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Business strategies and practices in developing economies
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Business strategies and practices in developing economies Abstract: Strategic business principles apply worldwide; however, practices will vary and often be influenced by the level of economic development found in a specific location. Interpersonal business practices will vary across locations and need to be aligned with the specific cultural environment in which a firm operates. Choice of operational business practices is often influenced by the technological environment and need for efficiencies, and thus is more likely to be able to be used across geographical and industrial boundaries with relatively little need for adaptation. Key words: strategy, national competitiveness, innovation, human resource management, leadership, operational management.
Business practices and principles As mentioned in the previous chapter, most business principles can be considered universal; however, the practices needed to be used to implement these principles will vary and need to be aligned with environmental conditions. Business practices come in a wide variety of types, some designed to ensure long-term success while others are used for increasing efficiency in day-to-day operations. While there is no one set of practices which will lead to success in every situation, internal consistency is often required. For example, a firm using a low-cost strategy will need to use practices which are helpful in creating efficiencies and will have to make some trade-offs and avoid most practices which increase costs, even if these practices provide some different forms of benefit. A three-level framework where business practices are broken down and examined into strategic, interpersonal and operational practices is used to examine business practices. While operating in the LDCs of Asia, some business practices
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can be imported from different environments, others might need to be adapted for local conditions and still others might have to be designed from the ground up based on local environmental conditions.
Strategic level business practices There is no single set of business strategies that can be universally applied in every situation which will lead to success. Business strategies are about choices and trade-offs; business strategy is as much about what a company chooses not to do as it is about what a company chooses to do (Porter, 1996; Peng, 2002). Using Porter’s (1980) framework of generic strategies there can be found examples of firms succeeding using low-cost leadership, focused and nearly endless variations of differentiation strategies. While there can be found universal best practices in operational business practices which can be used across industrial and national borders, there are no best strategic practices that can be used successfully by all firms. Selection of a business strategy relies on multiple internal and external factors. It has been argued the economic environment of a country in which a company operates is especially important when selecting strategies (Hipsher, 2007, 2010a). Increased wealth provides consumers and businesses more flexibility in purchasing decisions, which therefore provides companies more strategic options to attempt to capture the purchases of customers. Therefore, one finds more and more varied uses of differentiation strategies in more developed economies, while options for the use of differentiation strategies in less developed economies will be relatively limited. Porter (1980) felt the primary ways for a company to compete were to use one of the following: cost leadership, differentiation or focus/niche strategies. Cost leadership is ‘a business-level strategy in which the organization is the lowest-cost producer in its industry’ (Robbins and Coulter, 2005: 193). Cost leadership strategies provide firms the opportunity to compete on price while maintaining profitability. A firm is able to attain cost leadership through superior access to technology, technological leadership, process innovation, as well as leveraging benefits from the learning curve, economies of scale, creating products that are designed to reduce costs and manufacturing time, and/or through reengineering activities (Allen et al., 2006: 25).
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‘The differentiation strategy is an integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them’ (Hitt et al., 2005: 118). Product differentiation allows firms to charge a premium price based on ‘product characteristics, delivery system, quality of service, or distribution channels’ (Allen et al., 2006: 25). The differentiation strategy is often reported to be more sustainable that a cost leadership strategy and has the most potential for profitability (Hitt et al., 2005). ‘The focus strategy is an integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment’ (Hitt et al., 2005: 122). Niches can arise from a number of factors, including ‘geography, buyer characteristics, product specifications, or requirement’ and are segments of the market that are often ignored or found unattractive by large companies in the industry (Allen et al., 2006: 25). Therefore, the use of a focus/niche strategy is often associated with smaller firms. It has been commonly believed the external environment has a significant impact on the choice of strategies made by firms (e.g., Hagan and Amin, 1995; Kim, 2008; Bach and Allen, 2010). There is also significant evidence that a firm’s internal environmental factors such as corporate culture, leadership and organizational structure affect strategic choices (e.g., Franke et al., 2007; Epstein et al., 2010; Kipping and Cailluet, 2010). However, a clear separation between the internal and external environments is in reality not always easy to identify. Organizations are not closed systems but open ones and internal environmental factors are heavily influenced by the external environment. For example, organizational culture appears to be affected to a considerable extent by both the national culture of the country of origin and the country of operation of an organization (Jung et al., 2008; Prasnikar et al., 2008; Klein et al., 2009). National culture also appears to impact a firm’s organizational structure (Walsh, 2004; Li and Harrison, 2008) and choice of leadership styles (Kanungo and Wright, 1983; Chong and Thomas, 1997; Neelankavil et al., 2000; Suutari et al., 2002). If we accept strategy is the linkage between a firm’s internal and external environments (Ensign, 2008: 34) and accept that the internal and external environments of firms in LDCs are different from the environments found in more developed economies (Shenkar, 2009), then it would be expected strategies used and strategy formulation in firms in LDCs will be significantly different from those practiced in the environments found in more developed economies.
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Environmental conditions Theories about business strategy and other business practices have mostly been developed by examining business practices in the most developed economies around the world (Mathews, 2000; Lau, 2006). In general, both the internal environments found in firms from emerging economies and the external environment which influences strategic decisions in LDCs are quite different from the environments found in the firms that were explored when developing most strategic theories. Most strategic management theories make an assumption the goal of increasing competitiveness within a market is the primary driver of strategic decision making. This assumption may hold in environments with relatively free markets and where the government’s primary role in business is regulation, but in many LDCs governments play a more direct role in business and it has been found building relationships is often the primary strategic focus of firms operating in LDCs. This choice of strategic option can be attributed to the fact LDCs are often characterized by informal legal systems and the government’s direct involvement in economic activities (Kim, 2008; Luk et al., 2008; Chattananon and Trimetsoontorn, 2009). Instead of focusing on beating the competition, in LDCs the focus of strategy is often on joining a network and cooperating with various business partners and government officials (Tsang, 2001; Suehiro and Wailerdsak, 2004; Aribarg, 2005). The primary factor differentiating LDCs from developed economies is level of economic development. Firms originating from developed economies operate in environments where financial support, technology and skilled labor are more abundant than what is normally found in LDCs. Strategic theory often makes the assumption that firms have access to the resources necessary to engage in a variety of different strategies. This assumption may not hold in LDCs where the lack of access to vital resources, such as technological innovation, financing and human knowledge and skills, may limit the strategic choices available to a firm. The social-cultural environments firms operate in also have an impact on the strategic options available to them. For example, for the most part religion is not normally thought of as having a direct influence on business practices mainly due to individuals thinking the values shaped by religions in their home markets are natural and often assume they are universal (Ali and Gibbs, 1998). Yet a linkage between Christian values and business practices in Western countries has been identified (Anderson et al., 2000;
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Vinten, 2000; Cornwell et al., 2005). Muslim values have been found to influence the business environments and practices where Islam is widely practiced (Abbasi et al., 1989; Ali and Al-Owaihan, 2008). Confucian values have been thought to influence business practices in much of East Asia (Wang, 2004; Yan and Sorenson, 2004). Additionally, it has been proposed the business environments of Thailand, Laos PDR, Cambodia and Myanmar/Burma have been influenced by Theravada Buddhist teachings and values (Hipsher, 2010a). As religion often has more influence on the lives of individuals in LDCs than on individuals living in countries with higher standards of living (Barro and McCleary, 2003; McCleary and Barro, 2006), the impact of religious values may have a more pronounced impact on business practices and strategy formulation in LDCs than in more developed economies. The technological environment in LDCs is generally less mature than in environments found in developed economies. The number of patents having been filed in, or from residents of, LDCs is very low is comparison to what is found in more developed economies (WIPO, 2008), which would seem to indicate companies from LDCs are farther removed from the invention of cutting edge technology than are firms in developed economies. Another factor limiting the use of technology is the lower pay scales making some technologies used in developed economies less cost effective in LDCs than using human labor. Ownership structures also differ in LDCs in comparison to what is seen in more developed economies. In studying strategy in Western societies and, in particular, the USA, there is often an assumption of a separation of ownership and management and the sole purpose of a firm is to maximize profits. However, corporations and the separation between owners and managers are rare in LDCs (Suehiro and Wailerdsak, 2004; Luthans and Ibrayeva, 2006). Owner-managed and entrepreneurial firms in both developed and LDCs have been found to have many non-financial objectives (such as independence and the creation of jobs for family members) in addition to, and sometimes conflicting with, the goal of profit maximization (Befus et al., 1988; Pinfold, 2001; Paulson and Townsend, 2005; Choo and Wong, 2006; Hatcher and Terjesen, 2007). Moreover, in many LDCs state-owned firms are not uncommon and these firms also often have objectives in addition to, and sometimes in conflict with, maximizing profits. Since the ownership structures and objectives of many firms from LDCs differ from the corporate model, often there will be found different approaches taken as regards strategy.
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Innovation Innovation has often been considered a necessary component in gaining strategic competitiveness. For example, Pellicer et al. (2010) proclaimed every organization needs to invest in research and development (R&D); however, it is questioned whether the majority of organizations from countries such as Cambodia, Nepal or Afghanistan have access to the financial and human capital needed to engage in effective R&D. Zhang (2010) found some Chinese manufacturing firms made limited use of R&D while others did not engage in any R&D activities at all, and yet still managed to survive and sometimes thrive. De Valk (2003) in his study of firms in Laos PDR felt that it did not make much sense for firms in this country to engage in R&D in order to reinvent the wheel, but rather it made more sense to adapt technology and ideas generated elsewhere for use locally. Instead of expecting firms from emerging economies to either think of innovation and R&D in the same terms as firms from developed economies or to strictly copy ideas, innovation in LDCs may often entail adapting ideas, products and processes originally created in other locations in unique ways for use within the specific environment found in each LDC. Lederman (2010) reported firms which were globally engaged through the use of licensing, foreign investment or involved in exporting activities generally increased the number of product innovations they created, with firms in China being somewhat of an exception. Most firms in LDCs, with the exception of a few firms in the export sector, generally have few opportunities to engage in activities that allow for substantial importing of foreign knowledge which would appear to limit the amount of product innovation possible. Lederman also found at the country level innovation breeds innovation and firms operating in national environments where there is significant global engagement by other firms can use spillover knowledge to enhance their ability to create product innovation even if the firms were not directly engaged globally. Firms from LDCs are less likely to have the opportunity to take advantage of this spillover effect than are firms from more economically developed and globally integrated economies. Li et al. (2010) broke down innovation into the categories of exploratory and exploitative. Exploratory innovation involves radical changes and is intended to be used in pursuing new opportunities. Exploitative innovation involves incremental changes intended to improve existing processes. The authors found the external environment had some impact on a firm’s innovation strategy. In more competitive environments, which are more
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likely found in developed economies, exploratory innovation has a higher payoff than exploitative innovation, while the reverse is true in less competitive environments, such as found in LDCs. National culture might also play a role in fostering innovation within a country. Innovation requires change, which is often accompanied by conflict and challenging existing authority. Individualistic societies with relatively lower levels of power distance would be expected to embrace radical change and innovation to a greater extent than would cultures, such as often found in many LDCs, which are more collectivist and have more respect for existing authority (Ty et al., 2010). Research has shown innovation can give firms what is referred to as a first-mover advantage (Shao, 2011). First-mover advantages come from both product innovation and consumer brand preferences. However, the length of time an innovative company can leverage a first-mover advantage appears to be shortening over time (Poletti et al., 2011). First movers gain advantages by staying ahead of the learning curve; however, most research on first movers has been conducted in developed economies and it is not well understood what it means to be a first mover in LDCs (Rahman and Bhattacharyya, 2003). While firms originating from LDCs could be considered first movers in their own markets in some existing product categories, as markets become more open it becomes more difficult for firms from LDCs to develop the technological and marketing capabilities to compete with firms from developed economies as first movers in new product categories. Instead, we normally see firms originating from LDCs to be following the lead of international firms and learning from the experience of first movers. Without having to bear the cost of product research, educating the market about the new product or developing an internationally recognized brand name, it would appear most firms from less developed economies will follow the second or late-mover strategies and consider ensuring a reasonable price as being an important part of their strategy.
National competitiveness The country a firm originates from and operates in affect both its chance for international success and choice of strategies. Torrisi and Uslu (2010) found there are three different sources for national competitive advantage for an industry: basic requirements, efficiency enhancers and innovation/sophistication factors and each of these have different impacts on competitiveness. Basic requirements (labor force, natural resources,
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etc., . . .) drive factor-driven economies within a firm, efficiency enhancers are important for cost advantages, and innovation/sophistication factors are used to create competitive advantage through differentiation. It would appear LDCs have varying types and amounts of basic requirements and efficiency enhancers, but mostly lack the innovation/sophistication factors needed to gain an advantage through innovation and differentiation, at least differentiation aimed at top-of-the-pyramid markets. It is expected this lack of innovation/sophistication factors will normally limit the strategic options for firms originating from LDCs. A common framework used to examine the competitiveness of an industry within a specific nation is the four-pointed ‘Porter’s Diamond’ (Porter, 1990). Porter’s framework consists of four categories which can determine the competitiveness of a specific industry within a nation: (1) Factor conditions such as availability of natural resources, skilled work force, etc., . . . ; (2) demand conditions, if demand is high, and customers are demanding and sophisticated, an industry is more likely to develop worldclass producers; (3) related and supporting industries, without easy access to the services these supporting firms perform, an industry will generally be at a disadvantage to firms operating in nations with access to high-quality suppliers and other strategic business partners; and (4) the strategies, structure and rivalries of specific firms within the industry. In general, according to Porter’s framework, it would appear firms from economically developed nations have advantages in the majority of industries, especially those in the higher value-added segments of a value chain. Many firms from LDCs face a number of obstacles in achieving international competitiveness. These include controlled markets, less sophistication of demand and lack of various human capital factors, especially access to skilled workers and the availability of knowledge and the ability to effectively use knowledge that is gained. These problems are often compounded and perpetuated by the high power distance cultures often found in LDCs where top managers maintain tight control (Shenkar, 2009). Moreover, as these difficulties cross industries, this can have a knock-on effect as potential supporting and related industries are likely to be restrained by the same type of limitations. The amount and the type of innovation an organization can use are greatly affected by the location in which it operates (Porter and Stern, 2001). For example, Subrahmanya (2009) found, in a study comparing Japanese and Indian entrepreneurs, the backgrounds of the entrepreneurs and initial internal environments within the firms in both locations were often similar. The difference in external environment was where Japanese firms gained their competitive advantage in the field of innovation. In
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addition, it was found reputation mattered and external actors were more likely to support product innovation for firms originating from Japan, a location with a reputation for product innovation, but were less likely to provide similar support for firms from India, a location without the same type of reputation for product innovation. The commonly held belief that innovation does not come from LDCs would appear to limit access to external resources and support that firms from these countries would need for major product innovation. However, firms in LDCs often have some advantages in addition to the obviously one of lower labor costs. One of these advantages is the ability to act flexibly, which is gained from experience in working in environments without the formal legal systems and availability of suppliers and complementary businesses found in developed economies; and often this knowledge of working within the systems found in one LDC can be leveraged when expanding into other LDCs (Cuervo-Cazurra and Genc, 2008; Shenkar, 2009: 150). Companies from LDCs also have some cost advantages when compared to multinational firms even when operating within the same country with the same labor market. Companies originating from developed economies, even while operating in a LDC, have tighter regulations as they have to meet home country standards and face pressures from NGOs, while local firms normally operate in a less stringent regulatory environment and are usually not targeted by NGOs and the media for scrutiny over business practices (Shenkar, 2009: 157). These additional costs might help explain the tendency of multinational MNCs to focus on the higher profit margins found at the ‘top of the pyramid’ of the market in LDCs which leaves most of the bottom of the pyramid open to local firms to operate in without direct international competition (London and Hart, 2004). The environments found in LDCs indicate firms originating from these areas are at a distinct disadvantage when it comes to creating product innovation. Moreover, public opinion in both developed and developing economies would appear to limit the perception of quality of products from LDCs. Consumers often rank product quality by the nation the product comes from. It would be difficult for an Indian-made automobile to compete with a German automaker on perception of quality. Likewise Chinese wines will have a difficult time in replacing French wines in preference for luxury-oriented customers. Therefore, it would appear firms from LDCs will generally have a difficult time competing in the high end of the market using a differentiation strategy and will normally compete using a low-cost leadership or niche strategy in operations in the home market or in
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exporting, and occasionally in other developing economies. Firms from LDCs will also have the option of using a differentiation strategy that focuses on the middle to lower areas of the pyramid within the home market, but will generally not compete at the top end of the pyramid, leaving that segment to developed country multinationals. An example of this can be found in the beer markets of some countries in Southeast Asia. Heineken dominates the top-of-the-pyramid market in Thailand and Vietnam, and no local companies attempt to compete with Heineken at the same price level; however, multiple local companies have positioned themselves in the middle using differentiation strategies while others have chosen to compete primarily on price. This proposal is consistent with Shenkar’s research (2009: 151) who reported firms from LDCs more often compete on price than on product differentiation.
Interpersonal business level practices Strategic management is mostly impersonal and analytical. However, there are a number of business practices that require directly working with other people. While the underlying assumptions of strategic management might be universal, even if the application of strategy may differ depending on the level of economic development and other factors found in different locations, the same cannot be said about many interpersonal business practices such as HR management, tactical marketing practices, negotiations and leadership. Hofstede (1980) found many American management practices were founded on assumptions of working with individuals who prized both egalitarianism and individualism, were fairly comfortable with uncertainty and sought success and monetary gains over maintaining good relationships. Yet these conditions are not commonly found outside the USA and therefore interpersonal business practices which work in the environment found in the USA, or other Western countries, might not always be as effective when working in other cultural environments. Therefore, it has been argued the socialcultural environment a firm operates in will have a significant impact on a firm’s choice of interpersonal business practices (Hipsher, 2007, 2010a). There is significant evidence that national differences in interpersonal business practices remain and the international convergence of interpersonal business practices is limited. Van de Vliert et al. (2009) found distinct differences in decision making involving conforming to leadership ideals, handling work motivations and recruitment across
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cultures. There is also evidence of the lack of convergence of tactical marketing activities in different geographical locations (Suh and Kwon, 2002; Lu and Lee, 2005). Human resource management practices also differ considerably across national borders (Chew and Goh, 1997; McGrath-Champ and Carter, 2001; Beer and Katz, 2003; Chen and Wilson, 2003; Mayrhofer et al., 2004; Claus and Hand, 2009). Additionally, we see ideas about the ideal forms of managerial and leadership styles and behaviors being very culturally specific (Zagorsek et al., 2004; Javidan and Carl, 2005; Sharma et al., 2009). In addition, whereas companies from different cultural environments may have similar objectives while engaging in a negotiation process, the decisions on how to conduct interpersonal negotiations often differ from one nationality to another (Hurn, 2007). Cultural background can also impact on how one is perceived while working internationally. For example, Varma et al. (2009) found willingness to provide support from locals in China to expatriates was determined by a number of factors, including the quality of the personal relationship as well as the perceived cultural similarity of the expatriate to the local staff. One of the components often claimed as being a positive managerial trait is the possession of emotional intelligence, but Sharma et al. (2009) reported what constitutes emotional intelligence differs from culture to culture and therefore being emotionally intelligent while working in one culture does not automatically imply one will be emotionally intelligent in other cultures. Interpersonal business activities in LDCs in Asia are often significantly different from those practiced in other locations. Ideas about leadership and leadership practices are often culturally specific. For example, empowering employees is often thought to be a practice management should embrace; however, the concept of empowerment is usually based on assumptions that employees have values normally found in individualistic cultures with moderate to low levels of power distance. Incorporating Western-style empowerment systems into Asia have not always been very successful (Hui et al., 2004; Huang et al., 2006; Newburry and Yakova, 2006). While many Chinese managers realize the importance and value of empowerment, they also know it is more difficult to implement in China than it is in the West. Confucian teachings stress the need for order and respect for authority and ‘empowerment upsets the order between the leader and the follower’ (Gallo, 2011: 109). Modern Western business education generally makes a clear distinction between management and leadership and, while leadership is often not well
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defined, it is usually thought of as being both personal and ‘good’. For example, Bass and Avolio (1993) and Bass and Steidlmeier (1999) advocated the use of ‘authentic transformational leadership’ as a best practice for dealing with subordinates. Authentic transformational leadership is a concept that has influenced much of the teaching of leadership over the last two decades in Western countries. Authentic transformational leadership includes four general components: idealized influence, inspirational motivation, intellectual stimulation and individualized consideration. Although these components are pretty abstract, they are all considered positive and involve the leader’s personality and relationship with subordinates more than the leader’s intellect or decision-making abilities. These qualities might be considered ideal in individualistic societies with relatively low power distances, but might not be as central to leadership in other cultural contexts. For example, Gallo (2011: 7, 57) finds the expectation of developing a personal relationship is not part of traditional Chinese ideas about leadership and doesn’t fit well with the country’s higher power distance culture. Hipsher (2010b) found a more top-down and paternalistic style of leadership was preferred by both management and workers in the countries of mainland Southeast Asia, a style that is quite different from the idealized transformational leader normally advocated in the USA and other Western countries. The business environments in Western societies generally feature many rules and regulations controlling interpersonal business practices, mostly designed to ensure fairness. Moreover, there is a tradition of more bureaucratic organizations where one’s loyalty is to the job, the company or even the profession. However, in many LDCs in Asia one sees less use of a bureaucratic style of management and more use of arbitrary decision making by leaders, as there appears to be less pressure to ensure fairness and more emphasis on adapting decisions that involve people to fit specific situations. What is more, loyalty is more likely to be personal and directed towards one’s boss or business owner as opposed to an impersonal organization. For example, Holmes et al. (1996: 34) observed in Thailand that, instead of ensuring workers are following specific rules and guidelines, ‘The senior is expected to provide direction, control, protection as well as emotional support, looking after the needs of his colleagues and staff, much like a prosperous father might do. This support is strongly personal in nature.’ Somewhat ironically in the individualistic societies of the West, impersonal rules and regulations are much more commonly used to ensure fairness, while in the more collectivist LDCs in Asia one often finds fewer impersonal rules guiding leaders
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and more arbitrary and contextual decision making as regards personnel issues. The concept of gaining and protecting one’s ‘face’ is often associated with Asian cultures. Although the term is not necessarily used worldwide, the concept of how one is seen by others and the importance of maintenance of one’s pride and reputation are probably in reality pretty universal. Nevertheless, this concept is often thought to have additional importance in Asian societies. Persons (2008) found there were five distinct but interrelated phrases used in Thai to refer to ‘face’, which can be roughly translated as: appearance to the outside world, honor, fame, dignity and virtue. Gallo (2011: 83) found in China many organizations sometimes give the title ‘manager’ to individuals who do not actually have managerial responsibilities in order to provide face to their employers which gains the companies greater employee loyalty. In individualistic Western societies, conflict is often thought to be normal and can be constructive when different ideas compete for acceptance. However, in the more collectivist societies found in Asia, conflict is usually thought of as something to be avoided. The preference for avoidance of conflict has an impact on both internal and external business relationships. Avoidance of conflict in Thailand and the use of compromise often take precedence over making the optimal decision to maintain good relationships (Holmes et al., 1996: 21). A similar situation is found in Laos, where Rehbein (2007a: 54) reported how traders in the market did not focus solely on competition and making sales but often cooperated with each other to ensure everyone went home with at least some profits in order to avoid conflicts and hard feelings. Whereas in China, Gallo (2011: 93) reported that while truthfulness is an important virtue, it is generally acceptable to tell white lies if these lies allow everyone to save face and thus avoid a confrontation. Everyone likes change but everyone also likes stability. There is nothing as exciting as going on vacation to a new location, and nothing more satisfying than returning home to familiar surroundings at the end of the vacation. However, on the continuum between change and stability, one might find in some companies operating in the LDCs of Asia more preference is given to stability than to change. For example, Gallo (2011: 10) noticed Westerners change jobs, homes and even spouses more frequently than do the Chinese, but we should also remember many communities in Asia have gone from agrarian societies to industrial and even post-industrial societies in a much shorter time period than was the case in the West. These successful transitions show workers in LDCs in Asia have the capability to handle rapid change. This preference for
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stability may not be seen in all LDCs. As Hipsher (2010a) pointed out the Theravada Buddhist teaching of the non-permanence of everything may assist the societies of many countries in mainland Southeast Asia to accept change easier than is the norm in other more traditional societies found in other locations. Differences in communication styles between cultures have often been reported. Hall’s (1976) framework includes high-context cultures, which use less direct and more contextual communication styles, and low-context cultures, where communication is more direct and there is more emphasis on spelling out the meaning. It has been noted, Asian countries generally use more of a high-context communication style while the Anglo-American countries use more of a low-context communication style. The less direct style of communication in Asia can help avoid confrontations and loss of face. Managers from outside the region working in the LDCs of Asia might want to be mindful of their communication style and adapt a slightly less direct style of communication than would be the norm in some other regions. In Western societies, laws and the legal system are generally thought of as being mostly black and white where there are fairly clear boundaries between following rules or laws and breaking them. While in Asia, one sees more of an acceptance of gray areas and more reliance on personal interpretations in the application of rules and laws. This makes relationships often more important than compliance in meeting legal requirements. For example, in reference to conducting trade between Thailand and Burma/Myanmar, Aribarg (2005: 126) wrote, ‘People find personal relations and social networks more efficient than interacting with formal institutions, since laws and regulations are susceptible to authority’s discretion.’ Hawks (2005: 111) found for small businesses in Cambodia having personal connections with government officials is often considered a form of competitive advantage as without these connections one is susceptible to arbitrary enforcement of the laws by officials who might be more interested in supplementing their meager salaries than objectively enforcing written laws. This looser interpretation of laws and rules also applies to the use of contracts. In Western societies a contract is normally considered as written in stone and cannot be altered without the consent of both parties while in China, and other countries in Asia as well, a contract is often more like what those in the West call a letter of intent, or a gentleman’s agreement with serves as a guideline for an ongoing business relationship that is expected to evolve and change over time as conditions change (Gallo, 2011: 124).
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As managers in many LDCs cannot be assured of enforcements of private contracts by the courts, there is much more reliance on building relationships, and trust is often as important as quality and price in selecting suppliers, distributors and other business partners (Hallen and Johanson, 2004; Nguyen et al., 2005; Young, 2005). Human resource management practices are often influenced by culture. For example, in individualistic societies the main emphasis on hiring is to find the best person for the job; however, in collectivist societies, while individual skills are also important, added importance is placed on how the individual will fit into the organization and work team (Sekiguchi, 2006). Having a worker in a work team in a collectivist society who does not socially mesh with co-workers is a bigger problem than it would be in a more individualistic society. Another aspect of HR management which can be quite different in different locations is in how companies find new workers. In most LDCs one sees more informal and personal recruitment methods. Local newspapers are not always common and internet access for potential nonmanagerial workers is far from universal. Therefore, most firms in LDCs in Asia rely mostly on referrals. For example, in the garment industry in Cambodia, Dasgupta and Williams (2010) reported only slightly over 2% of job seekers search for jobs through newspapers, and most of the rest seek and find jobs through their social networks. Strauss et al. (2010) reported in factories in Wenzhou (China), recruitment for labor was generally informal, although a significant number of managers were recruited through more formal means while many others were family or close friends of the principal owner of the firm. In most Western societies a cornerstone of performance management is the formal performance appraisal. However, these formal appraisals are not used as often in the LDCs of Asia than they are in the West. For example, Saeed and Shahbaz (2011) found formal performance appraisals were rarely used in SMEs in Pakistan; instead, more informal appraisal methods were primarily used. Claus and Hand (2009) reported most MNCs are already aware of the need to localize performance management systems with differences in the dimensions of power distance and masculinity being the primary drivers of different performance management systems. If formal performance appraisal systems are to be introduced into the LDCs of Asia, one should be aware of how these systems often make it more difficult for all employees to save face, and ranking employees inevitably will result in conflict and confrontation. Performance appraisals are intended to motivate individual performance through
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competition, but one should consider whether to use or how to use this form of performance management in a collectivist society with relatively high power distance scores.
Operational level business practices The operational level consists of day-to-day business practices. Operational business practices are where the grand strategies are implemented. Operational level business practices include production and operational techniques, accounting practices, use of communication technology and logistics procedures. Often the selection of a particular operational level practice is greatly influenced by costs and the need for efficiencies. It has been proposed the most important influences on operational business practices are technology and price of labor (Hipsher, 2007). When globalization and convergence of practices in business are discussed, it is often the technologies and operational business practices that are being referred to. Cellphones, computers, shipping containers, bar codes and other technologies have become the tools used at the operational level of businesses throughout the world. While successful firms use a wide variety of strategies and tactics, there is often less variety seen at the operational level and best practices often emerge which cross geographic and industrial boundaries. There is some research which supports the concept of global convergence of operational business practices. There has been found some level of international convergence in accounting and auditing (Brackney and Witmer, 2005; Horstmann, 2005; Herrmann and Hague, 2006), and in the use of information technology (Van Ark and Piatkowski, 2004; Zhang and Jeckle, 2004) and production technology (Frantzen, 2004). However, differences remain and a total convergence of operational level business practices has not happened and some differences are likely to remain for a considerable length of time (Pagell et al., 2005). One of the drivers of operational level business practice differences is the difference in labor costs. Some technologies that save money in areas where labor costs are relatively high do not bring cost savings in LDCs where labor costs are much lower. Therefore, in countries with relatively lower labor costs, such as those found in the LDCs of Asia, one is likely to see more labor-intensive operational business practices and less use of technology than in locations where labor costs are higher.
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Yu and Zaheer (2010) believed new technologies were usually more easily accepted when introduced than were new practices requiring changes in social interactions or conceptual thinking. They also believed changes in one area, such as use of a new technology, sometimes caused misalignments in other business areas which would then need to be realigned. Therefore, introducing a new technology might help in the gradual acceptance of changes in other work practices which are more interpersonal or strategic in nature. While convergence in the use of technology and operational level business practices is often seen, the use of specific operational tools can still vary across cultures. For example, Han et al. (2010) found, while moves to have a single worldwide accounting system continue, the nuanced application and choices made within emerging frameworks are affected by culture and companies from more individualistic societies often attempt to ‘manage’ earnings to a greater extent than do companies from more collectivist countries. It is proposed best practices in operational level business practices can often be transferred across international boundaries with limited need for adaptation to local conditions. In recent years we have seen many technologies and operational business practices, such as the use of cellphones and bar code readers that originated in more economically developed nations, become nearly universally accepted across the globe and it is likely this trend will continue. An example of how technology can be used efficiently across borders is the use of mobile phones by banana growers in Uganda. Mobile phones have given farmers more control over price, which has resulted in increased production and sales of perishable bananas. Mobile phone ownership in rural Uganda is not widespread, but as long as one was available in a community, information about prices spread rapidly throughout the community. The use of mobile phones significantly reduced the transaction costs of matching buyers and sellers of bananas, making the entire value chain more efficient, and has increased profits and the standards of living of the farmers (Yamano et al., 2010). Universal standardization of operational business practices also facilitates international trade. Firms using differentiation strategies can easily buy from suppliers using a niche or cost leadership strategy. In addition, there is no need for interpersonal business practices to be aligned between trading partners. However, at the operational level, to ensure smooth and efficient exchanges, some standardization of practices is required. Therefore, we see some uniform protocols in communications, logistics and other operational business practices. Firms trading with each
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other need to have some integration of operational business practices, and increased international trade pressures firms to adapt more common operational business practices to reduce transaction costs.
Three-level approach When operating in LDCs in Asia, it is proposed firms can take a three-level approach. The first step is to use universal approaches to strategic management but, because economic and other environmental conditions may be different from what is found in other locations, firms will need to adjust strategies to local conditions. In the LDCs of Asia, there will generally be limited opportunities to use differentiation strategies at the top of the markets. Instead, costs will take on added importance, and most successful business strategies will most often focus on cost leadership, focused strategies or using differentiation strategies aimed at the lower and middle segments of the market. For interpersonal business practices, in general, a company will need to adjust practices for the social-cultural environment found in each location.
Figure 4.1
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Transportation system, Aranyaprathet, Thailand
Business strategies and practices in developing economies
The third level shows firms can often use universal best operational business practices and adapt foreign technology for use in any environment, although a company might use less technology and more human labor than a firm might use in other locations due to lower labor cost and more availability of low-skilled labor in LDCs.
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Business strategies and practices in developing economies Abstract: Strategic business principles apply worldwide; however, practices will vary and often be influenced by the level of economic development found in a specific location. Interpersonal business practices will vary across locations and need to be aligned with the specific cultural environment in which a firm operates. Choice of operational business practices is often influenced by the technological environment and need for efficiencies, and thus is more likely to be able to be used across geographical and industrial boundaries with relatively little need for adaptation. Key words: strategy, national competitiveness, innovation, human resource management, leadership, operational management.
Business practices and principles As mentioned in the previous chapter, most business principles can be considered universal; however, the practices needed to be used to implement these principles will vary and need to be aligned with environmental conditions. Business practices come in a wide variety of types, some designed to ensure long-term success while others are used for increasing efficiency in day-to-day operations. While there is no one set of practices which will lead to success in every situation, internal consistency is often required. For example, a firm using a low-cost strategy will need to use practices which are helpful in creating efficiencies and will have to make some trade-offs and avoid most practices which increase costs, even if these practices provide some different forms of benefit. A three-level framework where business practices are broken down and examined into strategic, interpersonal and operational practices is used to examine business practices. While operating in the LDCs of Asia, some business practices
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can be imported from different environments, others might need to be adapted for local conditions and still others might have to be designed from the ground up based on local environmental conditions.
Strategic level business practices There is no single set of business strategies that can be universally applied in every situation which will lead to success. Business strategies are about choices and trade-offs; business strategy is as much about what a company chooses not to do as it is about what a company chooses to do (Porter, 1996; Peng, 2002). Using Porter’s (1980) framework of generic strategies there can be found examples of firms succeeding using low-cost leadership, focused and nearly endless variations of differentiation strategies. While there can be found universal best practices in operational business practices which can be used across industrial and national borders, there are no best strategic practices that can be used successfully by all firms. Selection of a business strategy relies on multiple internal and external factors. It has been argued the economic environment of a country in which a company operates is especially important when selecting strategies (Hipsher, 2007, 2010a). Increased wealth provides consumers and businesses more flexibility in purchasing decisions, which therefore provides companies more strategic options to attempt to capture the purchases of customers. Therefore, one finds more and more varied uses of differentiation strategies in more developed economies, while options for the use of differentiation strategies in less developed economies will be relatively limited. Porter (1980) felt the primary ways for a company to compete were to use one of the following: cost leadership, differentiation or focus/niche strategies. Cost leadership is ‘a business-level strategy in which the organization is the lowest-cost producer in its industry’ (Robbins and Coulter, 2005: 193). Cost leadership strategies provide firms the opportunity to compete on price while maintaining profitability. A firm is able to attain cost leadership through superior access to technology, technological leadership, process innovation, as well as leveraging benefits from the learning curve, economies of scale, creating products that are designed to reduce costs and manufacturing time, and/or through reengineering activities (Allen et al., 2006: 25).
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‘The differentiation strategy is an integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them’ (Hitt et al., 2005: 118). Product differentiation allows firms to charge a premium price based on ‘product characteristics, delivery system, quality of service, or distribution channels’ (Allen et al., 2006: 25). The differentiation strategy is often reported to be more sustainable that a cost leadership strategy and has the most potential for profitability (Hitt et al., 2005). ‘The focus strategy is an integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment’ (Hitt et al., 2005: 122). Niches can arise from a number of factors, including ‘geography, buyer characteristics, product specifications, or requirement’ and are segments of the market that are often ignored or found unattractive by large companies in the industry (Allen et al., 2006: 25). Therefore, the use of a focus/niche strategy is often associated with smaller firms. It has been commonly believed the external environment has a significant impact on the choice of strategies made by firms (e.g., Hagan and Amin, 1995; Kim, 2008; Bach and Allen, 2010). There is also significant evidence that a firm’s internal environmental factors such as corporate culture, leadership and organizational structure affect strategic choices (e.g., Franke et al., 2007; Epstein et al., 2010; Kipping and Cailluet, 2010). However, a clear separation between the internal and external environments is in reality not always easy to identify. Organizations are not closed systems but open ones and internal environmental factors are heavily influenced by the external environment. For example, organizational culture appears to be affected to a considerable extent by both the national culture of the country of origin and the country of operation of an organization (Jung et al., 2008; Prasnikar et al., 2008; Klein et al., 2009). National culture also appears to impact a firm’s organizational structure (Walsh, 2004; Li and Harrison, 2008) and choice of leadership styles (Kanungo and Wright, 1983; Chong and Thomas, 1997; Neelankavil et al., 2000; Suutari et al., 2002). If we accept strategy is the linkage between a firm’s internal and external environments (Ensign, 2008: 34) and accept that the internal and external environments of firms in LDCs are different from the environments found in more developed economies (Shenkar, 2009), then it would be expected strategies used and strategy formulation in firms in LDCs will be significantly different from those practiced in the environments found in more developed economies.
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Environmental conditions Theories about business strategy and other business practices have mostly been developed by examining business practices in the most developed economies around the world (Mathews, 2000; Lau, 2006). In general, both the internal environments found in firms from emerging economies and the external environment which influences strategic decisions in LDCs are quite different from the environments found in the firms that were explored when developing most strategic theories. Most strategic management theories make an assumption the goal of increasing competitiveness within a market is the primary driver of strategic decision making. This assumption may hold in environments with relatively free markets and where the government’s primary role in business is regulation, but in many LDCs governments play a more direct role in business and it has been found building relationships is often the primary strategic focus of firms operating in LDCs. This choice of strategic option can be attributed to the fact LDCs are often characterized by informal legal systems and the government’s direct involvement in economic activities (Kim, 2008; Luk et al., 2008; Chattananon and Trimetsoontorn, 2009). Instead of focusing on beating the competition, in LDCs the focus of strategy is often on joining a network and cooperating with various business partners and government officials (Tsang, 2001; Suehiro and Wailerdsak, 2004; Aribarg, 2005). The primary factor differentiating LDCs from developed economies is level of economic development. Firms originating from developed economies operate in environments where financial support, technology and skilled labor are more abundant than what is normally found in LDCs. Strategic theory often makes the assumption that firms have access to the resources necessary to engage in a variety of different strategies. This assumption may not hold in LDCs where the lack of access to vital resources, such as technological innovation, financing and human knowledge and skills, may limit the strategic choices available to a firm. The social-cultural environments firms operate in also have an impact on the strategic options available to them. For example, for the most part religion is not normally thought of as having a direct influence on business practices mainly due to individuals thinking the values shaped by religions in their home markets are natural and often assume they are universal (Ali and Gibbs, 1998). Yet a linkage between Christian values and business practices in Western countries has been identified (Anderson et al., 2000;
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Vinten, 2000; Cornwell et al., 2005). Muslim values have been found to influence the business environments and practices where Islam is widely practiced (Abbasi et al., 1989; Ali and Al-Owaihan, 2008). Confucian values have been thought to influence business practices in much of East Asia (Wang, 2004; Yan and Sorenson, 2004). Additionally, it has been proposed the business environments of Thailand, Laos PDR, Cambodia and Myanmar/Burma have been influenced by Theravada Buddhist teachings and values (Hipsher, 2010a). As religion often has more influence on the lives of individuals in LDCs than on individuals living in countries with higher standards of living (Barro and McCleary, 2003; McCleary and Barro, 2006), the impact of religious values may have a more pronounced impact on business practices and strategy formulation in LDCs than in more developed economies. The technological environment in LDCs is generally less mature than in environments found in developed economies. The number of patents having been filed in, or from residents of, LDCs is very low is comparison to what is found in more developed economies (WIPO, 2008), which would seem to indicate companies from LDCs are farther removed from the invention of cutting edge technology than are firms in developed economies. Another factor limiting the use of technology is the lower pay scales making some technologies used in developed economies less cost effective in LDCs than using human labor. Ownership structures also differ in LDCs in comparison to what is seen in more developed economies. In studying strategy in Western societies and, in particular, the USA, there is often an assumption of a separation of ownership and management and the sole purpose of a firm is to maximize profits. However, corporations and the separation between owners and managers are rare in LDCs (Suehiro and Wailerdsak, 2004; Luthans and Ibrayeva, 2006). Owner-managed and entrepreneurial firms in both developed and LDCs have been found to have many non-financial objectives (such as independence and the creation of jobs for family members) in addition to, and sometimes conflicting with, the goal of profit maximization (Befus et al., 1988; Pinfold, 2001; Paulson and Townsend, 2005; Choo and Wong, 2006; Hatcher and Terjesen, 2007). Moreover, in many LDCs state-owned firms are not uncommon and these firms also often have objectives in addition to, and sometimes in conflict with, maximizing profits. Since the ownership structures and objectives of many firms from LDCs differ from the corporate model, often there will be found different approaches taken as regards strategy.
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Innovation Innovation has often been considered a necessary component in gaining strategic competitiveness. For example, Pellicer et al. (2010) proclaimed every organization needs to invest in research and development (R&D); however, it is questioned whether the majority of organizations from countries such as Cambodia, Nepal or Afghanistan have access to the financial and human capital needed to engage in effective R&D. Zhang (2010) found some Chinese manufacturing firms made limited use of R&D while others did not engage in any R&D activities at all, and yet still managed to survive and sometimes thrive. De Valk (2003) in his study of firms in Laos PDR felt that it did not make much sense for firms in this country to engage in R&D in order to reinvent the wheel, but rather it made more sense to adapt technology and ideas generated elsewhere for use locally. Instead of expecting firms from emerging economies to either think of innovation and R&D in the same terms as firms from developed economies or to strictly copy ideas, innovation in LDCs may often entail adapting ideas, products and processes originally created in other locations in unique ways for use within the specific environment found in each LDC. Lederman (2010) reported firms which were globally engaged through the use of licensing, foreign investment or involved in exporting activities generally increased the number of product innovations they created, with firms in China being somewhat of an exception. Most firms in LDCs, with the exception of a few firms in the export sector, generally have few opportunities to engage in activities that allow for substantial importing of foreign knowledge which would appear to limit the amount of product innovation possible. Lederman also found at the country level innovation breeds innovation and firms operating in national environments where there is significant global engagement by other firms can use spillover knowledge to enhance their ability to create product innovation even if the firms were not directly engaged globally. Firms from LDCs are less likely to have the opportunity to take advantage of this spillover effect than are firms from more economically developed and globally integrated economies. Li et al. (2010) broke down innovation into the categories of exploratory and exploitative. Exploratory innovation involves radical changes and is intended to be used in pursuing new opportunities. Exploitative innovation involves incremental changes intended to improve existing processes. The authors found the external environment had some impact on a firm’s innovation strategy. In more competitive environments, which are more
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likely found in developed economies, exploratory innovation has a higher payoff than exploitative innovation, while the reverse is true in less competitive environments, such as found in LDCs. National culture might also play a role in fostering innovation within a country. Innovation requires change, which is often accompanied by conflict and challenging existing authority. Individualistic societies with relatively lower levels of power distance would be expected to embrace radical change and innovation to a greater extent than would cultures, such as often found in many LDCs, which are more collectivist and have more respect for existing authority (Ty et al., 2010). Research has shown innovation can give firms what is referred to as a first-mover advantage (Shao, 2011). First-mover advantages come from both product innovation and consumer brand preferences. However, the length of time an innovative company can leverage a first-mover advantage appears to be shortening over time (Poletti et al., 2011). First movers gain advantages by staying ahead of the learning curve; however, most research on first movers has been conducted in developed economies and it is not well understood what it means to be a first mover in LDCs (Rahman and Bhattacharyya, 2003). While firms originating from LDCs could be considered first movers in their own markets in some existing product categories, as markets become more open it becomes more difficult for firms from LDCs to develop the technological and marketing capabilities to compete with firms from developed economies as first movers in new product categories. Instead, we normally see firms originating from LDCs to be following the lead of international firms and learning from the experience of first movers. Without having to bear the cost of product research, educating the market about the new product or developing an internationally recognized brand name, it would appear most firms from less developed economies will follow the second or late-mover strategies and consider ensuring a reasonable price as being an important part of their strategy.
National competitiveness The country a firm originates from and operates in affect both its chance for international success and choice of strategies. Torrisi and Uslu (2010) found there are three different sources for national competitive advantage for an industry: basic requirements, efficiency enhancers and innovation/sophistication factors and each of these have different impacts on competitiveness. Basic requirements (labor force, natural resources,
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etc., . . .) drive factor-driven economies within a firm, efficiency enhancers are important for cost advantages, and innovation/sophistication factors are used to create competitive advantage through differentiation. It would appear LDCs have varying types and amounts of basic requirements and efficiency enhancers, but mostly lack the innovation/sophistication factors needed to gain an advantage through innovation and differentiation, at least differentiation aimed at top-of-the-pyramid markets. It is expected this lack of innovation/sophistication factors will normally limit the strategic options for firms originating from LDCs. A common framework used to examine the competitiveness of an industry within a specific nation is the four-pointed ‘Porter’s Diamond’ (Porter, 1990). Porter’s framework consists of four categories which can determine the competitiveness of a specific industry within a nation: (1) Factor conditions such as availability of natural resources, skilled work force, etc., . . . ; (2) demand conditions, if demand is high, and customers are demanding and sophisticated, an industry is more likely to develop worldclass producers; (3) related and supporting industries, without easy access to the services these supporting firms perform, an industry will generally be at a disadvantage to firms operating in nations with access to high-quality suppliers and other strategic business partners; and (4) the strategies, structure and rivalries of specific firms within the industry. In general, according to Porter’s framework, it would appear firms from economically developed nations have advantages in the majority of industries, especially those in the higher value-added segments of a value chain. Many firms from LDCs face a number of obstacles in achieving international competitiveness. These include controlled markets, less sophistication of demand and lack of various human capital factors, especially access to skilled workers and the availability of knowledge and the ability to effectively use knowledge that is gained. These problems are often compounded and perpetuated by the high power distance cultures often found in LDCs where top managers maintain tight control (Shenkar, 2009). Moreover, as these difficulties cross industries, this can have a knock-on effect as potential supporting and related industries are likely to be restrained by the same type of limitations. The amount and the type of innovation an organization can use are greatly affected by the location in which it operates (Porter and Stern, 2001). For example, Subrahmanya (2009) found, in a study comparing Japanese and Indian entrepreneurs, the backgrounds of the entrepreneurs and initial internal environments within the firms in both locations were often similar. The difference in external environment was where Japanese firms gained their competitive advantage in the field of innovation. In
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addition, it was found reputation mattered and external actors were more likely to support product innovation for firms originating from Japan, a location with a reputation for product innovation, but were less likely to provide similar support for firms from India, a location without the same type of reputation for product innovation. The commonly held belief that innovation does not come from LDCs would appear to limit access to external resources and support that firms from these countries would need for major product innovation. However, firms in LDCs often have some advantages in addition to the obviously one of lower labor costs. One of these advantages is the ability to act flexibly, which is gained from experience in working in environments without the formal legal systems and availability of suppliers and complementary businesses found in developed economies; and often this knowledge of working within the systems found in one LDC can be leveraged when expanding into other LDCs (Cuervo-Cazurra and Genc, 2008; Shenkar, 2009: 150). Companies from LDCs also have some cost advantages when compared to multinational firms even when operating within the same country with the same labor market. Companies originating from developed economies, even while operating in a LDC, have tighter regulations as they have to meet home country standards and face pressures from NGOs, while local firms normally operate in a less stringent regulatory environment and are usually not targeted by NGOs and the media for scrutiny over business practices (Shenkar, 2009: 157). These additional costs might help explain the tendency of multinational MNCs to focus on the higher profit margins found at the ‘top of the pyramid’ of the market in LDCs which leaves most of the bottom of the pyramid open to local firms to operate in without direct international competition (London and Hart, 2004). The environments found in LDCs indicate firms originating from these areas are at a distinct disadvantage when it comes to creating product innovation. Moreover, public opinion in both developed and developing economies would appear to limit the perception of quality of products from LDCs. Consumers often rank product quality by the nation the product comes from. It would be difficult for an Indian-made automobile to compete with a German automaker on perception of quality. Likewise Chinese wines will have a difficult time in replacing French wines in preference for luxury-oriented customers. Therefore, it would appear firms from LDCs will generally have a difficult time competing in the high end of the market using a differentiation strategy and will normally compete using a low-cost leadership or niche strategy in operations in the home market or in
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exporting, and occasionally in other developing economies. Firms from LDCs will also have the option of using a differentiation strategy that focuses on the middle to lower areas of the pyramid within the home market, but will generally not compete at the top end of the pyramid, leaving that segment to developed country multinationals. An example of this can be found in the beer markets of some countries in Southeast Asia. Heineken dominates the top-of-the-pyramid market in Thailand and Vietnam, and no local companies attempt to compete with Heineken at the same price level; however, multiple local companies have positioned themselves in the middle using differentiation strategies while others have chosen to compete primarily on price. This proposal is consistent with Shenkar’s research (2009: 151) who reported firms from LDCs more often compete on price than on product differentiation.
Interpersonal business level practices Strategic management is mostly impersonal and analytical. However, there are a number of business practices that require directly working with other people. While the underlying assumptions of strategic management might be universal, even if the application of strategy may differ depending on the level of economic development and other factors found in different locations, the same cannot be said about many interpersonal business practices such as HR management, tactical marketing practices, negotiations and leadership. Hofstede (1980) found many American management practices were founded on assumptions of working with individuals who prized both egalitarianism and individualism, were fairly comfortable with uncertainty and sought success and monetary gains over maintaining good relationships. Yet these conditions are not commonly found outside the USA and therefore interpersonal business practices which work in the environment found in the USA, or other Western countries, might not always be as effective when working in other cultural environments. Therefore, it has been argued the socialcultural environment a firm operates in will have a significant impact on a firm’s choice of interpersonal business practices (Hipsher, 2007, 2010a). There is significant evidence that national differences in interpersonal business practices remain and the international convergence of interpersonal business practices is limited. Van de Vliert et al. (2009) found distinct differences in decision making involving conforming to leadership ideals, handling work motivations and recruitment across
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cultures. There is also evidence of the lack of convergence of tactical marketing activities in different geographical locations (Suh and Kwon, 2002; Lu and Lee, 2005). Human resource management practices also differ considerably across national borders (Chew and Goh, 1997; McGrath-Champ and Carter, 2001; Beer and Katz, 2003; Chen and Wilson, 2003; Mayrhofer et al., 2004; Claus and Hand, 2009). Additionally, we see ideas about the ideal forms of managerial and leadership styles and behaviors being very culturally specific (Zagorsek et al., 2004; Javidan and Carl, 2005; Sharma et al., 2009). In addition, whereas companies from different cultural environments may have similar objectives while engaging in a negotiation process, the decisions on how to conduct interpersonal negotiations often differ from one nationality to another (Hurn, 2007). Cultural background can also impact on how one is perceived while working internationally. For example, Varma et al. (2009) found willingness to provide support from locals in China to expatriates was determined by a number of factors, including the quality of the personal relationship as well as the perceived cultural similarity of the expatriate to the local staff. One of the components often claimed as being a positive managerial trait is the possession of emotional intelligence, but Sharma et al. (2009) reported what constitutes emotional intelligence differs from culture to culture and therefore being emotionally intelligent while working in one culture does not automatically imply one will be emotionally intelligent in other cultures. Interpersonal business activities in LDCs in Asia are often significantly different from those practiced in other locations. Ideas about leadership and leadership practices are often culturally specific. For example, empowering employees is often thought to be a practice management should embrace; however, the concept of empowerment is usually based on assumptions that employees have values normally found in individualistic cultures with moderate to low levels of power distance. Incorporating Western-style empowerment systems into Asia have not always been very successful (Hui et al., 2004; Huang et al., 2006; Newburry and Yakova, 2006). While many Chinese managers realize the importance and value of empowerment, they also know it is more difficult to implement in China than it is in the West. Confucian teachings stress the need for order and respect for authority and ‘empowerment upsets the order between the leader and the follower’ (Gallo, 2011: 109). Modern Western business education generally makes a clear distinction between management and leadership and, while leadership is often not well
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defined, it is usually thought of as being both personal and ‘good’. For example, Bass and Avolio (1993) and Bass and Steidlmeier (1999) advocated the use of ‘authentic transformational leadership’ as a best practice for dealing with subordinates. Authentic transformational leadership is a concept that has influenced much of the teaching of leadership over the last two decades in Western countries. Authentic transformational leadership includes four general components: idealized influence, inspirational motivation, intellectual stimulation and individualized consideration. Although these components are pretty abstract, they are all considered positive and involve the leader’s personality and relationship with subordinates more than the leader’s intellect or decision-making abilities. These qualities might be considered ideal in individualistic societies with relatively low power distances, but might not be as central to leadership in other cultural contexts. For example, Gallo (2011: 7, 57) finds the expectation of developing a personal relationship is not part of traditional Chinese ideas about leadership and doesn’t fit well with the country’s higher power distance culture. Hipsher (2010b) found a more top-down and paternalistic style of leadership was preferred by both management and workers in the countries of mainland Southeast Asia, a style that is quite different from the idealized transformational leader normally advocated in the USA and other Western countries. The business environments in Western societies generally feature many rules and regulations controlling interpersonal business practices, mostly designed to ensure fairness. Moreover, there is a tradition of more bureaucratic organizations where one’s loyalty is to the job, the company or even the profession. However, in many LDCs in Asia one sees less use of a bureaucratic style of management and more use of arbitrary decision making by leaders, as there appears to be less pressure to ensure fairness and more emphasis on adapting decisions that involve people to fit specific situations. What is more, loyalty is more likely to be personal and directed towards one’s boss or business owner as opposed to an impersonal organization. For example, Holmes et al. (1996: 34) observed in Thailand that, instead of ensuring workers are following specific rules and guidelines, ‘The senior is expected to provide direction, control, protection as well as emotional support, looking after the needs of his colleagues and staff, much like a prosperous father might do. This support is strongly personal in nature.’ Somewhat ironically in the individualistic societies of the West, impersonal rules and regulations are much more commonly used to ensure fairness, while in the more collectivist LDCs in Asia one often finds fewer impersonal rules guiding leaders
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and more arbitrary and contextual decision making as regards personnel issues. The concept of gaining and protecting one’s ‘face’ is often associated with Asian cultures. Although the term is not necessarily used worldwide, the concept of how one is seen by others and the importance of maintenance of one’s pride and reputation are probably in reality pretty universal. Nevertheless, this concept is often thought to have additional importance in Asian societies. Persons (2008) found there were five distinct but interrelated phrases used in Thai to refer to ‘face’, which can be roughly translated as: appearance to the outside world, honor, fame, dignity and virtue. Gallo (2011: 83) found in China many organizations sometimes give the title ‘manager’ to individuals who do not actually have managerial responsibilities in order to provide face to their employers which gains the companies greater employee loyalty. In individualistic Western societies, conflict is often thought to be normal and can be constructive when different ideas compete for acceptance. However, in the more collectivist societies found in Asia, conflict is usually thought of as something to be avoided. The preference for avoidance of conflict has an impact on both internal and external business relationships. Avoidance of conflict in Thailand and the use of compromise often take precedence over making the optimal decision to maintain good relationships (Holmes et al., 1996: 21). A similar situation is found in Laos, where Rehbein (2007a: 54) reported how traders in the market did not focus solely on competition and making sales but often cooperated with each other to ensure everyone went home with at least some profits in order to avoid conflicts and hard feelings. Whereas in China, Gallo (2011: 93) reported that while truthfulness is an important virtue, it is generally acceptable to tell white lies if these lies allow everyone to save face and thus avoid a confrontation. Everyone likes change but everyone also likes stability. There is nothing as exciting as going on vacation to a new location, and nothing more satisfying than returning home to familiar surroundings at the end of the vacation. However, on the continuum between change and stability, one might find in some companies operating in the LDCs of Asia more preference is given to stability than to change. For example, Gallo (2011: 10) noticed Westerners change jobs, homes and even spouses more frequently than do the Chinese, but we should also remember many communities in Asia have gone from agrarian societies to industrial and even post-industrial societies in a much shorter time period than was the case in the West. These successful transitions show workers in LDCs in Asia have the capability to handle rapid change. This preference for
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stability may not be seen in all LDCs. As Hipsher (2010a) pointed out the Theravada Buddhist teaching of the non-permanence of everything may assist the societies of many countries in mainland Southeast Asia to accept change easier than is the norm in other more traditional societies found in other locations. Differences in communication styles between cultures have often been reported. Hall’s (1976) framework includes high-context cultures, which use less direct and more contextual communication styles, and low-context cultures, where communication is more direct and there is more emphasis on spelling out the meaning. It has been noted, Asian countries generally use more of a high-context communication style while the Anglo-American countries use more of a low-context communication style. The less direct style of communication in Asia can help avoid confrontations and loss of face. Managers from outside the region working in the LDCs of Asia might want to be mindful of their communication style and adapt a slightly less direct style of communication than would be the norm in some other regions. In Western societies, laws and the legal system are generally thought of as being mostly black and white where there are fairly clear boundaries between following rules or laws and breaking them. While in Asia, one sees more of an acceptance of gray areas and more reliance on personal interpretations in the application of rules and laws. This makes relationships often more important than compliance in meeting legal requirements. For example, in reference to conducting trade between Thailand and Burma/Myanmar, Aribarg (2005: 126) wrote, ‘People find personal relations and social networks more efficient than interacting with formal institutions, since laws and regulations are susceptible to authority’s discretion.’ Hawks (2005: 111) found for small businesses in Cambodia having personal connections with government officials is often considered a form of competitive advantage as without these connections one is susceptible to arbitrary enforcement of the laws by officials who might be more interested in supplementing their meager salaries than objectively enforcing written laws. This looser interpretation of laws and rules also applies to the use of contracts. In Western societies a contract is normally considered as written in stone and cannot be altered without the consent of both parties while in China, and other countries in Asia as well, a contract is often more like what those in the West call a letter of intent, or a gentleman’s agreement with serves as a guideline for an ongoing business relationship that is expected to evolve and change over time as conditions change (Gallo, 2011: 124).
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As managers in many LDCs cannot be assured of enforcements of private contracts by the courts, there is much more reliance on building relationships, and trust is often as important as quality and price in selecting suppliers, distributors and other business partners (Hallen and Johanson, 2004; Nguyen et al., 2005; Young, 2005). Human resource management practices are often influenced by culture. For example, in individualistic societies the main emphasis on hiring is to find the best person for the job; however, in collectivist societies, while individual skills are also important, added importance is placed on how the individual will fit into the organization and work team (Sekiguchi, 2006). Having a worker in a work team in a collectivist society who does not socially mesh with co-workers is a bigger problem than it would be in a more individualistic society. Another aspect of HR management which can be quite different in different locations is in how companies find new workers. In most LDCs one sees more informal and personal recruitment methods. Local newspapers are not always common and internet access for potential nonmanagerial workers is far from universal. Therefore, most firms in LDCs in Asia rely mostly on referrals. For example, in the garment industry in Cambodia, Dasgupta and Williams (2010) reported only slightly over 2% of job seekers search for jobs through newspapers, and most of the rest seek and find jobs through their social networks. Strauss et al. (2010) reported in factories in Wenzhou (China), recruitment for labor was generally informal, although a significant number of managers were recruited through more formal means while many others were family or close friends of the principal owner of the firm. In most Western societies a cornerstone of performance management is the formal performance appraisal. However, these formal appraisals are not used as often in the LDCs of Asia than they are in the West. For example, Saeed and Shahbaz (2011) found formal performance appraisals were rarely used in SMEs in Pakistan; instead, more informal appraisal methods were primarily used. Claus and Hand (2009) reported most MNCs are already aware of the need to localize performance management systems with differences in the dimensions of power distance and masculinity being the primary drivers of different performance management systems. If formal performance appraisal systems are to be introduced into the LDCs of Asia, one should be aware of how these systems often make it more difficult for all employees to save face, and ranking employees inevitably will result in conflict and confrontation. Performance appraisals are intended to motivate individual performance through
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The Private Sector’s Role in Poverty Reduction in Asia
competition, but one should consider whether to use or how to use this form of performance management in a collectivist society with relatively high power distance scores.
Operational level business practices The operational level consists of day-to-day business practices. Operational business practices are where the grand strategies are implemented. Operational level business practices include production and operational techniques, accounting practices, use of communication technology and logistics procedures. Often the selection of a particular operational level practice is greatly influenced by costs and the need for efficiencies. It has been proposed the most important influences on operational business practices are technology and price of labor (Hipsher, 2007). When globalization and convergence of practices in business are discussed, it is often the technologies and operational business practices that are being referred to. Cellphones, computers, shipping containers, bar codes and other technologies have become the tools used at the operational level of businesses throughout the world. While successful firms use a wide variety of strategies and tactics, there is often less variety seen at the operational level and best practices often emerge which cross geographic and industrial boundaries. There is some research which supports the concept of global convergence of operational business practices. There has been found some level of international convergence in accounting and auditing (Brackney and Witmer, 2005; Horstmann, 2005; Herrmann and Hague, 2006), and in the use of information technology (Van Ark and Piatkowski, 2004; Zhang and Jeckle, 2004) and production technology (Frantzen, 2004). However, differences remain and a total convergence of operational level business practices has not happened and some differences are likely to remain for a considerable length of time (Pagell et al., 2005). One of the drivers of operational level business practice differences is the difference in labor costs. Some technologies that save money in areas where labor costs are relatively high do not bring cost savings in LDCs where labor costs are much lower. Therefore, in countries with relatively lower labor costs, such as those found in the LDCs of Asia, one is likely to see more labor-intensive operational business practices and less use of technology than in locations where labor costs are higher.
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Yu and Zaheer (2010) believed new technologies were usually more easily accepted when introduced than were new practices requiring changes in social interactions or conceptual thinking. They also believed changes in one area, such as use of a new technology, sometimes caused misalignments in other business areas which would then need to be realigned. Therefore, introducing a new technology might help in the gradual acceptance of changes in other work practices which are more interpersonal or strategic in nature. While convergence in the use of technology and operational level business practices is often seen, the use of specific operational tools can still vary across cultures. For example, Han et al. (2010) found, while moves to have a single worldwide accounting system continue, the nuanced application and choices made within emerging frameworks are affected by culture and companies from more individualistic societies often attempt to ‘manage’ earnings to a greater extent than do companies from more collectivist countries. It is proposed best practices in operational level business practices can often be transferred across international boundaries with limited need for adaptation to local conditions. In recent years we have seen many technologies and operational business practices, such as the use of cellphones and bar code readers that originated in more economically developed nations, become nearly universally accepted across the globe and it is likely this trend will continue. An example of how technology can be used efficiently across borders is the use of mobile phones by banana growers in Uganda. Mobile phones have given farmers more control over price, which has resulted in increased production and sales of perishable bananas. Mobile phone ownership in rural Uganda is not widespread, but as long as one was available in a community, information about prices spread rapidly throughout the community. The use of mobile phones significantly reduced the transaction costs of matching buyers and sellers of bananas, making the entire value chain more efficient, and has increased profits and the standards of living of the farmers (Yamano et al., 2010). Universal standardization of operational business practices also facilitates international trade. Firms using differentiation strategies can easily buy from suppliers using a niche or cost leadership strategy. In addition, there is no need for interpersonal business practices to be aligned between trading partners. However, at the operational level, to ensure smooth and efficient exchanges, some standardization of practices is required. Therefore, we see some uniform protocols in communications, logistics and other operational business practices. Firms trading with each
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The Private Sector’s Role in Poverty Reduction in Asia
other need to have some integration of operational business practices, and increased international trade pressures firms to adapt more common operational business practices to reduce transaction costs.
Three-level approach When operating in LDCs in Asia, it is proposed firms can take a three-level approach. The first step is to use universal approaches to strategic management but, because economic and other environmental conditions may be different from what is found in other locations, firms will need to adjust strategies to local conditions. In the LDCs of Asia, there will generally be limited opportunities to use differentiation strategies at the top of the markets. Instead, costs will take on added importance, and most successful business strategies will most often focus on cost leadership, focused strategies or using differentiation strategies aimed at the lower and middle segments of the market. For interpersonal business practices, in general, a company will need to adjust practices for the social-cultural environment found in each location.
Figure 4.1
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Transportation system, Aranyaprathet, Thailand
Business strategies and practices in developing economies
The third level shows firms can often use universal best operational business practices and adapt foreign technology for use in any environment, although a company might use less technology and more human labor than a firm might use in other locations due to lower labor cost and more availability of low-skilled labor in LDCs.
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