Adapting to Changing Business Environment in Asia: China, Japan, South Korea,…

“The dramatic modernization of the Asian economies ranks alongside the Renaissance and the Industrial Revolution as one of the most important developments in economic history.”  ~Larry Summers

There is a common misconception that all Asian countries share the same Asian values, attitudes, and mindset. This idea is occasionally promoted by some Asian politicians who emphasize pan-Asian values when arguing against the incursion of Western influence into their countries.

When viewed in detail, Asian cultures share a variety of characteristics, but each distinguishes itself from the next through specific cultural elements and accepted business norms. Therefore, it is important to understand the cultural or business norms that are unique to a specific country or ethnic group, and then adapt one’s business approach to address such customs or norms.

Michael Witt, Professor of Asian Business-INSEAD Business School and Associate in Research-Harvard’s Reischauer Institute, is at the forefront of an emerging field called “Comparative Business Systems.” Witt doesn’t focus solely on macroeconomic trends, but how to capitalize on opportunities by understanding the differences between workforces in different Asian markets. And the differences, he says, are stark. “Everyone is playing ball,” Witt says, “but they’re playing very different games.”

It all comes down to understanding how people think. “Culture is not how you pick up the chopsticks,” says Witt. “Its how you make sense of the world.” In other words, the ways in which people interpret facts have a huge impact on how decisions are made and how businesses are run. One way to evaluate culture is to consider how business leaders view the role of the firm in their economy. In Witt’s latest research, he asked senior executives in both the U.S.and Asian countries why their firms exist.

Most Americans answered quickly that firms exist to “create shareholder value” — a mantra in the world at least since the early 1980s. But across Asian countries, Witt found, the answer to this simple question varies widely. How top management in China understand their world, for instance, differs starkly from the views of their counterparts in Japan. “When firms partner with each other, they are thinking about what the other side wants,” says Witt. “We’re adding a key piece of information: it depends on the country.”

Private firms in China exist to provide shareholder value–like their U.S. counterparts–but only for people at the very top. The function of the firm in the private sector in China is mainly about generating family wealth. Most of China’s new class of millionaires comes from profitable family-owned businesses. Thus, the idea of most of these businesses is to squeeze as much as possible out of the workers for the benefit of the owner, which is why many large Chinese companies are governed more hierarchically than their Western counterparts.

What foreign firms need to think about carefully when buying or partnering with a private Chinese firm is whether highly valued products are being created.If you’re thinking about taking over a Chinese company,” says Witt, “you need to think about what you’re really acquiring once the family is out of there. Executives in state-owned enterprises, which are ubiquitous in China, have their own set of rules and incentives.

These firms are considered the strategic tools of the state, and managers often view their positions as steps in their career within the communist party. The overriding objective for many of these managers, Witt says, is to supply resources and compete in global markets in order to propel the country’s economic reemergence. One risk of partnering with Chinese firms, Witt says, is that they might attempt “to find out how you do it and take your business from you in the long-term.”

Like in China, the purpose of the Japanese firm is not solely to maximize shareholder value–but Japanese firms commonly assume a more family-like focus and strive first and foremost to take care of their employees. This is often a major constraint for foreign firms considering operations in Japan–given the labor practices often don’t mesh well with those of Western counterparts.

Many Japanese firms entering a merger insist on retaining their entire workforce as a condition of sale. This focus often translates to weak shareholder rights. Japanese firms provide benefits to employees like stable employment and a good livelihood, but this practice can be a major deterrent for foreign firms. “If you acquire a Japanese firm,” says Witt, “you’ll find it to be extremely resilient to any changes you would introduce.”

South Korea, according to a number of corporate executives, resembles Europe more closely than it resembles either Japan or China. The South Korean executive’s primary rationale for the existence of corporations is the generation of profit, says Witt. Yet very much like China, the East Asian country boasts its own graveyard of Western companies who have tried to enter the market and failed.

Any Western executive considering work in South Korea should know first and foremost that South Korean labor unions are some of the fiercest in Asia. “When the unions are on strike, it’s basically war,” says Witt. In 2009, the World Economic Forum cited the difficulty of hiring and firing employees as the reason that Korea dropped so dramatically in its business competitiveness rankings.

The main thing to understand about a South Korean firm, Witt says, is that it has an eye towards its three major stakeholders — employees, shareholders, and society. If a foreign firm isn’t able to strike a balance and please all three stakeholders, then doing business in South Korea can be extremely difficult.

In an article by Paul Temporal & Rod Davies write:  In South East Asia, the world of corporate success and management development are poised in a potentially dangerous relationship. The fast growth rates of countries such as Malaysia, Singapore and Thailand are now on track to see the double figures of pre-1996.

We can still expect to see businesses bursting at the seams with opportunities for growth and development. However, recent economic history leads us to ask two questions. Firstly, “how far is the success due to managerial skill”, and secondly, “how can the human resource function cope with the need to develop top managers in greater numbers and more quickly than ever before”?

Top leaders are often made on the basis of “political” (in a corporate sense) and on a “who do you know” basis. These factors combine to create top management teams that are often unbalanced in terms of the skills and abilities of members.

Consequently these organizations reveal excellence in ideas and concepts but fail when it comes to delivering on time and realizing the practical implications of their work. Similarly, the top teams of many institutions are unbalanced having myriad’s of detailed, quantitative, and ‘practical’ people, but lacking the creative and ‘exploring’ skills that are necessary for business development.

“All people are the same … it’s only their habits that are so different!” ~Confucius

In the article “Looking East: The Changing Face of Business” by Alan Keir (HSBC) writes:  A fundamental and unprecedented shift is taking place in the global economy. As we see a very clear move from West to East; Asia and the Middle East continue to assert themselves as the brightest prospects on the global landscape; certainly, the rise—or, some might say, the re-emergence–of the East…

This changing economic landscape and the impact of Asia on the rest of the world are profound: China will be the biggest economy in the world by the end of the decade. Many might think this unsurprising; after all, the East has long been force in manufacturing, particularly goods which then make their way over to the West. However, some might not be aware that today, many Asian goods don’t go to the West, but to other Asian countries. InIndia, two thirds of exports now go to markets outside the US and Europe.

And last year, China became the largest importer of goods from Latin American powerhouse Brazil. We are seeing the emergence of South-South trade: globalization isn’t just a process of goods circulating from developing to developed countries; it crosses and connects emerging markets.

The developing markets of Asia offer a virtuous circle of economic growth, investment and economic growth, and it is crucial that Western business people open their minds to the possibilities offered by the rise of Asia. In the report called: ‘Looking East: The Changing Face of World Business’ draws on Eastern economies, political, social, and financial and consumer climate.

The report says “that while every business and every national economy across the world is being affected by this shift from West to East, we will, in the future, see the decline of the western-centric mindset, and a new way for the world to do business; quite simply, the West is at risk of losing leadership”. Bearing this is mind, in my view, two key questions remain:

  • Do businesses across the West truly appreciate not only the vast scale of this change, but more critically, the considerable opportunities it presents?
  • In a time when the West is most in need of an economic and financial boost, are business leaders ‘looking East’ quickly enough?

Western businesses need to ask themselves how they can tap into the fast-paced thinking in Asia and how they can work with the development of Asian economies. Forming partnerships that see India and China take state-of-the-art design to the mass market by recognizing global strengths and expertise is a big opportunity.

For many Western companies, the rebalancing of economic power towards Asia presents a more challenging, more competitive, more threatening business environment. But they also suggest a huge range of opportunities; the new economic confidence of Asia means new markets, new global wealth and new business….

According to a study by the ‘Boston Consulting Group’ (BCG) and ‘Wharton School’; as China’s economy evolves — growing larger, more complex and more competitive — so must the way that multinational corporations (MNC) manage their operations there. CEOs and other senior executives at MNC in the U.S., Europe and Asia are focusing more of their time and their companies’ resources on China.

Research by BCG suggests that the MNC that have had the most success in China are those whose top managers have gone out of their way to stress the importance of their China business in relation to their global operations. At the same time, the managers on the ground in China are also changing: Expatriates still hold the most senior positions in China, but Chinese locals are assuming a greater role in both middle- and senior-management ranks.

One of the key takeaways from BCG’s research is that MNC grow their China operations from the top down, not the bottom up. “It needs to be top down because you need to reallocate global-level resources and activities if you are to really make a commitment to China.  To accelerate investment successfully in China over time, you need to bend the rules that otherwise might prevail inside your company.

You need to be able to allocate more management talent, more senior time and attention, and more investment than the near-term financial returns might otherwise warrant. If the regular rules say you need a two-year payback from the day you set up operations, you have to understand that a China investment probably won’t achieve that goal.

Another important finding: Bringing the industry value chain to China and building for the long term are also important. “You can’t just have a little sales arm there. You’ve got to be ultimately customizing and modifying your products for the local market. And you need enough value-added activity, like R&D, so that you can establish closer relationships with local suppliers and demonstrate commitment to local customers”.

“The central drama of our age is how the Western nations and the Asian peoples are to find a tolerable basis of co-existence” ~Walter Lippmann

Business methodologies across Asia are not uniform; each country has a different management approach, for example: Japanese management considers ‘market share’ growth strategies, value maximization, and creates value by optimization.

Supplier relationship, close cooperation and coordination with the supplier which allows fast and flexible product development. Participation of workers is highly valued. The customers are as important as the competitors when scanning the business environment. Product design is linked to production, which generates value to the company.

South Korean management, despite their inspiration by the Japanese, they are somewhat different. For the Koreans the main characteristic is the close relation of the companies with the government which was copied from the Japanese. The ‘Chaebol’ structure is an adaptation of the Japanese ‘Zaibatsu’ model. The Koreans tend to be more individualistic, despite stressing the concept of group harmony, they do not practice the loyalty and consensus found in Japan. The family business in Korea is a very strong figure based in blood lines.

Chinese management tends towards the directive, with the senior manager giving instructions to their direct reports who in turn pass on the instructions down the line. The manager is seen as a type of father figure who expects and receives loyalty and obedience from colleagues. In return, the manager is expected to take a holistic interest in the well-being of those colleagues. It is a mutually beneficial two-way relationship.

Senior managers will often have close relations to the communist party and many business decisions are likely to be scrutinized by the party which is often the unseen force behind many situations.

Asia is critical for all multinational companies (MNC), but doing business in Asia is different then doing it elsewhere in the world. In order to be effective, you need to be aware of these differences. Building credibility, building relationships, and building trust are the imperatives for doing business in Asia.

Regardless of country or strategy, the key to success in Asia is identifying, recruiting, developing and retaining very strong leaders in each nation. The reality is that these leaders should be locals: Japanese for Japan, Koreans for Korea, Indians for India, and so on…  Even China should be Chinese for China, or more specifically, Mandarin speakers for China… And, above all else, the leaders must have a commitment to consistency, a strategic understanding of regional intricacies, and strong culturally-sensitivity…

“Asian countries produce eight times as many engineering bachelors as the United States, and the number of U.S. students graduating at the masters and PhD levels in these areas is declining” ~Mark Kennedy

Cyber Attack, Internet Crime, Hackers,….Impact on Business Performance: Menace, Threat, Warfare…

 “Presence of mind… is nothing but an increased capacity of dealing with the unexpected.” ~ Baron Carl von Clausewitz

According to the FBI and the ‘Computer Security Institute Annual Survey’ of 520 companies and institutions, more than 60% reported unauthorized use of computer systems over the past 12 months and 57% of all break-ins involved the Internet.  

An ‘E-Crime Watch Survey’ shows the impact of cyber crimes on business: 56% on operational losses, 25% on financial loss and 12% on other types of losses. Interestingly, 32% of respondents do not track losses due to e-crime or intrusions; among those who do track, half say they do not know the total amount of loss. 41% of respondents indicate they do not have a formal plan for reporting and responding to e-crimes…

The Department of Justice categorizes computer crime in three ways: Using computer as a target; attacking the computers of others (e.g., spreading viruses); Using computer as a tool; using a computer to commit ‘traditional crime’ (e.g., credit card fraud); Using computer as an accessory (e.g., store illegal or stolen information).  The ‘Tenth United Nations Congress on the Prevention of Crime and the Treatment of Offenders’ categorized five offenses as cyber-crime:

  • Unauthorized access,
  • Damage to computer data or programs,
  • Sabotage to hinder the functioning of a computer system or network,
  • Unauthorized interception of data to, from and within a system or network,
  • Computer espionage.

In the article “Sony Says it’s a Victim of a Sophisticated Cyber-Attack” by Joelle Tessler writes: The recent data breach of ‘Sony’s PlayStation Network’ was a “very carefully planned, very professional, highly sophisticated criminal cyber attack designed to steal personal and credit card information for illegal purposes,” a Sony executive said. The attack may have compromised credit card data, email addresses and other personal information from 77 million user accounts, and data from an additional 24.6 million online gaming accounts may have been stolen.

The company said it did not know who is responsible for the attack and is working with outside security and forensics consultants and the Federal Bureau of Investigation (FBI) on an inquiry. The hack came on the heels of ‘denial of service’ (DoS) attacks launched against several Sony operations and threats made against Sony and its executives in retaliation for complaint filed by the company against a hacker in U.S. District Court in San Francisco…

In the article “Protecting Your Business Finances from Cyber Attack” by Professor Thomas H.B. Symons writes:  A recent report indicates that ‘small-medium-size-business’ (SMB) are increasingly targeted by cyber criminals due to the perception that SMB employ less robust IT security measures than large corporations. One common method installs a small piece of malware (malicious software) on an unwitting machine that silently logs usernames and passwords. Once obtained, the hacker cleans out the victim’s bank account…

To ensure protection, SMB owners need to implement strict security practices. For example, install security software that is regularly and automatically updated to defend against new viruses and other malware. Dedicate one machine to the task of ‘online banking’ and set the security software’s settings to maximum. Don’t use it for surfing the Web or reading email. Disconnect it from the Internet completely when it’s not in use and configure it to perform frequent, automatic system scans.

“Much is needed to increase the security of the Internet and its connected computers and to make the environment more reliable for everyone. Security is a mesh of actions and features and mechanisms. No one thing makes you secure” ~Vint Cerf

Criminal attacks and cyber espionage are on the rise, and in the case of domain and address theft, they are increasing exponentially. Cyber criminal gangs are increasingly motivated by the potential gains from extortion, theft of credit cards, and abuse of private information. Sophisticated, persistent groups—particularly organized criminal gangs and state or corporate espionage agencies— are targeting specific enterprises to steal intellectual property and conduct fraud or other money-making activities.

Moreover, according to a ‘Symantec Internet Security Threat Report’, attackers are now creating global networks that support coordinated criminal activity. All this sophisticated criminal activity has driven up the costs of defense and recovery. The business costs of cyber-crime and cyber-terrorism are already staggering.

Globally, malware and viruses cost business between US$169 billion and US$204 billion, and the trend is rising sharply. Even the cost of spam is significant: Costs associated with spam in the United States, United Kingdom, and Canada was US$17 billion, US$2.5 billion, and US$1.6 billion, respectively.

In addition, cyber criminals and corporate espionage agencies intent on harvesting corporate data, interrupting corporate business, or compromising corporate computers and networks to launch attacks on other networks are immensely creative, and readily adapt to defensive measures. Cyber criminals and espionage agencies are constantly watching for small oversights in a corporate network infrastructure that will give them the opportunity they need. Some of the most common mistakes include:

  • Failure to maintain the corporation’s online identifiers.
  • Neglect of security-related software patches and updates.
  • Poor handling of sensitive data, including the failure to deploy encryption when necessary.
  • Sacrificing security for convenience.

In the article “High Cost of Cyber Attacks” by Courtney Rubin  writes:  More than half of the companies running critical infrastructure such as; electric grids, gas and oil supplies have sustained cyber attacks of stealth infiltrations by organized gangs or state-sponsored hackers. The rates of ‘stealth infiltration’ were highest in oil and natural gas operation, with 71 percent claiming to have been targets. The  cost of the downtime caused by cyber attacks is high, average cost is $6.3 million a day, for corporations.

A study presented at ‘World Economic Forum’, Davos, Switzerland, surveyed some 600 IT and security executives from the energy, transport, water and sewage, government, telecoms and financial sectors in 14 countries. The findings were chilling, particularly as they come on the heels of both ‘Operation Aurora’ (the high-profile episode whose targets included Google and Adobe Systems) and new revelations of orchestrated cyber attacks against Exxon Mobil, ConocoPhillips, and Marathon Oil.

Even worse news: The risk of cyber attack – including everything from garden variety-viruses and malware on up to the more vicious – is rising. In the study ‘Crossfire: Critical Infrastructure in the Age of Cyberwar’ – blamed the current economic climate for shrinking security resources available, and 25 percent said resources had suffered cuts of 15 percent or more. The cuts were most severe in the energy, oil and gas sectors…

In the article “Cyber Attacks on Business – A National Security Threat?” by Kevin Coleman writes:  In a recent testimony before Congress, a cyber security expert warned that the private sector in the United States has proven unable to defend the nation’s critical cyber infrastructure from attack; business own 85 percent of critical infrastructure and they have not invested in the skills or technology to secure it from cyber attack leaving the electrical grid, financial services, other key elements vulnerable; foreign intelligence agencies, organized gangs, corporate spies have successfully infiltrated banks, multinational corporations, and even government websites and stolen sensitive data; cyber security experts urged for greater government regulation to secure  U.S. networks…

James Lewis from the ‘Center for Strategic & International Studies’ said that the private sector has been largely responsible for protecting critical portions of U.S. networks for the past ten years and “it’s not working.” To bolster U.S. networks, Lewis urged lawmakers to impose regulations on the private sector…

Mischel Kwon, the former director of the ‘U.S. Computer Emergency Readiness Team (CERT)’, was also present at the subcommittee’s hearing and explained that ‘cloud computing’ is putting cyber defense in the hands of real experts. Kwon said, “Soon most companies, even government departments and agencies, will no longer have data centers, or continue to manage their own e-mail servers, applications or desktops, as they move to cloud computing systems”. By building security measures into cloud computing, cyber security efforts could be centralized thereby reducing costs, minimizing the ‘cyber talent pool shortage’, and increase defense capabilities.

In the article “Cyber Attack Protection Not Worth the Cost for Most” by Georgina Prodhan and Marius Bosch write:  Most companies have no protection at all against ‘distributed denial-of-service’ (DDoS) attacks, which put computer servers out of action by overwhelming them with requests. Most companies will never become targets, so they are willing to take the risk and save the costs. But for those who are attacked, the consequences can be huge — the loss of a single day’s pre-Christmas sales could easily cost hundreds of millions of dollars for an online retail giant like Amazon, which has been targeted…

DDoS attacks are clearly against the law in most countries, although for many protesters that may be an academic question. Peter Church, London law firm, says “It’s not a pure law issue. It’s a question of actually; how do you track these people down? How do you secure a conviction to criminal standards of proof?

In the article “Managed IT Service Spotlight , Cyber Attack Prevention” by Karl Muhlbach writes:  Another day, another cyber attack. Actually, the statement should be, “Another day, another 60 million cyber attacks.” A recent government report shows that the United States government faces 1.8 billion cyber attacks per month. While this report only pertains to government resources, businesses also face cyber attacks at alarming rates. The estimated number of attacks against businesses is harder to aggregate as there is no central source to report the information to, but the numbers would be equally as high if not greater.

Unfortunately, many businesses are still not protected. The ‘2009 National Small Business Cyber-security Study’ revealed alarming statistics for small business. The report found that only 28 percent of businesses surveyed had any type of formal Internet security policy, and only 35 percent provided Internet safety training to employees. One of the most interesting details of the report was that 65 percent of the business surveyed stated that the Internet was vital to the success of their business; however, the numbers show that the businesses are not taking adequate measures to protect against an attack.

In the article “Cyber-attacks: Misunderstood Menace?” by Kyle Cunliffe writes: ‘Cyber-attacks’ are often presented as an impending virtual Armageddon, creating concerns for governments and corporations a like. Britain’s ‘Daily Mail’ anointed cyber-terrorism as top threat to British security, while the ‘U.S. Homeland Security and Government Affairs’ committee speculated terrifying consequences of a cyber-attack against critical U.S. infrastructure. Even the European Union (EU) officials consider cyber attacks the most prominent threat to European energy! Sir Richard Mottram, former chairman of the ‘British Joint Intelligence Committee’, told the ‘House of Lords’ that cyber attacks from one state against another should be considered an “act of war”…

Provocative headlines and large statistics can make the internet seem like an unrelenting terror, but this isn’t necessarily the case. Bruce Schneier, chief security of British Telecom argues that the term ‘cyber warfare’ has been greatly exaggerated. Mr. Schneier complained that headline stories and inappropriate phrases wrongly portray most cyber attacks as ‘cyber warfare’; in actuality very few cyber-attacks have anything to do with warfare.

Even obvious cases have caused little lasting damage…In the end, while cyber-attacks may cost governments and businesses ‘billions of pounds’ and act as a genuine menace, they do not fall under the same categories as terrorism and warfare.

Cyber-terrorism (definition): “The premeditated use of disruptive activities, or the threat thereof, against computers and/or networks, with the intention to cause harm or further social, ideological, religious, political or similar objectives. Or, to intimidate any person in furtherance of such objectives.” ~Barry C. Collin

One of the fastest growing segments of the world economy is cyber-crime. Cyber criminals typically exploit one of the thousands of vulnerabilities of the underlying operating system or the web server or the firewall that the enterprise uses as it’s security foundation. And, many IT professionals never even bother to research the existence of these vulnerabilities, although they are readily available by checking the ‘national vulnerability database’.

The first thing any organization should do when formulating a proactive approach to internet security and risk management: Do homework, obtain independent affirmation for the level of security appropriate for your company, educate your company about cyber-attacks and internet crime, and invest in technology that protects sensitive data from the inside out…

Why do Companies Hire Management Consultants: Expert, Best Practice, Contacts, Objectivity, Knowledge, Signaling…?

“A management consultant is someone who saves his client almost enough to pay his fee” ~Arnold H. Glasgow

Management consulting indicates both the industry and practice of helping organizations improve their performance primarily through the analysis of existing business problems and development of plans for improvement. Organizations hire the services of management consultants for a number of reasons, including gaining external (and presumably objective) advice and access to the consultants’ specialized expertise.

Because of their exposure to and relationships with numerous organizations, consulting firms are also said to be aware of industry “best practice”, although the transferability of such practices from one organization to another may be problematic depending on the situation under consideration.

Consultancies may also provide organizational change management assistance, development of coaching skills, technology implementation, strategy development, and operational improvement services.

Management consultants generally bring their own, proprietary methodologies or frameworks to guide the identification of problems, and to serve as the basis for recommendations for more effective or efficient ways of performing business tasks. There are four basic types of consulting firms:

  • Large and diversified services organizations; offer a wide range of consulting services, information technology, and strategy practices. Some very large IT ‘service providers’ have moved into consultancy and are developing strategy practices, as well.
  • Medium-size management consultancies; offer a blend of consulting services and technologies with specialties similar to both the large consultancies and boutique firms.
  • Management and strategic consulting specialists; offer primarily ‘strategy consulting and business intelligence models’ for many industries.
  • Boutique firms; focus consulting expertise in specific industries, functional areas, technologies, or regions of the world.

Management consultants are often criticized for overuse of buzzwords, reliance on and propagation of management fads, and a failure to develop plans that are executable by the client. A number of books critical of management consulting argue that the mismatch between the management consulting advice and the ability of business executives to actually create the change suggested can result in substantial damage to the existing business.

In his book Flawed Advice and the Management Trap”, Chris Argyris believes that much of the advice given today has merit. However, a closer examination shows that much advice also contains gaps and inconsistencies that may prevent positive outcomes… Disreputable consulting firms are often accused of delivering empty promises, despite high fees. They are often charged with “stating the obvious” and lacking the experience on which to base their advice. Some consultants bring few innovations, instead they offer generic and “prepackaged” strategies and plans that are irrelevant to the client’s particular issue…

In the article “When to Hire a Consultant” by Steve Tobak writes: You hire a consultant for: 1) expertise, 2) objectivity, 3) credibility, 4) leadership, and 5) time. Here’s a hypothetical example:  ‘Let’s say a company has been exploiting a leadership position in the marketplace and executing well on its operating goals for a number of years. Now, competition is getting stiffer and the company is suffering from margin pressure.

The company has reached an inflection point. That happens from time-to-time. The CEO realizes the company may need new strategic direction. It may need to cut some projects and businesses and add others to meet its new direction. Moreover, the company lacks a process for developing and implementing new corporate and product strategy’. In this hypothetical case, it would be a good idea to bring in a consultant.

As for common pitfalls, aside from the obvious–expertise, track record, chemistry, etc.–remember these three and you’ll do fine:

  • Be careful what you wish for.
  • Garbage-in, garbage-out.
  • Set-up the problem and commit.

The bottom line: Just like with lawyers and doctors, working with consultants may be distasteful or even painful, but there are times when you need them if you know how to recognize those times. While trying to go it alone sounds noble or courageous, it isn’t. It can cost your company big-time.

In the blog “The Role of Management Consulting” by Basab Pradhan writes: The value in hiring management consultants lies in broadly three (overlapping) areas:

  • Superior analytics skills
  • Expertise
  • Best practice

‘Best practice’– does overlap with ‘expertise’, but differs in a crucial way. ‘Expertise’ could be acquired either because you were a part of industry or because you have been a consultant to that industry (or, functions like Marketing or HR) for many years. But ‘best practice’ is what the ‘best companies’ are doing. Hiring consultants to get industry ‘best practice’ is quite common.

There was a time when smart MBAs were concentrated in management consultancies and were hired by companies just looking for smart analytical types to fix problems that their own managers were not able to. But hiring MBAs became  common practice in the industry as business schools kept churning them out. This redressed IQ balance (between consultancies & companies)  somewhat: Which forced management consulting firms to shift more towards hiring people from the industry (acquired expertise) and to offering best practice.

In the article “Why Do Firms Hire Management Consultants?” by Peter Klein writes: Academics, economists, and management scholars are often skeptical of management consulting firms: “Their advice seems fluffy, ad hoc, unscientific…” But consulting firms continue to prosper. Are their clients irrational? I have always assumed that the ‘signaling game’ plays a role.

One can imagine a ‘Spence-style (Michael Spence) separating equilibrium’ in which high-quality firms signal their unobservable characteristics to customers, suppliers, rivals, etc. by hiring an expensive consulting firm, while low-quality firms find this prohibitively costly. Of course, all consulting firms are not alike, and there are many different types of consulting services (e.g., strategy—more fluffy; IT implementation—less fluffy).

An article in the JMS by Donald Bergh and Patrick Gibbons look at the ‘signaling game’ value of consulting, measuring the stock-market reactions to firms’ announcements of hiring a consulting firm. The stock-market likes it when “good” firms hire consultants, typically the returns are positive and significant even with the client’s prior performance. There are many reasons for hiring consultants:

  • Rent rather than own specialized skills.
  • Break up internal political deadlocks.
  • Provide better rationalizations for what you want to do already.
  • Take advantage of consultants’ exposure to other firms and their practices.
  • Signaling various things to the market–lack of complacency, growth opportunities, etc.
  • Building the entourage for image-polishing or ego-building purposes.
  • A sounding board for managers who are afraid to say what they really think to their intramural colleagues.

In the article “McKinsey’s Corrupted Culture” writes: The reason you hire McKinsey is that its consultants have seen strategic business issues like yours before, and therefore might have developed good insights into how to approach them. But the reason they’re familiar with those issues is that they’ve been given highly confidential information about your competitors.

So when you hire McKinsey you’re essentially trying to acquire, for a very high hourly fee, the kind of corporate intelligence that can only be built up through long exposure to highly-sensitive commercial information. The accumulation and sharing of privileged knowledge is integral to how it works…

In the words of Christopher McKenna, Oxford University’s ‘Saïd Business School’; the calculation every client makes is that “consultants will carry information ‘in’ and information ‘out’. The client has to decide which of those flows is worth more.” Indeed, one of the main reasons companies hire consultants is to make sure they do not fall behind what their competitors are doing – in return for parting with their own secrets, they gain access to their rivals’ suitably disguised ‘best practice’.

The consultant is broker who attempts to amass so much knowledge that each company has to hire him, no matter how uncomfortable that feels. In this sense, a management consultant is a bit like an art dealer or anybody else who traffics in valuable information asymmetries. The consultant knows more than the client, when it comes to strategic issues within the industry in question. If the client wants access to that knowledge, he has to open his own kimono to get it, thereby putting the consultant at yet more of an information advantage.

Management consulting is the only kind of consulting where most of what they do is not complementary to what the client’s leadership is doing: It makes up for their deficiencies. The companies who therefore use consultants for core stuff have admitted to themselves that (a) their executive team cannot rise to the challenge, and (b) they will definitely gain from the in-flow more than they can lose from the out-flow of information.

In March 2008, Apple CEO, Steve Jobs, told Fortune that Apple doesn’t hire consultancy firms and instead focuses all of its efforts on creating great products. “We do no market research. We don’t hire consultants. The only consultants I’ve ever hired in my 10 years is one firm to analyze Gateway’s retail strategy so I would not make some of the same mistakes they made [when launching Apple’s retail stores]. But we never hire consultants, per se. We just want to make great products.”

Consultants bring expertise, a fresh perspective, and focused energy… How you manage a consultant may be the most important single factor in getting good advice.  Motivate a consultant the way you would motivate a valued employee.  Involve them in the business.  Make them feel part of the team.  Encourage them to affiliate emotionally, and get them to over-deliver because they care…

“My greatest strength as a management consultant is to be ignorant and ask a few questions” ~Peter Drucker

The Thin Mint Paradox, Non Profit – For Profit: Yes, It’s Delicious Girl Scout Cookies…

The best non profit devote a great deal of thought to defining their organization’s mission. They avoid sweeping statements full of good intentions and, instead, focus on objectives that have clear-cut implications for the work their staff and volunteers perform ~Peter Drucker

We have a ‘delicious‘ problem. The millions that Girl Scouts and other non-profits make each year don’t actually go to the organization; more often than not, it’s funneled into investments to make more money. Steve Fortier writes: We also have to question misalignment between the mission of an organization and what it is selling. I see an incongruence between the Girl Scouts’ mission and them selling $200M worth of sugar-filled treats... especially given the health crisis that affects so many girls.

According to the New York Times article, ‘Thin Mints’ were the third best-selling cookie in the United States behind Oreos and Chips Ahoy. The spectrum of Girl Scout cookies accounted for over 200 million boxes sold. Gasp. Great article, it also goes into an explanation about how Boy Scouts keep 35% of the purchase price of their popcorn and peanuts, while Girl Scouts only take home 17%.

In the articleThe Thin Mint Paradox by David Zax writes:  The more money brought in by a non profit side business, the smaller the share devoted to the organization’s actual mission, suggests a Pace University study.  Does it help a non-profit to have a profitable side business? Apparently not. A study presented by a Pace University researcher at the ‘Satter Conference on Social Entrepreneurs’ at New York University examined 700 tax returns from New York non-profits, finding that the more money brought in by side-businesses, the smaller the proportion of total expenses spent on the organization’s actual mission. The organizations examined included well-known examples like the American Foundation for the Blind, God’s Love We Deliver, and Boy Scouts of America.

The study by Pace’s Rebecca Tekula, follows a hunch articulated in a 1988 book by the economist Burton Weisbrod called “The Non-profit Economy,” a book which noted an increasing trend toward profit-making arms of non-profits.

By 1982, for instance, the Girl Scouts were selling 124 million boxes and grossing $200 million annually. Though Weisbrod had hypothesized that the trend was not good for the non-profits, the hypothesis had not been tested till Tekula’s study, who look at 700 organizations that provide human services concludes that, in the words of a press release, the more they brought in from their businesses, the smaller were their proportion of total expenses spent on programs.”

Tekula speculates that many organizations actually don’t invest their profits in the actual services of the organization, but simply reinvest them in the side-businesses. “Running a gift shop or anything that isn’t an integrated part of your program may be bringing in money–gross revenues–but if it’s not making a profit, you’re keeping it going with funds that you could have spent on counseling and food for your clients,” she said.

It’s a problem that could benefit from further study. Even if it were true that the rise of the ‘Thin Mint’ has resulted in a smaller fraction of Girls Scouts of America’s organizational dedication to services, one could argue that so long as the pool has grown substantially, services still benefit.

Quick thought experiment: 10% of 200 million dollars is far more than 100% of 200 thousand dollars, after all”. Still, the notion that the increasing trend of for-profit arms of businesses might be leading to a sort of “mission distraction,” in Tekula’s words, is troubling. For groups that may be taking the enterprise component of social enterprise too seriously, she counsels an old-fashioned strategy: Just asking for charitable donations.

In the articleThe Thin Mint Effect by Peter Klein writes: The article “The Thin Mint Paradox” (noted above) finds that as non-profit organizations increase their for-profit activities, the share of resources going to the core mission decreases.  This strikes me as a good illustration of multi-task principal-agent problems. The output of for-profit activities is more easily measured than the output of non-profit activities, giving agents (under performance-based pay) the incentive to increase effort toward those for-profit activities…

‘The Non-profit Reporter, Inc.”, a 501(c)(3) organization, was formed in March 2006 to strengthen the operations of American non-profit organizations and it was created to assist and encourage United States charitable organizations to improve accountability, transparency, and governance, and to spur the development and use of program performance measures. The following statistics highlight a vast sector comprised of U.S. non-profit organizations and demonstrate the need for a national assessment system:

  • According to the World Factbook, the asset base of the American non-profit sector would make the “non-profit economy” the sixth largest in the world – larger than the economies of Brazil, Russia, Canada, Mexico, and South Korea.
  • There are 1.9 million non-profit organizations in theUnited States, a figure that has doubled in the last twenty-five years.
  • The Internal Revenue Service (IRS) reports that there are more than 70,000 new non-profits formed annually.
  • The collective assets of the non-profit sector total nearly $3 trillion or the equivalent of the United States federal budget for one year.
  • 9 percent of the workforce is represented by those in the employ of a non-profit organization, more than the American finance, insurance and real estate industries combined.
  • From 1987 to 2005, the numbers of charitable organizations in the United States experienced nearly triple the growth rate of the business sector, according to the Independent Sector’s “2006 Facts and Figures about Charitable Organizations”.
  • In 2006, $295 billion was given to American non-profits by individuals, corporations, charitable bequests, and foundations, representing 2.2% of American GDP. Adding in earned income, investment income, contracts and grants, etc. would approximate 10% of GDP, as reflected in Giving USA: The Annual Report on Philanthropy, published by the Giving USA Foundation and researched and written by the Center on Philanthropy at Indiana University.

Unfortunately, unlike business investors, social investors have almost no information with which to compare one non-profit against another, one social investment choice against another.  Although it is easy to acquire basic information about administrative, fundraising, and program costs for the roughly 250,000 non-profits that file annual reports with the IRS, even these data are suspect—the rules governing the reporting are loose and auditing is rare.

Social investors have little knowledge on which to make thoughtful choices between non-profits, let alone conduct due diligence on the actual operations of the organizations they support.  Although they regularly assess the financial performance of each organization in terms of growth, deficits, possible diversification in revenue, and the strength of internal controls such as auditing and real-time budgeting, their investments are often based more on hunch and the salesmanship of a given organization than hard-nosed assessments of operations and impacts…

In the article How the Increasing Number of  ‘For-profit’ Arms of  ‘Non-profit’ Businesses are Leading to Mission Distraction by Burton Wiesbrod writes: Non-profit organizations are all around us. Many people send their children to non-profit day-care centers, schools, and colleges, and their elderly parents to non-profit nursing homes; when they are ill, they may well go to a non-profit hospital; they may visit a non-profit museum, read the magazine of the non-profit National Geographic Society, donate money to a non-profit arts organization, watch the non-profit public television station, exercise at the non-profit YMCA. Non-profits surround us, but we rarely think about their role in the economy, or the possibility of their competing unfairly with private enterprise.

Burton Weisbrod asks the important questions: What is the rationale for public subsidy of non-profit organizations? In which sectors of the economy are they of real importance? Why do people contribute money and time to them and why should donations be tax deductible? What motivates managers of non-profits? Why are these organizations exempt from taxes on income, property, and sales?

When the search for revenue brings non-profits into competition with proprietary firms–as when colleges sell computers or museum gift shops sell books and jewelry–is that desirable? Weisbrod examines the raison d’être for non-profits. The evidence he assembles shows that non-profits are particularly useful in situations where consumers have little information on what they are purchasing and must therefore rely on the probity of the seller…

According to Steven Rathgeb Smith, non-profits face important challenges: “Arguably, the non-profits, governments, and foundations are at a crossroads in terms of next steps and where they go in the future.” Smith noted the economic crisis — which has forced funding cutbacks at the state and local levels, forcing many non-profits to reduce services — as one of the challenges facing the sector. “The severity of these cutbacks has been exacerbated by reductions of funding from foundations and private donors,” he said.

Smith also pointed to new initiatives to increase demands for accountability, noting that state governments have embraced ‘performance‘ contracting with non-profits in which agencies that receive public funds are not reimbursed by governments unless they meet certain performance targets.

With government and private funders placing more emphasis on evaluation and performance measurements, Smith said “the pressure for accountability and improved performance, combined with the ongoing financial pressure on non-profit organizations, means that non-profit agencies are engaged in complex and sometimes contradictory relationships with other agencies in the service field.

Funding cutbacks can prompt non-profits to join together to influence public policy, and the growing interest in efficiency is spurring agencies to explore ways to share cost, including co-locations of some programs and services. So there is pressure on agencies to be more collaborative, and yet ‘performance’ contracting and the sheer growth of the number of agencies in many communities are actually encouraging more competition among agencies for funding and clients.”

Because of the fiscal cutbacks, as well as the increase in competition among non-profits, Smith said he believes it is a very important and critical time for government, non-profits, foundations, corporations and universities to rethink how they’re working together. Because we have so many organizations out there and the funding is scarcer, there is a need to rethink how we’re doing business”.

Smith said, government should take an investment approach when working with non-profit organizations, “one that emphasizes accountability as well as results and sound governance of community engagement.”

Smith finished his talk by saying that with the increasing interest in the American non-profit sector, urgent public problems are in need of attention and with the economic crisis to effectively respond, “non-profit agencies, foundations, universities, corporations and government will need to think creatively and constructively about their roles and responsibilities in order to successfully address social problems and local needs.”

Non-profit organizations are at work every day in our communities, and their work is evident in the people they are serving.” ~Grace King

Is There Distinctive European Management Style: German, English, French… or Cross-National?

“Europe has never existed. One must genuinely create Europe.” ~Jean Monnet

Management styles are characteristic ways of making decisions and relating to subordinates. This idea was further developed by Robert Tannenbaum and Warren H. Schmidt, who argued that the style of leadership is dependent upon the prevailing circumstance; therefore leaders should exercise a range of management styles and should deploy them as appropriate.

Even though there are clear differences between individual European regions, there is a set of common underlying tendencies to observe and thus we speak about European style of management.

In the article Are We Entering an Era of European Management Leadership? by James Heskett writes:  Antonio De Luca describes important differences between American and European management leadership this way: “If one has to generalize, it is fair to say that Americans pursue risk and Europeans seek stability … (leading) to fewer opportunities with more limited financial rewards, but possibly more balance for Europeans. The solution, as usual, is a sensible convergence of these two nuanced cultural approaches.”

Roy Bingham points out that “American management seems to work best when the key needs are speed, aggression, last-minute genius, and take-chance, inspiring leadership. In boom times when it’s ‘expand at all costs’–pick the American style. At other times the more deliberate, consultative European approach is your ally. Maybe this is why we are hearing more from the Europeans these days.”

Jose Pedro Goncalves takes issue with the idea of a “European” style of management; pointing out that there is no one style. In some parts of Europe “(As a manager) I’m a human being.” In others, “I’m just a number.” In general “we (Europeans) are more human, but less flexible, and this ‘leadership’ is only temporary.”

Dr. B. V. Krishnamurthy picks up this theme by commenting; “to argue that Europe might be snatching the lead in management is a little far-fetched. When one looks at the very successful organizations anywhere in the world, one discerns striking similarities—emphasis on efficiency, innovation, quality, and responsiveness to customers—even as one also finds adaptations to cultural differences.”

Heskett writes: I have sat in on several meetings with heads of major European companies in which questions about American leadership have been raised. What’s new, at least in my experience, is that the questions aren’t confined to political leadership; those are perennial favorites among our European counterparts. Instead, the questions deal with issues of business leadership.

They prompt the question of whether the highly-touted American style of management of the 90s is giving way to a new and different European style, just as Americans replaced Japanese management style as the ‘sine qua non’ among the world’s managers just a little more than a decade ago. In a word, the Europeans are acting as if they know something we in the U.S. don’t.

“If one has to generalize, it is fair to say that Americans pursue risk and Europeans seek stability” ~ Antonio De Luca

In the article “Comparison in German and French Management Styles and Business Meeting Etiquettesby Vaobhav Misra writes:  Managers in Germany are expected to be technically capable in their respective areas and to show strong, clear leadership. Although disagreement with a superior will rarely be seen in public this does not mean that Germans are ‘yes’ men. Subordinates tend to respect the technical abilities of their superiors and this will impact on their willingness to implement instructions.

People from cultures where managers are expected to develop a closer, more intimate ambience can see the German manager-subordinate relationship as distant and cold. The higher up the organization people rise the more a sense of the ‘dignity of the position’ becomes apparent. Socializing tends to be at peer group level rather than up and down a hierarchy…

In contrast, most senior management in most French companies was educated at the ‘Grandes Ecoles’ which are the elite schools of France. These colleges champion an intellectual rigor in their students, which is rarely matched elsewhere in the world. This produces a highly educated management population, which approaches management with an unusual degree of academic precision.

‘Intellectualism’ is something to be cherished rather than sneered at and a comment once attributed to French management was that; “this idea seems alright in practice but will it work in theory?” Thus, according to the French, management is an intellectual task to be mastered and thought about in terms of detailed analysis, the complete mastery of complex concepts and information and the eventual application of rational decisions.

More pragmatic issues of employee buy-in, motivating staff, etc. are not as prominent in French management thinking.  Decisions, once taken at senior levels, will be passed down the chain to lower management for implementation. This directive approach can be seen, especially by those from a consensus oriented, non-hierarchical background, as being overly authoritative and lacking in the necessary team-building elements…

In the article “German vs. U.S. Business Mentality” by Geschrieben von Gudrun Smith writes: German style of competition is rigorous but not ruinous. Although companies might compete for the same general market, as Daimler-Benz and BMW do, they generally seek market share rather than market domination. Many compete for a specific niche. German companies despise price competition. Instead,  engage in what German managers describe as Leistungswettbewerb, competition on the basis of excellence in their products and services.

They compete on a price basis only when it is necessary, as in the sale of bulk materials like chemicals or steel.  The German manager concentrates intensely on two objectives: product quality and product service. He wants his company to be the best, and he wants it to have the best products. The manager and his entire team are strongly product oriented, confident that a good product will sell itself. The watchwords for most German managers and companies are; quality, responsiveness, dedication, and follow-up. 

The business practices that might be termed a German management style have the following characteristics: collegial, consensual, product- and quality-oriented, export-conscious, and loyal to one company and committed to its long-term prospects. One could legitimately conclude from this that the German system could stifle change because it is not as innovative, aggressive, or results-oriented as U.S. management style.

That, however, would not be correct, for change can and does take place. It occurs gradually, not always obviously, under the mottoes of stability and permanence, with the least dislocation possible, and often under competitive pressures from abroad. German managers themselves occasionally speculate that change might come too slowly, but they are not certain whether or how to alter the system and its incentive structures.

In the book “Rethink: CEO series: “Europe Shows the Way! The Case for a Superior Management Model” by Professor Burkhard Schwenker writes: The recent financial and economic crisis showed that the European management model is superior to the American one. Weaknesses in the American style of management include a bias toward short-term gain, an inordinate focus on capital markets and finance, a misunderstanding of the concept of shareholder value and a systematic tendency to underestimate complexity.

Europe’s strengths, on the other hand, are rooted in a long-term mentality, excellent manufacturing skills, the ability to set products and services apart and the ability to translate diversity into creativity… According to Schwenker, the forceful economic upturn that has followed the crisis is due in part to the buoyancy of China and India, but also – and primarily – to the strengths of Europe and its superior management style.

The key attributes of this style include; a long-term strategic focus, the ability to set products and services apart, and what is already a very international and decentralized footprint. Schwenker states that the strength of Europe’s economy and the success of its companies are eminently measurable: A comparison of the world’s 3,000 biggest capital market-oriented companies from 1998 through 2008 found European firms to be the true global players.

Of the 3,000 companies analyzed, 27% are European, accounting for 34% of total revenue and 42% of total profit in the defined corporate universe. Schwenker sees these numbers as proof positive that European enterprises grow faster and (above all) more profitably, have a more international footprint, and have a more long-term focus.

In the book “The World We’re In” by Will Hutton writes: Work less but work smarter. French productivity is up; some would claim it is now higher than the U.S., just as is productivity in The Netherlands, Belgium, and the former West Germany. Volkswagen’s market share is climbing even though its highly unionized, highly paid work force puts in an average workweek of 28.8 hours. To this we add a second and related practice; balance work and personal life.

Many would claim that the quality of life (bolstered even by traditional measures of standard of living) in Europe is much higher than in the U.S. In addition, money that would otherwise be paid for management mega-salaries and mega-incentives are invested in technology. These developments seem to be providing the fuel to help Europeans work smarter.

Further, European companies rely more heavily on operational improvements and the contributions of employees rather than mergers and acquisitions to build value. This philosophy seems to be gaining some credence in well, with recent research on the high proportion of U.S. merger and acquisition activity that has actually destroyed value. Do the Europeans have it right? In the long run, will their management philosophy produce superior results? Combining all this with what is now the world’s second currency, the Euro, is the baton being passed from American to European management?

In the article “How European is Management in Europe?” by Markus Pudelko,University of Edinburgh and Anne-Wil Harzing, University of Melbourne, write: “Are there sufficient similarities among the management approaches of European countries to justify the term European Management?” Given Europe’s diversity this question seems justified.

Europe has a population of roughly 800 million, which is divided into 45 nation states, and is home to some 70 languages. Germany’s population is 82 million; Luxembourg’s a mere 450,000. The GDP of Germany is about 2.7 trillion US$, whereas that of Poland is only 180 billion US$. GDP per capita runs from a high of about 50,000 US$ in Luxembourg to a low of 4,000 US$ in Albania.

To understand why European management has many differences, one has first to study the dissimilarities of the legal frameworks in Europe. There are four different legal backgrounds to distinguish from their origin: the civil laws of French, German, and Scandinavian origin and the common law approach of the Anglo-Saxon countries.

In addition, one also finds very different corporate governance codes in Europe. Some European countries emphasize cooperative relationships and consensus, while other countries focus on competition and market processes in their corporate governance frameworks.

Europe is not a monolithic bloc of countries. Its strength and weakness at the same time is its variety of management styles and cultures. European managers are still facing very different business environments, cultures, and corporate governance issues. Being successful in Europe therefore depends very much on the knowledge of these differences. Management styles that work in Germany may not work in France, Italy, or The Nordic countries. Management cultures of the Middle and Eastern European countries and Russia are difficult to identify, because there Western style management has never existed.

In an increasingly multi-polar world in which it becomes ever more complicated to define what “best practices” actually are, allowing for pluralism seems the better strategy than the search for  “one best way”. The ability to integrate opposites and deal with inconsistencies are features for which Europe should have a natural competitive advantage, given its internal diversity which far exceeds that of the United States or Japan.

Given the likely increase in importance of European management practices, one conclusion seems certain: research on European management in an international context will become increasingly important…

  “Europe’s strength is its diversity, not its uniformity.”  ~Sir John Harvey-Jones

Geert Hofstedes Uncertainty Avoidance (UAI) Model for Global Business Success: Is it Brilliance or Folly?

“Culture is more often a source of conflict than of synergy. Cultural differences are a nuisance at best and often a disaster.” ~ Prof. Geert Hofstede

Recent trends such as, the globalization of business, increased diversity in the workforce, and increasing international alliances and mergers, highlight the need to examine business practices within an international context. Researchers caution against unquestioning adoption, dissemination, and application of Western management theories through out the world.

Cultural differences in a work place go deeper than an appreciation of different foods and a preference for different clothing: Western cultures shake hands. Cubans kiss. Some cultures hug when greeting one another. Many bow and bow differently. Japanese bow from the waist; the deeper the bow, the greater the respect. Thais bow with their hands chest high, palms together. Taiwanese are more likely to nod than bow. Dressing, eating and greeting, however, only scratch the surface of cultural differences.

In a landmark study, Prof. Geert Hofstede examined how values in the workplace are influenced by culture. He authored several books including Culture’s Consequences and Cultures and Organizations: Software of the Mind, co-authored with his son Gert Jan Hofstede. Geert’s model, when introduced in 1980, came at a time when cultural differences between societies had become increasingly relevant for both economic and political reasons. Hofstede’s model identifies four primary ‘dimensions’ to assist in differentiating cultures, and they are:

1. Power Distance Index (PDI) focuses on the degree of equality, or inequality, between people in the country’s society. A ‘high Power Distance Index’ indicates that inequalities of power and wealth have been allowed to grow within the society. A ‘low Power Distance Index’ indicates the society de-emphasizes the differences between citizen’s power and wealth. The top countries for ‘high power distance ratio (PDI)’ are: Malaysia, Guatemala, Panama, Philippines, Mexico. The lowest ranked countries for ‘power distance ratio (PDI)’ are: Austria, Israel, Denmark, New Zealand, Ireland.

2. Individualism (IDV) focuses on the degree to which the society reinforces individual or collective, achievement and interpersonal relationships. A ‘high Individualism’ ranking indicates that individuality and individual rights are paramount within the society. A ‘low Individualism‘ ranking typifies societies of a more collectivist nature with close ties between individuals. The highest ranked countries for Individualism ratio are: United States, Australia, United Kingdom, Netherlands, New Zealand. The lowest ranked countries for Individualism ratio are: Guatemala, Ecuador, Panama, Venezuela, Colombia.

3. Masculinity (MAS) focuses on the degree the society reinforces, or does not reinforce, the traditional masculine work role model of male achievement, control and power. A ‘high Masculinity’ ranking indicates the country experiences a high degree of gender differentiation. A ‘low Masculinity’ ranking indicates the country has a low level of differentiation and discrimination between genders. The highest ranked countries for Masculinity ratio are: Japan, Hungary, Austria, Venezuela, Italy. The lowest ranked countries for Masculinity ratio are: Sweden, Norway, Netherlands, Denmark, Costa Rica.

4. Uncertainty Avoidance Index (UAI) focuses on the level of tolerance for uncertainty and ambiguity within the society – i.e. unstructured situations. ‘High Uncertainty Avoidance‘ ranking indicates the country has a low tolerance for uncertainty and ambiguity. ‘Low Uncertainty Avoidance’ ranking indicates the country has less concern about ambiguity and uncertainty and has more tolerance for a variety of opinions. The highest ranked countries for ‘uncertainty avoidance’ ratio are: Greece, Portugal, Guatemala, Uruguay, Belgium. The lowest ranked countries for ‘uncertainty avoidance’ ratio are: Singapore, Jamaica, Denmark, Sweden, Hong Kong.

Geert Hofstede added a fifth (5th) dimension after conducting an additional international study using a survey instrument developed with Chinese employees and managers. Hofstede described that dimension as a culture’s ‘Long-Term Orientation’.

5. Long-Term Orientation (LTO) focuses on the degree the society embraces, or does not embrace, long-term devotion to traditional, forward thinking values. ‘High Long-Term Orientation’ ranking indicates the country prescribes to the values of long-term commitments and respect for tradition. ‘Low Long-Term Orientation’ ranking indicates the country does not reinforce the concept of long-term, traditional orientation. In this culture, change can occur more rapidly as long-term traditions and commitments do not become impediments to change.

The highest ranked countries for ‘long term orientation’ ratio are: China, Hong Kong, Taiwan, Japan, South Korea. The lowest ranked countries for ‘long term orientation’ ratio are: Sierra Leone, Nigeria, Ghana, Philippines, Norway.

(“In Hofstede’s view, the western culture is short-term oriented while the Chinese culture is long-term oriented. (…) The West has used the capacity to love as the symbolic basis for social relationships; the Chinese people use the capacity to work, because the Chinese people care about mutual aid and reciprocity.”)

In the article Understanding Hofstede’s Five Cultural Dimensions and Applying them to Your Business” by Michelle Cramer writes: Geert Hofstede developed a way to analyze a society’s culture based upon five cultural dimensions. Many organizations and businesses later applied this analysis to their companies in order to determine where they stood as a whole, and what needed to happen in order to change unfavorable results.

As you look at the elements of the ‘Five Cultural Dimensions’ created by Geert Hofstede, it’s important to keep in mind that the results only pertain to a culture or group as a whole, not to individuals within that culture. Thus, you should only apply this analysis to your business as a whole, and not let the results reflect upon any employee…

‘Uncertainty avoidance’ is one of the five intercultural dimensions developed by Hofstede. In essence this cultural dimension measures a country or culture’s preference for strict laws and regulations over ambiguity and risk. According the Hofstede’s findings, Greece is the most risk-averse culture while Singapore the least. Generally speaking Protestant countries and those with Chinese influences score low. Catholic, Buddhist and Arabic speaking countries tend to score high in ‘uncertainty avoidance’.

But, how does this manifest in a culture or country? Some of the common traits found in countries that score high on the uncertainty avoidance scale (UAI) are: 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.

Some of the common traits found in countries that score low on the ‘uncertainty avoidance scale (UAI)’ are: 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.

If you are working or doing business in a country with ‘higher uncertainty avoidance score (UAI)’ than yourself 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.

If you are working or doing business in a country with ‘lower uncertainty avoidance score (UAI)’ than yourself 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.

Kevin Dwyer writes: Cultural differences have an impact on how we conduct our business. They determine, in part, how easily we can build rapport. In my experience, well over half the battle in building rapport across very different cultures is understanding. For example:  Different cultures choose different approaches for a dilemma, such as: Diagnosis of a problem and suggested solution.

These two dimensions, ‘Power Distance and Uncertainty Avoidance’, affect our thinking about organizations. Taking these two dimensions together reveals differences in the implicit model that people from different cultures may have about organizational structure and functioning. Organizing demands the answers to two important questions:

  • Who has the power to decide what?
  • What rules or procedures will be followed to attain the desired ends?

The answer to the first question is influenced by indigenous cultural norms of ‘power distance’; the answer to the second question by the cultural norms about ‘uncertainty avoidance’. Taken together these two dimensions reveal a remarkable contrast in a society’s acceptance and conception of an organization and the mechanisms that are employed in controlling and co-ordinating activities within it.

For example, in Germany there is reasonable ‘high uncertainty avoidance’ (65) compared to countries as Singapore(8) and neighboring country Denmark (23). Germans are not to keen on uncertainty, by planning everything carefully they try to avoid the uncertainty. In Germany there is a society that relies on rules, laws and regulations. Germany wants to reduce its risks to the minimum and proceed with changes step-by-step. The U. S. scores 46 compared to the 65 of German culture.Uncertainty avoidance’ in the U.S. is relatively low, which can clearly be viewed through the national cultures.

In the articleExecutive Commentary: The Impact of Hofstede’s Work on Business Practices” by John W. Bing sites a few examples, such as:

1. Models of Leadership: Providing an understanding of how leadership practices and expectations may differ internationally and how to express the specific leadership practices of organizations in ways that can be understood by various constituencies. “Good” leadership behavior in one culture may be considered rather poor behavior in another.

2. Management Practices: Offering an understanding of the influence of culture on management practices worldwide within and between companies. Both compensation and benefit practices differ considerably across cultures, often on the individual-group dimension. What may be considered appropriate CEO compensation in a high individualistic culture may be considered larceny in a high group-oriented country.

3. Communicating Across Geographic and Institutional Boundaries: Understanding the role of leadership in translating and communicating both within and between local subsidiaries and between the corporate entity and its local subsidiaries. The study of dimensional differences can help global leaders both create and interpret policies at both local and corporate levels with a higher chance of success across company and geographic boundaries.

4. Global Teams: Learning how to lead global teams and measure obstacles and progress. Team members can discuss how their preferences influence their work on the team and how each person can help reach the team’s objectives. They can discuss why some members of teams would prefer for the team to perform like a leaderless jazz band (high individuality) and others like an orchestra with a conductor (group orientation and high power distance). Differences in cultural preferences can be leveraged to improve creativity and work effectiveness.

5. Development of Global Competencies: Understanding how cultural dimensions interact with global competencies. The dimensions mediate how competencies are both interpreted and rewarded. Helping senior leaders identify cultural and related barriers and bridges to communications and trust-building within new entities and provide solutions to speed these business transactions.

According to a KPMG study, “83% of all mergers and acquisitions (M&A’s) failed to produce any benefit for the shareholders, and over half actually destroyed value.”Cultural preferences have been identified as often overlooked barrier to effective implementation of mergers, acquisitions. The dimensions can be used to anticipate and reduce the culture clashes. In addition, merging companies’ disparate practices must also be aligned.

If you are aiming to expand or set-up a business in a new country, culture is a very important aspect to consider in your feasibility study. Here are a few examples of marketing blunders:

  • A toothpaste selling company tried to sell its product in Southeast Asia by emphasizing that it “whitens your teeth”. Their strategy failed because they found out that the local natives chew betel nuts to blacken their teeth which they find attractive.
  • A perfume company advertised a pastoral scene with a man and his dog. It failed in Islamic countries as dogs are considered as unclean there.
  • A motor company tried to market its new car, the Matador, based on the image of bravery and strength. However, in Puerto Rico the name meant “killer” and was not popular on the perilous roads in the country.

All these issues aroused because of low research made about the culture of the other countries. Poor cross cultural awareness has many consequences; some are serious while others are humorous. It is primordial that in the global economy, cross cultural awareness is seen a necessary investment to avoid such blunders.

You should be aware of the degree of equality between people in a particular society, whether individualism prevails over collectivism, whether the society is a male dominated one, whether people have low level of tolerance for uncertainty, whether there is willingness to commit in long-term business among many others.

Using this model as a benchmark, marketers can now fully develop their market entry method, their objectives, mission and vision, their marketing and communication strategies, the proper use of language and visuals in advertising, the way to approach potential clients and partners among many others…

“Culture is a little like dropping an Alka-Seltzer into a glass- you don’t see it, but somehow it does something”– Hans Magnus Enzensberger

Changing Rules of Global Competition: The New Reality…

“There will be hunters and hunted, winners and losers. What counts in global competition is the right strategy and success” ~ Heinrich von Pierer

In the report “Results of the U.S. President’s Commission on Industrial Competitiveness” by John A. Young writes:  The final report that the Commission submitted to the President was unanimous in its key findings, which were these:

  • There is compelling evidence that this nation’s ability to compete has declined over the past 20 years. We see its effects both in our domestic markets and in our ability to sell abroad.
  • We must be able to compete if we are going to meet our national goals of a rising standard of living and strong national security for our people.
  • Decision makers in both the public and private sectors must make improved competitiveness a priority on their agendas. As a nation, we can no longer afford to ignore the competitive consequences of our actions—or our inaction.

Competitiveness can be defined as the degree to which a nation can, under free and fair market conditions, produce goods and services that meet the test of international markets while at the same time maintaining or expanding the real incomes of its citizens. One-fourth of the goods produced in the world cross national borders, and fully 70 percent of the goods produced here in the United States compete against products made abroad.

These facts lead to this simple conclusion: the wages we get paid—the high standard of living we enjoy—must be earned in the world market.  No single indicator gives an adequate representation of our nation’s competitive performance. The Commission identified five trends, and they all point to a declining ability to compete:

  • First, growth in American productivity has been surpassed by many of our major trading partners. Productivity growth rate is greater than our own. In absolute terms, they are more productive than American industry in autos, steel, and electrical and precision machinery.
  • Second, real hourly wages in the business sector have remained virtually stagnant since 1973, and they have actually declined in the past five years.
  • Third, our manufacturing sector is not generating the kinds of real returns on assets that encourage investments. Twenty years ago the average real pretax return on manufacturing assets was almost 12 percent. In 1983, it averaged about 4 percent. Investors can do a lot better by putting their money in financial assets. Our manufacturing sector is the foundation on which many services rest.
  • The fourth trend that concerned the Commission is even more dramatic: deficits are at all-time highs.
  • The fifth and final warning signal hits close to home. Since 1965, 7 out of 10 U.S. high technology industries have lost world market share.

Our ability to compete in world markets depends on decisions made by both public servants and private citizens in four basic areas, and here are some actions that we can take to attain key goals in each of them. The goals are as follows:

  • Create, apply, and protect technology—it is our greatest competitive advantage;
  • Increase the supply of capital available for investment and reduce its cost to American business;
  • Develop a more skilled, flexible, and motivated work force;
  • Make trade a national priority at home and to strengthen the world trading system in which we operate.

All of us face a new reality—global competition. It requires a new vision and a new resolve. If we can forge these, we can—and will—meet the challenge of this new reality.

In the article “Explode the Myths of Global Competition” by Michael Lind writes:  First myth: “In today’s global economy, any job can be performed anywhere.” This is false or, at best, only a half-truth. All economies, even very open ones, have both a traded sector that is exposed to foreign competition and a non-traded sector that is insulated from it. According to a recent study by the McKinsey Global Institute, only about 11 per cent of the world’s service sector jobs can be performed remotely.

Most services, such as home construction and hospital care, by their very nature must be provided by workers in the same location as their customers. Workers in the non-traded service sector, such as nurses, may face competition from immigrants for jobs in the national labor market, but they are not competing with foreign workers in a global labor market.

Myth: “In order to compete in a global labor market–all students in advanced industrial countries need to be highly trained in science and mathematics.” This, too, is false. According to the U.S. labor department, the 10 fastest-growing occupations in the U.S. in 2002-2012 are: “medical assistants; networks systems and data communications analysts; physician assistants; social and human service assistants; home health aides; medical records and health information technicians; physical therapist aides; computer software engineers, applications; computer software engineers, systems software; physical therapist assistants.”

The future job outlook in other industrial democracies with service economies and ageing populations is similar. It is absurd to tell the nurses of tomorrow that, in addition to being literate and numerate, they need to study trigonometry in order to be effective at their job.

Myth about global competitiveness: “In order to compete in the global economy–the advanced industrial nations must downsize generous welfare states.” The premise is that generous welfare states prevent high-wage countries from competing with low-wage countries such as China and India in traded-sector industries. But scaling back or abolishing the welfare state would do nothing, and the truth is that the scale and scope of national welfare states is far less constrained by the global economy than many believe…

Therefore, it is time to replace the conventional wisdom: In the 21st century, most workers in advanced industrial nations will work in the non-traded domestic service sector. Most will not compete with workers in other countries. And a generous welfare state need not be a hindrance to competitiveness. These statements are not as familiar as the platitudes that make up the conventional wisdom. But they happen to be true.

Competing with multinationals can be considered a big game of chess, with each engagement with a competitor can be broken into an opening, a middle game, and an endgame” ~ Ed.

In the article “How Successful Companies Adapt to Global Competition” by Peter Koeppel writes: The global marketplace is changing rapidly and competition is fiercer than ever.  Industries are under attack from competition that didn’t exist a few years ago. However, instead of fixating on competitors, companies that are standing out in the global marketplace are finding ways of differentiating themselves by creating new markets.

In today’s business environment it’s sometimes more important to be unique rather than the biggest player in your industry. For example, Whole Foods is an example of a smaller grocery retailer that found a profitable niche and brand loyalty among a group of customers interested in a healthier and more eco-friendly lifestyle.

Cirque-du-Soleil, Apple and Starbucks are examples of companies that created new markets and have reaped the rewards from creating innovative products. How profitable can it be creating a new market vs. developing a product that is merely a brand extension?

Research contained in a book ‘Blue Ocean Strategy’ by W. Chan Kim and Renee Mauborgne showed that “86% of product launches that were line extensions accounted for 39% of the profits from all new-business launches from 108 companies tracked, but the remaining 14% of product launches that represented new markets accounted for 61% of profits!” The lesson here is that you don’t have to be mega brand to be profitable.

Understand what your customers want and use that information to your advantage. Successful companies like Dell and Land’s Endare supplying customers with customized computers and clothing, rather than trying to mass produce products appealing to the broadest audience. Competition is constantly evolving in today’s marketplace and the companies and their leaders that are in touch with the ways that winners are differentiating themselves are going to stay a step ahead of the competition.

In the article “Innovation as a Weapon in Global Competition by Stephen Shapiro writes: If you create a business that can adapt quickly and flexibly to the changing economic and cultural landscape, you may have the silver bullet you’re looking for. A key to achieving this kind of quick response is learning how to inject innovation into decision-making at all levels of the organization. It won’t happen by decree from the CEO, and I’m afraid there is no shortcut.

Real innovation requires broad cultural change based on values, guidelines, and outcome-based measurement systems that give flexibility to all employees while mitigating risk for the business as a whole. Done properly, a company can stay ahead of the change curve and beat the competition while also easing its move into new markets.

Successful innovation is continuous, and that very continuity enables companies to keep pace. Executives recognize that their company loses ground when the pace of change outside the company is greater than the pace of change within.  The ability to innovate is much more pervasive and ubiquitous than most of us imagine.

A word about definitions: Innovation is not the same as invention. Invention is something to be pursued in a carefully controlled laboratory atmosphere. Invention is the process of discovering things that have never been discovered before. Innovation is different. In the business world, innovation is the discovery of new ways of creating value. Not everyone can be an inventor, but everyone can be innovative.

What this leads to is the difference between “box” thinking and “line” thinking. When people say you need to get “out of the box” to be innovative, they are right, but for the wrong reasons. The box that most people operate in is focused on activities, computers, people, or departments within a company.  It is the lines, interconnections and interdependencies between the boxes, where innovation emerges. Innovative thinking comes from making connections: Connections between boxes; connections between ideas; connections between companies; or, connections between industries.  Focusing on the lines frees up the organization to improve within the guidelines of the simple structure…

In the article “The Changing Face of Competitive Strategy” by Niceto S. Poblador writes: It is now commonly accepted that the center of gravity of the global economy has shifted away from the U.S. towards Asia –China and India, in particular – and in the case of agricultural products, Brazil.  This observation is quite correct in the sense that these countries are fast becoming the largest economies in terms of total economic output (or GDP), as well as being the largest consumers of energy.

It is also valid in terms of the international flows of manufactures and commodities… The major differences between the old and the new competition are: In competing for markets, traditional competitive strategy stresses positioning in existing, well-defined markets, and striving to enhance market share. The new competition involves pre-positioning in future and yet undefined markets (or so-called ‘Blue Oceans’), and co-developing these markets with others. Here, firms compete not to maximize market share but to maximize value. In today’s global, intensively interconnected business environment, a major challenge faced by business organizations is how to maximize shareholder value and sustain growth, while at the same time creating economic value for all.

Two essential ingredients of strategy are needed to achieve these long-run corporate objectives: (1) Setting up and being the central part of constellations of partners with whom to conceive and co-create a continuous stream of value propositions; and (2) Identifying unique combinations of these value propositions by engaging customers in developing customized services that meet their continuously changing – and equally unique – needs…

In the article “Responding to the Challenges of Global Markets: Change, Complexity, Competition and Conscience” by C. Samuel Craig and Susan P. Douglas write: A new economic order appears to be emerging, characterized by new players and new and more diverse patterns of trade. Firms from nations such as Taiwan, Singapore, Korea and Hong Kong are increasingly taking the initiative in competing in global markets, rather than acting as low-cost suppliers to firms in the Industrial Triad.

The threat of competition from companies in countries such as India, China, Malaysia, and Brazil is also on the rise, as their own domestic markets are opening up to foreign competition, stimulating greater awareness of international market opportunities and of the need to be internationally competitive. Companies which previously focused on protected domestic markets are entering into markets in other countries, creating new sources of competition, often targeted to price-sensitive market segments. Several emerging trends are impacting organizational life. Of these emerging trends, five are noteworthy: globalization, diversity, flexibility, flat, and networks…

According to Dani Rodrik, Professor at Harvard’s Kennedy School of Government “the most serious challenge for the world economy in the years ahead lies in making globalization compatible with domestic social and political stability”. This will ensure that international economic integration does not lead to domestic social disintegration…

“A competitive world offers two possibilities. You can lose. Or, if you want to win, you can change.”

Absurdity of Executive Compensation: Golden Parachute, Golden Handshake, Golden Fetters, Golden Coffins…

“The best bargain is an expensive CEO . . .. You cannot overpay a good CEO and you can’t underpay a bad one. The bargain CEO is one who is unbelievably well compensated because he’s creating wealth for the shareholders. If his compensation is not tied to the shareholders’ returns, everyone’s playing a fool’s game.” ~Al Dunlap

Executive pay is financial compensation received by an officer of a firm, often as a mixture of salary, bonuses, shares of and/or call options on the company stock, etc. Over the past three decades, executive pay has risen dramatically beyond the rising levels of an average worker’s wage. Executive pay is an important part of corporate governance, and is often determined by a company’s board of directors.

In a modern US corporation, the CEO and other top executives are paid salary plus short-term incentives or bonuses. This combination is referred to as Total Cash Compensation (TCC). Short-term incentives usually are formula-driven and have some performance criteria attached depending on the role of the executive.

For example, the Sales Director’s performance related bonus may be based on incremental sales growth; a CEO’s could be based on incremental profitability and revenue growth. Bonuses are after-the-fact (not formula driven) and often discretionary.

In a study of 20,000 U.S.companies from 1965 to date by Deloitte’s ‘Center for the Edge’ shows a disastrous decline in performance overall in this period:

  • The rate of return on assets of firms has fallen by 75%.
  • The life expectancy of firm has fallen from around 70 years to less than 15 years, and is heading towards 5 years, unless something changes.

While corporate performance has been on this sharp decline, executive compensation has been increasing astronomically. Whereas in 1965, executive compensation was 24 times what the typical worker made, studies show that today executive compensation is a staggering 275 times what the typical worker makes.

In a more detailed study of the growth of U.S. executive pay during the period 1993-2003 by Lucian Bebchuk and Yaniv Grinstein, pay grew much beyond the increase that could be explained by changes in firm size, performance and industry classification. Had the relationship of compensation to size, performance and industry classification remained the same in 2003 as it was in 1993, mean compensation in 2003 would have been only about half of its actual size.  In other words, executives were receiving increases in compensation that were twice what would have been justified by performance.

Meanwhile, during the period, compensation for workers has remained basically unchanged.  Studies show that real average hourly earnings (excluding fringe benefits) now stand roughly at 1974 levels. Since the cost of health and education has been increasing rapidly, the actual standard of living of most people has been on the decline… Many newspaper stories show people expressing concern that CEOs are paid too much for the services they provide.

In “Searching for a Corporate Savior: Irrational Quest for Charismatic CEOs” by Rakesh Khurana documents the problem of excessive CEO compensation, showing that the return on investment from these pay packages is very poor compared to other outlays of corporate resources. Defenders of high executive pay say that the global war for talent and the rise of private equity firms can explain much of the increase in executive pay. But, how should we view the disparity between executive compensation which has been soaring and workers’ pay which has been flat for some 45 years?

Here are a couple of viewpoints: CEO of a green tech firm said: “I can get workers anywhere in the world. It is a problem for America, but it is not necessarily a problem for American business… American businesses will adapt.”  Nor was the CFO of an internet company particularly sympathetic to the plight of the American middle class. “If you’re going to demand 10 times the paycheck, you need to deliver 10 times the value. It sounds harsh, but maybe people in the middle class need to decide to take a pay cut”…

In the article “What Fueled Public Outrage Wasn’t How Much Execs Got But How Little the Rest of Us Did” by Camelia Kuhnen writes: We’ve seen the call for reform before: Back in the ’90s, there was a similar sort of public outrage [and that led to] changes in the law. Cash pay had to be capped at $1 million [because] after that the tax implications for the company were more severe. Companies invented other ways to pay CEOs that weren’t subject to this cap. That’s when you saw stock options take off as a form of CEO pay. …

The public outrage recently has been about bonuses—the total value of pay that executives receive, especially the banking execs. So the issue is, if you regulate the way execs are paid, will they just come up with new ways to pay executives that aren’t in violation of regulation?

In the blog “Executive Compensation by Deborah DeMott writes: In the book the ‘Big Short’ by Michael Lewis observes that “What are the odds that people will make smart decisions about money if they can get rich making dumb decisions?” Put differently, what worries Lewis is the risk that the incentives that channel greed aren’t necessarily calibrated to encourage smart decisions. Pressing a bit further, decisions that are dumb may have negative effects for particular firms and their constituents, including shareholders.

But, as we know, the adverse consequences of some dumb decisions extend more broadly. Some reforms to executive compensation practices, i.e., say-on-pay (SOP), more disclosure, greater focus on the composition and independence of boards’ compensation committees – may help, but also better oversight on managerial decisions that create major systemic risks is essential…

In the article “Competition for Managers, Corporate Governance and Incentive Compensation” by Acharya, Gabarro and Volpin write: Pay-for-performance compensation is greater in firms with weaker governance, thus a reminder of the dangers of putting on blinders when evaluating and regulating corporate governance. Executive compensation depends not just on a firm’s own governance, but on the governance of the firm’s competitors of comparable size.

Managerial quality also depends on firm governance. The authors note that the offsetting effects of governance and managerial quality “may explain why it has proven so hard so far to find direct evidence that corporate governance increases firm performance.”

However, a notable exception is the link between governance and performance found in firms owned by private equity: Private equity ownership features strong corporate governance, high pay-for-performance but also significant CEO co-investment, and superior operating performance. Since private equity funds hold concentrated stakes in firms they own and manage, they internalize better (compared, for example, to dispersed shareholders) the benefits of investing in costly governance.

Our model and empirical results can be viewed as providing an explanation for why there exist governance inefficiencies in firms with dispersed shareholders whereas, concentrated private equity investors can “arbitrage” through their investments in active governance.

In a Bloomberg poll, more than 80% of Americans – evenly divided between the well-off and those making under $100,000-a-year agreed most CEOs are paid “too much.” However, the simple truth is that Americans don’t mind income inequality, as Harvard University’s Benjamin Friedman points out in his book, ‘The Moral Consequences of Economic Growth Throughout U.S. History’ writes; “the central question is not the poverty of the most disadvantaged, not the success of the most privileged. It is the economic well-being of the broad majority of the nation’s citizenry.” 

So when all income levels prosper, as they did in the mid-to-late 1990s, few mind if the rich get richer.  What’s at stake, in short, is nothing less than the public trust essential to a thriving free-market economy. “There’s a right amount for CEOs to get paid, and it could very well be lower than it is today,” says Jeff Immelt when asked about executive compensation. “I don’t know. I wish the debate would end, though, for one reason … it’s crowding out important debates on education, innovation, technology, globalization, competitiveness, that are really what you want this whole thing to be about.”

In the article “Absurdity of the Golden Parachute” by Carl Icahn writes: A golden parachute is a binding agreement between a company and an employee (most often a CEO but in some cases all the employees) detailing considerable benefits for the employee if the employee is terminated or retires. When executives retire, parachutes are sometimes known as ‘golden handshakes’.

Golden parachute or golden fetters payments may also benefit employees should there be a change in company ownership or control. More perplexing and just utterly illogical are “golden coffins.” As if golden parachutes were not enough, many executives will receive huge packages after they die, says the Wall Street Journal. Without an act of Congress, the only way these practices will change is if shareholders demand it…

The issue of executive compensation seems to revolve primarily around many of the Fortune 500 companies, which are mostly proceeding along the lines of ‘classic capitalism’ (i.e. maximizing value to shareholders…). These are the Walmarts and G.E.s of this world—companies which are doggedly tweaking their value chains and whose share price has struggled for at least the last decade.

The picture is dramatically different if we look at companies practicing ‘new age capitalism’ (i.e. maximizing value to customers…). These are firms like Apple and Amazon, with increments in share value of ten-to-fifteen times over the last decade. If firms were performing like Apple and Amazon, then there would be plenty of room—and justification—for substantial increases in both executive and worker compensation.

All of which underlines the need for organizations to move into ‘new age capitalism’ and begin to significantly reduce the enormous compensation disparity between executives and workers…

Differentiation is Heart & Soul of Business Success: It’s Not Discretionary!

“Competitive strategy is about being different.  It means deliberately choosing to perform activities differently or to perform different activities than rivals to deliver a unique mix of value.” ~ Michael Porter

The concept of being unique or different is an imperative in today’s business environment. The key to successful marketing and competing is differentiation. What used to be national markets with local companies competing for business has become a global market with everyone competing for everyone’s business everywhere.

Choosing among multiple options is always based on differences, implicit or explicit, so you must differentiate in order to give the customer a reason to select your product or service.

In the article “Differentiation–Smart Strategies for Solo Entrepreneur” by Terri Zwierzynski writes: “So what makes you different?” In business terms, to differentiate means to create a benefit that customers perceive as being of greater value to them than what they can get elsewhere. It’s not enough for you to be different; a potential customer has to take note of the difference and must feel that the difference somehow fits their need, better… (That means you have a better competitive advantage, unique selling proposition, or value proposition.)

Differentiation allows you to charge a fair price because you are delivering more value to your customers. It’s prudent to evaluate and adjust your differentiation methods at least annually. Keys to successful differentiation:

  • Know your customers, really, really well.
  • Pick a blend of differentiation methods that, in the eyes of your customers, truly sets you apart.
  • Talk about your differentiation in terms of customer benefits.
  • Tell everyone about what differentiates you–often.
  • Keep your differentiation fresh by listening for changing customer needs.

In the article “Have You Got Differentiation?” by Kevin Levi writes: The best way to leverage your key messages to differentiate yourself and your business is to use quantifiable metrics. Instead of saying proven solution, why not list your total number of clients, or even actual customer names (if possible)? Rather than using words like global or leader, explain why you are global.

For instance, list the number of countries you operate in or all of the geographic regions you service. And if you are a leader or innovator in your space, then talk about exactly what it is that makes you so. Don’t leave your clients guessing. Words like leader and innovator are a waste of space if they aren’t explained. The key here is to stand out from your competition. Make it easy for your clients and prospects to exalt you higher than the others.

In your messaging or positioning statement state exactly what customer problem you are solving or fulfilling. Don’t only talk about how great you are; tell the potential client what it is you are going to help them accomplish. At the end of the day, messaging is all about differentiation. Whatever you and your business can hang your hat on, do so. If you have certain reasons why you stand above the rest, tell people about it — shout if from the rooftops. Business is no place to be modest. Honest-Yes: Modest-No.

In the article “Making Differentiation Make a Difference” by Patrick Barwise and Seán Meehan writes: Many companies wrongly allocate millions of dollars to add a slight twist to their product — a new color, a new taste, a new chemical, or a new label — to distinguish it from the previous version. They put an equal amount of money into promoting their new-and-improved product through advertising and other marketing campaigns. Their return, over the long term, is usually marginal.

Marketers ardently care about those little features because they believe the features make their products and services stand out. That’s why they try so hard to build their brand’s performance on tidbits like a deodorant with vitamin E, the cereal that proclaims it stays crispy in milk longer than the others, or the Web-enabled refrigerator…

But customers hardly seem impressed. With all the brand tinkering that’s gone on in the past decade, the University of Michigan’s American Customer Satisfaction Index, which measures satisfaction for 200 companies in 40 industries has never exceeded 75 out of a theoretical maximum of 100. Although scores in some industries have risen in the last few years, many industries rate lower today than they did in 1994.

What’s wrong? When companies are so preoccupied with fiddling with individual products and brands, they lose sight of the value they can create for themselves, and for consumers, by raising the bar for the entire category. If Crest, Exxon Mobil, Tide, Citibank, or Marriott disappeared tomorrow, most American consumers would at worst feel slightly inconvenienced by having to switch to indistinguishable alternative. But how would they feel if an entire category — toothpaste, gasoline, detergent, consumer banks, or hotels — disappeared? That would have an effect on their lives they’d notice.

So how can a company be rewarded for getting consumers to notice their role in raising category quality? To start, companies need to know what customers really care about. In 1993, Unilever launched ‘Mentadent’ toothpaste, a combination of toothpaste, baking soda, and peroxide delivered through a clever pump.

Within two years, Mentadent became a $250 million brand with a 12 percent share of the U.S.toothpaste market, an impressive figure in this crowded category. Why? Because Unilever understood that dental hygiene is what’s on people’s minds when they buy toothpaste. So the company created a product that offered superior dental hygiene. Unlike a meaningless pink stripe down the middle of the toothpaste, this was differentiation that made a difference.

In his 1980 classic Competitive Strategy: Techniques for Analysing Industries and Competitors, Michael Porter describes a category scheme consisting of three general types of strategies that are commonly used by businesses to achieve and maintain competitive advantage. These three ‘generic strategies’ are defined along two dimensions: strategic scope and strategic strength.

Strategic scope is a demand-side dimension and looks at the size and composition of the market you intend to target. Strategic strength is a supply-side dimension and looks at the strength or core competency of the firm. In particular he identified two competencies that he felt were most important: product differentiation and product cost (efficiency).

Then, later he simplified the scheme by reducing it down to the three best strategies. They are cost leadership, differentiation, and market segmentation (or focus). Market segmentation is narrow in scope while both cost leadership and differentiation are relatively broad in market scope.

Since that time, empirical research has indicated companies pursuing both differentiation and low-cost strategies may be more successful than companies pursuing only one strategy.  Some commentators have made a distinction between cost leadership, that is, low cost strategies, and best cost strategies. They claim that a low cost strategy is rarely able to provide a sustainable competitive advantage. In most cases firms end up in price wars. Instead, they claim a best cost strategy is preferred. This involves providing the best value for a relatively low price.

A popular post-Porter model was presented by W. Chan Kim and Renée Mauborgne in their 1999 Harvard Business Review article “Creating New Market Space”. In this article they described a “value innovation” model in which companies must look outside their present paradigms to find ‘new value propositions’. Their approach fundamentally goes against Porter’s concept that a firm must focus either on cost leadership or on differentiation. They later went on to publish their ideas in the book “Blue Ocean Strategy”.

In the book “Differentiate or Die” by Jack Trout and co-author Steve Rivkin, spell out a 4-step process for differentiating a company from its competition. For easy recall we sum it up in a sentence: Discover-it, define-it, prove-it, proclaim-it. The “it,” of course, being that thing which makes your company different from — and, therefore, presumably better than — your competitors. Adding a fifth step: Proliferate-it, the following 5-step differentiation process emerges:

  • Discover – what it is about your company that makes it different from — and, therefore, better than — its competitors.
  • Define – that difference in a brief statement — the fewer words, the better.
  • Prove – that what’s stated in the statement is true.
  • Proclaim – the statement everywhere and project the point of difference through every aspect of your business.
  • Proliferate – the point of difference by installing not duplicable products, services, promotions, and methods that expand that difference and also protect it from competitive encroachment. We call these things differentiation-builders.

‘Differentiate or Die’ builds upon a very simple premise: To survive, or at least out-perform, one’s competitors in this era of killer competition, a company must out-differentiate that competition…

“Don’t forget that it (your product or service) is not differentiated until the customer understands the difference.”  ~Tom Peters

In the article “There is Little Benefit in Having a Highly Differentiated Product That No One Wants to Buy” by Terra L. Fletcher writes:  The differentiation strategy of a business is a predetermined set of actions designed to produce and deliver goods or services to customers who perceive the company’s offering as different.  Not just different, but different in a way that is important to the customer.  This means meeting your customer’s unique needs with products in a way that gives your company a competitive advantage.

When you have the ability to view your business and competition from an objective viewpoint; the differentiation necessary to separate yourself and your product or service becomes clear.  Determine precisely what your current positioning is and how you could improve it. Then, determine your exact competitive advantage and how can you improve your difference and separate yourself further from the competition.  A strong business differentiation strategy is fundamental to a successful business.

Put yourself in the place of the business’ customer. The question here is “Why go to company A instead of company B? The only reason would be the items that differentiate the two (price, quality, location, atmosphere, response time, etc.).

It is important to note that these differentiators will be most effective if they reflect your brand’s core values and committed promise. Creating a differentiator for the sake of differentiation will be short-lived and thus create distrust among not only your customers, but your employees as well. Take some time to think through the key attributes of your brand’s DNA, and sometimes it takes getting back to basics before you can take the next step towards evolution.

“To create differentiation that won’t be imitated, you have to think beyond the core benefits that are considered important in your market. The companies that have succeeded in maintaining their differentiation over the years and weren’t imitated even though they were making tremendous profits are those that innovated in qualities beyond the core benefits of their market.”

In the article “Meaningful Brands from Meaningless Differentiation: the Dependence on Irrelevant Attributes” by Carpenter, Gregory S.; Glazer, Rashi; Nakamoto, Kent write: Product differentiation is a classic marketing strategy, well illustrated by General Motor’s legendary success in differentiating itself from Ford by introducing colors. Much has been written about product differentiation strategies (e.g., Aaker 1991; Kotler 1991; Porter 1985).

The prevailing view is that successful product differentiation requires distinguishing a product or brand from competitors on an attribute that is meaningful, relevant, and valuable. For example, Porter describes differentiation as developing a unique position on an attribute that is “widely valued by buyers”.

However, many brands also successfully differentiate on an attribute that appears valuable but, on closer examination, is ‘irrelevant’ to creating the implied benefit. For example, Procter & Gamble differentiates instant Folger’s coffee by its ‘flaked coffee crystals’ created through a “unique, patented process,” implying (but not stating) in its advertising that flaked coffee crystals improve the taste of coffee.

In fact, the shape of the coffee particle is relevant for ground coffee (greater surface area exposed during brewing extracts more flavor), but it is irrelevant for instant coffee: The crystal simply dissolves, so its surface area does not affect flavor. Similarly, Alberto Culver differentiates its Alberto Natural Silk Shampoo by including silk in the shampoo, and advertising it with the slogan “We put silk in a bottle” to suggest a user’s hair will be silky. However, a company spokesman conceded that silk “doesn’t really do anything for hair”.

Consumers apparently value these differentiating attributes even though they are, in one sense, irrelevant…  We argue that adding an irrelevant attribute to one brand changes the structure of the decision consumers face, especially if the differentiating attribute is difficult to evaluate, such as silk in shampoo. As a result, consumers may infer the attribute’s value and, in some cases, conclude that it is valuable…

“Competitive differentiation has become the life blood of organization as it is the base for value creation. Presently, business organizations operate in all areas through people and it is their contribution which determines success.” ~Deepak Jaroliya

Buying is an exercise in decision-making. Some buying decisions are made impulsively and almost unconsciously; others are made after long and careful consideration. But all decisions, that is, all logical decisions; are ultimately the end result of a mental selection process by which the buyer converges on a “best” option. Buyers can perform that selection process in two ways: They can make the selection at random, by throwing dice, drawing straws, or just guessing.

Or they can make the selection by differentiating; by acting on a perceived distinction between the available options. Of these two ways of deciding, differentiation is by far more “natural”; it’s the rational process to sort and select one product or service over another. Nobody (well almost nobody) makes a decision, especially a potentially costly buying decision, by random choice unless there is no distinguishable difference between the options. This is differentiation, and without it you lose…

“The essence of strategy lies in creating tomorrow’s competitive advantages (differentiation) faster than competitors can mimic the ones you possess today.” ~ Gary Hamel & C. K. Prahalad