Avoiding culture wars: Making your top decision makers understand the foreign markets

Culture war - as Financial Times correspondent in Asia Edward Wide calls it - is “one of the most thorny non-tariff trade barriers foreign companies [...] are dealing with in Asia”. While Nike and H&M are currently dealing with a vast decrease in sales in China due to offending local consumers on their comments of Chinese treatments of Uyghurs, it seems like many multinational corporations (MNCs) struggle with understanding cultures and countries they do business in. Global sensibility is very important when operating in many different national markets as the different formal and informal institutions require different approaches towards the local consumers.

MNCs operate in multiple countries and are characterized by having valuable assets in countries outside their home country. Their presence in cross-border markets results in increased organizational complexity. Besides, markets worldwide are characterized by differences that all impose different challenges for MNCs to retain their competitive advantage. Although internationalization allows for benefiting from access to new markets and economies of scale, it also poses many risks like culture clashes, increased organizational complexity and increased competition from local competitors. This is the ‘globalization penalty’ that MNCs' indivertibly pay when going global.

Source: theguardian.com

To better understand this globalization penalty in practice, it is good to look at the case of Ford in India. Ford has been trying over the years to get a foot in the door of India, a huge market with much potential - but with no success. Now, it is seriously considering pulling out of the country as it is unable to enter the market profitably with their products. The main problem for Ford seems to be that their vehicles offered in India do not seem to appeal to a big enough audience due to different consumer-preferences. Just like the case of Nike and H&M on publicly dealing with their stance on the Uyghur treatment in China, the case of Ford’s failed entrance in the Indian market is another example of an MNC struggling to understand foreign markets and fully leverage their capabilities to meet these markets' idiosyncratic needs.

But why is it that MNCs, who are so successful in their home country, seem to struggle more in their foreign markets? More importantly, what would decrease either the likelihood or the impact of lacking the local knowledge needed in foreign markets? One way to do this is by ensuring that a higher degree of local knowledge is embedded in the top management teams (TMTs) of the MNC. As TMTs have executive powers, and ability to initiate the firm’s strategy, they play an important role in (and responsible for) determining the likelihood of success when entering foreign markets. Given the important role of TMT members and the apparent need for more local knowledge in their foreign markets, MNCs would benefit from a more nationally diverse group of top managers.

In the case of Ford, the main problem seemed to be Ford’s lack of understanding the local Indian customers, who were more value-conscious than expected. Cheap, efficient, easier-to-maintain cars were preferred by the Indian customers - something that Ford's product portfolio lacked. Although this shows a rather clear difference in perceived preferences, the case of Nike and H&M is a bit more complex. Dealing with culture wars goes beyond mere knowledge of the local market in that it extends to a deep understanding of the cultural and political environment and history. Especially when it comes to these types of moments, where decisions of the TMT potentially worsens or eases off the culture wars, it is important for MNCs to have a nationally diverse top management team. MNCs with a nationally diverse top management team, including nationalities similar as, or culturally proximate to, the majority of markets where their foreign sales come from will likely perform better in such situations.

It seems unfair to consider a top manager’s nationality as a predictor of the knowledge in a certain market and the quality of decision making in an area with a certain formal and informal institutional context. However, growing up and living in a country will embed a manager with the way of thinking that is common in that specific country. Indeed, in nationally diverse teams, nationality is the dominant sense making vehicle being used and it plays a significant role in explaining differences in cognitive schemas and beliefs of the members in a TMT. With this in mind, nationality is indeed an important factor in the decision making of a team and should therefore be considered by MNCs when forming their TMT. Not surprisingly, researchers have found support for the claim that in organizations that have a relatively large amount of sales coming from foreign markets benefit from having a nationally diverse TMT.

For Ford, Nike, H&M, and many other organizations that “globalize” and obtain a fair share of their sales outside of their home country, truly understanding local customs, thought processes, customer behavior, and culture is important to survive and grow. Ford lacked the ability to understand what the Indian consumers actually wanted. Similarly, H&M and Nike were taken off-guard by the unexpected reaction of the Chinese customers. Failing to completely understand the impact hurts MNCs as they greatly rely on these markets. MNCs instead should consider improving their TMT diversity in such a way that the nationalities in the team represent their countries of operation of the MNC more closely. Ford might have been able to gain a foothold in the Indian market with more success due to adjusting their decisions and becoming more sensible to the Indian consumer preferences. H&M, Nike, and others doing business in China, who (rightfully so) want to express their corporate values, will be able to do so more successfully and with fewer repercussions if sensible top managers, who truly understand that culture, are involved in the decision making process. Appointing top managers who better understand the cross-cultural nuances when making critical decisions is a vital element for MNCs to successfully engage in international business in a foreign market.