91 Activity 3.2
ACTIVITY 3.2
Questions
1. How would you define the concept of ‘economic patriotism’? What role do you think it may have played in the problems besetting Airbus and the decision not to go ahead with the EADS–BAE merger?
2. To what extent do you consider that the wiring problems with the A380 were a reflection of the way the Airbus company was organised, despite the merger of the national components in 2001?
3. The author of the article ‘For EADS partners, culture still matters’ refers to Hofstede’s ‘power dis- tance’ and ‘uncertainty avoidance’ scores for the major countries involved in the Airbus project. To what extent do you consider it valid for these scores to be used to support the author’s arguments?
4. When examining the culture of its company, Airbus mentions on its website (see above) that it
‘thrives on the mix of ideas, vision and knowledge such a combination of cultures creates’.
How do you imagine the way in which the company has exactly thrived, despite the events described in this activity?
5. What elements in these texts about the Airbus consortium are reflected in the description of the culture clusters in this chapter?
6. What other explanations can you find for the change in name from ‘EADS’ to ‘Airbus’?
Why fi nancial scandals diff er in the US and
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Chapter 3 Business cultures in the Western world
The divergence refl ects underlying diff erences in the way US and European companies are organ- ized, Prof. Coff ee argues. In the US, the typical company’s shareholders are a widely dispersed group. Being too fragmented to exercise day-to-day control over executives, they attempted to align top managers’ interests with theirs by granting them share options.
In 1990, the average chief executive of an S&P 500 Industrial company earned $1.25m (£660,000), of which 92 per cent was in cash and 8 per cent in equity. By 2001, the average chief executive was earning more than $6m, of which 66 per cent was in equity.
The prevalence of share options substantially changed US chief executives’ attitudes to presen- tation of their companies’ earnings. ‘During early periods, US managements famously employed
“rainy day reserves” to hold back the recogni- tion of income that was in excess of the market’s expectation in order to defer it until some later quarter when there had been a shortfall in expected earnings’, Prof. Coff ee writes.
‘Managers engaged in income smoothing, rolling the peaks in one period over into the valley of the next period. This traditional form of earnings management was intended to mask the volatility of earnings and reassure investors who might have been alarmed by rapid fl uctuations.’
By the late 1990s, chief executives, stuff ed with share options, were doing something diff erent:
‘stealing’ earnings from future periods to create an ‘earnings spike’ to meet market expectations and prevent the share price from taking a dive.
‘Although such spikes may not be sustainable, corporate managers possess asymmetric infor- mation and, anticipating their inability to main- tain earnings growth, they can exercise their options and bail out’, Prof. Coff ee writes. He cites studies demonstrating a relationship between how extensively companies use options and the likelihood of their falling victim to fraud.
European companies, on the other hand, often have controlling shareholders or groups of share- holders, who do not need indirect mechanisms such as share options to control management.
They can simply tell them what to do. European chief executives have less freedom to manipulate their earnings. But they also have less incentive to do so.
Fraud still occurs in Europe, but it is a diff erent sort of fraud and diff erent people perpetrate it.
Instead of executives manipulating earnings, dominant shareholders use their control to help themselves to the company’s assets.
Because European and US companies are vulner- able to diff erent types of fraud, they should adopt diff erent ways of preventing it. While US corpor- ate governance reforms have concentrated, for example, on ensuring that independent audit com- mittees deal with the auditors, this might be less eff ective in Europe where the board struggles to escape the controlling shareholder’s infl uence.
‘Although diligent auditors could have presum- ably detected the fraud at Parmalat . . . one suspects that they would have likely been dis- missed at the point at which they began to monitor earnestly’, Prof. Coff ee says.
He confesses he does not have a simple sugges- tion on how to prevent European-style frauds.
Regulators could require auditors to report to minority shareholders, he says, but he appears to accept this is unlikely to have many takers.
A second objection to his argument that Euro- pean fraud is diff erent from the American variety is that there are prominent exceptions. What about Ahold and Vivendi? Were not these European companies whose scandals involved earnings manipulation? They were, Prof. Coff ee says, but that manipulation either happened in their US subsidiaries or in companies such as Vivendi that turned themselves into US-style conglomer- ates and therefore took an American form.
What of Tyco, a US company where the top man- agers allegedly appropriated assets for themselves?
Prof. Coff ee acknowledges that the diff erences between US and European companies are overall tendencies rather than iron-clad rules.
In the polarized world described by Mr Friedman, I suppose we should take some comfort from the small number of Europeans and Americans imitating one another’s misbehaviour.
Source: from ‘Why financial scandals differ in the US and Europe’, Financial Times , 13/4/2005, p. 12 (Skapinker, M.),
© The Financial Times Limited. All Rights Reserved.
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93 Activity 3.3
ACTIVITY 3.3
Read the following case study about the problems of exporting flowers to Russia and then answer the questions.
To Russia with love
Jan de Rover sat back in his chair, his feet resting on the piles of paperwork on his desk. He watched a jet flying low over the greenhouses as it came in to land at Amsterdam airport. He was thinking about his next trip to Moscow, where he was trying to sell flowers, which his company grew under glass. ‘I’m not looking forward to going’, he told his financial director Rob, who was also watching the plane. ‘It’s frightening over there, you know?’ Sitting up, he leaned over his desk and said: ‘You won’t believe what the Russian mafia gets up to. Their tentacles are everywhere. And you never know where you are with them, they’re so unpredictable.
Do you know there was a shooting incident last week – about flowers, would you believe it!’
Jan’s company is all about flowers – acres of greenhouses, a dozen trucks to transport the flowers to the flower auction just round the corner, two hundred employees, including seasonal workers, and the office building where everything is managed. He exports 120 million flowers to all parts of the world, including Eastern and Southern Europe, North and South America. Forty dozen flowers are sent to Russia each week.
The time factor plays an important role here since flowers will not survive any long transport delay.
The prices of flowers sent to Russia are automatically set 30 per cent higher. The difference in price is given to the mafia, otherwise the flowers would never arrive at their destination on time. For Jan this is the only way to overcome the problems caused by the poor infrastructure. Bribes are the only way, for example, to make sure that the flowers get loaded on to local transport before they start wilting. Even then, however, as Jan explains to his financial director, you never know beforehand whether they’re going to accept the bribe.
Rob is not happy with these ‘facilitation payments’ either. Nor is he happy about the fact that the eventual payments for the flowers take ages to reach Holland. In some cases it has taken over a year before the money has been transferred – and then without any excuse or apology. If this happened in his own country, the company would stop any further deliveries. ‘If you ask me’, said Rob to his boss, ‘I reckon the Russians and the mafia are in it together.’ Jan nodded his head in reluctant agreement.
Questions
1. Jan believes that paying bribes is the only way to overcome the problems caused by the poor infrastruc- ture in Russia. Is this really the only way of tackling these problems?
2. How do you explain Rob’s comment that ‘the Russians and the mafia are in it together’?
Question
Fraud seems to be a universal phenomenon. In this case, however, the author underlines the difference between committing fraud in the US and Europe. Can you explain how this difference comes about?
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The previous chapter discussed the Western clusters which comprised the European, American and Australasian clusters. The chapter also took into consideration the emerging markets, including Turkey, Russia and Brazil, the last two of which are classified as BRICS countries together with India, China and South Africa. The latter three countries will be discussed in this chapter.
Chapter 4 will cover aspects of the other clusters and countries as outlined in the GLOBE project. This will be done in a similar way to that used in the previous chapter: a cultural feature will be described which relates to the history, geography and/or religion of one or more countries from each cluster, and which is reflected in work-related values and business practices. Concept 4.1 will discuss Asia and the role played by diasporas in the rapid globalisation of business; Concept 4.2 will discuss Africa and the Middle East.
Learning outcomes
After reading this chapter you should:
● Be able to distinguish essential differences and similarities between four culture clusters devised by GLOBE, viz. Confucian Asia, Southern Asia, Sub-Saharan Africa and the Middle East.
● Have some insight into the cultural factors that have an influence on business.
● Gain initial insight into the cognitive approach to management taken in the East and that taken in the West.
When comparing business management styles across countries it is important to be aware that diff erences in management thinking aff ect the way business is done in the Eastern, Western, Northern and Southern parts of the world. In other words, the ideas about ‘how to do business’ may diff er between people and infl uence their thinking and acting in their respective managerial environments.
Preface: two different cognitive approaches to management
According to Kase et al. (2011: 40), most researchers assume that the process of ‘scientifi c’
managerial thinking is universal. With this assumption they (1) reduce diff erent management practices to ‘one common scientifi c approach’ and (2) consider business at international
Chapter 4
Business cultures in Asia, Africa and the Middle East
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Preface: two different cognitive approaches to management
95 level only in terms of being able to ‘identify the diff erences between empirical phenomena and situational contexts’.
However, Kase et al. are convinced that there are diff erent epistemological approaches to thinking (which they defi ne as ‘the science of knowing’):
There are internal, cognitive reasons that lead managers to approach strategic problems, and arrive at conclusions about outcomes, differently.
Kase et al. , 2011: 41 Th ey suggest that managers can be divided into two main categories at macro level: Eastern (Eastern Asian) and Western (Europe and North America).
1. Western managers: deal with managerial issues using a ‘deductive thinking’ approach which is ‘defi ned as a process of drawing logical consequences from premises. In this way, consequences or outcomes are derived from what is assumed’ ( p. 51 ).
2. Eastern managers: deal with managerial issues using an ‘inductive thinking’ approach which ‘is a process of seeking new knowledge which starts with a generalization and concludes with a particular’ ( p. 48 ).
Besides inductive reasoning (bottom-up logic) and deductive reasoning (top-down logic), there is a third type of logic called ‘abduction’ (rational perspective). However, because abduc- tion is also the process of explaining what is known, Kase et al. (2011) argue that abductive reasoning could culturally be considered as an element of the inductive thought process.
Th ey therefore categorise abduction along with induction, deduction being the opposite.
Table 4.1 outlines the general schemas (categories) and the main diff erences in these two thinking approaches. Th is can help in understanding how the managers from diff erent backgrounds resolve their problems and challenges.
Table 4.1 Main differences between inductive and deductive thinking
Categories Deductive Inductive
Temporality
(how time is perceived)
Anticipation of predictability and linearity of time
Anticipation of unpredictability and circularity of time
Predictability
(how future uncertainty is coped with)
Guarantees in projected future Probable truth in projected future
Recursivity (causes are simultaneously effects and vice versa)
Not admitted: there must be observability of linear actions
Real existence of unobservable and recursive actions
Approach to learning Learn by memorising Learn by understanding
Approach to thinking and restructuring of problems
Apply solution habits from past experience, try until it works
Create new solution to new situation, rearrange problem elements Approach to categorisation
(of social surroundings)
Categories are determinate, with definite boundaries and clear structures
Categories are an experimental epistemology. Boundaries are not definite Cognition
(about the validity of empirical facts derived from the mental realm)
To be legitimate, key decision makers’
perceptions in issue diagnosis and problem formulation must represent innate, real and demonstrable capability
Links between environment, strategy, structure can legitimately be cognitive and socially constructed
Use of metaphor Metaphors are concrete and verbally coded
Metaphors can be abstract, and verbally or non-verbally coded
Perception of reality Objective-absolute Subjective-relative Source: adapted from Kase et al. , 2011: 105–106 ( Table 6.1 : Twelve schema categories related to inductive and deductive thinking).
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Chapter 4 Business cultures in Asia, Africa and the Middle East
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Th is fi rst concept will examine the two Asian clusters featuring in the GLOBE culture clusters: Confucian Asia and Southern Asia. According to Chhokar et al. (2008), a clear distinction needs to be made between these two clusters. Th e Confucian Asia cluster, as its name implies, has undergone the infl uence of Confucian ideology. Th e Southern Asia cluster, on the other hand, contains many diff erent religions and ethnic groups which live in peaceful co-existence.
Th ere is, however, one feature which both clusters share and that is to do with the way relationships are managed. Unlike the West, business in Asian countries is as much to do with the relationship between the parties concerned as the actual transaction itself.
Th is entails paying considerable attention to building trust and establishing respect while displaying the utmost courtesy, particularly towards those in senior positions. Harmony between the participants of any meeting is required, so everything must be done in a courteous, deferential manner to ensure that nobody is off ended or loses face. If harmony is maintained, confi dence and trust will build and this in turn will form the basis of consensus and eventual agreement on a deal. Patience is of the essence: time is needed to establish a relationship, to decide whether a deal can be made and, if it can, to actually make the deal.
All these elements cause Westerners considerable frustration when trying to do business in Asia. Th ey oft en have to try to make deals under time pressure, so go for the hard sell, assuming that vigorous handshakes and tales of past successes will immediately put them in a good light. Egocentric, brash behaviour does not encourage the establishment of a harmonious relationship, let alone any attempt by the Westerner to impose a deadline on any deal.
Nevertheless, deals are made, relationships between Asia and the West do develop, and more and more joint ventures or partnerships are formed. Asians are always interested in a good deal. Th e basis has to be right: trust is the key component for establishing a good relationship as is illustrated in Spotlight 4.1 on a deal between French and Indian industries.