly pick up their merchandise in person.

Walmart is also developing and modernizing its deliv- ery and fulfillment systems. To a large degree, this means emulating Amazon’s strategy. To compete with Amazon’s “Prime” shipping services, Walmart has begun offering “Shipping Pass,” which provides users with unlimited three-day shipping on all online orders. Amazon Prime has led to increased consumer loyalty, a benefit Walmart also hopes to gain. To modernize its delivery services and increase its ability to ship to all locations around the world, Amazon is currently developing drone delivery services. In 2015, Walmart also announced its intent to utilize drones in the near future.

Building an extensive online infrastructure has the sec- ondary benefit of increasing the variety of digital products that companies like Amazon and Walmart can offer. Spe- cifically, companies with a massive networking infrastruc- ture can provide customers with online services, like cloud storage, using the servers that they already have purchased. Amazon first took advantage of this by offer- ing free storage space to Prime members and to other customers for a monthly fee. Walmart has followed by introducing OpenOps, an open-source cloud service.

Despite the progress, Walmart’s online sales still lag far behind Amazon’s. While Walmart’s product line con- sists of nearly a million items, Amazon boasts over 19 million. In 2015, despite the introduction of its “Walmart Pay” mobile wallet and millions in investment, Walmart’s online sales grew only 12 percent. During the same period, Amazon’s sales grew by 20 percent, further increasing its already overwhelming lead in global online sales. By the end of the year, Walmart recorded US$13.7 billion in online sales while Amazon recorded a record US$107 billion, leading some to question if Walmart could ever pose as a serious e-commerce challenger.64,65

Continued Challenges with Corporate Responsibility Like other retailers, Walmart continues to face challenges from its exposure to the realities of production and sales in emerging and developing regions. On the sales side, as noted above, Walmart has been embroiled in corruption scandals in Mexico and India. On the production side, a fire at a Bangalore textile factory in late 2012 and two horrific accidents at garment factories in Bangladesh in 2013 have placed renewed pressure on U.S. and European

In January 2015, Walmart Canada announced that the company will invest several hundred million dollars in capital improvements over the following year. Plans included opening 30 new supercenters by the end of the fiscal year, adding 230,000 square feet of additional retail space. In total, about 1,000 new permanent in-store jobs will be created by the new stores, as well as 3,700 con- struction jobs.58

In addition to store expansions, Walmart Canada is investing tens of millions of dollars into its distribution network and e-commerce projects. Walmart Canada’s website currently receives 400,000 customers every day and boasts 150,000 different items for sale. Online order- ing, with in-store pickup, constitutes a portion of this cur- rent e-commerce investment. Walmart’s focus on improving its distribution centers is aimed at increasing the company’s market share in the fresh food and grocery sector. Approximately 300 permanent jobs will be added to the distribution side of the business with these invest- ments.59

Walmart Canada has leveraged the failure of other for- eign retailers within Canada to its advantage. In 2015, Target announced that it would be withdrawing from the Canadian market, leaving a network of 133 empty big-box retail spaces in its wake. In mid-2015, Walmart Canada agreed to purchase 13 former Target locations, as well as a distribution center.60

South Africa Walmart first emerged in South Africa through its US$2.4 billion purchase of 51 percent of Massmart, the country’s third-largest retailer, in 2010. Since then, Walmart has been slow to expand. A lack of infrastructure has caused headaches; at the current time, distribution networks across the country are inconsistent, increasing the amount of time that it takes products to reach consumers. Addi- tionally, there are not enough shopping centers and malls to accommodate stores as large as Massmart. In response, Walmart is moving toward building standalone stores. In 2015, Walmart constructed 19 new ground-up stores.61  Walmart also views South Africa as a bridge to the rapidly emerging African marketplace. In 2015, Walmart announced plans to enter Nigeria, and the Massmart brand has plans to open a few stores in strategic locations in Angola.62,63   

Walmart’s Global.com Challenge to Amazon.com Sensing the shift towards digital sales in both developed and developing economies, Walmart has heavily invested in building its e-commerce infrastructure. The company spent tens of billions in 2015 alone.

With more commerce being conducted on smart- phones, Walmart introduced a new mobile app in 2015 to

286 Part 2 The Role of Culture

lessons did Walmart learn from its experience in Germany and in Japan?

3. How would you characterize Walmart’s Latin America strategy? What countries were targeted as part of this strategy? What potential does this region bring to Walmart’s future global expansion? What cultural challenges and opportunities has Walmart faced in Latin America?

4. What group of countries will be targeted for Walmart’s future growth? What are the attractive- ness and risk profiles of these countries? What regions of the world do you think will be vital for Walmart’s future global expansion?

5. How would you characterize Walmart’s response to pressure for greater ethics and social responsibilities in its expansion strategy and supply chain? Are its responses appropriate and adequate?

Exercise You are part of Walmart’s global strategic planning group and have been asked to explore the benefits and chal- lenges of expansion into the following regions. Divide your group into six teams, each representing a country or region of the world other than North America.

Team Country/Region

1 Latin America 2 Western Europe 3 Central/Eastern Europe 4 Japan 5 China 6 Russia

Describe the opportunities and challenges of expansion in your assigned country or region. Be sure to summarize the cultural environment, how it differs from the U.S., and what challenges that might pose for the company.

Source: This case was prepared by Tetyana Azarova of Villanova University under the supervision of Professor Jonathan Doh as the basis for class discussion. Additional research assistance was provided by Ben Littell. It is not intended to illustrate either effective or ineffective managerial capability or administrative responsibility.

clothing brands to take greater responsibility for the work- ing conditions of the factories from which they source products. What happened in Bangladesh has underscored the difficulties and vulnerabilities of outsourcing produc- tion to sometimes unreliable and unethical suppliers.

In early 2013, more than 1,000 workers were killed when an eight-story garment factory in Dhaka caught fire while thousands worked inside. Not two weeks later, a fire killed eight workers in another site in Bangladesh. After initially denying it had production at these locations, Walmart eventually confirmed that it had ordered gar- ments from a supplier who utilized the plant.66  Then, on June 11, another fire erupted at a Dickies garment factory on the outskirts of Dhaka, causing employees to run from the building, raising further questions about safety in Bangladeshi factories.67

As a result, Walmart and the Gap Inc. subsequently announced their signing of the Bangladesh Worker Safety Initiative to ensure factory safety in Bangladesh. This agreement, backed by a $50 million commitment, will be overseen by the Bipartisan Policy Center, a nonprofit group based in Washington. As part of this effort, various U.S. retail trade groups who had been concerned about the legal liability associated with the competing, European-dominated agreement will join with Walmart and the Gap.68  On June 25, 2013, the Obama administra- tion announced it was suspending trade privileges with Bangladesh, removing the country from the list of coun- tries with most-favored-trade status. The move came after pressure from unions and continuing concerns about the Bangladeshi government’s ability to maintain safe work- ing conditions in its factories.69 Walmart and other retail- ers continue to struggle with how to manage extended global supply chains with multiple layers of suppliers.

Questions for Review

1. What was Walmart’s early global expansion strat- egy? Why did it choose to first enter Mexico and Canada rather than expand into Europe and Asia?

2. What cultural problems did Walmart face in some of the international markets it entered? Which early strategies succeeded and which failed? Why? What

1. Jennifer McTaggart, “Walmart versus the World,” Progressive  Grocer,  October 15, 2003, p. 20.

2. “‘Walmart’ in Japan Sees Losses,”  Associated Press, August 23, 2006,  www.sptimes.com/2006/ 08/23/Business/_Wal_Mart__in_Japan_s.shtml.

3. David Lague, “Unions Triumphant at Walmart in China,”  New York Times, October 12, 2006,  www.

nytimes.com/2006/10/12/business/worldbusiness/ 12iht-unions.3134329.html?_r=0.

4. “China Fact Sheet,”  Walmart Inc.,  www.wal- martchina.com/english/walmart/award.htm.

5. “Where in the World Is Walmart?”  Walmart, http:// corporate.walmart.com/our-story/our-locations (last visited March 3, 2016).

ENDNOTES

In-Depth Integrative Case 2.2 Walmart’s Global Strategies 287

23. “Financial Highlights,”  Walmart México y Cen- troamérica,  www.walmex.mx/informe/2014/en/ fortaleza_financiera/datos.html.

24. Clay Chandler, “The Great Walmart of China,” For- tune, July 25, 2005,  money.cnn.com/magazines/ fortune/fortune_archive/2005/07/25/8266651/index.htm.

25. Pallavi Gogoi, “Walmart’s China Card,”  Business- Week,  July 26, 2005.

26. “Walmart’s Cheap Doubling in China,”  24/7 Wall Street, February 27, 2007,  www.247wallst. com/2007/02/walmarts_cheap_.html.

27. “Walmart Buys China Grocery Chain,”  Wire Ser- vices, October 17, 2006,  www.sptimes.com/2006/10/ 17/Business/Wal_Mart_buys_China_g.shtml.

28. Bailian Group, www.bailiangroup.cn/html/english/. 29. Gogoi, “Walmart’s China Card.” 30. “Walmart Reaches Agreement to Acquire German

Hypermarket Chain,”  Business Wire,  December 18, 1997,  www.thefreelibrary.com/Wal-mart+Reaches+ Agreement+To+Acquire+German+Hypermarket+ Chain.-a020081857.

31. Mark Lander, “Walmart Gives Up Germany— Business—International Herald Tribune,”  New York Times, July 28, 2006,  www.nytimes.com/2006/07/28/ business/worldbusiness/28iht-walmart.2325266.html.

32. Ibid. 33. Ibid. 34. Allan Hall, Tom Bawden, and Sarah Butler,

“Walmart Pulls Out of Germany at Cost of $1bn,” The Times, July 29, 2006.

35. Lander, “Walmart Gives Up Germany.” 36. Tom Buerkle, “$10 Billion Gamble in U.K. Doubles

Its International Business: Walmart Takes Big Leap into Europe,”  New York Times,  June 15, 1999,  https:// web.archive.org/web/20080226063515/http://www.iht. com/articles/1999/06/15/walmart.2.t.php.

37. Ibid. 38. Clark, “Wal-Mart, the U.S. Retailer Taking Over

the World by Stealth.” 39. Boyle, “Walmart’s Painful Lessons.” 40. Ibid. 41. Ibid. 42. Mariko Sanchanta, “Wal-Mart Bargain Shops for

Japanese Stores to Buy,”  The Wall  Street Journal, November 15, 2010, p. B1.

43. “Wal-Mart Announces Central American Invest- ment,”  Walmart, September 20, 2005,  http://corpo- rate.walmart.com/_news_/news-archive/2005/09/20/ wal-mart-announces-central-american-investment.

44. Gordon Platt, “Wal-Mart Bets Big on Brazil’s Market,”  Global Finance,  January 1, 2006, 

6. Matthew Boyle, “Walmart’s Painful Lessons,” BusinessWeek, October 13, 2009,  https://www. dii.uchile.cl/wp-content/uploads/2011/05/13_ BUSINESS_WEEK_WalMarts_Painful_Lessons.pdf.

7. “Annual Reports & Proxies,”  Walmart,  http://stock. walmart.com/investors/financial-information/annual- reports-and-proxies/default.aspx.

8. Andrew Clark, “Wal-Mart, the US Retailer Taking Over the World by Stealth,”  Guardian,  January 12, 2010,  www.guardian.co.uk/business/2010/jan/12/ walmart-companies-to-shape-the-decade.

9. Vijay Govindarajan and Anil K. Gupta, “Taking Walmart Global: Lessons from Retailing’s Giant,” Strategy  +  Business,  June 19, 2002,  www.strategy- business.com/article/13866?pg=all.

10. Ibid. 11. Ibid. 12. Ibid. 13. Ibid. 14. Walmart Annual Report 2015. 15. David Barstow, “Vast Mexico Bribery Case Hushed

Up by Wal-Mart after Top-Level Struggle,”  New York  Times,  April 21, 2012,  www.nytimes. com/2012/04/22/business/at-wal-mart-in-mexico-a- bribe-inquiry-silenced.html?_r=1.

16. Stephanie Clifford, “Bribery Case at Wal-Mart May Widen,”  New York Times, May 17, 2012,  www. nytimes.com/2012/05/18/business/wal-mart-con- cedes-bribery-case-may-widen.html?pagewanted=all.

17. Aruna Viswanatha and Devlin Barrett, “Wal-Mart Bribery Probe Finds Few Signs of Major Miscon- duct in Mexico,”  The Wall Street Journal, October 19, 2015,  www.wsj.com/articles/wal-mart-bribery- probe-finds-little-misconduct-in-mexico-1445215737.

18. David Welch,  “Wal-Mart Mexico Probe Threatening Global Growth Success: Retail,”  Bloomberg BusinessWeek, April 25, 2012,  www.bloomberg.com/news/articles/ 2012-04-25/wal-mart-mexico-probe-threatening- global-growth-success-retail.

19. Geri Smith, “In Mexico, Banco Walmart,”  Business- Week,  November 20, 2006.

20. Carolyn Whelan, “Walmart Gets Its Bank—in Mexico,” Fortune,  January 29, 2008,  http://archive. fortune.com/2008/01/28/news/international/walmart_ bank.fortune/index.htm?section=money_latest.

21. Amy Guthrie, “Wal-Mart de Mexico Sells Bank Business to Inbursa,”  The Wall Street Journal, December 18, 2014,  www.wsj.com/articles/wal- mart-de-mexico-sells-bank-business-to-inbursa- 1418941370?cb=logged0.9633912930255639.

22. Walmart Annual Report 2015.

288 Part 2 The Role of Culture

archive/2015/02/11/walmart-canada-announces- expansion-plans-retailer-continues-to-accelerate- food-and-e-commerce-growth.

59. Ibid. 60. Phil Wahba, “Target’s Loss Is Wal-Mart’s Gain in

Canada,”  Fortune, May 8, 2015,  http://fortune. com/2015/05/08/walmart-target-canada/.

61. Tiisetso Motsoeneng, “Wal-Mart Makes Slow Prog- ress Navigating Africa’s Challenges,” Reuters, June 2, 2015,  www.reuters.com/article/us-wal-mart- stores-africa-idUSKBN0OI12V20150602.

62. “Massmart Announces Plans to Expand to Angola,” Ventures, April 9, 2014,  http://venturesafrica.com/ massmart-announces-plans-to-expand-to-angola/.

63. Yomi Kazeem, “Walmart Is Planning to Open Retail Outlets in Nigeria,”  Quartz, July 31, 2015, http://qz.com/469407/walmart-is-planning-to-open- retail-outlets-in-nigeria/.

64. Phil Wahba, “In 2015, Amazon Ate Even More of Walmart’s Lunch,”  Fortune, December 22, 2015, http://fortune.com/2015/12/22/retail-ecommerce- 2015-amazon-walmart/.

65. Madeline Vuong, “Walmart’s E-commerce Growth Slows to 8% as Amazon Soars to Record Sales,” Geek Wire, February 18, 2016, www.geekwire. com/2016/walmart-and-amazon-face-off-over-online- retail-market/.

66. Mathew Mosk, “Walmart Fires Supplier after Bangladesh Revelation,”  ABC  News Blotter, May 15, 2013,  http://abcnews.go.com/Blotter/wal-mart- fires-supplier-bangladesh-revelation/ story?id=19188673#.Ua3fGEC7Itg.

67. Ulfikar Ali Manik and Jim Yardley, “Another Garment Factory Scare in Bangladesh,”  New York Times, June 14, 2013, p. A11.

68. Steven Greenhouse, “U.S. Retailers Announce Safety Plan,”  New York Times,  May 31, 2013, p. B6.

69. Steven Greenhouse, “Obama to Suspend Trade Privileges with Bangladesh,”  New York  Times, June 28, 2013, p. B1.

https://www.gfmag.com/magazine/january-2006/ milestones–wal-mart-bets-big-on-brazils-market-.

45. Brad Haynes and Nathan Layne, “Insight: Lost in Translation—Wal-Mart Stumbles Hard in Brazil,” Reuters, February 17, 2016,  www.reuters.com/ article/us-walmart-brazil-idUSKCN0VQ0EQ.

46. Boyle, “Walmart’s Painful Lessons.” 47. Ibid. 48. Ibid. 49. Krystina Gustafson and Courtney Reagan, “Wal-Mart

to Close 269 Stores as It Retools Fleet,” CNBC, January 15, 2016,  www.cnbc.com/2016/01/15/ wal-mart-to-close-269-stores-as-it-retools-fleet.html.

50. Ibid. 51. Laurie Burkitt, “Wal-Mart Says It Will Go Slow in

China,”  The Wall Street Journal,  April 29, 2015,  www.wsj.com/articles/wal-mart-to-open-115- stores-in-china-by-2017-1430270579?cb=log ged0.09944356285914002.

52. Ibid. 53. Shashank Bengali, “Wal-Mart, Thwarted by India’s

Retail Restrictions, Goes Big: Wholesale,”  Los Angeles Times, July 23, 2015,  www.latimes.com/ world/asia/la-fg-india-walmart-20150723-story.html.

54. Ibid. 55. Shivani Shinde Nadhe, “Walmart Eyes $300-mn

Investment by 2020,”  Business Standard, February 17, 2016,  www.business-standard.com/article/com- panies/walmart-chalks-out-expansion-plans-for- india-116021600459_1.html.

56. Kurumi Fukushima, “Wal-mart Renews India Whole- sale Expansion, Plans 50 New Stores by 2020,” The Street, August 12, 2015,  www.thestreet.com/ story/13253722/1/wal-mart-renews-india-wholesale- expansion-plans-50-new-stores-by-2020.html.

57. Walmart Canada,  www.walmartcanada.ca/about-us/. 58. “Walmart Canada Announces Expansion Plans;

Retailer Continues to Accelerate Food and E-Commerce Growth,”  Walmart, February 11, 2015,  http://corporate.walmart.com/_news_/news-

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Thank you for downloading this free guide on APA formatting 7th edition for STUDENT PAPERS!

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Page number

Paper title Bolded Capital Case

Author(s)

Affiliation line

Course info

Instructor

Due date

Title page

Inset page break

For full APA formatting tutorial click here!

Paper title No "introduction" heading before the first

paragraph. Title of your paper

signifies the introduction.

Parenthetical citation, one author

Narrative citation, one author

Parenthetical citation, multiple authors

Parenthetical citation, direct quote

Parenthetical citation, two authors

For full in-text citation tutorial click here!

First page/ in-text citations

Main section heading

Subsection of Level 1

Subsection of Level 2

Centered Bolded Title Case

Flush left Bolded Title Case

Flush left Bolded italic Title Case

Indented Bolded Title Case End with period

Indented Bolded italic Title Case End with period

Subsection of Level 3

Subsection of Level 4

For full section heading tutorial click here!

Section headings

Inset page break

Reference List

For full reference list tutorial click here!

Centered & Bolded

4 elements all references Author. (Date). Title. Source

Inset page break

Centered & bolded

DO NOT indent first line

For full ABSTRACT tutorial click here!

ABSTRACT/ Running Head

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