Analyzing Risks For Working Internationally

Analyzing Risks for International Companies and ManagersMeasuring cultural risk with Dimension Models

Julianne Salisbury – Independent Study – 4/7/2010

Business today

International Companies are faced with increasing risks as they expand to new markets

Globalization, faster technology markets are moving over borders and many companies have new opportunities for expansion

Many wish to expand but are unsure of the risks and how to calculate them

Categories of Risk

Political Economic

Cultural

Economic Risk

The likelihood that events, including

economic mismanagement, will

cause drastic changes in a country’s

business environment that adversely

affect the profit and other goals of a

particular business enterprise.

Hill, C. (2004). International Business: Competing in the Global Marketplace . Chicago: Irwin Professional Publishing.

Economic Risk: General examples

A countries central bank may

raise interest rates

A government or a state’s

legislature may raise taxes for

foreign investors or companies

Beginning to build and sell

luxury condo’s immediately

before or during a recession

Political Risk

Associated with major changes in political regimes and it reflects the threats and opportunities associated with potential or actual changes in the political system

Found at macro or micro levels

Higher concern in emerging markets and developing countries

Most risky for direct foreign investmentsShubik, M. (1983). Political risk: Analysis, process, and purpose. In R. J. Herring, Managing International Risk (pp. 109-38). New York: Cambridge University Press.

Political Risk General Examples

The government structure that was present upon

initial investment in the country is dramatically

changed after a new leader is elected that wants to

discourage FDI through higher taxes

A country has a complicated tax system, which

increases the costs of accounting practices and fees

required for basic business practices in the country

Cultural Risk

Least-structured and least-defined

element of risk

Lowering cultural risk requires an

understanding of the specific foreign

beliefs and systems that could affect

business and daily interaction

If none, a companies risk mitigation

approach won't develop strategies to

avoid potential pitfalls and harness

opportunities for synergy

Schomer, K. (n.d.). Change Management Consulting & Training. Retrieved Feb 1, 2010, from Cross-Cultural Risk Factors in Offshore Outsourcing: http://www.cmct.net/article_risk_factors.html

Measuring Cultural Risk

Use broad cultural dimensions to see compatibility and foster understanding

The process gives direction and finds outward compatibility

Implements two important studies that help measure the impacts of cultural differences on management and success

To understand different cultures, remember these four principles:

1. Individuals may not conform

2. Differences may not be culturally based

3. Understand your own culture first

4. Cultures are on Continuums– Few fall at the extremes, most

are somewhere in the middle

Image accessed at: http://noelbellen.blogspot.com/2009/06/understanding-cultural-differences.html

Ethnocentrism

Belief thatone's culturalvalues, beliefs

and norms are

better thanthose ofanotherculture

Geert Hofstede Cultural Dimensions

Study started in 1960 and continued for three decades

Great guidelines to understand and implement when analyzing

cultural risk and planning for management adjustments when

doing business with diverse cultures.

Based on an employee opinion survey involving 116,000 IBM

employees in 40 different countries. From the results of the

survey, which asked people for their preferences in management

style and work environment

Identified four “value” dimensionsHampden-Turney, C., & Trompenaars, F. (2000). Building Cross-Cultural Competence: How to Create Wealth from Conflicting Values. New Haven & London: Yale University Press.

Hofstede’s Cultural Dimensions

power distance – indicates the extent to which a society accepts the unequal

distribution of power in institutions and organizations.

uncertainty avoidance – refers to a society’s discomfort with uncertainty,

preferring predictability and stability.

individualism versus collectivism – reflects the extent to which people

prefer to take care of themselves and their immediate family, remaining

emotionally dependent from groups, organizations, and other collectivities.

quantity of life versus quality of life – the focus in culture of

accumulation of wealth or the focus on relationships and quality of life

Hampden-Turney, C., & Trompenaars, F. (2000). Building Cross-Cultural Competence: How to Create Wealth from Conflicting Values. New Haven & London: Yale University Press.

Fons Trompenaar’s cultural model

A Dutch author in the field of cross-cultural communication.

Ph.D at Wharton with a dissertation on differences in

conceptions of organizational structure in various cultures.

Professionally worked with Shell in nine countries

Model of culture with seven dimensions and orientations

covering the ways in which human beings deal with each other

Trompenaar’s cultural model Universalism vs. particularism - What is more important, rules or relationships?

Individualism vs. communitarianism

Neutral vs. emotional - Do we display our emotions?

Specific vs. diffuse - Is responsibility specifically assigned or diffusely accepted?

Achievement vs. ascription - Do we earn our status or is it given to us?

Sequential vs. synchronic - Do we do things one at a time or several things at once?

Internal vs. external control - Do we control our environment or are we controlled?


Road Map for using the studies here

1. Selected dimensions will be

explained and illustrated

with real-world examples.

2. A situation will be presented

3. Both viewpoints will be

explained

4. Management techniques for

each situation

Universalism vs. Particularism

The DilemmaUniversalism

(rules, codes, law, and generalizations)Searches for sameness and similarity

and tries to impose on all members of their commonality.

Particularism

(exceptions, circumstances, relations)Searches for differences, for unique and exceptional forms of distinction

that render phenomena incomparable of matchless quality.

Management Implications

Use procedures applied to allFormalizes business practicesAnnounce changes publicly

Treat all cases similarly

Management Implications

Make changes subtly and privatelyTreat each case based on its unique

circumstances


Percent who prefer Universalist system

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Graph made from data offered at : http://www.kwintessential.co.uk/map/hofstede-uncertainty-avoidance.html.

The Dilemma in Practice

A real-estate investment company in the U.S. is entering into a joint

venture to build a sports center in Shanghai.

They meet halfway, in Hawaii, to sign the contracts. The U.S. businessmen

bring along two lawyers with them, and because of this the Chinese seem a

bit taken aback. During the negotiations the Chinese try to keep the

contracts vague and not too tied. They tell the Americans that the

contracts can be figured out as things go along, and they want to continue

after dinner.

The Chinese are obviously positive and excited about the venture, but the

Americans feel that the negotiations are not complete until everything is

set in stone.

Photo accessed from: http://www.fotosearch.com/bthumb/CSP/CSP036/k0360680.jpg

Universalist views of the situation

The Universalist culture (The U.S.) relies on the courts

to help settle disputes and for lawyers to help with

negotiations and writing contracts.

It is nothing against the other party, but just part of

the process to make sure both parties are in

agreement and protected.

Americans often try to close deals as fast as possible.

Particularistic views of the situation

A Particularistic culture (Chinese) trust very much on relationships between the

partners.

The U.S. focus on strict regulations/formulations in this situation or similar, could have

offended the Chinese businesses because they felt they weren’t being trusted.

It might happen that Chinese business people will still try to negotiate afterwards

even the contract was already signed/closed and agreed from all sites. In negotiations

Chinese will spend a lot of time in building up a relationship with their business

partners so the actual negotiation will be at the end of the meeting time. A

particularistic culture considers the human relationships more important than rules.

Guidelines for doing business: Universalism and Particularism

The importance of relationships in a Particularistic culture should be

carefully considered and taken into account during business dealings.

For an American doing business with a Particularist culture, they need

to be aware of the way business is normally done.

As a result of the Particularist way to make deals, the Americans might

commit more advantages than first thought just to rush forward and

close a deal. This can be a disadvantage for universalistic cultures

Power DistanceThe Dilemma

High Power Distance Low Power Distance

Those in authority openly demonstrate their rank.

Subordinates are not given important work and expect clear guidance from above.

Subordinates are expected to take the blame for things going wrong.

The relationship between boss and subordinate is rarely close/personal.

Politics is prone to totalitarianism.

Class divisions within society are accepted.

Superiors treat subordinates with respect and do not pull rank.

Subordinates are entrusted with important assignments.

Blame is either shared or very often accepted by the superior due to it being their responsibility to manage.

Managers may often socialize with subordinates.

Liberal democracies are the norm.

Societies lean more towards egalitarianism.



An American manager was placed in a new plant in Malaysia.

Malaysia has a large power distance. The manager appreciated a

level playing field and wanted to motivate the employees to

speak up if they had new ideas or recommendations for

improvement.

He held biweekly meetings with teams and could see that they

were uncomfortable being asked for input, and they would

always agree with him.


High and Low Power Distance viewpoints

Adjusting for Power Distance would be

different for countries that were higher or

lower than the home country.

Measurements are readily available

online. For example, the US Power Index

is 40, and Malaysia is 104. Bartlett, C., & Ghoshal, S. (2008). Transnational Management: Text, Cases, and Readings in Cross-Border Management. New

York: McGraw-Hill Education.

Power Distance ComparisonsAverage = 51M

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Irela

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0

10

20

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40

50

60

70

80

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6154

49

40 38 3528


As an American working with or going to a country with a higher PDI than yours then:

give clear and explicit directions to those working with you. Deadlines should be

highlighted and stressed.

do not expect subordinates to take initiative.

be more authoritarian in your management style. Relationships with staff may be

more distant than you are used to.

show respect and deference to those higher up the ladder. This is usually reflected

through language, behavior and protocol.

expect to encounter more bureaucracy in organizations and government agencies.Bartlett, C., & Ghoshal, S. (2008). Transnational Management: Text, Cases, and Readings in Cross-Border Management. New


As an American working with or going to a country with a lower PDI than yours then:

don't expect to be treated with the usual respect or deference you may be used to.

people will want to get to know you in an informal manner with little protocol or

etiquette.

be more inclusive in your management or leadership style as being directive will be

poorly interpreted.

involve others in decision making.

do not base judgments of people on appearance, demeanor, privileges or status

symbols. Bartlett, C., & Ghoshal, S. (2008). Transnational Management: Text, Cases, and Readings in Cross-Border Management. New


Uncertainty Avoidance

the degree to which employees are threatened by

ambiguity, and the relative importance to employees

of rules, long-term employment and steady

progression through well defined career ladders.

measures the level to which individuals in a society

feel uncomfortable with situations that are abnormal

or difficult to understand.

Uncertainty AvoidanceThe Dilemma

High Uncertainty Avoidance Low Uncertainty Avoidance

Usually countries/cultures with a long history.

The population is not multicultural, i.e. homogenous.

Risks, even calculated, are avoided in business.

New ideas and concepts are more difficult to introduce.

Usually a country with a young history, i.e. USA.

The population is much more diverse due to waves of immigration.

Risk is embraced as part of business.

Innovation and pushing boundaries is encouraged.


Uncertainty AvoidanceAverage = 64G

reece

Jap

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Mexic

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Taiw

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20

40

60

80

100

120 112

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69

53 49 4635

29

High Avoidance of Risk Willing to take risks



A Taiwanese company operates with a uncertainty avoidance level of 69. This shows with

the heavy formalization that is evident in great amount of written rules and procedures.

Also there is a greater (compared to a U.S. company) specialization evident in the

importance attached to technical competence in the role of staff and in defining jobs and

functions. Managers here avoid taking risks and are motivated by stability and security.

Leaders are chosen for their skills in planning, organizing, coordinating and controlling.

A U.S. company is discussing a joint venture with these managers for a real estate

investment in Taiwan. The landscape is a little risky for the project they have in mind, how

can they best succeed?


As an American working or doing business in a country with a higher uncertainty avoidance score than at home then:

Don't expect new ideas, ways or methods to be readily embraced. You need to

allow time to help develop an understanding of an initiative to help foster

confidence in it.

Involve local counterparts in projects to allow them a sense of understanding. This

then decreases the element of the unknown.

Be prepared for a more fatalistic world view. People may not feel fully in control

and are therefore possibly less willing to make decisions with some element of the

unknown.

Remember that due to a need to negate uncertainty proposals and presentations

will be examined in fine detail. Back up everything with facts and statistics.Bartlett, C., & Ghoshal, S. (2008). Transnational Management: Text, Cases, and Readings in Cross-Border Management. New


As an American working or doing business in a country with a lower uncertainty avoidance score than at home then:

Try to be more flexible or open in your approach to new ideas than you

may be used to.

Be prepared to push through agreed plans quickly as they would be

expected to be realized as soon as possible.

Allow employees the autonomy and space to execute their tasks on

their own; only guidelines and resources will be expected of you.

Recognize that nationals in the country may take a different approach

to life and see their destiny in their own hands.Bartlett, C., & Ghoshal, S. (2008). Transnational Management: Text, Cases, and Readings in Cross-Border Management. New


Individualism vs. Communitarianism

Points to how the individual, and therefore the community, is defined.

Nations that display highly individualistic attitudes are comprised of a

greater number of citizens who believe that their responsibility for

support extends only as far as their immediate family while the social

framework is tighter in collective societies.

People in the collective cultures discriminate in-groups (relatives,

institutions and organizations) and out-groups. Responsibility for care and

loyalty extend beyond the immediate family to include all members of

the in-group.


Individualism vs. Communitarianism

The Dilemma

Individualism(competition, self-reliance, self-interest,

personal growth and fulfillment)Believe that motives such as charity, participation, compassion and social

improvement, originate with individuals and are the result of choice and voluntary

commitment.

Communitarianism(cooperation, social concern, altruism,

public service and societal legacy )Belief that gains in a society (engineering,

increasing population or gdp, high graduation rates), originate in shared

knowledge, communal values, and mutual supportiveness.

Individualism Management ImplicationsUse individual incentives, such as a pay

for performancePlan for turnover

Provide for individual initiative

Collectivism Management ImplicationsFocus on group morale and cohesiveness

Expect low turnoverSet group goals


Individualism vs. Communitarianism Ratings Average=51

US

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17


The Dilemma in PracticeA manufacturing plant in Singapore is owned by anAmerican multi-national company.

There has been some issues with a lack of productivity andmanagement has been having a closer look at employeesand processes to see where the problem lies.

The problems are found with a team that overseestransitions between the day and night shifts, specificallywith one employee that has worked in that position for lessthan six months.

The American managers starting asking some questions tothe teammates and team managers but it was difficult topinpoint a problem, as the team seemed unable to offerblame to a specific person.

What would be the best way for the American managers tofind the results they need? Who is responsible for an errormade at work by a new member of a work team?


Individualistic Views

The American managers would reasonably take the view

that this person alone must carry the responsibility alone,

and that if he or she were dismissed, the other members of

the team would work with greater diligence.

Their cultural views would lean toward the thought that

achievement involved individual goal-setting and action,

and that each team member would have the understanding

that they are ultimately accountable for themselves.


Communitarian Views

The Singaporean managers and employees would reasonably

argue that the team and immediate colleagues should have

looked out for a new member and checked that everything was

going smoothly, and that the instructions had been properly

understood.

Instead of placing them they would look at the system and the

team to find possible weaknesses: Had the new member been

adequately trained? Were the instructions clear? Unless such

questions are answered satisfactorily the problem may persist.


Advice to managers facing the individualistic/communitarian dilemma

With these differences in mind, it is important for

individualists to recognize the web of relations

encompassing the communitarian party to a conflict,

and to act in recognition of those.

Similarly, it is helpful for those from communitarian

settings to remember that individualists value

autonomy and initiative, and to act in ways that

respect these preferences.


Specific vs. Diffuse

Measures the differences in how people engage colleagues

in specific or multiple areas of their lives.

Two groups:

people from more specific-oriented cultures tend to keep private

and business agendas separate, having a completely different

relation of authority in each social group.

In diffuse-oriented countries, the authority level at work can reflect

into social areas, and employees can adopt a subordinated attitude

when meeting their managers outside office hours


Specific vs. DiffuseThe Dilemma

SpecificDirect in relationships

Blunt and precise in communicationPrincipled moral reasoningClear distinction between

work and personal life

DiffuseIndirect and subtle in relationships

Ambiguous or evasive in communicationSituation-based moral decision making

small public space that is difficult to enter (e.g. an outsider needs a formal introduction from a

mutual friend in order to do business with aparticular manager)

Specific Managerial ImplicationsUse of objectives and standards

Separate private and business livesGive clear and precise directions

Give constant feedback for best resultsWhen you give your word, you must keep itBe careful of “paralysis through analysis”

Diffuse managerial implicationsAttempt continuous improvement

Mix private and business livesUse ambiguous directions to give

employees latitudeEach decision takes into account the entire

process by which a product is conceived, each decision effects everything.



A manufacturing company in the U.S. has a plant on one site, and the

research and development branch is located hundreds of miles away.

The products move from stage to specific stage, first developed, then

manufactured, then marketed.

The company is interested in opening another operation in East Asia,

and hired a consultant from the area to review their processes and give

recommendations to how they could adjust these for the type of workers

and management that they’d be hiring.

The consultant’s recommendation was to find developments for easier

manufacturing and locate all functions at a single site, where the

researchers make the product easier to distribute and to service.


Diffuse Viewpoint

Diffuse styles of thinking create ways of assuring quality that are strange to

most Western cultures. For example, Taichi Ohno’s Toyota production system

asks “five times why” something has gone wrong. If a drillbit broke in

production there may be five or more places to intervene in a diffuse system.

These might include: a stronger drill bit, slower drill speed, softer metal being

drilled, better lubrication, improved training for the drill operator.

Diffuse thinking is much more alert to remote consequences and the need for

balance. The reason for all operations of manufacturing to be together is that

Diffuse thinking considers the entire process from conception to completion,

and often all offices need to get involved to solve a problem or think of a new

idea. Hampden-Turney, C., & Trompenaars, F. (2000). Building Cross-Cultural Competence: How to Create Wealth from Conflicting Values. New Haven & London: Yale University Press.

Specific Viewpoint

Specific cultures usually try and pinpoint a single case,

for example “the drill bit was defective and broke.”

A specific viewpoint would see occurrences to be

separate from each other and a manager would focus

on each individual problem as a separate case.

These cultures are more definite and unambiguous and

may force employees and managers to face the facts.


Advice for U.S. managers working within a diffuse culture

“Don’t do business with strangers, you can just trust friends”

It is sometimes as important if not more important to built up

a close relationship than the deal itself.

People from diffusive cultures circle around the strange

business partner to get to know him more deeply and they

will discuss the specific facts only after a relationship of trust

has been created


Conclusion

A part of business strategy and risk assessment

should take into account cultural differences,

and be able to adapt when large gaps are seen.

The world is chaotic. We need structure in order

to make sense of it. Culture is what helps us to

organize our world and to know how to respond

to it

Analyzing Risks For Working Internationally

Documents

yale university

cultural competence

american working

data offered

photo accessed

create wealth

conflicting

hill education