Referring to our recent meeting about expanding Kismet's business aboard, I have some concerning about the role of culture. As cross-cultural risk is indicated as one of the big four risks in doing international business, emphasis should be placed on the challenge of crossing cultural boundaries. Every country has its own unique culture. Stepping into unfamiliar cultures can creates miscommunication, so called cross-cultural risk. To overcome this risk, geocentric orientation or a global mindset is required.
"Let's get down to business" and "slowly building up the relationship" can be perfectly described as an example of the differences in each culture. In the Western world, talking straight and directly to the point is how the business works while in the Eastern world, relationship should be strongly built before starting the business together. According to the well-know Dutch organizational anthropologist, Hofstede, "culture is a collective mental program of people, the software of the mind or how we think and reason which differentiates us from other groups". It is something human has to learn to be able to survive in the society. In the international business aspect, understanding and adapting to our partners' cultures lead to success in partnership and finally, to the profit of the company. In Thailand, most people buy insurance from person they are familiar with i.e. whom they can trust. This is the result from long-term relationship based culture. If the sale persons don't know how to build the relationship with customers, they will not be able to sell anything. Other reason behind is that Thais believe that in this way, it is easier to go through the claiming process. Anyway, as mentioned earlier, culture has huge influences on customer behavior, managerial effectiveness, as well as range of value chain operation e.g. product and service design, marketing, and sale.
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Few things to keep in mind about culture are as follow: it cannot be right or wrong, not inherited, and not about individual behavior. In order to learn, of course, there is something about the culture of each country written in the books but that is only just the level above water of culture iceberg. What is hidden under water is something we have to be integrated within the society and learn it by heart.
As being a life insurance company, a service provider, we have to deal with customers not only to persuade them to buy our product but also to take care till the last. Understanding culture of the targeted country helps in various aspects.
Developing the Right Products and Service: Product that is suitable for one country might not be suitable for the others, for example, providing insurance for people living with HIV in South Africa.
Interaction with Foreign Business Partners: Some misunderstanding for the hidden culture can lead to the failure of the corporation between two companies.
Selecting Foreign Distributors: The higher authority given from being partner with the company belongs to closed friend of the leader in Arab world. Understanding about the connection system, exist in many countries, helps in selecting the right partner. In some countries, it is nearly impossible to start business without having the connection.
Business Negotiation: In order to benefit the most in business negotiation, give priority to the partner's culture. Avoid something which can lead to losing face for the Asian people. In this way, they will feel more comfortable and have a positive attitude toward our company.
Dealing with Customers: In the West, "the customer is king" but in Japan, "the customer is God". If we treat customer in Japan as king, we will not be able to complete with the local Japanese companies. Another example from Japan, the sale persons need to have the ability to figure out when the Japanese customer saying "no" without saying it directly.
Preparing for Trade Fairs: Same decorating color of booth in the trade fair can be interpreted as different meaning in different countries. For example, red means celebration and good luck in China but in South Africa, it is a color of mourning.
Preparing for Promotional Material: Even in the countries who share the same language like Germany and Austria require the different in advertisement. The picture can be the same but the dialogue has to be changed due the difference in sense of humor.
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Apart from all the influences, culture also has played an important role in the following issues.
Teamwork: The ability to get along with each other between foreign and local employees are very important as they have to work together in order to reach the same goal which is a critical to business success. The way to communicate between the lines of Japanese people can create confusion and misunderstanding for foreign colleges.
Lifetime Employment: In Japan and some Asian countries, most employees work for the same company for their whole life. Long-term relationship and royalty are given in high priority in their culture.
Pay-for-Performance System: In the Western countries, employees are promoted basted on their performance evaluation while in some of the Eastern countries, promotion is based on their age.
Organization Structure: Difference in organization structure e.g. centralized VS decentralized system and bureaucratic VS family practice, give a huge obstacle in information sharing. For insurance industry, information of customers have to be shared among the service stations e.g. hospitals and the insurance offices.
Union-Management Relationship: Distance between top manager level and employees are different from country to country. In European firms, employees have quite equal status with managers while in Asian ones, high respect has to be given to the higher rank positions.
Attitudes toward Ambiguity: In some cultural, giving too many instructions make the employees feel like they have no flexibility. In contrast, employees don't know what to do without the exact instructions.
Culture can be classified in to three layers which are national, professional, and corporate culture. The overlapping of these three layers has created the challenge for the manager. In Middle East as an example of influence from national culture, a local employee would not stay late at night to complete his work if he has a duty at home while in the Japan, leaving the workplace before your boss is considered to be very irresponsible. And, of course, the Japanese boss always works until late at night. How can the local Middle East employee works with the Japanese boss without having conflict with each other. Having the strong corporate culture leads to standardization and higher management control of the company. An example of strong corporate culture in Japan is Toyota with the core word "Kaizen" or continuous improvement.
Interpreting culture can be done in several approaches. The first one is cultural metaphors. It is a representation of distinctive tradition or institution which is strongly associated with a particular society. The Japanese garden presents the peacefulness of the country. Doing business in Japan required a lot of understanding about the state of tranquility. Being invited to the tea ceremony is considered as given the high level of relationship. Another approach is stereotype which is the generalization about group of people compared to others. However, the behavior of people should be observed rather than evaluating the stereotype. German's stereotype is sausages and beer but in fact, they neither eat only sausage nor drink only beer. Sale persons, sent aboard from our company, should be able to overcome the prejudice from stereotype. The third approach is idiom. It is an expression which has different meaning from the literal meaning. As selling insurance requires a lot of contact with the customers, it is necessary to understand the real meaning of what they are saying. Also, idiom can be used in the advertisement to represent the real understanding of their culture to the local people.
According to Edward T. Hall, culture is characterized into low context and high context culture. Low context culture talks everything straight forward while the high context one needs a lot of interpreting and reading between the lines. Understand which characteristic of the business partners and customers are, helps in communication more efficiency and lead to business success. Another popular classification of culture dimension is from Greet Hofstede. His four dimensions consist of:
Individualism VS Collectivism: Preference between working in group and in individual is different between countries. If we expand to South Korea which is high in collectivism, understanding of the relationship and connection between persons are required. The buying behavior of customers in the collectivism countries would rather be in the way of following each other. For example, if one member of the society buys insurance from our company and spread it out in the good way, the possibility to have more customers from this society are very high. In contrast, if the word is spread out in the bad way, possibility of failure is also relatively high.
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Power Distance: This is referred to the distance between top level and the lower ones. In United State, there is less in power distance. People in the company share their idea and have quite equality in power. In contrast, people from Thai company have to pay respect to the higher rank and have much lower in power. When having the discussion, the inequalities in power can be obvious seen. The lower position rank always follows the higher one. The manager from low power distance should understand and do not expect much respond from the high power distance employees.
Uncertainty Avoidance: People from high uncertainty avoidance countries tend to need more secure in their life than people from the lower one. Product for ensuring the financial security such as life insurance would be more popular in the high uncertainty avoidance countries. Examples of these countries are Belgium, France, and Japan.
Masculinity VS Femininity: In high masculinity countries, competitiveness and caring less about each other are found. On the opposite site, high femininity countries are more in helping and caring each other. If our customers are in masculinity society, type of insurance offered should be for the individual person only while in the femininity society, insurance for other members of the family can be offered.
Long-Term VS Short-Term Orientation: Planning for a long run is a characteristic of a long-term orientation. As life insurance is considered to be the secure for the future, people from long-term orientation tends to have more potential in buying our product.
Numerous dimensions of national culture can be found and grouped into two broad dimensions which are subjective and objective. Subjective dimension is something untouchable such as values and attitudes, deal versus relationship orientation, manners and customs, perception of time, perception of space, and religion. Objective dimension is something touchable, for example, symbolic productions, material productions, and creative expressions. Customers from China, who have high value on the family issue i.e. living in big family and have high respect toward the elders, are more likely to buy some security like the life insurance for their parents. After identify the potential customers from their national culture, the next step is sending staffs aboard to get in touch with customers. Life insurance product is sold mostly by direct sale. Sale persons have to confront with customers many times. Assume there are two customers, one from the United States and another one from Japan. The quick selling strategy would work for the customer from U.S. but would never work on another one from Japan who prefers a long-term relationship orientation. Talking about the public manner, for greeting, a strong handshake is perfectly fine for the U.S. customer while the Japanese would much prefer the bow. Time consuming during the conversation and personal space required are quite different as well. Religion is one big issue which deals with the people's belief. Inviting Muslim customer to the meal which consists of pork would consider as being very rude and could cut down the whole relationship. If our sale persons cannot differentiate the differences between each culture and adapt themselves in the right way, there will be very high possibility for us to lose customers and fail at the end.
One challenging obstacle in going aboard is language. It is not easy to get into the society without the knowledge of their local language. Again, our sale depends much on the connecting between our sale persons and customers. Unable to communicate or understand the real meaning can cause a huge problem. Language is not only the words to speak. It comes together with the non-verbal characteristics, facial expression and gestures, and jargons which required the interpretation from deep understanding in the culture.
As mentioned earlier, culture has played a very important role in the international business. Overlook cross-cultural risk could lead to the failure from losing both the business partners and customers. However, the prevention can be done by raising cultural awareness among people, who are going aboard, as well as introducing the cross cultural training.
Case 2: Accessories for Luxury Automobiles Company
In expanding into foreign markets, countries selection is one of the most critical steps. Once investing in the chosen countries and found out that it is actually the wrong decision, there is no way to get back both the capital and time used during the investment. Moreover, there is a high chance for losing huge amount of the market share to the competitor who has entered to the right market. Per capita income is one of the approaches used for selecting countries. However, using traditional per capita income which overlooks the purchasing power parity might lead to wrong conclusion due to the price differences between countries. In Germany, three EURO can be used for buying one dish of rice in the cafeteria while three dishes are provided from the same amount of money in Thailand. Adjusted per capita income, with purchasing power, represents the amount of products which can be bought in a specific country with their own currency and standard of living.
When the company is ready for going aboard, product suitability is the next step to be observed. Success product in one country might not be able to sell in some countries. For example, seat heaters are popular among the countries in the cold climate zone. Trying to sell this product in the tropical countries would be very ridiculous. In order to ensure the success, product should be firstly expand according to one of the following situations.
The expanding market has similar needs and conditions compared to the success existing market. Potential customers are already existed in this market. Success of convertible car in many European countries comes from having the similar climate and style of living.
The product itself is very unique and can hardly be imitated by competitors. The ability to synchronize data of all the products from Apple as an example.
Entering the market where existing needs are not well recognized or served. Starbuck has noticed the need of "feeling at home" in the big city where everything is filled with chaotic. What it serves to the customers is not just the coffee but also, the relaxing and peaceful space for metropolitan.
Emergent trend or a disaster can create the opportunity of the market as well. Products supply for these kinds of situation is based on need which is given higher priority than want. The stockpile of pandemic influenza, H5N1, vaccine has been in the world discussion during the year 2007.
One more important point for identifying the suitability of the product is potential product demand. In many cases, end users are not the persons who buy the product. The office copy machine is bough by the secretary's decision but used by the office staffs. The reason for buying, distribution channel, and limited factors should also be taken into consideration. Why are they buying our accessories? Is it for personal satisfaction or just to show off? Where can they buy our product, thought the shop in shopping mall or the private shop? Finally, what might be the limitation for the product in a specific area, for example, the public infrastructure like transportation system? People who have to drive on the bumpy road would never buy a relatively expensive alloy wheel.
There are various principles for selecting the right countries. If we look in term of economic development, countries can be classified into four main groups: advanced economies, developing economies, emerging market economies, and un-developed economies. Advanced economies countries have a very high per capita income which seems to be suitable for our products. However, competition is also relatively high. Red ocean strategy, referring to a bloody fight among the competitors which turn the ocean into red, can be applied for this group of countries. Developing economies countries are considered as high risk because of its limited industrialization and inactive economies. Let's go over to un-developed economies. Countries in this group would not be suitable for our products since they would rather fulfill their first few steps of basic needs before going after the needs for esteem, according to Maslow's basic needs. At last, the most attractive group for our product is emerging market economies due to the fact that it is growing very fast with al lot of potential demand.
After selecting the specific group of countries, screening process can be done through the economic rank and index. The information can be obtained from the research institution. Main purpose is to cut down the number into five to six potential target countries. Unattractive countries should be eliminated as soon as possible. There are three main practical approaches. The first one is using per capita income. As mentioned earlier, it has to be considered together with the purchasing power parity. Since our products are in the luxury class, this indicator in the targeting countries should be high enough to be able to afford our product. In order to use this approach, there are some four concerning points that should be kept in mind.
Informal economy is not included. In developing economies, not every economic transaction is officially recorded. Examples are some activities like barter exchange and growing their own food. What if there is a guy who is working in exchange for the food and shelter, he neither receives nor spends any money.
Majority of the population is represented by the low end customers. It can be referred that the average income cannot really show the economic picture of the country.
Having more than one wage earner living together in one house can multiple the purchasing powers i.e. the ability to afford the higher price products. There are several things that can be shared together, for example, refrigerator and television. Per capita income considers person individually only.
Underreport from the government, in order to receive low interest loans and grants, is another point which can distort the real value of per capita income.
The second approach is considering the size of middle class because this is the majority group in the society and has the ability to purchase. High end customer seems to match better with our products but this group has much less potential to grow comparing to the middle class. In reality, not many people own as many as five cars per person, even with the case of very rich people. What will happen when the high ends customers, relatively small group of people in the country, have their own five cars with fully load of accessories? There will be no more customers for us. On the other side, the middle class is growing every day with the potential to buy more and more to fulfill their needs. In addition, the size of middle class can also be used to indicate the distribution of income in the society. Limited size can be referred to the inequality in distribution and result in the conclusion of slow growing or unattractive market.
The last approach is using a mix of market potential indicators by giving the weight according to the important level of each indicator. The country that scores the most would be the most attractive country. Ranking and index of each country can be obtained by either conducting the research ourselves or buying from the research institute. List below is some of the important indicators used for selecting countries.
Market Size: Number of population within a specific area. Giving concern only at the size cannot indicate the potential of the market. Small market size with potential growth would be more prefer than the large one with inactive growth.
Market Growth Rate: It indicates how fast the market can grow. The better way to interpret this factor is to look at the trend from three to five years back. Considering only one specific year can lead to wrong picture of the country's economy as it might be the result from unexpected events like natural disaster.
Market Intensity: Buying power of the people in a particular area can be observed from this factor which can give us the overview of their consumption level.
Market Consumption Capacity: Concerning about the middle class only, this factor indicates the level of consumption and income in the proportion of the whole country.
Commercial Infrastructure: Talking about the communication channel between company and customers. How easy can the information access to the customers?
Economic Freedom: Level of ease in doing business in the country, for example, support from government in tax and bureaucratic system. In some countries, foreign companies are very welcome by giving special low tax and giving the property right.
Market Receptivity to Imports: How much the country wants to import products from other countries? If the answer is no, there is a high chance for us to face with huge barriers like import tax and quality control.
Country Risk: It is referring to political risk level of the country. Political has played quite an important role toward the country's economy as politicians are the ones who determine its direction. There is no investor who wants to invest in unpredictable country.
Various approaches can be used in selecting the right countries for the international business. However, different type of business can value each factor differently. Another approach which has not been mentioned is to select the gateway countries or regional hub as they are the channel for other countries in their region.
To sum up, selecting countries for international business might take long time and afford to do but ending up with the right countries bring company to success and can lead to easy expansion in the future. Therefore, various factors should be taken into consideration. At first, narrow down the countries into five to six high potential countries. Then, conduct a deep evaluation of each country in order to meet with the most potential country for the company.
Case 3: Aoki Corporation, a glass manufacturing
In international business world, it is nearly impossible to survive without understanding of the political and legal system in the invested countries. Possibility to have adverse effects from either political development or legal environment is known as country risk. It is in one of the four main risks in doing business aboard. From the previous year, talk of the town about Google and China can obviously present the huge effect of the country risk. Various indicators, e.g. political stability and government debt, can be used to measure country risk. Deep understanding in some political issues cannot be done by reading from articles only. The best way of learning is to talk with local people because there might be some hidden issues which known only by locals and are not regularly written on the papers.
One source of country risk is political system. Having unstable government can result in uncertainty of the business settled in that particular country. Changing of government leader in Russia, for example, had cough the eyes of people from all over the world, especially in business sector, as there might be the turning point for the country's policies. The reaction of people in the country is as important as the issue itself. In general, political system can be classified into three major types: totalitarianism, socialism, and democracy. Totalitarianism is about ruling by one person or one party only. In the past, China and Soviet Union, for example, employed this type of political system. Nowadays, most countries have been changed to either democracy or capitalism. There are still some countries employing this system such as Cuba, North Korea, and several countries in Africa. Command economies system, which controlled everything by the state, is resulted from totalitarianism even in some countries that have changed their political system already such as China. Socialism talks about having benefit of group over individual. However, it is revealed in most countries as social democracy where the balance between individual right and group welfare is achieved. Example countries are Germany and Japan, together with mixed economies system where interference from government is working along with the market mechanism itself. The last type, democracy, has two main features which are private property right and limited government. Most countries in Europe and Latin America apply this system. In general, the market economies system, i.e. activities flow according to the supply and demand, is used together with this political system.
Legal system is another source of country risk. It is developed in order to provide the frame of conduct within the society. Laws and regulation in the world are founded from one of the five legal systems: primarily common law, primarily civil law, primarily religion law, primarily socialist law, and mixed system. According to the list of interested countries, much of Western Europe and Mexico apply for primarily civil law which is originated from Roman law. The law has to be passed by legislatures before effect is taken place. China applies for primarily socialist law which is based on civil law, used mostly in communist countries. Much of Eastern Europe applies for mixed system which is, as the name stated, mixing of various legal system types together.
Various laws in the legal system have direct effect in international business such as foreign investment laws, controls on operating forms and practices, laws repatriation of income, contract laws, and environmental laws. Firstly, foreign investment law should be carefully studied due to both its variation between countries and huge effect over the business. As it covers every form of capital bought into a particular country for a business purpose, selected countries from both manufacturing and selling should be taken into consideration. Talking about manufacturing first, China, Mexico, and Eastern Europe are the selected options. Here are some examples from each area.
In China, the law provided by the central government is quite difference from the regional one which results in confusion and time consuming in collecting all the information. In addition, relationship based culture should be kept in mind. Many companies, who have no support, failed doing business within this country.
Investing in Mexico can be done directly without advanced notification. However, the company has to register with Foreign Investment Registry within 40 days after the first day of operation.
Eastern Europe consists of many countries which have their own law. In Poland, permission from the Ministry of Internal Affairs is required for non-EU in buying real property. Apart from being members of European Union which allows free movement of capital, this area has advantage on low cost labor.
For selling, the selected areas are Latin America and Europe. Examples of differences in law are provided below.
Difference countries in Latin America have difference laws. In Chile, most business branches allow foreign investors to hold 100% of the shares.
Setting distribution channel in one of European countries have many advantages, especially member countries of European Union due to the concept of free movement of service, goods, and capital. Note that each country has its own foreign investment law which has to be searched for specific country.
As seen from above examples, many areas have applied their own law. Company should study the foreign investment law and follow it carefully.
Control on operating forms and practices are considered to be importance for both areas Aoki wish to set up manufacturing and sell its glass. The law covers how the company should act in production, marketing, and distribution area. Law about production should be concerned for countries Aoki wishes to do the manufacturing while the other two should be for the countries wishes in selling its product.
Most foreign investors would like to send their earned profit back to their home countries. Law repatriation of income is applied for this purpose. Some countries have limited the amount of money that can be transferred back while the others are not. In Chile, for example, foreign investors can do the income repatriation whenever they want after paying all the taxes. Having less ability to transfer the profit back would give the country less attractive because the company will then have to invest more in that particular country and would have less chance in using that profit for other countries investment.
Environmental issue is quite a big issue followed the global warming trend of the past few years. The specific law for this issue should be considered for areas of manufacturing. The purpose is to protect natural resources which can be referred as saving our lives as well. Glass industry also provides some pollution, e.g. Nitrogen Oxide and particulates, during the process. It is important to know the limitation of pollution discharge. According to Climate Conference in Copenhagen in 2009, took place in order to continue the Kyoto Protocol, many countries have promised to reduce their percentage of discharge pollution even though the agreement of the conference has not been reached. The result is the stronger environment laws in some countries.
Contact Laws concerns about how to set the standard procedure of making contract between foreign company and local one. It can be classified into 5 types of contract as follow.
Sales of goods or services: For the countries Aoki wishes to sell its product, this is quite an important issue to be taken into consideration.
Distribution of the firm's product through foreign distributors: Apart from selling the products by itself, Aoki can look for some distributor either foreign or local. In case of foreign distributors, this law should be applied.
Licensing and franchising:
Foreign Direct Investment: This topic should be taken into consideration for countries Aoki wishes to set up the manufacturing.
Joint ventures: Creating the joint ventures can be done with concerning of this law.
As mentioned earlier, country risk is an important issue which had to be carefully looked at and there are several laws concerning this issue. Aoki should study according to the purpose of investment whether it will be the manufacturing or selling its product.