Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the Way?
LINKAGES TO THEORY •
Modern Slavery; Theoretical framework of modern slavery; Modern slavery and Corporate Social Responsibility; Human rights as a Management issue; Human rights and sustainability; Businesses as human rights advocates;
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Carroll’s Pyramid of CSR; Managing change
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Ethical supply chain; Supply chain mapping; Supply chain audit
TEACHING THE CASE Ideally, the case may be distributed 2-5 days before the class. In the classroom, the case instructor can initiate the discussion by giving a brief introduction about the case and how companies are facing the heat related to modern slavery (5 minutes). This can be followed up with a discussion regarding Nestlé battling allegations of abetting child slavery in cocoa plantations in Ivory Coast while at the same time admitting to forced labor in its seafood supply chains in Thailand. The ethical dilemma facing Nestlé over the existence of slavery in its cocoa supply chains and the steps taken to combat it can also be touched upon. The instructor can take the discussion further with the help of the following questions. 1. What is modern slavery? Where does it fit in with a company’s CSR strategy? (10 minutes) 2. What are the conditions enabling slavery in cocoa supply chains in Ivory Coast? (10 minutes) 3. Why is tackling the issue of modern slavery so important for a company like Nestlé? (10 minutes) 4. Investigate the existence of modern slavery in Nestlé’s supply chains and its efforts to address the issue. (15 minutes) 5. Discuss the key challenges Nestlé faced while addressing modern slavery in its cocoa supply chain. (10 minutes) 6. What more should Nestlé do to mitigate the risk of modern slavery in its cocoa supply chain? (15 minutes) The learning from the case may be summarized at the end of the class (5 minutes).
ANALYSIS 1. What is modern slavery? Where does it fit in with a company’s CSR strategy? The first modern definition of slavery appeared in the 1926 League of Nations Slavery Convention, which defined slavery as “the status or condition of a person over whom any or all of the powers attaching to the right of ownership are exercised” (Allain, 2009). Modern slavery can take several forms including forced labor, debt-bondage, child labor, wage exploitation, human trafficking, forced marriage, involuntary domestic servitude, or any other practice wherein victims are coerced through physical or mental threat to engage in unreasonable work. Increasing globalization means that nearly every corporation is exposed to the risk of forced labor and human trafficking in its supply chain. Modern slavery affects virtually all industries and can occur at any stage in the supply chain. It exists because it is profitable. Companies benefit hugely from cost savings through use of modern slavery (Crane, 2013). Forced labor within corporate global supply chains is a particularly elusive form of modern slavery that has been addressed the least. The ILO predicts that out of the 20.9 million victims of modern slavery globally, 14.2 million are victims of forced labor (See case exhibit). 2
Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the Way?
The external factors that influence slavery can be broken down into conditions related to the industry context and to the broader institutional context (Scott, 2001). The institutional context captures socioeconomic, geographic, cultural, and regulatory factors. A theoretical framework proposed by Crane (2013) identifies the economic and institutional conditions that give rise to modern slavery (See TN Exhibit I). Modern Slavery, CSR and Corporate Sustainability CSR refers to ‘the integration of social, environmental, and economic concerns into business operations’. It is distinctive from, though related to, the business and human rights agenda. In response to increased concerns about the social environmental impact of their supply chain and to the growing importance of CSR, several companies have adopted codes of conduct that extend to their suppliers. In terms of CSR, modern slavery is one among a number of social risks to be taken into account by corporations when assessing what is in the best financial interests of shareholders. A business is expected to operate in an ethical manner and an obligation that it will do what is right, just, and fair and to avoid or minimize harm to all the stakeholders with whom it interacts. Business is expected to be a good corporate citizen, that is, to give back and to contribute financial, physical, and human resources to the communities of which it is a part. Application of popular CSR models like the Carroll’s pyramid (Carroll, 1991) show that it is important to tackle the issue of modern slavery for a company like Nestle. The Universal Model of CSR (2014) proposed by Nalband and Al Kelabi explains how and why CSR will become part of the business and sustainability; and its applicability universally (See TN Exhibit II). Tackling modern slavery can be seen as an ethical responsibility wherein a company has a duty to protect the human rights of its workers. However, there are potent limitations of CSR on modern slavery. According to New (2015), the standard initiatives of anti-modern slavery CSR are themselves, in some sense, part of the enabling mechanisms for modern slavery to persist: •
the right hand (the CSR activity, the policy statements) gives the appearance of working to reduce the problem; and
•
the left hand (the brutal exercise of commercial power, hard negotiation on prices and trading terms) generates the conditions in which forced labour emerges.
The corporate sustainability (CS) approach that aims for the transformation of markets, consumer patterns, life styles, etc. can prove to be a better alternative to tackle the issue of modern slavery. CS is about “...meeting the needs of a firm’s direct and indirect stakeholders (such as shareholders, employees, clients, pressure groups, communities, etc.), without compromising its ability to meet the needs of future stakeholders as well“ (Dyllick & Hockerts, 2002). Lozano (2015) has identified various CS drivers (See TN Exhibit III): •
Internal: Shared values, resources and cost saving, company culture; sustainability reports; customer demands and expectations; moral and ethical obligations to contribute to CS; and champions.
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External: National government; raising student awareness; access to resources; environmental crises; regulations and legislation; raising society awareness; and collaboration with external organisations.
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Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the Way?
TN Exhibit I:
A Theoretical Framework of Modern Slavery
Source: Crane, A. (2013). Modern slavery as a management practice: Exploring the conditions and capabilities for human exploitation. Academy of Management Review, 38(1), 49-69.
TN Exhibit II: The Universal Model of CSR
Source: Nalband, N. A., & Kelabi, S. A. (2014). Redesigning Carroll’s CSR pyramid model. Journal of Advanced Management Science, 2(3). 4
Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the Way?
TN Exhibit III: Corporate Sustainability Driver Model
Source: Lozano, R. (2015). A holistic perspective on corporate sustainability drivers. Corporate Social Responsibility and Environmental Management, 22(1), 32-44.
Global companies have a moral and ethical obligation to combat slavery in their supply chains. Modern slavery is inconsistent with company values and a big threat to their reputation. If they fail to disclose to consumers the use of slavery in their supply chains, they are deceiving them into buying products they would not have otherwise purchased. For tackling the challenges posed by modern slavery, CS offer the potential to be more encompassing, both in terms of the company system (including operations, strategy, organisational systems, etc.), and in terms of stakeholders (internal and external, as well as social and environmental). 2. What are the conditions enabling slavery in cocoa supply chains in Ivory Coast? The condition can be analyzed using the theoritical framework of modern slavery (TN Exhibit I). Industry context: •
Labor intensity: Cocoa production is labor intensive and requires mostly unskilled labor. This contributes to the widespread use of child labor.
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Value distribution: In the cocoa supply chain, margins are narrow and value is captured further downstream by larger and more powerful tier I suppliers. Tier II suppliers might then perceive the necessity for coerced labor to accrue lower costs and drive profitability.
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Elasticity of demand: The global cocoa suppliers face high elasticity of demand coupled with low elasticity of supply. 5
Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the Way?
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Legitimacy: Slavery is more likely to persist in cocoa supply chains because suppliers seek to operate beyond the oversight of regulators and other formal institutional forces.
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Regional clustering: Slavery practices are more diffused in the cocoa supply chains as slave operators are part of strong geographic social networks that collectively divert institutional pressures.
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Supply chain interventions can also raise the effect of industry context on slavery by introducing new tiers of suppliers and putting pressure on prices.
Socio-economic context: •
Poverty and relative poverty: Extreme poverty is the norm for cocoa farmers wherein the lack of a decent livelihood for them leads to human rights violations; family members or others are forced to work the field.
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Education and awareness: Many children in Ivory Coast are forced into labor due to poverty and the absence of educational opportunities in the region. Lack of awareness regarding anti-slavery regulations also inhibits the reporting of potential slavery incidents.
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Unemployment: Lack of appropriate skills among workers and limited job opportunities in the region may force some people to work on cocoa farms.
Geographic context: •
Geographical isolation: Some cocoa growing regions have little or no contact with law enforcement, support groups, or trade unions that might otherwise help protect individuals’ interests.
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The locations are isolated from the main sources of labor (cities, towns). As a result, a high demand/ low-supply market for labor is created. This imbalance leads to higher labor prices and small-scale operations could only become economically viable by employing slave labor.
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Physical/political/psychological distance: Physical, political, or psychological distance from the usual home place of slave workers can prevent escape. People enjoying the end products are often not aware of the sufferings of the people in cacao plantations in places like Ivory Coast.
Cultural context: •
Traditions: Bonded labor is a longstanding issue, rooted in custom and tradition in West Africa.
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Entrenched inequalities: This includes exploitation or discrimination, notably against women, racial minorities, or children.
Regulatory context: Strength of governance: One of the key regulatory factors is the strength of governance in the region which includes government effectiveness, regulatory quality, political stability, control of corruption, and voice to citizens. Though Ivory Coast is contributing significantly to the economic development of the West African region, the region has endured political unrest over the years. 3. Why is tackling the issue of modern slavery so important for a company like Nestlé? •
Modern slavery is at odds with increased emphasis on CSR which entails taking responsibility for a company’s effects on economic and social well-being. Customer facing businesses, particularly those that have significant brand value like Nestlé, face growing expectations from customers that their products comply with social and human rights criteria. There are moral and human rights imperatives for Nestlé to take action on modern slavery. 6
Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the Way?
Responsible businesses must tackle slavery. The literature identifies a number of factors forcing as well as incentivizing companies to take action on slavery in their supply chains (Quarshie & Salmi, 2014; Schroders, 2016; Lake et al., 2016). These include: •
Fears of reputational damage (e.g. Nestlé suffered from bad press, etc.)
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Loss of consumer trust (e.g. negative sentiment, Case Exhibit X)
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Loss of trust in the brand leading to loss in revenues (e.g. most boycotted)
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Investor interest. Company’s reputation and the value of its shares are at risk, particularly if it operates in a consumer-facing sector
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Management of trade and investment risk. Allegations of modern slavery can threaten investor relations and risk access to public funds such as export credits.
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Loss of market share
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Rise in ethical consumerism
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Increasing government regulations
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Legal and compliance issues
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Legal risk due to lawsuits raised by employees and other stakeholders (e.g. Nestlé has been a subject of class action lawsuits, etc.)
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Financial penalties
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Risk to workers
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Risk of supply chain disruption (e.g. finding cocoa may become difficult in future)
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Doing the right thing
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Corporate mission and values
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Senior leadership values
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Lack of employee engagement
There can also be positive incentives for companies to tackle modern slavery in their supply chains (Gold et al., 2015). These include: •
Credibility with customers, investors, NGOs (e.g. Nestlé received some positive coverage with respect to its disclosures in its Thai seafood supply chain)
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Improved employee morale
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Higher investment prospects
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The company being able to market ‘slave-free’, ethical products at a higher price as customers are often willing to pay slightly higher prices for ethical products (e.g. Kitkat)
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The company receiving certification standards from organizations such as Fairtrade which may boost its image.
Hence, companies like Nestlé that have significant brand value are expected to comply with social and human rights criteria in their supply chains. Powerful companies like it should be ethically and socially aligned and should not shy away from investigating and preventing potential human rights abuses by their suppliers. Nestlé is aware of the human rights abuses against children in Ivory Coast and it is obliged ethically to take action. Moreover, Nestlé has the financial stability to bring about positive changes in its supply chains. If it is to be a long-term sustainable corporation, it must live up to the ethical promises that it makes and implement real change at the level of the cocoa farms. Nestlé must actively make its supply chains more transparent so that customers can see the efforts it is making to combat slavery in Ivory Coast. 7
Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the Way?
4. Investigate the existence of modern slavery in Nestlé’s supply chains and its efforts in tackling it. In its guidance, “Indicators of Forced Labor”, the International Labor Organization (ILO) identifies 11 indicators of forced labor: 1. Abuse of vulnerability: The employer takes advantage of a worker’s vulnerable position, for instance, to impose excessive working hours or to withhold wages. 2. Deception: Deception relates to the failure to deliver what has been promised to the worker, either verbally or in writing 3. Restriction of movement: Forced laborers may be locked up and guarded to prevent them from escaping, at work or while being transported. 4. Isolation: Victims of forced labor are often isolated in remote locations, denied contact with the outside world. 5. Physical and sexual violence 6. Intimidation and threats: This include loss of wages or access to land, sacking of family members, further worsening of working conditions, or withdrawal of privileges. 7. Retention of identity documents: Retention by the employer of identity documents or other valuable personal possessions. 8. Withholding of wages 9. Debt bondage: Forced laborers work in an attempt to pay off an incurred or sometimes even inherited debt. 10. Abusive working and living conditions 11. Excessive overtime TN Exhibit IV Observations from Nestlé’s Seafood and Cocoa Supply Chain
Applicable ILO Indicators
Based on Theory of Modern Slavery (See TN Exhibit I)
• Children were forced to work long hours, including overtime, and even when they were sick. They were denied sufficient food by their traffickers and employers.
Abuse of vulnerability
Ownership/control through abuse
• Workers were enticed by traffickers with promises of good wages and easy work.
Deception
Economic exploitation
• Children were imprisoned in dark rooms, forced to urinate in a cup.
Restriction of movement Isolation
Constraints on freedom of movement; Dehumanization and Commoditization Ownership/control through abuse
• Many of these workers were trafficked into labor, put to work on plantations in Ivory Coast. They endured verbal and physical abuse, and lived under abysmal conditions. • Children were whipped and forced to work for 14 hours a day. Guards would slice open the feet of any child worker who tried to escape.
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Physical and sexual violence
Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the Way? Observations from Nestlé’s Seafood and Cocoa Supply Chain
Applicable ILO Indicators
Based on Theory of Modern Slavery (See TN Exhibit I)
• Workers were led to believe that if they did not comply with what was being asked of them, their families would be subject to physical, social, or financial retribution in their home country.
Intimidation and threats
Forced work through threat
• Workers did not receive any salary for a year’s work at a farm.
Withholding of wages
Economic exploitation through underpayment
• Some children were sold by their parents to traffickers while some were kidnapped. The traffickers sold them to farmers, where they ended up in conditions of bonded labor. Some farmers refused to let them leave the farm until the debt of their purchase had been paid off.
Debt bondage
Constraints on freedom of movement
• Some children were involved in hazardous farming tasks or work on farms including carrying heavy loads, using machetes and sharp tools, and applying pesticides and fertilizers.
Abusive working and living conditions
Dehumanization and Commoditization
• At the seafood supply chain in Thailand, migrant workers had their passports confiscated and were forced into debt bondage after being recruited.
Retention of identity documents Debt bondage
Forced to work through threat
For this, Nestlé can be rightly accused of deceiving its customers into buying unethical products. As a consequence of its failures to address slave labor within its supply chain, Nestlé’s customers are also indirectly supporting slavery. Nestlé unethically continues to thrive and profit from the exploitation of unfair and unethical child labor. Nestlé’s Actions: In 2015, Nestlé voluntarily admitted to forced labor in its Thai sea food supply chain when it released the results of an internal investigation into practices on prawn farms and fishing boats in Thailand. In a move toward transparency, the company’s investigation found that the Thai seafood industry, suffered from widespread human rights abuses, including the use of child labor. Nestlé’s disclosure is rare because companies with allegations of abuse in their supply chains rarely share negative findings. With this, Nestlé has committed itself to self-policing its supply chains. The company has identified the protection of human rights, including the abolition of child labor and the elimination of all forms of forced or compulsory labor as one of its Corporate Business Principles. It •
Launched TNCP to ensure a sustainable future for the cocoa industry worldwide and the communities depending on it. For instance, KitKat became the first global confectionery brand sourced from 100% certified sustainable cocoa, supplied through TNCP that aimed to improve lives in farming communities and the quality of beans
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Set up a Child Labor Monitoring and Remediation System (CLMRS) to improve workers’ livelihoods and protect children in its cocoa supply chain (See case Exhibit VII).
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Rolled out the Nestlé Commitment on Labor Rights in cocoa Supply Chains
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Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the Way?
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Engaged with stakeholders. Collaborated with different stakeholders (NGOs, governments, trade unions) to set up mechanisms to provide comprehensive monitoring, implement effective remediation activities, and offer support to local communities.
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Evaluated the risks. Having identified 11 key human rights risks in its business, Nestlé developed detailed action plans for seven of them including child labor, labor rights in its operations, and forced labor in the upstream supply chain.
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Formed partnerships with key external organizations. It worked closely with the Danish Institute for Human Rights (DIHR) to roll out its Human Rights Due Diligence Program (HRDDP) throughout its operations globally and with the Fair Labor Association (FLA) to address labor-related issues.
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Continued to make its approach to human rights planned, comprehensive, and unified across all its business activities through HRDDP.
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Delivered transparency by communicating its commitment to suppliers and stakeholders, operating a complaints mechanism, monitoring progress, and reporting on actions and progress.
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Provided training and awareness. Engaged specialist partners, provided staff training and guidelines to tackle slavery in its cocoa supply chain.
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Enforced traceable supply chains identifying all potential sources of origin as part of a comprehensive supply chain risk assessment. Carried out assessments in its Thai seafood supply chain by undertaking a mapping exercise of its supply chain and followed this up with an NGO providing a detailed supply chain risk assessment (See Case Exhibit IX).
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Established a grievance mechanism that allowed for anonymous reporting and installed a fishing vessel verification program to assess working conditions on randomly selected boats
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Implemented a training program for boat owners and/or captains.
Tackling modern slavery is by no means an easy task. Nestlé has undertaken some sound actions to tackle this issue, particularly in its Thai seafood supply chain. But a lot needs to be done in the cocoa supply chain. As per its own admission, child labor still exists in its cocoa supply chain. Till the last child is rescued from slavery in its supply chain, a well-resourced company like Nestlé cannot afford to rest. 5. Discuss the key barriers Nestlé could face while addressing modern slavery in its supply chains. Modern slavery is a complex supply chain issue. For Nestlé, identifying modern slavery within its supply chains would be challenging due to the following reasons: Industry Context: •
Cocoa farming is highly labor intensive
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High elasticity of demand and low elasticity of supply may lead to a high demand for cheap labor.
Socio-economic context: •
Extreme poverty, social exclusion, discrimination, and lack of adequate social protection and educational and employment opportunities come into play while eliminating child labor.
Geographic context: •
Suppliers in cocoa farms in Ivory Coast are geographically isolated and have little contact with their procurers (big chocolate manufacturing companies). 10
Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the Way?
•
Nestlé may have limited visibility over what is occurring in its complex multi-tier supply chains, particularly where there is outsourcing or sub-contracting. Suppliers may actively deceive it about working conditions.
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Nestlé’s monitoring systems allegedly cover only tier one suppliers at the top of the value chain. As noted, forced labor is more likely to be found in the bottom tiers.
Cultural context: •
Slave labor is a longstanding issue, rooted in custom and tradition in Ivory Coast
Regulatory context: •
Government effectiveness, regulatory quality, control of corruption, and voice and accountability to citizens is reportedly not very effective in Ivory Coast
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The limited presence of law enforcement agencies in the region may hamper anti-slavery efforts.
Other barriers: •
The length and complexity of its supply chain.
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Nestlé can adopt a multi-stakeholder approach to address modern slavery, but working with a diverse range of stakeholders each with their own priorities and perspectives, could be difficult.
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Lower tier suppliers benefit hugely from cost savings through use of modern slavery and so could be unwilling to tackle it.
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Forced labor is a criminal activity; it is often actively hidden by the perpetrators, making it difficult to detect. Third party auditors may struggle to get full access to facilities and victims may be unwilling to speak up fearing retaliation.
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Cost and pricing pressures. The elimination of forced labor may conflict with the goal of profit maximization for suppliers.
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Modern slavery can feature in the supply chain in an episodic manner and can take many different forms. This can make it difficult to identify.
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Competitive tensions can be a barrier. Collaborating with competitors and competition law can be a challenge.
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CLMRS has cost implications. Working to make it as effective as possible is essential if the system is to be sustainable in the long term.
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Nestlé can face challenges of time, resources, and expertise, and lack commitment at the Board level.
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Issues relating to human trafficking in supply chains will garner a negative response. Failing to take action will damage its corporate reputation. An analysis of Nestlé’s adverse media coverage related to slavery with LexisNexis Newsdesk demonstrates that more than a third of the coverage was entirely negative, while only 2.5% was positive (See case Exhibit ix).
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Constant scrutiny. The requirement to produce a public statement on modern slavery results in consumers and investors dissecting the practices of the company. The desire for greater transparency will put pressure on Nestlé (as has been seen from the response to Nestlé’s disclosure about the Thai seafood supply chain, where it was accused of greenwashing). 11
Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the Way?
6. What should Nestlé do to mitigate the risk of modern slavery in its cocoa supply chain? From TN Exhibit I we can see that broadly major interventions are required on the supply chain, availability of credit, and private/ civil regulations in order to tackle the issue of modern slavery. In order to mitigate the risks of modern slavery in its cocoa supply chain, Nestlé’s business should be aligned in terms of strategy, policies, systems, key performance indicators (KPIs), and training (See TN Exhibit V). The more aligned a company’s response, the lower the likelihood of modern slavery being found in its supply chains. Transparency is also an important tool in eradicating modern slavery and human rights abuses in the supply chain. TN Exhibit V: Aligning Nestlé Response to Modern Slavery
Adapted from Tushman, Michael L. and O’Reilly, Charles A. (1996). The ambidextrous organisation: managing evolutionary and revolutionary change. California Management Review, 38: 1-23.
Senior Leadership •
The senior leadership team at Nestlé has to have zero tolerance for slavery and be accountable to the actions of the company
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The company should ensure senior management buy-in. They should realize that social responsibility is crucial to the farming communities in Ivory Coast, and also to the quality of Nestlé’s products.
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Boards and senior leaders need to understand how modern slavery could be a risk for their company as well as the complexity of the issues and their role in driving a strategic response.
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Senior leadership must be engaged early on to understand and appreciate the risks, to ensure appropriate resourcing and staffing and corporate culture transformation 12
Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the Way?
•
A person holding sufficient authority, resources and knowledge of the business has to be appointed to take responsibility for assessing and managing the company’s anti-slavery initiatives.
Take time to map supply chain and understand risks: The company should •
Understand its supply chain – the tiers and factories involved
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Traceability is key and visibility over the supply chain is vital to identify risks and be able to act upon them.
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Go and see what is happening on the ground
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Focus on first tier, high risk sectors
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Assess risks: Internal - what areas of its business are vulnerable – focusing on high risk regions; External - what areas of its supply chain are vulnerable? (Students can be encouraged to map Nestlé’s Cocoa Supply Chain in the Ivory Coast involving various stakeholders in order to understand what areas of the supply chain are vulnerable to slavery). (See TN Exhibit VI) TN Exhibit VI Stakeholder Map of Nestlé’s Cocoa Supply Chain in the Ivory Coast
Source: www.fairlabor.org/sites/default/files/documents/reports/cocoa-report-final_0.pdf
People: •
Nestlé should have a company policy and a commitment to tackling modern slavery
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Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the Way?
•
Bring together representatives from human resources, public relations, procurement and compliance to identify areas of weakness within the supply chain
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Promote workers’ voice in supply chains
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Focus more on due diligence
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Offer internal training on company policy
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Build a team of leaders across procurement, HR, legal, risk, and commercial to ensure that priorities and KPIs are not conflicting
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Ensure individuals whose roles directly relate to Nestlé’s modern slavery response (CSR, procurement, HR, legal, risk) develop their soft skills to build relationships of trust and transparency with suppliers
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Ensure company has a whistleblowing policy and that employees and suppliers know how to use it.
Supplier Codes of Practice: •
Consolidate and build relationships of transparency and trust with suppliers and seek longterm strategic partnerships – Transparency and communication with suppliers is key when it comes to identifying issues of modern slavery.
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Undertake responsible sourcing. Build better relationships with suppliers to ensure supply chains are resilient and efficient.
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Ensure company’s systems and processes are aligned with buying processes
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Review HR and procurement systems and ensure they are aligned with human rights standards
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Work with our suppliers, making them change, and if they fail to comply repeatedly, then delist them.
KPI’s and Objectives: •
Build on existing practices. For instance, Nestlé has a well-developed TNCP. The company can further expand it to address slavery
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Ensure KPIs are focused on impact rather than action
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Incorporate human rights performance criteria (KPIs) into screening and due-diligence processes for suppliers
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Integrate and embed human rights policies throughout its operations
Collaboration with peers and with others: •
Collaborate with the media and NGOs, which can play a role in enhancing governance and attention by investigating and publicizing instances of slavery. For instance, media and NGO pressure led Nestlé and some others to sign the Harkin/Engel Protocol in 2001 as a step toward eliminating child and forced labor in cocoa growing and processing
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Engage with external stakeholders who can assist with supply chain risk assessments
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Collaborate with peers
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Involve multiple stakeholders including buyers and suppliers of the product, government, and local enforcement authorities and labor unions to gain legitimacy and effectiveness
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Collaborate with governments to frame and strengthen modern slavery regulations
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Ensure these partnerships legitimize them as an ethical entity and drive consumers into believing that they are actively combatting child slave labor in their supply chain 14
Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the Way?
Other Practices: •
Generate new business opportunities among the poor
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Provide assistance to cocoa farmers in the form of new technologies, crop yield techniques, and fairer trading arrangements
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Encourage microcredit schemes in regions with persistent debt bondage problems
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Reduce the effect of high labor intensity and low value distribution by instituting new trading relationships and better technology.
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Provide funding for local policing and train people on human rights issues
Nestlé is capable of making significant changes to the issue of modern slavery due to its financial prowess and global presence and influence. It has the financial resources and huge bargaining power to make this issue disappear at least from its own supply chain. For instance, its sales were CHF 89.5 billion in 2016. If Nestlé were to provide higher wages for the farmers and ensure better livelihoods, slavery would undoubtedly decrease. It can also publicize at the point of sale the initiatives it has taken to ensure that its products are free from modern slavery and also what percentage of its supply chain is free from it. Not only will this incentivize the company to work toward eliminating this problem, but it will also help mitigate potential lawsuits (of deceptive marketing) and the resultant bad press associated with it.
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Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the Way?
Suggested Readings: 1.
Idris, I. (2017), Role of business in tackling modern slavery in supply chains.
2.
Kara, S. (2017). Modern Slavery: A Global Perspective. Columbia University Press.
3.
Killing Capitalism: Ending Modern Day Slavery and Leaving the Corporate Plantation, CreateSpace Independent Publishing Platform, 07-Jun-2016
4.
Carroll, A. B. (2016). Carroll’s pyramid of CSR: taking another look. International journal of corporate social responsibility, 1(1), 3.
5.
Off, C. (2016). Bitter chocolate: Investigating the dark side of the world's most seductive sweet. Univ. of Queensland Press.
6.
Gold, S., Trautrims, A., & Trodd, Z. (2015). Modern slavery challenges to supply chain management. Supply Chain Management: An International Journal, 20(5), 485-494.
7.
Lozano, R. (2015). A holistic perspective on corporate sustainability drivers. Corporate Social Responsibility and Environmental Management, 22(1), 32-44.
8.
New, S. J. (2015). Modern slavery and the supply chain: the limits of corporate social responsibility?. Supply Chain Management: An International Journal, 20(6), 697-707.
9.
Nalband, N. A., & Kelabi, S. A. (2014). Redesigning Carroll’s CSR pyramid model. Journal of Advanced Management Science, 2(3).
10.
Crane, A. (2013). Modern slavery as a management practice: Exploring the conditions and capabilities for human exploitation. Academy of Management Review, 38(1), 49-69.
11.
Datta, M.N. and Bales, K. (2013), Slavery is bad for business: analyzing the impact of slavery on national economies, Brown Journal of World Affairs, Vol. 19 No. 2, pp. 205223.
12.
Bales, K. (2012), Disposable people: New slavery in the global economy, Univ of California Press.
13.
Rodriguez, J. P. (Ed.). (2011). Slavery in the Modern World: A History of Political, Social, and Economic Oppression (Vol. 2). Abc-Clio.
14.
Allain, J (2009), The definition of slavery in international law. Howard Law Journal, 52: 239–276.
15.
Satre, L. J. (2005), Chocolate on trial: Slavery, politics, and the ethics of business, Ohio University Press.
16.
Chanthavong, S. (2002), Chocolate and Slavery: Child Labor in Côte d’Ivoire, TED Case Studies, 664.
17.
Dyllick, T., & Hockerts, K. (2002). Beyond the business case for corporate sustainability. Business strategy and the environment, 11(2), 130-141.
18.
Scott, W. R. (2001), Institutions and organizations (2nd ed.), Thousand Oaks, CA: Sage.
19.
Tushman, Michael L. and O’Reilly, Charles A (1996), The ambidextrous organisation: managing evolutionary and revolutionary change. California Management Review, 38: 123.
20.
Carroll, A. B. (1991). The pyramid of corporate social responsibility: Toward the moral management of organizational stakeholders. Business horizons, 34(4), 39-48.
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BECG/148
IBS Center for Management Research
Teaching Note:
‘Enrich Not Exploit’: Can New CSR Strategy Help Body Shop Regain Glory? This teaching note was written by Syeda Maseeha Qumer and Debapratim Purkayastha, IBS Hyderabad.
This case was a Runner Up in the 2017 oikos Global Case Writing Competition (Corporate Sustainability track), organized by oikos International, Switzerland.
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‘Enrich Not Exploit’: Can New CSR Strategy Help Body Shop Regain Glory? TEACHING NOTE SYNOPSIS This case looks at some key challenges before Jeremy Schwartz (Schwartz), CEO of The Body Shop International Plc. (Body Shop), and its International Director of Corporate Responsibility and Campaigns, Christopher Davis (Davis), as they try to re-establish the company as a leader in ethical retail and maintain its distinct image amid tough competition and boost sales. Body Shop was regarded as a pioneer in modern CSR practices and was strongly associated with the social activism of its founder, Dame Anita Roddick (Roddick). The case discusses how since its inception, Body Shop had endorsed and championed various social issues such as opposition to animal testing, development of community trade, building of self-esteem, campaigning for human rights, and protection of the planet. Through these initiatives, the company had cultivated a loyal base of customers. The case goes on to discuss the acquisition of Body Shop by the beauty care giant, L’Oréal SA (L’Oréal), and how its ethical image suffered after the takeover. Customers and activists felt betrayed by the deal as Roddick had previously been vocal in her criticism of companies like L’Oréal on account of their alleged unethical policies. According to Schwartz, after the death of Roddick in 2007, Body Shop’s fortunes reportedly took a sharp downturn and its ethical message faded. Moreover, with a host of new competitors making their way into the green cosmetics market, the sales of Body Shop plummeted. In 2016, to reinvigorate the brand, position itself as a more ethical business, and reassert its position as a trailblazer of positive change, Body Shop unveiled its new global CSR campaign. The new commitment entitled ‘Enrich Not Exploit’ outlined 14 sustainable targets with a focus on people, products, and the planet, touching all areas of the business, to be delivered by 2020. The initiative was aimed at supporting Body Shop in its aim of becoming the world’s most ethical and sustainable global business. But will this help Body Shop regain its past glory?
TEACHING OBJECTIVES AND TARGET AUDIENCE This case is designed to enable students to: •
Analyze the new CSR strategy adopted by Body Shop.
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Understand how The Body Shop established itself a champion of CSR under Anita Roddick.
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Understand the issues and challenges faced by Body Shop after its acquisition by L’Oréal.
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Evaluate the ‘Enrich Not Exploit’ commitments and the issues and challenges faced by Body Shop with regard to its new sustainability initiative.
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Explore ways through Body Shop can regain its leadership position in ethical business.
This case is meant for MBA students as a part of their Corporate Sustainability/ Corporate Social Responsibility/ Business Ethics/ Strategic Management curriculum. 1
‘Enrich Not Exploit’: Can New CSR Strategy Help Body Shop Regain Glory?
IMMEDIATE ISSUES •
With regard to the company’s new CSR approach, what steps should Schwartz and Davis take to establish Body Shop as the world’s most ethical and sustainable global business?
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How can Body Shop bridge the gap between its projected image and actual business practices as perceived by its customers and other stakeholders? How can it assure shareholders and customers that the company’s new green agenda is not a just a marketing ploy to boost sales?
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How can Body Shop be a change-maker in the retail and beauty industry? How can it emerge as a role model company with a strong focus on CSR without compromising on its bottom line?
BASIC ISSUES Pyramid of CSR, Evolution of CSR, Strategic CSR, CSR and Sustainability, Societal marketing concept, competitive advantage (See list of suggested readings)
TEACHING THE CASE This case study can be used to analyze, discuss, and debate the new CSR sustainability strategy launched by Body Shop in a number of ways and for achieving different learning objectives. In an 80-minute session, the instructor may start the classroom discussion by giving a brief overview about the background of Body Shop – its various CSR initiatives, its acquisition by L’Oréal, and the subsequent criticism. She can also take a poll on how many students agree that the new CSR strategy can help Body Shop regain its past glory. All this may take some 5 minutes. The instructor may then go back to the early days of Body Shop and how it evolved over the years to ensure a thorough analysis of the case. Some broad assignment questions are listed here: 1. How did Body Shop emerge as a champion of CSR while challenging industry norms? How important a contribution did Roddick make to the creation of Body Shop? (20 minutes) 2. How did the acquisition by L’Oréal affect the ethical image of Body Shop? Discuss the problems Body Shop faced following the takeover. (10 minutes) 3. Critically analyze Body Shop’s new CSR approach. (15 minutes) 4. Do you think the revamped strategy will help Body Shop regain its lost glory as a leader in ethical business? What possible challenges could Schwartz and Davis face going forward and how can they be tackled? (20 minutes) Another 10 minutes may be devoted to summarizing the learning from the case, and wrapping up the session.
ANALYSIS 1. How did Body Shop emerge as a champion of CSR while challenging industry norms? How important a contribution did Roddick make to the creation of Body Shop? A. Body Shop was set up 40 years ago by Roddick, a business woman way ahead of her time. At its core was the principle pioneered by Roddick that business should not be just about money, it should be about responsibility and public good (purpose beyond profit). Roddick linked the Body Shop brand with the social justice agenda as she believed that by being a good corporate citizen through social and environmental actions, the company could gain the trust of its employees, customers, stakeholders, and shareholders. She identified a niche in the market for nature-based beauty products with minimal packaging. Based on this principle, Body Shop 2
‘Enrich Not Exploit’: Can New CSR Strategy Help Body Shop Regain Glory?
established a strong position in the beauty industry as its products were environment friendly. Moreover, clever marketing and public relations ensured that the brand received free publicity and flourished. Roddick also took advantage of the rise in ethical consumerism and used it as an opportunity to build her company’s image and grow business. Moreover, franchising allowed for rapid growth and international expansion as entrepreneurs globally bought into Roddick’s vision. Defying the industry practices of massive advertising and expensive packaging, Roddick created a company that changed the face of the beauty industry. Where traditional manufacturers were offering inflated promises and ignoring customer needs, Body Shop was selling simple and honest products. Roddick changed the language of business by incorporating the action of social change with highly visible social campaigns. She believed that businesses had the power to do good. Roddick built her business on the societal marketing concept and led the company to stand up for its beliefs and champion causes such as self-esteem, environmental protection, animal rights, community trade, and human rights. Body Shop built its competitive advantage around five core values – Against animal testing, Defend human rights, Activate self esteem, Support community trade, and Protect the planet. The core values and the follow-up actions of the company showed a strong connect with the Triple Bottom line concept, at a time when much of the world was still debating the pros and cons of whether a firm should engage in CSR. These practices made Body Shop stand out from other cosmetic companies in the market and helped it in building up a loyal base of customers who associated themselves with the values of the company. Customers valued Body Shop due to its ethical stance, socially responsible values, unique products, and stores. Roddick was credited for the growth of ethical consumerism in the beauty industry, a concept that retailers of other major beauty brands also started following. Body Shop, since its inception, was viewed as a pioneer of modern CSR notwithstanding the criticism it had attracted in the first few decades of its existence. Pyramid of Corporate Social Responsibility Carroll (1991) formulated a model called the Pyramid of Corporate Social Responsibility that indicates companies are responsible to society as a whole, of which they are an integral part. The rationale behind this pyramid is that there is a natural progression of any business from being financially sustainable to being a good corporate citizen through engagement in social actions. A business is expected to operate in an ethical manner and has the expectation, and obligation, that it will do what is right, just, and fair and to avoid or minimize harm to all the stakeholders with whom it interacts. Business is expected to be a good corporate citizen, that is, to give back and to contribute financial, physical, and human resources to the communities of which it is a part. The Carroll’s pyramid is built in a way that reflects the fundamental roles played and expected by business in society (Carroll, 2015). The model proposes that CSR comprises four types of responsibility — economic, legal, ethical, and philanthropic expectations that society places on businesses at a given point in time.. These are depicted in a pyramid wherein their contribution to the overall CSR is represented (See TN Exhibit I). The economic and legal responsibility is “required” of business by society, the ethical responsibility is “expected” of business by society while the philanthropic responsibility is “expected/desired” of business by society. Economic Responsibility At the bottom of the pyramid is economic responsibility. The main purpose of any business is to make profits and be financially responsible. Profits are necessary to reward investors and also for business growth. While thinking about its’ economic responsibilities, businesses employ different strategies to enhance financial effectiveness such as focus on revenues, cost3
‘Enrich Not Exploit’: Can New CSR Strategy Help Body Shop Regain Glory?
effectiveness, investments, marketing, operations etc. In today’s hypercompetitive global business environment, economic performance is vital. Those firms that do not fulfill their economic responsibilty go out of business and any other responsibilities that may be incumbent upon them become irrelevant. Therefore, the economic responsibility is a baseline requirement that must be met in a competitive business world. Economic responsibilities mostly impact shareholders and employees because if the business is not financially viable both of these groups will be affected substantially. Body Shop maintained a steady balance between the short- and long-term needs of its business and stakeholders, to achieve a sustainable future. It adopted the more profitable franchising strategy. The company did not heavily rely on advertising. While keeping advertising to a minimum, it managed to make an impact, securing a place in the skincare, body care, and cosmetic markets thorough differentiation. Its products were packaged in plain-looking and recyclable packages. Body Shop sold simple products with a pleasant store experience. With economic responsibility comes ethical responsibility. The company believed that a wellplanned CSR strategy would not only benefit the society but also bring many advantages to the company such as increased sales and profits, operational cost savings, greater productivity, better quality, an efficient and loyal work force, enhanced company reputation, greater customer loyalty, better decision making, and risk management processes. As such, Body Shop led crusades for several causes including a ban against cosmetic testing on animals and campaigns for human rights. All this was done while increasing sales and profits and providing additional returns to shareholders for a better part of its existence. Legal responsibility The next layer of the pyramid is legal responsibility. A company has to be legally acceptable in the society where it is operating. Therefore it is important for it to run the business in accordance with the laws. Legal responsibilities are important with respect to owners, but in today’s society, the threat of litigation against businesses arise mostly from employees and consumer stakeholders. While meeting legal responsibilities, businesses must conduct themselves as law-abiding corporate citizens and fulfill all their legal obligations to societal stakeholders. One of the fundamental policies at Body Shop was that all employees should observe and comply with the laws and regulations applicable to its business in each country where it operated. It was essential that each employee in the company worked with high standards of business integrity. Both the suppliers and employees of the company had to sign Body Shop’s code of conduct which complied with all the relevant legislation. Legal responsibility also implied that Body Shop published complete and accurate financial statements and descriptions of its business. These records were the basis for managing the company’s business and for fulfilling its obligation to shareholders, employees, customers, suppliers, and regulatory authorities. Ethical Responsibility Ethical responsibility means that a company has to do business in the right way, with integrity and transparency. Though the ethical responsibility is depicted in the pyramid as a separate category of CSR, it should be seen as a factor which cuts through and permeate all four of the CSR categories, thereby playing a vital role in the totality of CSR. For instance in the Economic Responsibility category, the pyramid assumes a capitalistic society wherein the quest for profits is viewed as a legitimate expectation and is considered appropriate for owners or shareholders to expect a return on their investments. In the Legal Responsibility category, most laws are formed out of ethical issues such as concern for consumer safety, employee safety, the natural environment. Philanthropic Responsibilities are often ethically motivated by companies striving to do the right thing.
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‘Enrich Not Exploit’: Can New CSR Strategy Help Body Shop Regain Glory?
Ethical responsibilities affect all stakeholder groups. It includes a range of issues such as choosing the right ingredient/package and suppliers, testing products by adhering to safety regulations, and building programs for fair trade. Ethical responsibility was something that Body Shop strongly promoted and was closely linked to the company’s core values. According to Body Shop, every business had a responsibility to protect the environment in which it operated, both locally and globally. It was a strong advocate of fair trade, environmental conservation, and fair practices, among other things. Since its inception, Body Shop had made substantial efforts to improve environmental conditions globally. For instance, as early as 1986, the company participated in the Save the Whales campaign with Greenpeace. The company had actively led many movements and protests for environmental protection. Some of the environmental issues championed since 1976 were sustainable packaging, sustainable product ingredients, sustainable supply chain practices, water and energy efficiency, waste reduction, animal welfare, protecting rainforests, recycling, and reducing CO2 emissions. Body Shop worked toward producing environmentally friendly products. The company sold products made of natural ingredients, packaged in minimal and recyclable packages. The retailer’s beauty products were 100% vegetarian and complied with product safety and health regulations. The company was actively involved in researching about the ingredients that went into its products and eliminated any risky or unwanted chemical so the product could be as natural as possible. All of its wood-based products and shop fit cabinetry were from a Forest Stewardship Council approved source. Body Shop rejected animal-based product testing. It insisted that every single ingredient used by suppliers for Body Shop had its own animal testing declaration. In 1997, Body Shop became the first international cosmetic company to comply with the Humane Cosmetics Standard for its “Against Animal Testing” policy. It engaged in substantial lobbying and campaigns to ban animal testing. Partially as a result of Body Shop’s efforts, the UK banned cosmetic testing on animals. The company ensured ethical compliance in their supply chain. The company had a responsible sourcing and production department. Body Shop was an active member of the Ethical Trade Initiative (ETI) and adopted the ETI Base code purchasing products only from suppliers that met ethical trade standards where employment was freely chosen, working conditions were safe and hygienic, child labor was not used, working hours were not excessive, living wages were paid, and no discrimination was practiced. To make sure that all suppliers met the ETI standards, it made it mandatory for them to sign a contract agreeing to hold on to the standards and to undertake regular ethical assessment. New suppliers were appointed only after a rigorous procedure to ensure that they operated in accordance with the values held by the company. These clear standards of practice ensured ethical behavior and set Body Shop apart from its rivals. Body Shop believed it had a moral responsibility to be open and honest about what it did. It was one of the first companies to publish a ‘Values Report’ which were audit statements of its social, environmental, and animal protection practices. Philanthropic Responsibility Philanthropic responsibilities stand at the top of the pyramid. Philanthropic responsibilities not only affect the community and nonprofit organizations but also employees because a company’s philanthropic involvement boosts employees’ morale and engagement. This category is often considered as good corporate citizenship. A business is expected to contribute positively toward the community, basically helping the people improve their quality of living. Body Shop emphasized heavily on this responsibility in its operations. Through the various programs launched by the company, it provided the people with work and self-respect. Moreover, by engaging in projects to aid community organizations 5
‘Enrich Not Exploit’: Can New CSR Strategy Help Body Shop Regain Glory?
and contributing significant portions of its earnings to social causes, the company made an effort to benefit society. For instance, the establishment of The Body Shop Foundation in 1990 was a testament of the company’s commitment to donate a portion of its profits to different causes such as preservation of human and animal rights and the environment. The initiatives undertaken by the Body Shop were diverse on a global level. It supported drives in almost every arena, be it human rights, women rights, or animal rights. For instance, the“Stop violence at home” campaign that promoted human rights was one of the main focuses of the company’s volunteering activities. Body Shop’s ‘Stop Sex Trafficking of Children and Young People’ campaign called on governments to protect young survivors of trafficking, and offer specialized services to them. The campaign resulted in over seven million (7,044,278) petition signatures from customers globally. Body Shop established a Community Fair Trade (CFT) program to help create livelihood, and to support sustainable development by sourcing ingredients and accessories direct from socially and environmentally marginalized producer communities. CFT conformed to high levels of labor standards, including the avoidance of child labor, forced labor, sweatshops, adverse health and safety conditions, and violations of labor or human rights. By supporting and actively participating in community trade, Body Shop allowed the disadvantaged communities in underdeveloped regions to utilize their resources so they could earn a decent livelihood. Body Shop also gave its workers paid time to do volunteer work for the community. The CSR Pyramid - A Sustainable Stakeholder Framework The Pyramid of CSR is intended to be seen from a stakeholder perspective wherein the focus is on the whole and not on the individual categories. A consideration of stakeholders and sustainability, today, is inseparable from CSR (Carroll 2015). Stakeholder theory developed by R. Edward Freeman theory pays attention to the social component of CSR and regards the different groups in society which influence and are influenced by the company, in which they are interested. According to Freeman et al. (2010) “A stakeholder in an organization is (by definition) any group or individual who can affect or is affected by the achievement of the organization’s objectives.” Primary stakeholders include those who have an official or legal stake in the enterprise—owners, employees, customers, local communities. Secondary stakeholders include those who have a general interest in the outcome of business functioning—government, regulators, social pressure groups, activist groups, competitors, and so on. The Body Shop is a classic example of stakeholder theory. The company’s CSR commitment is driven by engaging with key stakeholders across the world, as it continues to explore how to effectively apply its sustainable development goals to its business. The Body Shop considers customers, employees, suppliers, franchises, consultants and NGOs to be its main stakeholders. Body Shop adopted a social activist purpose, endorsing various social-change issues that complemented its core values. However the company’s commitment to these goals was questioned by some stakeholders. In order to deal with this, Body Shop developed a stakeholder culture that aimed to improve stakeholder engagement and interactions. Body Shop adopted a business specific stakeholder engagement plan to address the different stakeholder groups and to balance their responses so that they are fairly and effectively dealt with. The company engaged with external stakeholders to develop its ‘Values Report’ in order to update them on the company’s progress towards its sustainability targets. The company realized that mounting consumer pressure and poor relationships with franchisees and employees can hinder growth and financial prosperity. So Body Shop ran its business in a way that balanced economic, social and environmental needs of various 6
‘Enrich Not Exploit’: Can New CSR Strategy Help Body Shop Regain Glory?
stakeholders (See TN Exhibit II). Body Shop is actively involved with its primary stakeholders. The testing on animals is of great concern for some of Body Shop’s primary stakeholders such as animal rights groups and consumers, which is why the company is very careful when engaging with suppliers by examining the ingredients used in the products to make sure they are not tested on animals. The ‘Community Trade’ value can be related to the stakeholder theory, as the value regards the concern for one of Body Shops primary stakeholders, the suppliers. In the Community Trade programme, the suppliers are important as it is because of them Body Shop could provide its customers with naturally produced ingredients in the products. The Community Trade programme is also linked with the society in which these suppliers live, as well as with the protection of the environment. The ethical aspect is also present in this value because Body Shop behaves ethically by showing concern for the communities’ and the suppliers’. Another important value that can be related to the stakeholder theory is ‘Active Self Esteem’. The Body Shop is very concerned for the well-being of its employees and customers and wants its primary stakeholders to feel confident and valued. Since the majority of these stakeholders are women, Body Shop engages in women’s rights issues such as ‘Stop Violence in the Home’, a campaign that pays attention to domestic violence of women. From this discussion, it is evident how Body Shop developed a pioneering image in CSR with a focus on its core values that made visible contributions on the economic, social, and environmental fronts. 2. How did the acquisition by L’Oréal affect the ethical image of Body Shop? Discuss the problems Body Shop faced following the takeover? A. The announcement of Body Shop’s acquisition by L’Oréal brought a spate of criticism against the company and its founder, and gave credence to the view that there was a disconnect between Body Shop’s sustainability rhetoric and its actions. Accusations were made that L’Oréal was trying to buy CSR through its acquisition of Body Shop as multinationals generally acquire small ethical companies in the hope that it will influence how they themselves are perceived. However, L’Oréal announced that Body Shop’s values would not be compromised and that it would continue to operate as an independent entity within the parent group. Roddick, for her part, projected it as an opportunity to make changes at L’Oréal. Expected Synergies for Body Shop •
L’Oréal acquired Body Shop at a time when the latter was going through difficult times. The acquisition was intended to enhance Body Shop’s growth while adding a complementary brand with a strong identity and values to L’Oréal’s portfolio.
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Body Shop was poised to benefit from L’Oréal’s expertise in management, marketing, and research & development while maintaining its own identity as a stand-alone unit within the L’Oréal Group.
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Body Shop could exploit L’Oréal’s huge resources to build its retail network and brand range in emerging markets such as India and China where the ethical concept was newer.
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The diversity and complementary nature of both the brands provided them with the opportunity to capture a major market share of the beauty and cosmetic industry.
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Under L’Oréal, Body Shop’s products were able to reach a larger market with better marketing support.
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The deal gave Body Shop a chance to retain its core values, while at the same time spreading its values to L’Oréal.
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‘Enrich Not Exploit’: Can New CSR Strategy Help Body Shop Regain Glory?
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The acquisition was highly valuable for shareholders of Body Shop since L’Oréal offered a significant premium on the share price and provided an opportunity for them to fully realize the prospects for the group on a stand-alone basis.
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The growing interest in natural/organic brands in developed markets provided L'Oréal a good opportunity to further expand the Body Shop brand.
Problems Body Shop’s Ethics under Fire Body Shop’s ethical image took a beating after the deal was announced. Its sale to L’Oréal was considered a sell-out of its values and principles. Body Shop was accused of being hypocritical and no better than other companies in actual practice. Activists and customers said that they felt betrayed by the deal as Roddick had previously been vocal in her criticism of companies like L’Oréal for allegedly testing their cosmetics on animals, exploiting the sexuality of women, and selling their products by making women feel insecure. Moreover, Nestlé which owned 26% of L’Oréal was one of the most boycotted companies in the world for its alleged unethical business practices. There were calls for boycotting Body Shop’s products. Losing Competitive Advantage Although the potential growth opportunities were easily visible, there was a concern regarding the possibility of Body Shop losing its main competitive advantage – its strong ethical standards. The sale could derail the original ideals of going against animal testing, environmental concerns, and the use of fair trade practices. Some customers felt that the philanthropic responsibilities that were the strength of Body Shop might be compromised under L’Oréal. Conflict of Values Both were global brands but captured different market segments. Body Shop and L’Oréal had different brand images and brand equity targeting different market segments. L’Oréal was known as the innovative brand in consumer mass market while Body Shop was known as a highly ethical brand in a niche consumer market. The acquisition led to a conflict in brand identity. Loss of Trust and Brand Loyalty The acquisition resulted in a loss of trust, company’s credibility, and product reliability in the eyes of Body Shop customers. Loyal customers of Body Shop felt insecure after the acquisition as they were skeptical about L‘Oreal maintaining Body Shop’s unique culture of socially responsible business. Consumers saw Roddick’s decision to be acquired by L’Oréal as a sell-out of Body Shop’s values. Many were left disillusioned and shifted to other brands that offered a similar green concept. The deal eroded the brand loyalty of Body Shop as a result of a consumer backlash. Cultural Incompatibility There is a question over the cultural compatibility of the two companies. Body Shop and its founder had on earlier occasions been major critics of L’Oréal. Body Shop was considered as the weakest entity in the L’Oréal Group (Case Exhibit VI and IX). It struggled to match L’Oréal’s growth and was a major disappointment for L’Oréal . Though Body Shop ran as a separate entity within the L’Oréal and continued to uphold its values and beliefs, it would be difficult to say whether such a position would be maintained, going forward. 8
‘Enrich Not Exploit’: Can New CSR Strategy Help Body Shop Regain Glory?
Growing Competition Further, in the four years following the acquisition, Body Shop’s annual sales fell by 2.5%. Even as the company was facing difficulties, a host of new competitors had elbowed their way into the green cosmetics market taking over Body Shop’s market share, and making it even more difficult for the company to revive. Body Shop’s once unique green proposition was widely imitated by its rivals and proved detrimental to its bottom line. Following the acquisition and Roddick’s death, Body Shop did not make much noise on the CSR front though it was still engaged in activities on the core values propounded by the founder. As can be seen from Case Exhibits IV, V, VI and IX, the brand was languishing under L’Oréal, and even dragging the parent company’s growth rates downward. 3. Critically analyze Body Shop’s new CSR approach?
A. To answer this question, it is important to understand how the CSR landscape has changed over the years. CSR in the past CSR was first invented in the scientific literature by Bowen in 1953. He defined CSR as “the bond of the businessmen to pursue those politics, to make those decisions, or to follow those lines of actions which are desirable in terms of the objectives and values of society” (Bowen, 1953). Though the concept of CSR had been developed, it was not extensively used until the 1970s. Critics argued that a company’s sole responsibility was to provide value to its shareholders and that CSR ran contrary to the interest of the company. People were skeptical about CSR programs and referred to them as “hypocritical window-dressing”. According to them, businesses inclined toward such initiatives “reveal a suicidal impulse.” CSR evolved as a response to stakeholders’ need for transparency with regard to the actions of corporations. Companies encouraged employees to volunteer their time to support charitable actions, and used these actions as a public relations plug. In the past, CSR activities were unrelated to the company’s core business and were largely combative, attempting to prevent criticism rather than promote real development. However, post World War II, the industry witnessed a boom and this led to escalating profits. Philanthropy, which had been more personal, became corporate. Philanthropy moved eventually into Corporate Citizenship and then into sustainability as companies started to integrate social concerns in their business operation. The story of Body Shop started with Roddick’s belief that businesses could benefit society. From its very early days (since 1976), Body Shop was associated with the social activism of Roddick. Roddick was very critical of what she called the environmental insensitivity of industry and called for a change in standard corporate practices. As a strong advocate for environment and community activism, she created a successful company based on what she described as profit with principle. She endorsed and championed various social and environmental issues that complemented Body Shop’s core values and thus Body Shop became a poster child of CSR. Though some critics panned Body Shop for greenwashing, to be fair to the company, it did much work on this front. This was also at a time when most companies in the beauty industry were not doing anything noteworthy to reduce their impact on the environment. CSR Today CSR has evolved dramatically as companies have become more transparent and accessible. The debate on the advantages and disadvantages of firms engaging in CSR has been settled in favor of CSR. With globalization and increased competition, businesses are increasingly feeling the need to incorporate CSR practices into their strategic decisions as well as their dayto-day business activities. CSR today is widely used as a business strategy to gain competitive 9
‘Enrich Not Exploit’: Can New CSR Strategy Help Body Shop Regain Glory?
advantage over rivals by being more ethically responsible and concerned. Companies engage in CSR to enhance the strength and reputation of their brands, create value for customers and shareholders, and to boost profits. Moreover, due to the rise in ethical and green consumerism, companies have a moral responsibility to do more than just generate a profit. People expect companies to drive social change by being part of the solution to the world’s biggest problems and challenges. Companies are reminded that, in addition to helping to make the world a better place, their commitment to social action will be rewarded by lasting customer loyalty and profits. Hence, it is not only fashionable for companies to engage in CSR, but is also a strategic necessity. Over the years, several factors have come together to shape the direction of the CSR. They are: •
Increased stakeholder activism
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Growth in codes, standards, indicators, and guidelines
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Accountability throughout the value chain
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Transparency and reporting
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Increasing interest from governments
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Merging of CSR and governance agendas
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Growing investor pressure and market-based incentives
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Pressure to quantify CSR “Return on Investment”
As a result, CSR has evolved from returning profits to society to creating shared value with stakeholders in order to improve the environmental and social corporate sustainability (See TN Exhibit III). CSR has become part of the core corporate strategy as well as a strategic necessity. Social responsibility and Business Strategy Socially responsible behavior can be used by an organization as a differentiation strategy to create a competitive advantage. Husted and Allen explored the conditions that foster a positive relationship between CSR and financial performance, and developed a model of Corporate Social Strategy (Husted & Allen, 2001). The authors defied the traditional notion that social strategy and business strategy are separate by developing a model (see TN Exhibit IV) which integrates the approaches of business and social strategy creating value and competitive advantage through corporate social action. The key focus of this model is how a company’s social strategy must be integrated with its business strategy and financial performance to formulate a CSR strategy based on four elements – market environment, non-market environment, firm’s resources, and corporate identity and values. Body Shop achieved competitive advantage by changing the rules of the game. The company combined its business strategy with a social agenda in order to gain competitive advantage. Roddick’s ethical approach was the Body Shop business strategy ever since it began. But since the 1990s and more so in the new millennium, other companies cutting across sectors started taking a strategic view of CSR and focused on sustainability. Much of Body Shop’s problems since then can be attributed to this, as its activities were no longer a great differentiator. Its problems were exacerbated with the company’s acquisition by L’Oréal, Roddick’s death, and Body Shop choosing not to make too much of its CSR following these developments. Understandably so, as much of Body Shop’s campaigns in the past had been very critical of the role played by companies such as L’Oréal. As part of L’Oréal, Body Shop’s CSR vision lacked a strategic integration with business principles, customer service, and marketing.
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‘Enrich Not Exploit’: Can New CSR Strategy Help Body Shop Regain Glory?
Body Shop’s new approach to CSR While Body Shop still maintained these values after its acquisition, they were less distinctive than in 1976. After the company’s poor financial performance in 2014 and 2015, the ethical message took a back seat as the management at Body Shop was more focused on improving the retailer’s financial position. Meanwhile, the challenges facing the planet having changed significantly, there was an increasing need for companies to tackle issues such as climate change, habitat destruction, species depletion, and economic inequality. The key challenge facing Body Shop on its fortieth anniversary was how to reorient itself in this new global landscape and achieve its aim of being the world’s most ethical and truly sustainable global business. Body Shop worked with the Future-Fit Foundation to develop the seven long-term sustainability goals that it had to meet to reclaim its position as a leader in ethical business. By mapping the world’s challenges and where the company could make the most positive impact, Body Shop launched its new CSR commitment which replaced the company’s earlier five core values and was stronger than ever. Entitled ‘Enrich Not Exploit’ the commitment was based on three core pillars – People, Products, and Planet. The primary focus of the commitment was using The Body Shop’s scale and networks to address the most critical problems facing the planet. It was a quest to deliver what Christopher Davis (Davis), International Director of Corporate Responsibility and Campaigns at Body Shop, called “true sustainability” – meaning putting the needs of the planet before corporate needs. The 14 objectives of the commitment were organized along three axes: Enrich our people (4 targets); Enrich our products (4 targets); Enrich our planet (6 targets). (See TN Exhibit V for the targets and their significance) The new CSR strategy seems to be a step in the right direction for Body Shop, bringing the company in line with existing best practices followed by companies focusing on sustainability. The company had taken up some ambitious targets and committed to work on them and also report them. This provided it with the opportunity to showcase that it had made a comeback and was prepared to put itself under the scrutiny of stakeholders with a focus on targets (on the economic, social, and environmental fronts) and its performance on these targets. This, along with the follow-up actions that the company had taken to engage the employees at Body Shop would help integration of CSR with business strategy and ensure that the CSR ideology was matched by its marketing strategy. 4. Do you think the revamped strategy will help Body Shop regain its lost glory as a leader in ethical business? What possible challenges could Schwartz and Davis face going forward and how can they be tackled? A. Body Shop through its new CSR strategy made genuine progress toward sustainable development by being accountable for economic, ecological, and social performance, and responding to the concerns of shareholders. However, the biggest question was whether Body Shop would be able recapture its past glory as a leader of ethical business practices in retail as it entered a highly competitive market with its new CSR approach. Yes •
The new agenda reflected Body Shop’s core principles and strengths – things that would set the brand apart from its rivals.
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The new CSR targets were very clear and coherent.
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Important themes such as packaging, ingredient traceability, and issue of animal testing were addressed.
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The goals were ambitious and accessible to the public. 11
‘Enrich Not Exploit’: Can New CSR Strategy Help Body Shop Regain Glory?
•
Body Shop could use its marketing prowess to fulfil its targets.
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If successfully implemented, the new CSR approach could enhance the brand image of Body Shop in the market, boost sales, and improve customer loyalty.
No •
The new CSR targets were not extraordinary.
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The CSR objectives were not integrated in the strategy of the parent company, L’Oréal.
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Though the targets were decent in themselves, the context was missing – context related to the parent company, sector, and sustainable development.
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With competitors jumping onto the green bandwagon with a similar agenda, it was difficult to say that Body Shop would be able distinguish itself from its rivals and attract customers.
The possible challenges that Schwartz and Davis could face going forward are as follows: •
Though Schwarz saw this new CSR approach as an opportunity to strengthen Body Shop’s business, the biggest challenge would be execution and how to develop an appropriate approach that could rightly deliver on these ambitions.
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Managing the initiative, focusing on the total array of benefits sought and not just the short-term financials.
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Engaging the entire workforce and leading by example.
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Turning the new CSR strategy from an expense into an investment to create value for the company’s shareholders
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Ensuring sustainable supplies of critical raw materials. Ensuring transparency in supply chains, production processes and distribution, as well as social aspects.
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Fulfilling the level of expectation the new CSR strategy sets. Having a new CSR strategy raised people’s expectations of Body Shop both internally with its employees and externally with customers, the media, and other stakeholders.
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The high expectations could make Body Shop a target for criticism, as there could be a gap between the company’s said standards and the actual conditions. There is the risk of reputational damage and wrong perceptions. Unrealized promises could lead to reputational damage. This requires extreme attention to detail from the top management, which could be quite time consuming.
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As an ethical company, the challenge for Body Shop would be to meet the customers’ expectations. As Body Shop consisted largely of franchises, this could also lead to difficulties and affect the company’s ethical image.
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Running multiple campaigns simultaneously as part of the new CSR strategy would be a tough task. Unlike in the past, Body Shop, being a part of L’Oréal, wouldn’t be able to adopt a combative stance toward other cosmetic companies.
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The monitoring aspects related to the new approach were likely to be challenging as was planning effectively to ensure that the new CSR approach was successful in terms of milestones, measurement, and accountability.
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Balancing the needs of customers, employees, suppliers, the communities in which the company operated, as well as its shareholders both in the short and longer term while at the same time ensuring the long-term financial success of the company.
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Tough competition in the cosmetic/ ethical product market. 12
‘Enrich Not Exploit’: Can New CSR Strategy Help Body Shop Regain Glory?
The following measures could be adopted by Schwartz and Davis to overcome some of these challenges: •
Review and streamline Body Shop’s core policies and systems to monitor and evaluate performance in line with the new CSR strategy.
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Issues of transparency. Transparent communication and frequent dialogue with stakeholders is a must.
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Regular reviews of performance against policies and indicators would help the management to make adjustments quickly wherever necessary.
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Provide an accurate picture of the impact of the new strategy by making its environmental and sustainability reporting more comprehensive than ever.
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Publish commitment reports either bi-annually or annually to ensure transparency in business practices and progress toward new CSR targets.
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Calculate the biodegradability, water footprint, and ingredients of natural origin for each of the products and publish this information on the company’s website to ensure sustainable supplies of critical raw materials.
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Engage and inspire customers and employees around the commitment and listen to their views and ideas to find innovative environmental solutions and to gather support for the new CSR related campaigns.
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Extensively promote campaigns across all of Body Shop’s communication to raise awareness and involve new and existing customers. This was what Body Shop was known for in its heyday.
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Present campaigns in new and different ways to maximize customer engagement. While it might not be able to be as combative as before, it could utilize other ways to connect with the target audience — for instance, by undertaking campaigns such as ‘Help Reggie Find a Date’, which could also be a rage online.
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Work with partners across the L’Oréal Group to develop formulations that promote the very best practices in the supply chain.
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Conduct comprehensive risk assessments to ensure social and environmental accountability across all supply chains.
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Engage key stakeholders globally in order to apply the new sustainable principles across the business. Update them on the Body Shop’s progress toward its new CSR targets by outlining performance against key performance indicators.
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Engage external experts including academic institutions and inventors and also leverage expertise in the company’s own supply chain and the L’Oréal Group to research, develop, and launch innovative products. In the past few years, product innovation has been an area of concern for Body Shop. This is a high priority area, as even an ethical consumer may not compromise on the product she chooses.
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CSR is about building trust. Critics often labeled Body Shop as hypocritical and accused it of greenwashing and using various social justice agendas as just emotive marketing tools. Body Shop should see to it that there is no disconnect between its rhetoric and activities.
13
‘Enrich Not Exploit’: Can New CSR Strategy Help Body Shop Regain Glory?
TN Exhibit I
Pyramid of Corporate Social Responsibility
Source: .“Carroll’s pyramid of CSR: Taking Another Look,” International Journal of Corporate Social Responsibility, July 5, 2016.
TN Exhibit II
Body Shop’s CSR Actions vis-à-vis key stakeholders Stakeholder
Actions vis-à-vis key stakeholders
Consumers
• Body Shop provides its customers with naturally produced ingredients in the products. • Offers quality products • Undertakes customer focus groups and surveys to learn about customers’ values. • Keeps the promise it has made to its customers regarding the avoidance of animal testing • Committed to help customers to look and feel their best. • Offers a range of products made with Community Trade ingredients packaged using recycled materials and sold with the expert advice of store staff and consultants. • Provides information that is honest and useful • Avoids false and misleading claims
Employees
• The Body Shop Employee Code of Conduct is in line with best practice and international labour standards and aligned with universal Body Shop Values. • Ensures that employees have similar experiences and opportunities, regardless of where they are based in the world. • Provides employees with the opportunity to help support and make a difference to communities through volunteering • Committed to individual development of employees by encouraging them to learn new skills, and stay fit and healthy for work. • Encourages employee participation in community projects Contd... 14
‘Enrich Not Exploit’: Can New CSR Strategy Help Body Shop Regain Glory? Contd...
Suppliers
• Engages in fair trading transactions with suppliers • Trades with suppliers that commit to and make demonstrable improvement to meeting requirements in the Body Shop Code of Conduct for Suppliers • Engages suppliers on issues related to reducing waste and choosing environmentally-friendly materials and production processes. • Works with suppliers in more than 20 countries to improve workers’ rights and supply chain ethics. • Fair pay for work in fair conditions, where decisions are made through local engagement.
Investors
• Engages in fair business practices with respect to shareholders • Strives for a high return on investment
Community
• Community Fair Trade (CFT) is Body Shop’s own independently verified fair trade initiative to help marginalized communities improve their lives and alleviate poverty. • Supports and built self-esteem, particularly among women, through its human rights campaigns and income-generating projects linked to its CFT initiative. • Engages in women’s rights issues such as ‘Stop Violence in the Home’.
Adapted from Papasolomou-Doukakis, I., M. Krambia-Kapardis and M. Katsioloudes: 2005, ‘Corporate Social Responsibility: The Way Forward? Maybe Not!’, European Business Review 17(3), 263–279
TN Exhibit III
Evolution of CSR
Source: https://corporatesocialreality.net/?s=EVOLUTION+OF+CSR
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‘Enrich Not Exploit’: Can New CSR Strategy Help Body Shop Regain Glory?
TN Exhibit IV
Source: Bryan W. Husted, David Bruce Allen Corporate Social Strategy: Stakeholder Engagement and Competitive Advantage Cambridge University Press, 11-Nov-2010 - Business & Economics
16
‘Enrich Not Exploit’: Can New CSR Strategy Help Body Shop Regain Glory?
TN Exhibit V ‘Enrich Not Exploit’ Targets and their Significance People (Target 1-4)
Products (Target 5-8)
Planet (9-14)
Target 1: Double our Community Trade program from 19 to 40 ingredients and help enrich the communities that produce them Significance • Community Trade partners incorporate the best sustainability practices, standards and approaches in Body Shop’s supply chain including new agricultural techniques, smarter production methods, and positive impacts on local communities and ecosystems.
Target 5: Ensure that 100% of our natural ingredients are traceable and sustainably sourced, protecting 10,000 hectares of forest and other habitats. Significance • No business can accurately measure or manage its impact on the planet and the people unless it can trace where its raw materials come from and the conditions under which they are produced. • Conserving habitats safeguards resources for future generations while protecting the way of life of indigenous people.
Target 9: Build Bio-bridges, protect and regenerate 75 million square meters of habitat and help communities to live more sustainably. Significance • Protect endangered habitats and guard the planet’s biodiversity
Target 2: Help 40,000 economically vulnerable people access work around the world Significance • Employment helps people provide for the basic needs of their families such as food, shelter, education, and healthcare. Target 3: Engage 8 million people in our Enrich Not Exploit™ mission, creating our biggest campaign ever. Significance • As a trusted global brand, Body Shop can voice the concerns of millions of customers and convince decision-makers globally to implement measures in order to safeguard the planet. Target 4: Invest 250,000 hours of our skills and know-how to enrich the biodiversity of our local communities Significance • Employees’ skills and passion can make a positive impact on the communities where they work
Target 6: Reduce year on year the environmental footprint of all our product categories. Significance • Measure the potential environmental impact of Body Shop products and set targets to reduce this impact in the future. Target 7: Publish our use of ingredients of natural origin, ingredients from green chemistry, and the biodegradability and water footprint of our products. Significance • Be transparent and open about the company’s environmental impact to ensure full accountability to customers and other stakeholders. Target 8: Develop an innovation pipeline that delivers pioneering cosmetic ingredients which are sustainably sourced from biodiversity hotspots and helps to enrich these areas. 17
Target 10: Reduce the environmental footprint of our stores every time we refurbish or redesign them Significance • Unsustainable use of raw materials may deplete Earth’s natural resources. • Use of energy based on fossil fuels and resulting greenhouse gas emissions, such as CO2, may contribute to climate change. Target 11: Develop and deliver three new sustainable packaging innovations. Significance • Sustainable packaging helps in reducing environmental impact by utilizing fewer resources during production and increasing recyclability. Target 12: Ensure that 70% of our product packaging does not contain fossil fuels. Significance • By eliminating use of plastic made from oil, Body Shop supports the principle of keeping fossil fuels in the ground as burning them significantly contributes to climate change. Target 13: Power 100% of our stores with renewable or carbonbalanced energy.
‘Enrich Not Exploit’: Can New CSR Strategy Help Body Shop Regain Glory? People (Target 1-4)
Products (Target 5-8) Significance • The company can develop new and improved products. • Sustainable sourcing helps in selecting ingredients which enhance the quality of products and help sustain specific species, the wider ecosystem and the livelihoods of local communities.
18
Planet (9-14) Significance • Use of non-renewable energy can increase greenhouse gas emissions and contribute to global climate change. Target 14: Reduce by 10% the energy use in all our stores. Significance • Body Shop aims to achieve global energy efficiency in the first year of its new commitment (2016) in order to build momentum and employee engagement around its other environmental initiatives.
‘Enrich Not Exploit’: Can New CSR Strategy Help Body Shop Regain Glory?
Suggested Readings: 1.
Michael Hopkins, CSR and Sustainability: From the Margins to the Mainstream, Greenleaf Publishing, January 8, 2016.
2.
Carroll, A. B. (2016). Carroll’s pyramid of CSR: taking another look. International Journal of Corporate Social Responsibility, 1:3
3.
Carroll, A. B. (2015). Corporate social responsibility. Organizational Dynamics, 44(2), 8796.
4.
Timo Wilhelm Rang, The Strategic Importance of Corporate Social Responsibility: Competitive Advantage or Contemporary Trend? GRIN Verlag, November 10, 2011.
5.
Mark S. Schwartz, Corporate Social Responsibility: An Ethical Approach, Broadview Press, March 22, 2011.
6.
Samuel O. Idowu and Celine Louche, Theory and Practice of Corporate Social Responsibility, Springer Science & Business Media, January 6, 2011.
7.
Bryan W. Husted, David Bruce Allen Corporate Social Strategy: Stakeholder Engagement and Competitive Advantage Cambridge University Press, November 11, 2010.
8.
Subhabrata Bobby Banerjee, Corporate Social Responsibility: The Good, the Bad and the Ugly , Edward Elgar Publishing, January 1, 2009.
9.
Chris A. Mallin, Corporate Social Responsibility: A Case Study Approach, Edward Elgar Publishing, January 1,2009.
10.
A.B. Carroll, The pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders, Business Horizons, July/August 1991.
11.
Porter, M. E. and M. R. Kramer (2006), The link between competitive advantage and corporate social responsibility, Harvard Business Review 84(12): 78-92.
12.
Jenkins, H. (2006), Small Business Champions for Corporate Social Responsibility." Journal of Business Ethics, 67(3): 241-256.
13.
Snider, J., R. P. Hill, and D. Martin (2003), Corporate Social Responsibility in the 21st Century: A View from the World's Most Successful Firms, Journal of Business Ethics 48(2): 175-187
14.
Papasolomou-Doukakis, I., Krambia-Kapardis, M., & Katsioloudes, M. (2005). Corporate social responsibility: the way forward? Maybe not! A preliminary study in Cyprus. European Business Review, 17(3), 263-279.
15.
Porter, M. E. and M. R. Kramer (2002), The Competitive Advantage of Corporate Philanthropy, Harvard Business Review 80(12): 56-68.
16.
Carroll, A. B. (1979), A three-dimensional conceptual model of corporate performance, Academy Of Management Review 4(4): 497-505.
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Case Moving for work from the high rises of Singapore to Zurich, one of the best cities in the world for expatriates Teaching Note
This teaching note was prepared by Christina Neylan, lecturer of intercultural management at Lucerne University of Applied Sciences and Arts, as an aid to instructors in the classroom in the use of the case Cross-cultural (mis)fortune of a cyber security specialist in Zurich. Its objective is to illustrate the challenges associated with crosscultural management, diversity and inclusion and adjusting to a new social environment. Sole responsibility for the content rests with the author. Some of the possible answers reflect answers submitted by bachelor’s degree students to the case. The case is intended as a basis for class discussion rather than to illustrate either effective or ineffective handling of management situations. Copyright 2018 by Lucerne School of Business, Lucerne, Switzerland, www.hslu.ch. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner.
Case Summary Eunice Lee struggles to adapt to her new work environment in Zurich. Cybot delivers on what it offered; a multi-cultural team, swanky new offices, opportunities to put her own stamp on things, they even prioritised an inclusive work culture offering various activities such as Lunch and Meet, the Alumni, a mentoring programme and other cultural events not to mention language classes. As a native Singaporean Eunice was used to working and living in a multinational environment, outwardly there was no reason to complain as she was not discriminated because of her different background, or gender, religion or skin colour. As a leading cyber risk organisation, Cybot needs to be on top of its game to grow and expand the business, at present its main clients are spread across Europe, and the US and the company hope to go into the Asian market in the near future. Like most innovative companies today, Cybot`s workforce reflects its diverse customer base, primed to increase customer satisfaction and sales. The case study serves as a discussion on the need for a global mindset, the role of inclusion and diversity, and the challenge of settling into a new work environment. Andreas, the CEO, was personally keen to establish a work environment of involvement, respect, and connection, as the old adage says - when everyone contributes the sum of the whole is greater than the individual. He had zeroed in on Eunice after she gave a powerful presentation to the cyber community in San Francisco, she impressed with her energy, her resolve and pragmatic approach to problem-solving. He interviewed her over a cup of coffee in the hotel lobby after the conference, she had no inkling she was been vetted for a job in Zurich. A few months into the assignment Eunice is not sure she has made the right choice; should she give Switzerland another go or return home. Case use and learning objectives The is a case relevant to cross-cultural management. It helps students and executives to better understand the types of challenges that can arise working across borders. The case has been successfully used with degree students as part of an intercultural management course. The case is most effective when used with culturally diverse groups of students who are preparing to go on an exchange abroad or students who are on an exchange programme. The case is also suitable for use in executive education with culturally diverse groups of managers who have gained personal experience working with multicultural teams. The case illustrates challenges to working across borders: 1. Identify, analyse and discuss typical sources of cross-cultural misunderstanding when Swiss and Singaporeans work/study together. 2. Identify intercultural communication challenges, beyond languages issues. 3. Examine the impact of organisational diversity and inclusion tools. 4. Analyse global mindset traits required for an overseas assignment. 5. Learn how to apply a framework to bridge gaps between cultures. Synopsis and conceptual framework The case is completely fictional, it is based on a Chinese Singaporean woman who takes up a new post in a Zurich based company. The personal issues it raises are drawn from
real-life dilemmas based on a series of empirical interviews conducted with line managers and employees in a multinational company dealing with aspects of management in a cross-cultural business setting. The Diversity Officer was also interviewed to gain more understanding of the tools used to improve diversity and inclusion. The case is written from the point of view of a newly arrived employee on their first overseas assignment. The case study offers the opportunity to discuss the implications and importance of human resource aspects such as diversity and inclusion and working in multicultural teams, especially the implication for business. The case has been used effectively with international management students as part of a bachelor’s degree programme. The case is designed to: • Discuss the traits of a global mindset, and leadership qualities, • Discuss the use of diversity and inclusion tools in the organisation, • Explore the challenges of taking up an international assignment, • Discuss the challenges of working in a multicultural team, • Generate an informal discussion on some of the challenges that can arise as well as preparation needed when going on a student exchange/ overseas assignment, • Examine some cross-cultural management issues. Teaching approach with time plan The following teaching plan assumes the usage of the case in a single 90-110-minute session. The case works well when embedding in a management class related to human resources topics such as diversity and inclusion, overseas assignment, and teamwork. Session Timeline 1. 2. 3. 4. 5.
Case distribution and team preparation: 45-60 minutes Group presentation/discussion: 15-20 minutes Debrief and reflection on discussion findings: 10 minutes Debrief of cross-cultural issues: 10-15 minutes Possible extension: Role-play between Eunice and her boss
Case distribution and team preparation (45-60 minutes) The case is short enough to use in class without prior student preparation, distributing the case in advance for students to read saves time. Divide the class into groups of 4-5 students and hand out questions. Possible Assignment Questions 1. Choosing the right person in the first place is key to the success of an overseas assignment. Does Eunice have a global mindset? Use the list of leadership competencies by Bird & Osland (2004) as a basis for your answer. 2. Identify and evaluate the effectiveness of some of the diversity and inclusion tools mentioned in the case.
3. Roche CEO, Severin Schwan said about diversity and inclusion “I believe that diversity of people enhances innovation. The different ways of thinking foster creativity. But just having diversity is not enough. We have to embrace and appreciate each other`s diversity to translate it into novel ideas – that`s why inclusion of people is so important.”1 Comment. 4. Apply the Mapping Bridging Integrating (MBI) Framework by Prof. J. DiStefano and Prof. M. Maznevski to the case. 5. What advice would you give Eunice; should she give Switzerland another chance or return home to Singapore? Case Analysis The following section Course discussion topics – useful to extend on specific points of interest Information and other tips that may not appear in the case. After a short introduction, split into small groups and ask them to discuss the case assignment questions circa 45-60 minutes. When the groups return to the class, ask one or two to present findings to each question. Draw out examples from all students on what they consider to be a global mindset. Is there such a thing as a universal global mindset? Possible Answers 1. Choosing the right person in the first place is key to success of an overseas assignment. Does Eunice have a global mind set? Use list of leadership competencies by Bird & Osland (2004) as a basis for your answer. To have a global mindset one needs to consider aspects such as tolerance for ambiguity, flexibility, goal orientation, sociability and interest in other people, non-judgmental behaviour and meta-communication. According to the Pyramid Model of Global Leadership by Bird and Osland, global managerial expertise comprises various traits, attitudes, and skills, which build upon each other and are all interconnected. The main ones will be applied to the case below. Tolerance for Ambiguity Eunice had always displayed a professional work ethic as well as strong analytical and problem-solving skills. Eunice brings a lot of energy and new ideas to the company. In Singapore, Eunice was one of the youngest project managers’ in her company uncommon to hold such a position so young. In addition, she holds a Master`s degree from the University of Southern California which proves she can survive in a new
1
Roche website https://www.roche.com/careers/country/switzerland/ch-yourjob/diversity_and_inclusion.htm
environment. Nevertheless, Eunice seems to have difficulties adjusting to her current position and misses support networks from family and friends. Behavioural Flexibility It is difficult to determine how flexible Eunice is in real life, she is struggling to adjust to her new life in Zurich; the open office, the new environment, the team etc. Even when John told her to enjoy life a bit more, she felt misunderstood. She cannot really see a solution to her predicament, it appears she has issues accepting feedback even when people are only trying to help her. Goal Orientation She seems to be focused on her job, however, she has not attended the language course offered at the company even though she is open to learning a new language and is upset when her colleagues switch to speaking Swiss German. Sociability and Interest in Other People Eunice tries hard to make friends, for example, she goes to Lunch and Meet, an informal lunch in the canteen with colleagues, she goes to the after-work party, she prepares food from her home country. On the other hand, she is reluctant to meet John at the pub, which may be cultural perhaps she is not sure if he is asking her out on a date or just being friendly, in her culture the male-female interaction is different. Non-judgmental Eunice holds some stereotypes in terms of Swiss people such as they are hard to make friends with and prefer to speak Swiss German amongst themselves. In general, she appears to be sensitive as to how the others see the world. Meta-communication Eunice was not sure if she really understood the invitation to the food event, she decided to do something instead of asking for more information about it. Eunice has several of the necessary characteristics for a global mindset, however, due to her homesickness, she seems to be unable to apply them. Global Knowledge A network of relationships a person has and utilizes. Eunice is clearly struggling to build her network in Switzerland she needs to consider Cybot’s political, economic, social, and technical environment in Switzerland, and leverage the similarities and differences between both cultures. Know how refers to skills and knowledge to accomplish tasks in different situations. Although Eunice has lots of experience in the cyber industry and has displayed strong analytical and problem-solving skills, she seems to lack the social skills necessary to make friends. Know what refers to an understanding about specific products in a certain market area. Having headed several projects in Singapore, she is certainly very knowledgeable of the
Asian market and knows how to deliver results. She needs to transfer this know-how to the Swiss/European market. Know why refers to the extent a person identifies with an organization’s culture. Eunice is struggling to identify with the corporate culture, she perceives the people as superficial, she is not comfortable in the open-style office space and her attempts at participating in the Diversity & Inclusion (D&I) activities designed to integrate newcomers end in failure. Threshold Traits Integrity refers to having a stable personality and sense of self and conforming to a clear set of values. Eunice has strong problem-solving and analytical skills which help her deal with a complex environment, however, she does not demonstrate flexibility. She is good at her job, but she has failed to build social relationships in her workplace. Humility means not assuming that you know all the answers but showing a willingness to learn and inquisitiveness is constant curiosity about other people and cultures. Although Eunice desperately tries to fit into the Swiss environment, her heart may be still in Singapore, so instead of trying to understand other people, learn the language their culture, and way of doing things, she judges them i.e. “But all you English people do is go to the pub.” Hardiness is courage, determination, and capable of dealing with culture shock. The decision to move to Switzerland demonstrates Eunice is both courageous and determined. She is known for her outstanding professional work ethic, integrity, and humility; however, she lacks inquisitiveness and resilience. She wallows in missing family and friends, which prevents her from effectively recognizing her culture shock. Eunice puts a lot of pressure on herself to do a good job, and when things do not go as planned, she feels defeated. For instance, following the Cultural Evening, “She stood and felt devastated, slowly she packed up her expensive dishes and got ready to go home.” Attitudes & Orientation Refers to the importance of having a global mindset. Cognitive complexity is the ability to see a situation from multiple perspectives and Cosmopolitanism refers to having a positive attitude towards others. Despite her attempts to overcome her fears and be open to new things, she is not very successful. Her introspection prevents her from broadening her perspective, there is little evidence she tries to understand or get close to her co-workers. John tells Eunice in the pub that she is, “… putting too much pressure on yourself, enjoy life a bit more.” As such, she demonstrates cognitive complexity and cosmopolitanism, she should listen to John’s advice and be more open to new experiences. Interpersonal Skills The three most important skills for global leaders are mindful communication, building trust, and multicultural teaming. Eunice definitely tries to connect with others, for example, the “Lunch and Meet” event. However, instead of thinking about the other
persons’ assumptions and emotions and trying to put herself in their position, she judges them from her perspective and finds them superficial and doubts she can ever befriend them. In trying to gain trust, she has to be prepared to better empathize with people in order to collaborate successfully in a team. System Skills These skills at the top of the pyramid complement the global leader. Eunice has made the first step by moving to Zurich, however, she definitely needs to do better by engaging more with her peers. In her former job, she demonstrated her ability to work across countries and display excellent problem-solving skills , thus she has the necessary knowledge to be successful in her job, she just needs to transfer these skills. Probe how can Eunice compensate for lack of traits mentioned above? Ask students to comment on achieving a global mindset, do they consider it possible to create openness to new ways of thinking and acting about personal and business effectiveness? Be aware that there is no universal global mindset and traits are culture-bound i.e. communication – in the German speaking part of Switzerland people tend to be more direct when speaking to others while Singaporean Chinese communicate are less directly and are more worried about saving face; communication is usually indirect. 2. Identify and evaluate the effectiveness of some of the diversity and inclusion tools mentioned in the case. Cybot, has implemented various tools to help foreign workers integrate into the organisation. Some of these include sports events (such as yoga class, body toning at lunch, and football after work), Meet and Lunch event, alumni organized events, online training courses, mentoring, women’s networking group, and cultural evenings. But how can these tools actually improve relations within a multicultural team? Sport is universal, it generates fun and encourages workers to get to know new people outside of work. Eunice admitted she was “never one for sport,” a lot of people can relate to that, therefore, organizing sports activities will not work for everyone especially the couch potato types and is not as inclusive as other events. Yoga and other events bring people together but with limited opportunity to get to know people, more a springboard for pursuing contacts. Meet and Lunch, an informal lunch event is an opportunity to get to meet others from the company especially people not directly working in one`s area. It is a good starting point as it helps initiating conversation with others who are in a similar situation. However, it may not be a relaxed environment for everyone, since it is business related. To expand one`s business network, this seems a great idea, yet, the conversations at these events may be superficial but certainly not only restricted to small talk.
The goal of the culture evenings is to bring various teams closer together, an informal get together. Chatting over food from one`s home country it is a good way to break the ice, it encourages awareness of own culture and other cultures. Can be useful for building friendships and getting to know new people but loses its appeal if it happens too frequently. An argument might be made that various tools and activities exist to promote inclusion, yet, some are more inclusive than others, the variety of tools should reflect the diversity of the participants. A challenge in a diverse workplace culture is to value the similarities and work on the differences. Fact is almost 70% of the staff at Cybot are male who prefer doing sweaty sports or going to the pub after work. Eunice, as a female, does not like these types of activities and feels excluded. There is a Women’s networking group at Cybot, but it is not clear what they do. Language is a defining problem as the majority in the office speak Swiss German and Eunice is excluded because she cannot speak it. Draw up suggestions on how the gap between strategy and execution of the Diversity & Inclusion tools at Cybot can be better implemented. Consider individualized tools, employee involvement in activities, work free periods to participate in activities in the answer. Collectively come up with more dynamic ways of helping people integrate into a new work environment. Argue which activities would work better with people under 30 and over 30. 3. Roche CEO, Severin Schwan said about diversity and inclusion “I believe that diversity of people enhances innovation. The different ways of thinking foster creativity. But just having diversity is not enough. We have to embrace and appreciate each other`s diversity to translate it into novel ideas – that`s why inclusion of people is so important.”2 Comment. Hoffman-La Roche is a multinational pharmaceutical company founded and based in Switzerland. With a presence in 150 countries, thus, the inclusion and promotion of diversity are of key importance. David Youssefnia, the founder of Critical Metrics, identified diversity resulting from 2 components: Capital-D Diversity; which includes sex, gender, and race and lowercase-d diversity; which includes employees’ resume content, education, expertise, and experience. Therefore, companies’ initiative to embrace and appreciate diversity among their employees should also consider the less visible diversities. It can be argued that successfully including diversity in a company would allow a greater range of customers. Therefore, companies like Hoffman-La Roche and Cybot, which are 2
Roche website https://www.roche.com/careers/country/switzerland/ch-yourjob/diversity_and_inclusion.htm
continuously trying to enter new markets and expand their clientele should emphasise the implementation of inclusion and the promotion of a diverse team. Concerning creativity, studies prove that having diversified teams improves the quality of creative ideas and solutions. A counter argument relates diversified teams prove to be less effective in implementing these ideas, hence, homogeneous teams are more suitable for this process. From a financial perspective, research shows that organizations in the top quartile for ethnic and racial diversity are 35% more likely to have higher returns than the industry’s average. Furthermore, companies with higher gender diversity had an additional 15% probability of having higher returns.3 An important part of the discussion is to note both creativity and innovation are vital for an organisation. It is held generally true that a non-diversified team would not be as creative as a more inclusive team, and a less diversified team would encounter more challenges trying to survive in the technological industry. Detail how by not including new employees such as Eunice, Cybot, would negatively impact the company’s output due to the lack of creativity and innovation. Improving D&I in an organization – there are lots of good examples i.e. PepsiCo’s CEO Indra Nooyi openly talks about the importance of D&I in the workplace and what they are doing to improve it. Having an inspiring leader helps to motivate others to emulate the leader. Cascade the diversity policy down the organization and ensure the firm`s values are formally written and communicated appropriately both internally and externally within the organization. Thirdly, it is important to train and educate the workforce about the importance of having a diverse workforce. Introduce workshops that can include aspects such as unconscious bias to help staff recognize own biases and how they can work on them. Finally, ensure minorities have a platform where they can air their views and be taken seriously. 4. Apply the Mapping, Bridge and Integrate (MBI) Framework by Prof. J. DiStefano and Prof. M. Maznevski to the case. The MBI Model is based on validated research conducted by Prof. J. DiStafano and Prof. M. Maznevski of IMD. It also has elements of research conducted by Prof. H. Ghorashi and R. Thomas. Mapping, Bridge and Integrate (MBI) are processes that are relevant as they support effective and constructive communication among group members with different cultural backgrounds and perspectives. The model for managing cultural diversity involves 3 steps: Mapping the major cultural differences and similarities within a group, Bridging is communicating with the group, and Integrating is how to manage the differences. It is taken from the book by Lane, H,. and Maznevski, M, L,. (2014) International Management Behaviour: Global and Sustainable Leadership, chap.3.
3
https://hbr.org/2016/11/why-diverse-teams-are-smarter
Map – Understand the Differences Mapping represents the process of identifying and understanding differences including values. See Q 3 above for a comprehensive answer. The first step to managing cultural diversity is to understand relevant cultural differences and similarities within the group. Follow discussion of Hofstede dimensions above. Eunice should not only value her own culture but also acknowledge other cultures. Being able to move between cultures and seeing things from another perspective will get easier for Eunice. Various examples demonstrate that Eunice is not has a lot to learn concerning the cultural differences as in the case of the Cultural Evening, during which employees were invited to bring a dish from their home country. Eunice was shocked when her colleagues ate her food using spoons rather than chopsticks, thus ignoring the fact that most Swiss are not accustomed to using them. Eunice should not take such things so personally and be more open-minded. Bridge – Communicate Across the Differences Bridging refers to the effective communication of these differences and perspectives, two areas of importance, namely motivation and confidence. Although Eunice is communicative, yet, she wears headphones in the office, she has not attended language classes and she often finds herself left out of the conversation. Bridging has 3 parts; preparing, decentring and re-centering. Preparing: Andreas or the HR team could address Eunice’s unhappiness, which will definitely affect her performance in the team. De-centering: The team needs to sit together and discuss their concerns considering the other`s values and perspective without judging them. Re-centering: Together they need to find a common solution on what to do and especially, how to integrate Eunice more. Integrate – Manage the Differences Integrating is the process of bringing them all together. The Diversity & Inclusion (D&I) programme at the company organizes activities to integrate newcomers such as sports events, meet and lunch, mentoring, women’s networking group, culture evenings etc. Unfortunately, few of these could inspire Eunice to make new friends. Eunice should further pursue those activities, but not put herself under pressure. Making new friends takes time, especially if you do not know the culture and do not speak the language. Eunice should focus on what is going well and it is crucial to build on similarities. Even though working in a diverse team brings obstacles, in the beginning, taking the positives will eventually result in a high performing team. By introducing team events with fewer people, would make it easier to get to know people better and not only superficially. Examine the activities and opt for introducing more diverse and inclusive activities such as a breakfast meeting to accommodate people who cannot go for drinks on Friday due to family commitment. Do not only do activities that guys like such as soccer but team-building events that appeal to both genders. Draw out examples to identify the gaps in the company inclusive process.
MBI is a set of skills and thus has to be learned and improved over time it cannot be put in place with only policies alone. 5. What advice would you give Eunice? Eunice is not in a no-win situation, there is hope and every chance of a happy end. However, Eunice needs to stop wallowing in her own misery and look for a way out. She could start by re-examining her prejudices towards her co-workers and be more proactive in trying to understand them, their culture and their way of doing things – learn to show more empathy. Until she does that she will not be capable of recognizing the differences and similarities between her own and the Swiss culture as previously dealt with in Q.3. Eunice is a hard-working intelligent woman with good analytical and problem-solving skills, who has landed a top position in an up and coming business at a very young age. She has been proactive in trying out various Diversity & Inclusion activities on offer by the company i.e. yoga, lunch & meet, a business network, a hiking trip, cooked a Singaporean meal for her work colleagues. The whole team needs to work on cultural competencies and strengthen their resolve in working in diverse cultural settings. There needs to be a joint effort to take responsibility for ensuring the work environment is designed to include opportunities for employees to develop and improve their intercultural competencies and communication skills across different cultural and multicultural workplaces. Cultural intelligence is different from personality traits and can be addressed using CQ framework from Earley and Ang (2003) they identified four factors that are critical to Cultural Intelligence and divided them into mental and behavioural capabilities: cognition, metacognition, motivation, and behaviour. Cultural Intelligence combines the knowledge about cultural differences with the motivation and capability to reflect one’s own and others’ cultural conditioning and adapt behaviour to the cultural context. Eunice has lived overseas before, hence she has encountered different norms, values, and work practices previously. She needs to reflect on her own culture as well as reexamine her assumptions and her encounters with the people she works with, developing a good learning strategy would help in processing information about other cultures quickly. Outwardly, Eunice appears motivated and determined to make a go of her new life in Zurich yet, – things are not working out. A few tweaks would improve things such as ditching the earplugs in the office, being more flexible and take things less seriously as John suggested. Overdoing it with the food preparation in an effort to do things perfectly shows a lack of confidence and a need to be accepted. Her mental state can have a subconscious effect on her body language which can be misread by her colleagues. Taking up language lessons may signal an intention on her part to adjust to the culture and this is to be encouraged. Even though she will not speak German perfectly, Swiss people appreciate it when foreigners try to speak at least a few words of Swiss German.
Eunice should definitely give Switzerland another chance. If she gave up now and moved back to Singapore, she would regret it. Culture shock can be described as at least consisting of 4 phases; the honeymoon, the frustration, the adjustment and the acceptance stage. Eunice is most likely in the frustration stage as she misses her family, friends and the familiar surroundings, this is natural reaction while spending time abroad. Bouts of depression and homesickness are typical symptoms of this stage and once she gets used to the new environment she will see many reasons to stay in Switzerland namely her job and good salary. Her new role contributes to her personal growth. Returning to Singapore is not an option, Eunice may feel she failed or lose face. She should give herself a goal i.e. a 1-year plan, during this time she pulls out all the stops and give Zurich another chance, and she will need to be more patient. The CQ framework from Earley and Ang (2003) is useful in trying to understand the needs of individuals in culturally diverse situations, Earley and Ang, 2003 came up with the construct of cultural intelligence (CQ). Earley and Ang define CQ as adaptation to new cultural settings and capability to deal effectively with other people with whom the person does not share a common cultural background and understanding (Earley and Ang, 2003). Additional reading or references Bird, A. and Osland, J. (2004) Global competencies: An introduction. In Handbook of Global Management, (eds) Lane Henry, Maznevski Martha, Mendenhall Mark and McNett Jeanne, pp. 57–80. Blackwell, Oxford. Earley, P. and Ang, S. (2003) Cultural Intelligence: Individual Interactions across Cultures, Stanford University Press. Hofstede, G. Hofstede, G, J. and Minkov, M. (2010) Cultures and Organisations – Software of the Mind; Intercultural Cooperation and Its Importance for survival. McGraw-Hill Education Ltd. 3 ed. Lane, H. Maznevski, M, L. (2014) International Management Behaviour: Global and Sustainable leadership, 7th ed. Wiley. Stahl, G. and Björkman, I. Handbook of Research in International Human Resource Management. Osland, J. Bird A. and Mendenhall, M. Chapter 12 Developing a Global mindset and global leadership capabilities.
Indian Institute of Management Ahmedabad
IIMA/COMM0018TN Teaching Note
Anuj Pathak Returns to India SUMMARY The case deals with the situation of Anuj Pathak, who has returned to India after living and working overseas for many years. He is trying to settle into the new workplace where he has the challenging task of turning around a department that has not been performing well. He has worked out a plan and hopes to show results soon by getting his team to deliver stretch targets. Knowing that he has a strong team of committed hands, he has been trying to drive them in the way that has worked for him in the past. However, he has been called by the HR Head and advised to reflect on his style because there have been numerous complaints from his departmental subordinates that his style is unfriendly and overly critical. He is taken aback because he does not understand how despite his efforts to treat everyone well while trying to get the best out of his people in implementing his turnaround plan, they have reacted in this way. OBJECTIVES The case exposes students to the importance of intercultural communication competence. It helps them understand the ways in which the ethnocentric mindset plays out in terms of the expectation of similarity in others and the inability to attribute one’s own ways of doing and perceiving to one’s culturally shaped assumptions and values. The instructor could use a model of intercultural competence such as Spitzberg (2009) or Imahori & Lanigan (1989) to introduce the term and discuss its importance in today’s context. He could introduce the special challenges that professionals who are expatriates or are returning “home” after working overseas for a considerable period, face. Special emphasis could be given to the assumptions and values driving their behaviour and communication that they may have unconsciously internalised in their stay abroad and taken as universal norms. The case provides insights into the phenomenon of reverse culture shock wherein an initial phase on returning home of seeing everything through nostalgic, rose-tinted lenses, and the expectation of comfort and familiarity is followed by feelings of confusion, bafflement and even a sense of alienation. Pathak’s assumption, because of emotional attachment, that he is familiar with the country, leads him to overlook the differences in terms of national and organisational cultures at the workplace. Rather than being at the ethno-relative stages of acceptance or adaptation as posited by Milton Bennet, he is at the ethnocentric stage of denial or minimisation, which manifests itself in not seeing difference or minimising it and unquestioningly holding and acting upon what he regards as universal and self-evident “truths”. While he would have gradually absorbed and adapted to the organisational cultures of his previous workplaces (exclusively in the western world), he has assumed that the values, norms, and expectations are universal in the professional world and has based his behaviour on this rather than seeing the home country and a new organisation in it as requiring relearning and adaptation.
Prepared by Professor Meenakshi Sharma, Indian Institute of Management, Ahmedabad. © 2017 by the Indian Institute of Management, Ahmedabad.
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The case would be useful to expose students to the dynamics of organisational communication in general, and the role of culture in particular, in shaping common perceptions of appropriateness of verbal and non-verbal communication in an organisation. It would also highlight how a new entrant who comes with a different acculturation finds it difficult to build a comfort level and rapport because of different assumptions, perceptions, expectations, and values underlying the communication styles. If one does not accept the differences and take steps to adapt, one may find oneself in a bewildering situation where personal aspirations and work outcomes are both impacted. This would also throw up questions about the role of the organisation in facilitating the integration of the new entrant into its culture. In the context of the case, the instructor may discuss if other than Pathak himself, the management at IFL should have recognised the role of culture and taken the necessary steps to help make his adaptation to the new culture easier. It is obvious that in the absence of both individual and organisational awareness and effort, there are costs for both. Students would need to analyse various aspects of the situation to understand why Pathak is faced with these problems, and also how it has affected the organisation in terms of his settling in and the difficulties he encounters in achieving the targets. Having analysed these, they would be able to suggest how these could have been minimised by both Pathak and IFL. They could then recommend what could be done in the situation to improve matters. COURSES The case could be used in courses on culture and communication and organisational communication. The specific topics that could be covered are: the challenge of communication, the role of communication in gaining acceptance of a person and their ideas, the role of organisational culture and the need for effective socialisation into the new culture, and reverse culture shock. The case would ideally come after the key terms have been introduced in the course. Students would need to go through the readings given below or others preferred by the instructor so as to be familiar with culture and communication, intercultural communication competence, culture shock and reverse culture shock, and culture and leadership. TEACHING PLAN The class could begin with a role play. Students or groups of students could be assigned roles of the characters in the case and asked to come to class with their perspectives on what they have done and why. This could be followed up with a larger discussion and analysis. Alternately, students could engage in a class discussion and analyse the situation. In both cases, familiarity with concepts would need to be in place through preceding sessions in the course and readings. LEADING QUESTIONS FOR THE DISCUSSION AND ANALYSIS Why has this situation arisen? Why was Pathak hired? Did the company take any steps to facilitate his ability to perform? What has he missed and why? Is he suffering from reverse culture shock? Has he assumed that because he is Indian he does not need to be aware of cultural nuances or to make adjustments when he returns to India? Have the years abroad made him lose touch with the way things work in India? Is he correct in assuming that what has always worked for him would work again? Do the events show that leadership is related to culture?
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Such questions may throw up numerous points, some of which are given below as a sample: Pathak’s professional experience has been exclusively outside India and he has not appreciated that management and leadership styles have cultural elements. Readings from the GLOBE study could be referred to in order to bring out how leadership is conceptualised and enacted in different cultural milieus. The lack of cultural knowledge and intercultural competence has led him to assume that what works in some – culturally similar – places, will work everywhere. He has overlooked the fact that his task orientation and direct style of communicating have been shaped by his time in the West. Even though these have given him great results there, they may not work everywhere. Although he prides himself on knowing how essential it is to take people along and to keep morale high, he has not reflected on the fact that the ways to do so would be culturally shaped. As he has only worked overseas, his acculturation into professional life has probably been invisible to him and the values as well as cognitive and behavioural patterns would have become fixed in his mind as “universals” of all workplaces. It would be useful to discuss how the ethnocentric denial of difference marked by blindness to one’s own acculturation into certain ways of communicating becomes a barrier to understanding that meaning making is not shared across cultures. There are clues to the fact that Pathak seems unaware of the role of culture in shaping expectations of appropriateness in communication and behaviour. He believes things are “clear” or “best” without qualification. He displays an approach marked by “There can be no two ways about it”, whether it is to do with goal setting, feedback, or social interactions with colleagues. As a result, behaviour different from what he is used to and expects, is simply “surprising” to him. His ethnocentrism is evident in his denial and minimisation of difference. Because of these issues, he is unable to read between the lines when people tell him that they welcome the breath of fresh air that he brings in. He overlooks that he is being perceived as different even though it is couched in polite expressions of welcome. Acknowledging this difference and relating it to his acculturation in a different context may have made him more open to attempting to fit in rather than continuing to drive his own style as the only right one and being stumped by the lack of the response he expects. Students would discuss the situation and probably see that Pathak’s core socialisation in India would have been overlaid by long exposure to the West. He would have faced culture shock on moving abroad as a student that would eventually have resolved into adjustment. His tendency to generalise what he has become familiar and comfortable with for the last twenty years as universal should come up for discussion. Another point likely to be thrown up in the discussion is the romanticised notion of the home country from afar and the dream of an easy return due to an emotional feeling of rootedness and the perception of similarity set against the reality of one’s changed values, and thinking and communicating patterns. A discussion on the phenomenon of culture shock and reverse culture shock may be useful to provide insights into how even when one returns “home”, the kind of culture shock experienced when moving to a new culture, is experienced again and is more unexpected. Has he fallen into the ethnocentric trap of denial or minimisation? Has the swanky head office that reminds him of those in overseas locations made him assume that there would be a global culture in the professional field, resulting in him missing cues indicating differences in values and expectations? When he is asked how he is settling in, he is quick to respond with his confidence in his ability to deliver results. His immediate reaction on being told about his colleagues’ perception of
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him is that he has an outstanding track record. These reveal his focus on task versus people and relationships. Has his perception that the only difference is that the faces around him are now Indian, made him overlook the cultural differences? While moving abroad one expects change and tries to adapt, but when returning to what is emotionally perceived as “home” but is no longer familiar on a day-to-day basis, one is initially likely to experience denial of difference and feel that everything is fantastic. But as time passes, the difference in perceptions and assumptions begins to throw up uncomfortable realisations. One overlooks that “home” has changed, and the time away has changed oneself as one consciously or unconsciously adapted to other cultures. Discussion on the stages of culture shock and reverse culture shock, namely, honeymoon, anxiety, adjustment and acceptance could be brought in to discuss Pathak’s experiences. Such points would lead to the need to become aware of the invisible role of culture in making sense of the world and in shaping thinking, behaviour and perceptions. Students could analyse the importance of perception and of communication style affecting Pathak’s ability to lead and his overall experience of returning to his homeland. From forms of address and markers of politeness and respect to directness or indirectness in giving feedback, handling of conflict of opinions, perceptions of appropriateness of verbal communication styles and non-verbal behaviours are culturally shaped and blindness to this fact results in ethnocentric judgement about anything different. While Pathak repeatedly tells his team of his expectations, he seems unable to figure out their responses and to read between the lines. For instance, while he views his disregard of hierarchy in dealing with his team as a positive step, he does not realise that it may be regarded quite differently by them. Similarly, he seems unaware that his belief that his style of spelling out very specific targets and giving clear and explicit feedback is the best way to get people to perform, may not be the accepted way in the cultural context and may consequently lead to resentment. In the case of a new entrant into a culturally aligned group, such judgement may impact acceptance. The resultant inability to form bonds, and build rapport and credibility, would, in turn, affect the ability to take people along with ideas and initiatives. For a person inducted specially with a challenging brief, the high expectations would become difficult to meet. This is where Pathak finds himself in an alarming situation with little insight into the cause for the complaints against him. The concluding part of the discussion could be turned to the ways in which the situation could be improved now so as to help Pathak lead the division to successfully implementing the new plan for the division. The discussion would help bring up ideas such as the necessity of explicit acknowledgement of the role of culturally shaped ways of thinking and behaving, of perceptions of appropriateness and friendliness, and of leadership. Along with the acceptance of difference, providing sensitisation training to both sides to handle such challenges could be proposed as a way forward. The discussion could yield the insight that such intervention and provision of help would be necessary and important steps for both organisational as well as personal goals. Leaving Pathak to struggle with the cultural challenges may mean that his aspirations as well as the potential benefits to the company will suffer setbacks.
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SUGGESTED ASSIGNMENT A written report analysing the situation, identifying the problem, and addressing the questions: What could Pathak have done differently? What could the company have done differently? How can the situation be improved now? SUGGESTED READINGS Chhokar, J. S., et al. Eds. (2007). Culture and leadership across the world: The GLOBE book of indepth studies of 25 societies. New York: Psychology Press. Imahori T.T. and Lanigan M. L. (1989). Relational model of intercultural communication competence. International Journal of intercultural relations , 13, 269-286. Milton, B. J. (2004). Becoming Interculturally Competent. In Wurzel, J. (Ed.). Toward multiculturalism: A reader in multicultural education (2nd ed.,). Newton, MA: Intercultural Resource Corporation. 62-77. Spitzberg, B. H. (2009). A model of intercultural communication competence. In E. S. et al., Intercultural Communiation: A Reader. Boston: Wordsworth. 375-387. Wang, M. M. (1997). Reentry and Reverse Culture Shock. Improving Intercultural Interactions, Eds. Kenneth Cushner and Richard Brislin. 109-128.
BSTR/541
IBS Center for Management Research
Teaching Note:
Amazon.com in China: Can Elaine Chang Crack the Chinese Market? This teaching note was written by Koti Vinod Babu, under the direction of Debapratim Purkayastha, IBS Hyderabad.
2018, IBS Center for Management Research. All rights reserved. To order copies, call +91 9640901313 or write to IBS Center for Management Research (ICMR), IFHE Campus, Donthanapally, Sankarapally Road, Hyderabad 501 203, Telangana, India or email: casehelpdesk@ibsindia.org
www.icmrindia.org
BSTR/541
Amazon.com in China: Can Elaine Chang Crack the Chinese Market? TEACHING NOTE ABSTRACT This case discusses the challenges faced by Elaine Chang (Elaine), VP of Amazon.com, Inc., and President, Amazon China, as she endeavored to expand the company’s footprint in China. Amazon entered China in 2004, but was still struggling with less than a 3% share of the country’s ecommerce market in 2017. Amazon entered China by acquiring Joyo.com, which was an online bookstore, and expanded to an online website to sell different consumer goods. Amazon adopted certain localization strategies to win market share and also introduced Amazon Prime to offer better delivery services to Chinese customers. It also opened a store in rival Alibaba’s Tmall.com. However, despite these efforts, it failed to make a mark in China. Amazon was facing a lot of competition from rivals such as JD.com, Tencent, and Tmall.com. In addition to this, the regulation of the internet by the Chinese government, fraudulent and counterfeit sellers, and government restrictions on foreign investment also posed big challenges for Amazon. Elaine had the big responsibility of building a revival strategy for Amazon in China.
TEACHING OBJECTIVES AND TARGET AUDIENCE This case study is designed to enable students to: •
Evaluate Amazon’s entry and expansion strategy in China.
•
Understand the importance of the Chinese market to Amazon’s growth.
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Examine Amazon’s efforts to localize its offerings in China.
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Understand the issues and challenges faced by Amazon in China.
•
Explore future strategies that Amazon can adopt to grow in the Chinese e-commerce market.
This case is meant for MBA students as a part of their Strategic Management curriculum. It can also be used in an International Management curriculum.
IMMEDIATE ISSUES •
What should Amazon’s future strategy in China be? Which parts of its business should it focus on to gain faster results?
•
What strategy should Amazon adopt to compete in the over-crowded market? How can it increase its appeal to the emerging Chinese middle class that is already used to buying everything from home-grown e-commerce giants such as Tmall, Taobao, and JD, and other local niche players?
•
What should Amazon do regarding the threat of fraudulent and counterfeit sellers as well as improving delivery capability? 1
Amazon.com in China: Can Elaine Chang Crack the Chinese Market?
BASIC ISSUES •
International management; Globalization strategy; Evaluating country market attractiveness; model of entry; ‘Global-local’ dilemma; Localization
•
PEST analysis; Porter’s five forces model
•
BCG Matrix
TEACHING APPROACH AND STRATEGY This case can be used to illustrate the strategies adopted by Amazon in entering and expanding in the highly competitive and rapidly growing Chinese market and the reasons behind Amazon’s struggle in China. In addition to this, the case provides ample scope to the students to discuss the challenges faced by Amazon in China and explore ways in which the company could overcome these challenges. Some broad assignment questions are listed here: 1. Critically analyze Amazon’s strategy in China? 2. How could Amazon face up to the fierce competition from e-commerce retailers in China? 3. Discuss the possible challenges Amazon could face in China going forward. What should it do in such a scenario?
SUGGESTED SESSION PLAN Discussion pastures Introduction
Time 10 min
Discussion on Q1
Amazon’s strategy in China.
20 min
Discussion on Q2
Competitive forces faced by Amazon in China
20 min
Discussion on Q3
Future Challenges and strategy
20 min
Summary
10 min
Total
80 min
The case can be distributed to the students 2 days before the case discussion.
ANALYSIS 1. Critically analyze Amazon’s strategy in China? A company’s internationalization strategy requires it to select attractive and profitable national markets, and then expand the market. Looking at the macro level and in terms of competitive and market conditions it is not surprising that Amazon entered China despite its being so different from its traditional markets in the West. In 2001, Amazon CEO Jeff Bezos (Bezos) and his employees outlined a virtuous cycle called the “Amazon Flywheel”, which they believed powered their business in most of the countries (See Case Exhibit I). In fact, customer experience was at the core of Amazon’s flywheel. According to the concept, growth would be faster when more customers visited the site. By offering low prices, a wide selection, and a great customer experience, Amazon was able to drive traffic (customers) and increase sales in most of the countries, which in turn attracted third party sellers and accelerated the wheel. By partnering with the best third-party sellers, Amazon was able to offer a wide selection of products that added to economies of scale and allowed the company to benefit from a lower cost structure. This led to improvement in 2
Amazon.com in China: Can Elaine Chang Crack the Chinese Market?
operating efficiencies and the savings were passed on to its customers in the form of lower prices and free shipping, which in turn attracted more customers. When any part of this wheel was fed, it accelerated the loop and the cycle continued. Amazon entered China in 2004 by acquiring Joyo.com as it felt that the benefits of entering the market dwarfed any potential risks that it might encounter. Acquiring a local company would give the parent company immediate access to local markets, necessary connections to government, and an established logistics infrastructure. Another benefit was that the local company already knew the culture and language of the customers of the country which would facilitate the formulation of a suitable business strategy by the parent company. Apart from that, the parent company would also get a readymade set-up of skilled people familiar with the local business. At the same time, unavailability of these benefits could hamper the objective of the parent company. For instance, in China, there were language complications and cultural dissimilarities compared to the Western countries. In addition, government restrictions on acquisition of local companies, the high cost of operations, and information integration issues with the home office could disturb the parent company’s business in the new country. Soon after acquiring Joyo, Amazon assimilated it into its own brand, but the going remained tough for it in China. However, Amazon expanded by adding health and beauty products in 2006. It also launched Amazon Web Services in China offering the cloud computing facility to Chinese customers. Eventually it expanded in China by adding more products to its site and introducing its Prime service, acquiring Twitch, opening a store in Tmall, etc. But its share of the e-commerce market in China did not see substantial growth. Amazon had to confront different situations in China when compared to the US. The political, economic, social, and technological factors in China posed different challenges to multinational companies who wanted to enter China, as shown in TN Exhibit I. TN Exhibit I PEST Analysis of Amazon in China
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Amazon.com in China: Can Elaine Chang Crack the Chinese Market?
Amazon was initially attracted to this key emerging market as it held the promise of significant avenues for growth based on the following factors: •
The political environment – Though there were some concerns in the West about the Chinese regime favoring local companies, the political environment in the new millennium was much better, making China a favorable destination for FDI. In fact, the fast growth in ecommerce was due to the various regulatory initiatives taken by the Chinese government.
•
Though there were some political (e.g. arbitrary decisions by government, etc.) and legal (e.g. lax protection for intellectual property) risks associated with doing business in China, Amazon must have been confident that it would be able to navigate these challenges and these were after all the hazards of operating in an emerging market. Moreover, the government started various initiatives that led to the growth of e-commerce in the country. Even the Electronic Commerce Law in 2017, while increasing the compliance burden for companies like Amazon, had the potential for enhancing the appeal of e-commerce in China in the long run by rooting out misbehavior.
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Economic factors – Despite China being one of the fasting growing economies in the world, there had been a lot of turmoil in the Chinese economy since 2014. The economy grew at its slowest pace in 24 years to 7.4% in 2014 compared to 7.7% in 2013. The figures in the case indicate that the market for internet-based services was booming and China and e-commerce were also witnessing one of the highest growth rates in the world. However, since July 2015, the Chinese stock market had been very volatile, with sharp drops in stock prices. The country devalued its currency a few times, thereby rattling investors across the globe. But the prospects of the e-commerce market appeared bright.
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Social and cultural aspect – This aspect of China plays an important role in analysing the social environment of China as the demographics of China were continuously in changing momentum. For instance, population growth and age distribution are varied over time. These could change social trends and cultural values. The literacy rate in China was over 90% and China stressed on education and a majority of the Chinese were literate. Ecommerce had transformed how local consumers visualized shopping. However, there was still a consumer group that did not wish to take the alleged risks connected with online shopping. They chose physical shopping over online shopping.
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Though China differed considerably in terms of cultural norms and social structures with Amazon’s home market (US), there was strong demand for such e-commerce sites in China. Shopping on e-commerce sites had become a regular practice among China’s young people because of the availability of international products on those websites.
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Technological Factors – In China, these included many factors like new products being developed and new purchasing mechanisms such as the intranet being developed. Along with these factors, new production technology and new distribution mechanisms leveraging mobile telecommunications were developed. However, a major technological problem in China was that the progress of the B2C industry did not have a safe and steady online payment system. The problem was compounded by the fact that Chinese buyers were particular about avoiding ambiguity and were future oriented.
Many experts felt that Amazon had entered the Chinese market with the same design and strategy designed for American customers, whereas its competitors in China had done so after a comprehensive study of the multinational e-commerce sites. For instance, unlike its competitors who offered different online payment options, Amazon did not opt for any such payment methods. Besides, Chinese customers found more low-priced products on other local online shopping sites like Tmall other than Amazon. Apart from this, Amazon was an English name which Chinese people had to learn, and so Amazon failed to stick in the minds of Chinese consumers. But Amazon realized this issue and changed its name (Z.com). It also adopted many localization strategies. 4
Amazon.com in China: Can Elaine Chang Crack the Chinese Market?
Localization •
Amazon introduced portable Point of Sale (POS) devices so that customers could pay the delivery man via a credit card at their doorstep.
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The Amazon.cn website was built according to the browsing behavior of Chinese customers. Amazon registered a Chinese domain name Z.cn, from which traffic was redirected to Amazon’s Chinese official website Amazon.cn. The modification was made because Amazon was an English word which Chinese consumers found difficult to remember.
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Amazon had launched a project called Launchpad in 2014 which provided a platform for exceptional products and start-ups in China. The project could successfully aid the startups to reach most of the Amazon consumers globally and help consumers to get different products of their choice.
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Amazon introduced the Fire tablet in China in 2015. This came installed with the feature of an easy English learning task to offer a personalized reading experience for different English levels of users.
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Amazon launched a Chinese language version of its management system in 2015 for its US and UK websites in 2015. Through this, Chinese merchants could also benefit in terms of a ‘global product listing’ service that would enable them to upload product listings and sell them across multiple sites.
Amazon had been present in China for above ten years, but only controlled a meagre 3% of the country’s flourishing e-commerce market. Its investment in other countries was substantially lower than its investment in the US. Amazon had US$107.0 billion of total net sales in 2015. Of the US$107 billion of net sales in 2015, Amazon generated US$70.5 billion, 65.9% of the total, from the United States; US$11.8 billion, 11.0% of the total, from Germany; US$9.0 billion, 8.4% of the total, from the United Kingdom; US$8.3 billion, 7.7% of the total, from Japan; and US$7.4 billion, 6.9% of the total, from Rest of the World as shown in TN Exhibit II. TN Exhibit II Amazon Geographic Revenue Share
Source: http://revenuesandprofits.com/amazon-revenues-profits-analysis-2015/
Amazon was facing a lot of problems in China. Some of these were as follows: •
Local regulations. Amazon faced some problems while operating in China due to local regulations. Local competitors like Alibaba and JD were in a better position to understand and navigate the regulatory environment of China as they had established their stand in China even before Amazon’s entry into the country. For instance, Alibaba relied on a legal structure known as variable interest entity (VIE), which permitted it to bypass the Chinese government’s restrictions on foreign ownership of businesses in certain sectors, including information technology. 5
Amazon.com in China: Can Elaine Chang Crack the Chinese Market?
•
Regulations on the internet. The Chinese government’s tight control on information flow, internet restrictions, and online content censorship in China affected Amazon’s business in the country. Cloud computing in China was ruled by home grown Chinese companies like Alibaba’s cloud service Aliyun and Baidu, Inc. 1 These Chinese companies had close access to the Chinese government. Moreover, the Chinese regulations forbade nonChinese companies from owning or operating technology for providing cloud services. As a result, in order to observe Chinese law, Amazon Web Services (AWS) sold certain physical infrastructure assets to a local company called Beijing Sinnet Technology.
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Fraudulent sellers and counterfeit products in Amazon’s e-commerce site. These threatened Amazon’s business in China and could play havoc with its “Amazon Flywheel”, by starting a vicious cycle.
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Cut-throat competition from domestic players. These players offered cheaper products with premium features, and features valued by the Chinese customers.
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A meagre market share. Amazon had only a 1-3% market share in China. But, according to website data analytics company Alexa.com, the American, British, and Japanese versions of Amazon’s websites were in the top 50 most-visited websites in China. Analysts attributed the reason for this scenario to Chinese users simply surfing Amazon instead of actually purchasing products from it because the two major markets in China were categorised as a. White label items which were low-priced and b. Branded products sold at a higher price directly by the brand. Amazon could not capitalize on these two areas. In fact, Alibaba had exploited both these market segments. Tmall allowed brands to verify their products were genuine while selling directly to consumers for a fee.
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Amazon Prime provided free two-day shipping as well as access to audio and video streaming. But Amazon Prime in China could have been used to deliver services specially desired by the Chinese. For instance, there was a lot of market potential for pay-to-win games in China. Amazon could have given a yearly payment of digital currency with Amazon Prime to appeal to Chinese customers rather than just trying to replicate its American model of Prime.
Even though Amazon had taken several measures to grow in China, it had to invest more in China by understanding customer insights to introduce more localized products and payment methods. 2. What are the competitive forces faced by Amazon in China? How does Amazon measure up to the competition it faces in China? As shown in TN Exhibit III, Amazon was facing challenges from the factors which Porter had proposed in his five forces model. Porter’s five forces framework is a tool for analyzing competition within an industry. This framework was first published in Harvard Business Review in 1979.
1
Baidu, Inc. is a Chinese web services company. 6
Amazon.com in China: Can Elaine Chang Crack the Chinese Market?
TN Exhibit III
Porter’s Five Forces Model Threat of new entry Large amount of capital required High retaliation possible from existing companies like Alibaba and JD China’s legal barriers protect existing companies from new companies
Supplier power Alibaba dominating the supplier market Some suppliers are large but most of them are pretty small Lack of fully established supplier network
Competitive rivalry Moderate number of competitors Cost of leaving a potential market like China Larger Industry growth rate and competitors’ size Customer loyalty
Buyer power There are many buyers It doesn’t cost much for buyers to switch to another e-commerce company Buyers can easily choose alternative e-commerce websites
Threat of substitutes There are many alternative ecommerce sites like Tmall, JD, Tencent etc. Substitutes can offer the same convenience with lesser prices Alternative websites offer more features like guiding the customer to choose product
Adapted from: https://www.strategicmanagementinsight.com/tools/porters-five-forces.html
Competitive rivalry within an industry – Medium level Competitive rivalry among the existing firms in an industry is the level to which firms respond to the competitive moves of other binding firms. With the further spread of the internet, B2C and other e-commerce models in China were flourishing. Another factor that escalated the power of the internal competition in the B2C industry was the presence of large B2C websites such as Taobao Mall, QQ Mall, Jingdong, and Dangdang. With an increasing market size, it was likely that many B2C companies in China would focus on responsiveness from new customers rather than gaining the competitors’ share by strong marketing efforts. In a growth stage of the B2C industry, there were different models of B2C such as raise the D2C (designer to customer) model. The differentiation would help Amazon to avoid direct price competition. Bargaining Power of Suppliers – Low The bargaining power of the suppliers can be gauged from their capability to charge a high price in the supply demand relationship with the B2C companies. Since the suppliers wish to charge the highest prices for their products, a power tussle rises between organizations and 7
Amazon.com in China: Can Elaine Chang Crack the Chinese Market?
their suppliers. Whichever side has more choices benefits. To the B2C market in China, the supplier bargaining power was at a low level as the input contributed by the suppliers was not vulnerable to the B2C platforms and there was little switching cost for B2C companies to change to other product suppliers since the products were not sold in a physical store. Thus, changing the suppliers would in most case equal the changes of pictures and description on the websites. Bargaining Power of Buyers – High The bargaining power of buyers is the capability of the buyers to put the company under pressure, which also includes the customer’s reaction to price changes. Buyers’ power is high if buyers have many substitutes and it is low if they have few alternatives. Amazon focused mainly on customer satisfaction and product quality. However, converting costs for the customers were low and there were many competitors for Amazon in China. Retail stores also were posing considerable threat to Amazon in China. The Chinese customers had adequate information when searching for products online and could make their selection based on available information. This signifies the importance of customer retention for Amazon in China. Threat of New Entrants – High The threat of new entrants depends on the extent to which entry barriers exist in an industry. These may be economies of scale, capital requirements, access to distribution channels, etc. The capital required to open a B2C website is relatively low. It depends on the visiting volume of the customers. For instance, the venture of a large scale B2C website could begin with a smaller scale one because at the beginning, the visitors are small in numbers. And to most B2C websites, the internet will be the major distribution channel. The explosion of digital technology brought about several changes in the e-commerce industry in China. Due to this, it became easier to build an e-commerce business model with the existing technological resources. Growth in digital technology condensed the barriers to entry. Threat of Substitute Products – High Substitute products refer to products which are serving the same purpose in other industries. The threat of substitutes was higher in China, and it affected price elasticity. This was because the customer could switch easily to other goods or to other companies to buy it. Customers had numerous other choices when they did not choose to visit the B2C websites. The customers could go to the physical stores or other retailers to purchase the products rather than buying online where they could only view pictures and descriptions of the product but could not touch it. Amazon vis-à-vis its Competitors Some e-tailers like Tmall and JD.com were giving tough competition to Amazon in China. Amazon China did not progress as quickly as its rivals due to the regulatory problems in China which protected the local players. 1. Tmall’s model had thousands of merchants, with an effective system to restrain fraud. It was thus a better model than Amazon’s, especially in China. On one hand, the brutal competition between sellers pushed the prices to the bottom, which was encouraged by price sensitive Chinese consumers. On the other hand, the size and stiff competition forced these sellers to understand their customers and to be novel. This factor combined with China’s business potential, made it particularly easy to come up with some groundbreaking products for the small businesses that were willing to take a small order and produce them cheaply. Many customers turned to Tmall for products because its compliance handling system was prompt. In this way, Tmall provided a great platform for start-ups and novelty in the E-commerce space, while Amazon was only an online store. Thus, Amazon might have to fight hard to gain attention on the e-commerce platform of China. 8
Amazon.com in China: Can Elaine Chang Crack the Chinese Market?
2. Another factor was that Alibaba knew China better and launched the online business earlier than Amazon. But Amazon did not use an aggressive business strategy in China to defeat Alibaba. Alibaba commanded an amazing 80% market share in the price sensitive Chinese market. Amazon and Alibaba functioned on different business models. Alibaba ran its Tmall platform which acted as a web-based shopping center. In contrast, Amazon’s business model was the same model it implemented worldwide. Amazon needed to restructure its business model according to China’s customers rather than implementing the global model in China. 3. JD.com joined the e-commerce market of China a bit late but played quite well with the right pricing policy plus faster delivery due to its strong local resources and improved lowcost logistics and catalog. It became a strong opponent to Amazon in China after expanding its product range to include consumer goods. JD.com still held a bigger market share than Amazon in China, but both of them were far behind the famous Tmall. 4. The local companies in China made products usually based on Chinese consumer preferences; and Amazon was unable to contend with them. There were also a sizable number of Chinese consumers who favoured products from local companies. Furthermore, the government offered incentives to local firms, which made it difficult for international companies like Amazon to enter the local market. In China, people liked to buy the best product at the most inexpensive price. They wanted to buy products that replicated the ambitious lifestyle they wanted to have while making the budget work for them. Consumer models such as Louis Vuitton, Starbucks, and KFC had seen success in China Amazon’s status as an international brand with a solid standing and global sourcing had helped it entice more foreign-brand shoppers in China than Alibaba and JD.com. Amazon should invest more in the foreign goods category in China by focussed differentiation. Amazon should also upgrade its payment system so that shoppers can not only pay with local bank cards but also get the same after-sales services, including refunds, available to customers in other countries. Even if Amazon China started launching promotions and regular discounts like its competitors, it might find it hard to win a larger share of the ecommerce market in China. 3) Discuss the possible challenges Amazon could face in China going forward. What should Amazon do in such a scenario? The major challenge for Amazon came from its high reliance on selling foreign products. Chinese consumers were in the process of getting more power to choose from several ecommerce sites when shopping for foreign products. There might be even more competitive choices in the future. Counterfeit goods were the problem for Amazon’s existence in China. Amazon might choose the safer option of avoiding competition against low-quality counterfeits. Chinese Government restrictions on contractual agreements would pose a challenge to Amazon. The company could concentrate on cross- border e-shopping in China as it was getting a reasonable share of 7% when compared to the share of below 2% in China as shown in TN Exhibit IV. This was also one of the few things that Amazon could do in China better than other local rivals. China’s cross-border online shopping grew 23.5% to RMB 6.3 trillion (US$924 billion) in sales in 2016, according to iiMedia Research 2, a market consultancy. At the same time, more than 15% of Chinese consumers made purchases worth US$85.76 billion from abroad, according to consultancy eMarketer. 3
2 3
Ii Media Research is a consulting agency in the mobile internet industry. Fan Feifei, “A-Z in Cross-border e-shopping,” http://www.chinadaily.com.cn, June 26, 2017. 9
Amazon.com in China: Can Elaine Chang Crack the Chinese Market?
TN Exhibit IV Cross Border Retail E-Commerce Buyers in China
Adapted from: http://www.isynergi.com.au/e-commerce/
If Amazon aimed\s majorly at cross-border e-shopping in China, its global network would be an added advantage, particularly for Chinese sellers who were not only willing to serve domestic customers but also wanted to take their high-quality products globally through Amazon’s marketplaces in countries like the US, the UK, Germany, and Japan. This would help Chinese sellers to expand their brands worldwide, and would also result in enhancement of quality in products as they were going global. From Amazon’s viewpoint, cross-border ecommerce was growing and covering different age-groups belonging to both the younger and older generations. For this reason, Amazon China was escalating its city coverage by moving beyond tier1 and tier2 cities to tier3 and tier4 cities. When the management wants to study its product portfolio and distinguish between profitable and unprofitable business units, Boston Consulting Group Matrix is a suitable tool to carry out this analysis. The matrix contains 4 quadrants - cash cows, stars, question marks, and dogs. This analysis is based on the relative market share and industry growth prospects. Amazon has been a successful e-commerce player in most of the countries it operates in except in China. As shown in TN Exhibit V, Amazon should evaluate its profitability for its success. TN Exhibit V
The BCG Matrix of Amazon in China
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Amazon.com in China: Can Elaine Chang Crack the Chinese Market?
Stars Star in a BCG matrix refers to a high relative market share and high growth rate. These products are the revenue generator for an organization. The future growth of these business units is hopeful, thus encouraging the management to continue with the investment in them. The cross-border e-shopping of Amazon in China is in demand, making this business unit a rising star for the company as the market share in this domain is also increasing with time. Apart from that, the consumer electronics category is also promising for Amazon in China. Cash Cows There are certain product categories that fetch in sufficient revenue for a business to control its operations of different business units. These products are categorized as cash cows. Amazon has made profits through the sale of its e-books, making them a cash cow for the company. The Kindle has supported the company to use the e-books segment as a cash cow. In addition, Movie on Demand has also made a high amount of cash and holds an important market share in the industry. For instance, IMDB (Internet Movie Database) is another case of a cash cow as it helps the company to manage the sales of its movie DVDs, along with lending support to the movie on demand business. Question Marks The next quadrant is question marks. These products have a chance of growing into a profitable business; but the limited market share makes it difficult to use these business units as major revenue makers. The business unit of Zappos faced similar issues of low growth and return on investment after Amazon’s acquisition of Zappos. Similarly, the acquisition of Twitch proved fatal when Wand Sicong, a Chinese billionaire, announced the unveiling of Panda TV. There is a likelihood that Twitch and Zappos may move out of the question mark category in future. Dogs The Dogs quadrant indicates that the products are not generating high sales and cannot form a prominent market share. These products do not offer major financial gain to the company. Instead, they require cash investment. Due to this characteristic, dogs are recognized as cash ploys, since they could not help the business get a high ROI. For Amazon in China, Amazon cloud service could not make its mark and Amazon had to sell parts of its cloud business to Sinnet in November 2017. What Amazon should do Amazon should consider the following tactics to succeed in China. Amazon should adapt its offerings in China in keeping with the social habits of Chinese consumers. Chinese consumers depend heavily on social networks, reviews, and references when making a purchase decision. Thus, Chinese customers are also keen content providers. In fact, Chinese consumers are more social online than US consumers. Therefore, Amazon has to focus on customer service, as any bad word of mouth can have even worse fallout for it in China than it would in a country like the US. Amazon should focus on the customer, not just on the information system. Some organizations assume that the key to success in China is the high standard of information technology. Hence, they tend to focus more on information technology than on customer needs. But practically, meeting customer needs is the most important element of success. Amazon should speed up its decision-making practices; act fast and respond faster. China’s e-commerce houses shine at making quick, consumer-centric decisions. In China, local market circumstances change quickly. A long reporting chain with a head at Western headquarters governing all is not feasible. Decisions have to be made quickly. 11
Amazon.com in China: Can Elaine Chang Crack the Chinese Market?
Amazon should consider other methods of market entry. Given the tough competition in China, organizations would be sensible to contemplate forming strategic partnerships with local competitors. For instance, instead of constructing an e-commerce channel of their own, a number of Western companies have associated with Tmall to sell their products online in China. Another form of entry is investing in local companies. Amazon should be flexible and creative in its strategies in response to regulations. China is a fast developing economy whose business settings as well as the rules governing them are often not apparent and are uncertain. Amazon needs to be fully aware of the concerns of operating in such an environment and to be flexible in its strategies. Google, for example, decided to re-enter China in early 2012 with different product offerings. The company is now focusing on products and services that are less censor-sensitive, such as maps, shopping services, and mobile platforms. Amazon is a popular online retailer for different goods and products serving consumers all over the world. But, it is losing its market in China. From its acquisition of Joyo.com in the year 2004 to the latest of Twitch on 2015, the company has faced substantial drawbacks. Cross-border online shopping is one of the fastest rising trends in e-commerce globally. This is why Amazon should focus most on this area. This is one area it can be better than its competitors. With its capabilities like strong Amazon UK and US sites, global brand image, global network, and support of optimistic shareholders to back up its efforts in China, Amazon can focus on cross-border e-shopping in China to entice Chinese customers as most of them also favor global brands. As Elaine said, “For Amazon China, I believe e-commerce will continue to be a dynamic industry growing rapidly in 2017, especially in cross-border e-commerce. Chinese customers have shown tremendous enthusiasm for cross-border online shopping.” 4 However, Amazon is in the middle of correcting its flaws and working hard to become competitive and win over Chinese consumers and the online market. Amazon will be able to construct a world class logistics platform for small and medium sized Chinese businesses if it adds a global network of fulfilment centers and transportation resources to China. Amazon has a long-term orientation and will continue to invest in China. But going forward, it will have to adapt its strategy to suit the host market’s environment.
4
“Amazon Aims for Advantage among Consumers with Cross-Border Shipping,” www.globaltimes.cn, November 9, 2016. 12
Amazon.com in China: Can Elaine Chang Crack the Chinese Market?
Suggested Readings: 1.
Winston Ma, “China’s Mobile Economy: Opportunities in the Largest and Fastest Information Consumption Boom,” (John Wiley & Sons, 2016).
2.
Michael Bellomo and Joel Elad, “How to Sell Anything on Amazon...and Make a Fortune!” (McGraw Hill Professional, 2006).
3.
Dixit and Shailja, “E-Retailing Challenges and Opportunities in the Global Marketplace,” (IGI Global, 2016).
4.
Bill Donaldson and Tom O’Toole, “Strategic Market Relationships: From Strategy to Implementation,” (John Wiley & Sons, 2007).
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BSTR/551
IBS Center for Management Research
Teaching Note:
Souq.com and the Battle for the Future of E-Commerce in the MENA Region This teaching note was written by Koti Vinod Babu, under the direction of Debapratim Purkayastha, IBS Hyderabad.
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BSTR/551
Souq.com and the Battle for the Future of E-Commerce in the MENA Region TEACHING NOTE ABSTRACT Souq.com (Souq), which started as an auction site and eventually changed into an e-commerce portal, had tasted reasonable success in the MENA region. In 2016, it decided to collaborate with a potential buyer to realize its growth potential in the region. After a futile attempt to acquire Souq in 2016, multinational e-commerce company Amazon.com, Inc. (Amazon) again placed a bid for US$650 million in 2017. Emaar Properties PJSC (Emaar) also placed a counter bid for US$800 million, challenging Amazon. Both Amazon and Emaar had their respective advantages and challenges they would have to face if they succeeded in acquiring Souq. While some analysts suggested that Amazon was a better fit for Souq considering its global presence and core competency in technology infrastructure and logistics, others preferred Emaar in view of its local advantages like local government support and funding. Souq’s co-founder and CEO Ronaldo Mouchawar (Mouchawar) would have to quickly decide on the company’s next course of action.
LEARNING OBJECTIVES This case study is designed to enable students to: •
Understand the issues and challenges in managing the growth of an enterprise in the nascent ecommerce market in the MENA region.
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Analyze how Ronaldo Mouchawar built Souq from the ground up into a leading e-commerce company.
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Understand the issues related to harvesting the venture.
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Evaluate the competing bids from Amazon and Emaar.
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Understand the implications for the combined entity going forward.
TARGET AUDIENCE AND POTENTIAL AREA OF USE OF THE CASE This case is meant for MBA students as part of the Entrepreneurship/ Strategic Management curriculum.
IMMEDIATE ISSUES 1. Should Souq opt for a sell-out to achieve its aim of growth or should it look for other sources of funds to fuel its growth? 2. Should Souq accept Amazon’s offer or go with that of Emaar? 1
Souq.com and the Battle for the Future of E-Commerce in the MENA Region
BASIC ISSUES •
Managing Growth; Stages of growth; Sustaining growth
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Strategic planning; control; Sustainable Competitive Advantage; Core competence; Resources and Competencies; SWOT Analysis.
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Harvesting the venture; buyer’s/seller’s motive
SUGGESTED TEACHING APPROACH AND STUDENTS ASSIGNMENT This case can be used effectively in classroom discussions. The case instructor can initiate the discussion by giving a brief introduction about Souq and its growth and objective of looking for a buyer. Further, the students may be encouraged to evaluate the options before Souq, particularly with respect to the bids offered by Amazon and Emaar. The discussion can be taken forward with the following questions.
POSSIBLE DISCUSSION QUESTIONS 1. Critically analyze the reasons for Souq’s success in MENA. Do you think that the decision to sell out is a good option for Souq to realize its growth objective? 2. Evaluate the options before Souq in relation to the bids by Amazon and Emaar. 3. If you were in Ronaldo Mouchawar’s place, what would your decision be? What are the implications for this decision going forward?
PROPOSED SESSION PLAN Discussion pastures Introduction
Time 10 min
Discussion on Q1
Critically analyze the reasons for Souq’s success in MENA. Do 20 min you think that the decision to sell out is a good option for Souq to realize its growth objective?
Discussion on Q2
Evaluate the options before Souq in relation to the bids by 20 min Amazon and Emaar.
Discussion on Q3
If you were in Ronaldo Mouchawar’s place, what would your decision be? What are the implications for this decision going forward?
20 min
Summary
10 min
Total
80 min
The case can be distributed to the students 2 days before the case discussion.
2
Souq.com and the Battle for the Future of E-Commerce in the MENA Region
ANALYSIS 1. Critically analyze the reasons for Souq’s success in MENA. Do you think that the decision to sell out is a good option for Souq to realize its growth objective? In 2005, Mouchawar observed a demand in the MENA region for an appropriate one stop online retail store (Identification of opportunity). His determination and grit led to the establishment of the e-commerce website Souq which grew to become the largest e-commerce site in MENA. As a result, the company was touted as the Amazon of the Middle East. Souq achieved its first success by offering a unique service and it became a leader in the nascent ecommerce market in the MENA region by delivering superior value to customers. It was one of the first companies in e-commerce in the region and was largely credited with pioneering this concept. Promoting this concept required a lot of effort since there was not much of a market for such a service in the MENA region. At the beginning, online trade was still a budding field in the Middle East and Souq’s success was boosted by the development of mobile phone technology and internet penetration across the region. Souq provided extensive Arabic content in markets such as Egypt, where only 10% of the consumers used credit and debit cards to purchase online. Apart from that it formulated different strategies like White Friday, replicating the US tradition of Black Friday, during which different products were offered at affordable rates. It enjoyed a certain competitive advantage in MENA region which made it a successful venture. (Refer to TN Exhibit I provides a framework of generic strategies proposed by Porter). TN Exhibit I:
Porter’s Model of Generic Strategies Competitive Advantage
Broad Target
Lower Cost
Differentiation
Cost Leadership
Differentiation
Cost Focus
Differentiation Focus
Competitive Scope
Narrow Target
Source: http://strategy-models.blogspot.in/2011/06/introduction-to-porters-generic.html
Souq has been able to create a market for itself by implementing a differentiation strategy by developing its own set of proprietary know-how to manage fulfilment centers and make a timely delivery. In the MENA region, customers prefer to pay through ‘cash on delivery’ and also prefer Arabic content. Souq was successful in finding out what the customers valued most and in delivering it. As most of the customers in MENA preferred COD, Souq offered substitute payment options like CashU and Payfort to make it easier for customers in areas where credit card use was uncommon. Souq also developed logistical solutions to deliver goods to customers in populations with no postal addresses. It launched its logistics platform subsidiary Q Express for this purpose. 3
Souq.com and the Battle for the Future of E-Commerce in the MENA Region
It was also able to exploit the special needs of buyers in certain segments. For instance, it acquired sukar.com (fashion products) and catered to the needs of women shoppers. Then, it also launched the automotive category to provide a huge selection of car accessories online with attractive deals, keeping in mind the requirements of another customer segment. It gradually expanded the number of goods it offered on its platform and was able to capture a leading position in the e-commerce space in the MENA region. Competitive advantage Competitive advantage is the leverage that a business has over its competitors. This can be grown by offering customers superior and better value. When a firm sustains profits that exceed the average for its industry, it is said to possess a competitive advantage over its rivals. Porter identified two types of competitive advantages. Cost advantage – This happens when the firm is able to deliver the same benefits as its competitors but at a lower cost. Differentiation advantage – This happens when a firm can deliver benefits that exceed those of the competitors’ products. Souq had the certain competitive advantages as shown in TN Exhibit II. TN Exhibit II: Souq’s Competitive Advantages Traffic
Highest traffic share in MENA among other players – 39 million global monthly visits
Marketing
Extensive online offline marketing campaigns like White Friday
Local Operations
Local operations in the UAE, Kuwait, Egypt, and Saudi Arabia
Fulfilment
Localized own fulfilment structures in all markets
Souq’s competitive advantage lay in the fact that it had the highest local traffic and largest buyer base in the MENA region. Added to that, top strategic internet investors like Jabbar and Naspers supported it to become the largest marketplace in the region in terms of number of sellers and items. The solidity of its business model can be gauged from the fact that it had been able to attract so many funders since its inception. However, in 2016, Mouchawar realized that Souq, despite its market position and brand cachet, was at a crossroads. The competition was ever increasing as the entry barriers were low, and as such, if the company did not grow quickly enough, it would have to reconcile itself to having to fight it out for incremental gains in an overcrowded market. He felt that the time was ripe for harvesting the venture or seeking investment to acquire and grow. It was important for the entrepreneur to know the actual value of the venture and Mouchawar did not hesitate to enlist the services of professionals (Goldman Sachs) to help him chart out the future course of action for the venture. This goes a long way to show the emphasis Mouchawar put on planning and how he used it as a blueprint for action. Entrepreneurial ventures that show initial growth have to capture the value of their earlier advantage by building organizations that can operate effectively in a dynamic environment. They must make decisions to ensure they can sustain themselves over the long term, while building the foundation for the future. While doing so, the venture faces numerous challenges. According to researchers, the venture goes through stages, each with its own particular characteristics and challenges (Refer to TN Exhibit III). The solutions too will vary, depending on the stage in which the venture is. In this case, Souq is in the growth p h a s e and Mouchawar is trying to take the venture through to the maturity stage. 4
Souq.com and the Battle for the Future of E-Commerce in the MENA Region
TN Exhibit III:
Growth Stages of an Entrepreneurial Firm
Startup Early Later Maturity Renewal/
Size
Growth Growth Decline
Time
Source: William D. Bygrave and Andrew Zacharakis (Ed), The Portable MBA in Entrepreneurship, (3rd Edition, Wiley, March 14, 2003).
As Souq wanted to grow on a larger scale, it considered a lot of options. The funding options for a venture also change as it goes through different phases. So in 2016, Souq had also considered the option of going public, but at this stage, Mouchawar considered it to be a risky proposition. Being a privately-held company gave Souq some flexibility to try out different growth models and experiment. However, after going public, shareholder pressure might not always allow it to invest in exciting projects that could even fail, but would help the company grow if they succeeded. Mouchawar felt that selling out to a company that had the capabilities to spur the growth of Souq in the MENA region was a better option. There was growing competition in e-commerce in MENA. Large brick-and-mortar retailers such as the Al Futtaim Group and Majid al-Futtaim were giving it tough competition apart from Amazon. In such a situation, Mouchawar felt that the suitable strategy was to opt for a sell-out to a like-minded firm that would help realize Souq’s growth objectives. 2. Evaluate the options before Souq in relation to the bids by Amazon and Emaar? In early2017, Souq had two options before it – sell out to Amazon or sell out to Emaar. With Emaar challenging Amazon in a bid to acquire Souq, the competition took a new turn. Emaar was a strong contender to Amazon in terms of financial resources in view of its projects undertaken in Dubai. Amazon: Amazon started as an online bookstore, and soon transformed itself into the top online retailer across the world. Amidst the fierce competition also, Amazon has a strong base of loyal customers. It has grown into a remarkable force in five different huge industries: retail, logistics, consumer technology, cloud computing, and, media and entertainment. Amazon preferred inorganic growth in MENA (via Souq) to leverage Souq’s well-established infrastructure. This strategy required less time and money to convince the customers who were 5
Souq.com and the Battle for the Future of E-Commerce in the MENA Region
already using Souq. Amazon went into an acquisition spree in 2017 to expand its market reach to different sets of consumers. From Case Exhibit II we can see Amazon’s top 10 acquisitions which clearly show how it was targeting different segments of customers. It is vital to know about Amazon’s competencies to analyze its capabilities and predict its success in MENA if it acquires Souq. Amazon’s main resources and competences are summarized and listed in TN Exhibit IV, and these strategic capabilities can be assessed by looking at the physical, financial and human resources of a company. TN Exhibit IV Amazon’s Resources and Competencies Easy for competitors to imitate
Difficult for competitors to imitate
Resources
1. Product portfolio 2. Supply chain and distribution network 3. Human resource training and welfare 4. Online delivery system
1. Low prices and wide selection 2. Allied services like Amazon Prime 3. Innovations in developing new products 4. Offering of localized products 5. Cost leadership (low cost structure)
Competencies
1. 2. 3. 4. 5.
1. Vendor management 2. IT excellence (Amazon Web Services) 3. Quick delivery 4. Customer service 5. Fulfillment by Amazon 6. Focus on technology
Business model Brand recognition Promotional strategies Partnerships Kindle services
Amazon’s services and human resources contributed to a strong and flexible supply chain. The company exploited these factors to provide customers the most effective delivery services. Customers could also profit from Amazon’s hefty discounting. the result of its skill in negotiating with third parties. The combination of human resources and competencies associated with Amazon played a vital role in the long-lasting success of the company. Amazon has a strong presence in many developing economies as well. The company entered China in 2004 and the markets of Brazil and India in 2012 and 2013 respectively. A strong presence in emerging economies is an advantage for Amazon and the revenue from those economies can make a huge contribution to the long-term growth scenarios of the company. Amazon’s know-how and capability in terms of developing and marketing innovative products and services is a significant strength that can be further exploited for the long-term growth prospects of the business. The company competently exploits its slender cost structure as one of its main sources of competitive advantage. However, Amazon’s revenues and scope of operations are extremely seasonal with direct repercussions on business practices. Amazon has a thin profit margin, but it has to maintain its cost leadership strategy, as well as its assurance of free delivery. A low profit margin makes the business susceptible to external tremors and catastrophes. Due to low profit margins with negative effects on the level of liquidity and cash reserves, Amazon may find it difficult to go through the stages of low demand for its products and services as a result of changes in the external environment. 6
Souq.com and the Battle for the Future of E-Commerce in the MENA Region
Amazon has the opportunity to enter developing markets. It should take up this strategy before other large online retail firms take root, so that it can get the advantage of having a stronger competitive edge. The company also has the opportunity to open more brick and mortar stores to develop competitiveness against large retailers. Amazon was facing cyber threats as well as patent breach and other lawsuits. Another problem was weakening industry barriers which give other investors an opportunity to enter e-commerce. Emaar: The United Arab Emirates (UAE) government holds a 32% stake in Emaar and is also supporting it with less stringent regulations in land dealings in Dubai. In addition, the UAE government has showed a willingness to support Emaar’s businesses. Emaar has proficiency in creating master-planned community constructions for international markets. Its constructions include housing communities that integrate schools, parks, landscaped grounds and retail centers along with golf, equestrian fields etc. Each project has a mix of apartments, individual houses, and villas. However, overexposure to Dubai, operations and funding strategy, dependence on the local government, and labor problems and quality issues are considered to be weaknesses for Emaar. Regulations regarding foreign investments in certain sectors like infrastructure may hamper the international growth plans of Emaar. Dubai has been the focus of emigrants from the US and Western Europe, and they have been the main motivating factors behind the growth of Dubai. Job losses and the restrictions on the credit markets due to global economic turndowns may not offer the capital required for investing in the Dubai property market, and this may negatively impact the company’s sales. Additionally, higher operating expenses incurred on hotels and malls and higher marketing costs will balance the profitability produced by international revenue. One problem for Emaar is that e-commerce players often have to work with razor-thin margins. Physical retailers cannot do that and if they drop prices online they risk cannibalizing their own sales and driving margins down while having all the same overhead costs. A comparative SWOT analysis of Amazon and Emaar will provide a clear picture of their capabilities and weaknesses as well, as shown in TN Exhibit V. TN Exhibit V: Comparative SWOT Analysis of Amazon and Emaar Amazon Strengths
• • •
Weaknesses
• • • •
Emaar
Market leadership on a global scale Cost leadership due to efficient cost structure Efficient customer relationship management
• • • •
Seasonality of the business • Low profit margins • Weak competitive position of Amazon’s Fire Phone Damage to the brand image due • to tax avoidance scandal in the UK 7
Government backing Successful business model Foreign expansion & diversification Strong regional partnerships Overexposure to Dubai Operations and funding strategy depending on local government Labor problems and quality issues
Souq.com and the Battle for the Future of E-Commerce in the MENA Region
Amazon • • Opportunities
• •
• • Threats
• •
Emaar
Diversification of e-commerce • business segment Increasing focus on own brand • products and services Increasing physical presence of the brand by maintaining stores Engagement in strategic collaborations with companies in e-commerce and affiliated industries
Consolidate position in domestic market through acquisitions International expansion and diversification of revenue into other industries
The loss of profitability due to • low profit margin Patent breach and other lawsuits against the company Waning of industry entry • barriers Threats to online security
Economic protectionism like tariffs on imported goods, restraining trade between countries, restrictive quotas, etc. Global economic downturn like the Great Depression, global recession etc.
3. If you were in Ronaldo Mouchawar’s place, what would your decision be? What are the implications for this decision going forward? From the previous discussion, Amazon seems to be a better potential suitor for Souq, even though it was offering less money. If one goes just by the money offered, Emaar’s bid is US$150 million higher and provides the shareholders of Souq a better upfront pay-out. The non-financial aspects of a deal are as important as the financial ones as the seller might want assurances that the business name will continue after the sale, etc. While entering into such deals, entrepreneurs need to pay close attention to issues such as: the differing goals of the buyer and seller; the emotional bias of the seller; and the reasons for the acquisition, in addition to the financial aspects. In this case, both the companies involved in the deal, Amazon and Souq, wanted to grow aggressively in the e-commerce space, and at the same time complement each other’s capabilities. Moreover, if one looks at it from a long-term orientation, which Mouchawar is likely to do considering his objective of opting for the sell out, he is more likely to go with the Amazon bid as it offers more potential synergies: The Amazon Viewpoint: •
Management and know-how: Souq is in tune with the tech-savvy Middle East consumer and the needs of the region. Through such expertise, Souq has revealed its ability to work across a number of smaller markets while competing with the logistical issues of the region and it provides vital skills for Amazon.
•
Location: Souq, being headquartered in Dubai, its markets – the UAE, Egypt, Saudi Arabia, Kuwait, Bahrain, Oman, and Qatar – offer major retail prospects at a time when local governments are looking to expand beyond oil. Souq’s acquisition gives a strategic foundation to e-commerce in Africa and Asia, and the local drive to support innovation, extensive audience reach, spending power, access to a wider consumer base, and a large platform for online retail.
•
Localized audience and appeals: Souq draws over 45 million visits per month with strong penetration and includes a network of at least 75,000 traders. Operating this network requires expertise in Arabic content, being familiar with local tastes and cultural sensitivities, and allowing localized payment options. Souq provides these for Amazon. 8
Souq.com and the Battle for the Future of E-Commerce in the MENA Region
•
Value proposition: As the Middle East’s largest online retail platform, Souq sells more than 8.4 million products across 31 categories. Its offers include books, an online supermarket, and a store-based Customer Experience Center format.
The Souq Perspective: •
Influence to disrupt: Amazon’s operational expertise, long-term prudence, global reach, membership leverage, and convenience services like Prime Now will lift Souq up. Amazon’s investment and partnership could lead to innovation.
•
Competing with Noon: With the entry of Noon, this deal puts Souq in a position to compete despite the Gulf funding behind Noon and the 20 million products it offers.
•
Amazon’s global marketplace reach: This will be a two-way benefit with Souq sellers gaining access to Amazon’s global reach and Amazon’s third-party sellers gaining visibility among the Middle East audience.
•
Amazon membership programs: Given the success of Prime and the membership program on Zappos, Souq should also launch its own membership program. This will bring it lots of data and directed promotional opportunities.
However, the way forward will not be without its challenges. Goods delivery will be a major challenge for Amazon in the Middle East due to the absence of an efficient postal service. To successfully deliver goods to users, Amazon along with Souq must focus on solving problems in two main areas – payments and delivery. Credit card use is more common in some areas than in others in the Middle East. For instance, unlike in Dubai, only about 10% of the population in Egypt have credit cards. Amazon must come up with alternative payment methods. For instance, Souq has created a prepaid card which can be purchased for cash at brick and mortar stores and then redeemed online. Amazon would have to overcome several challenges to succeed in the Middle East – consumer faith and responsiveness issues, customers’ lack of trust in online payments, distribution, and logistics infrastructure and emerging government policies. For instance, the sale of books in the Middle East was subjected to censorship for religious reasons, and selling the books across borders was a substantial challenge. Added to that, the lack of credit cards among customers and the lack of proper mailing addresses in many parts of the area, posed stiff challenges to Amazon.
EPILOGUE Finally, Amazon announced in March 2017 that it was going to enhance its presence in the Middle East by acquiring Souq for US$650 million. Mouchawar called the acquisition “a profound accomplishment for us as we have always strived for the empowerment of our partners, our merchants, our team, local entrepreneurs and every person at SOUQ.” 1 Amazon had a big responsibility to make the Souq acquisition work. As a counter move to Amazon’s entry into the Middle East, Emaar Malls had acquired a majority 51% stake in Namshi backed by Rocket Internet SE 2 for US$151 million. Analysts felt that this move would facilitate a position for Emaar Malls against the entry of Amazon in the Middle East region.
1
2
Todd Bishop, “Amazon Wins Bidding for Souq.Com, Announces Deal to Acquire Middle East ECommerce Giant,” www.geekwire.com, March 28, 2017. Rocket Internet SE is a German internet company headquartered in Berlin. 9
Souq.com and the Battle for the Future of E-Commerce in the MENA Region
Suggested Readings and References: Books 1.
Marios Katsioloudes and Arpi K Abouhanian, “The Strategic Planning Process: Understanding Strategy in Global Markets,” (Taylor & Francis, 2016).
2.
Benjamin Birkinbine, Rodrigo Gomez and Janet Wasko, “Global Media Giants,” (Routledge, 2016.
3.
Imed Limam, “Challenges and Reforms of Economic Regulation in MENA Countries,” (American Univ in Cairo Press, 2003).
4.
Christopher M. Schroeder, “Startup Rising: The Entrepreneurial Revolution Remaking the Middle East,” (St. Martin's Press, 2013).
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Coming to America: A Successful Japanese Acquisition in Global Business 1 Synopsis – The SoftBank-Sprint Merger: 2012-2019
The SoftBank-Sprint case is a descriptive/illustrative exercise that evaluates and discusses SoftBank’s acquisition of U.S.-based Sprint Corp. (hereafter Sprint). Sprint was the third largest mobile telephone operator at the time of the acquisition. In Japan, SoftBank was also one of the largest telecom and Internet firms. The case specifically evaluates those developments and activities that took place when SoftBank bought Sprint for $21.6 billion. The acquisition was the largest purchase by a Japanese company in the U.S. that brought a massive visibility to SoftBank. The case analyzes pre- and post-merger developments that made headlines in the telecom sector. Masayoshi Son founded SoftBank in Tokyo, Japan in 1981 after graduating from the University of California at Berkeley. Right from its inception, the company was led by its entrepreneurial CEO who became an Internet guru in Japan. In the nineties and 2000s, Son was often called The Bill Gates of Japan, Cyber-Mogul, Master of the Internet, Japan’s Mr. Internet, etc. 1 Started as a small firm, SoftBank grew by acquiring Internet, technology, and telecom companies in Japan, Europe and North America. SoftBank’s early acquisitions and company-specific ownerships (1990-2010) included Yahoo Japan, E-Trade-Japan, E-Trade Group, Buy.com, Concentric, ELoan, USWeb, ZDNet, Ziff-Davis, ZD-Comdex, Kingston Technology, SB Networks, and Japan Digital Broadcasting Services. By 2013, Softbank had become a major firm in the telecom industry after acquiring Sprint from the U.S. In 2014, SoftBank Group’s other companies and subsidiaries included SoftBank Mobile, Yahoo! Japan, GungHo online entertainment, Wireless City Planning, Brightstar Global Group, SoftBank Telecom Corp., Supercell Oy, Ymobile Corp., Alibaba, Renren, and InMobi Pte. Ltd. Because of SoftBank’s aggressive growth and expansion in global markets, Son became the largest billionaire in Japan in 2014. Analysts believe that Softbank will continue to be a major telecom and Internet firm in Japan. At the same time, the company will be impacted by heightened global competition. The case is intended to have students look at SoftBank’s acquisition of Sprint within the concepts of internationalization and global strategy areas. The case is appropriate for use in undergraduate and graduate classes.
This teaching note was prepared by Syed Tariq Anwar, Professor of Marketing and International Business at West Texas A&M University. The material in this case is intended to be used as a basis for classroom and academic discussion rather than to illustrate either effective or ineffective handling of a managerial situation and business practices. © 2019: Syed Tariq Anwar 1
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Use and Objectives
The main purpose of this case is to discuss SoftBank’s 2013 acquisition of Sprint and expansion in the U.S. The case is appropriate for use in international management course. The case will help students to understand a fast-changing telecom industry in the U.S. Suggested Courses: M.B.A.: Seminar in International Management. B.B.A.: International Management (senior level).
Conceptual Foundations
In the areas of M&As, firms’ core competencies, corporate culture, and expansion strategies play an important role. The three areas remain inherently grounded in designing firm-level strategies that help companies to grow and expand in domestic and global markets. Core competencies reveal companies’ history, evolutionary growth, and advantages regarding factors of production and other corporate areas. In firms’ M&As and internationalization, business models play an important role as well. Major topics in these areas include organic growth, acquisitions and expansion, internationalization, born global firms, globalization, etc. Companies’ regional growth and global operations can also help these areas and take various forms. Furthermore, internationalization and global strategies can impact firms’ survival and product planning.
Teaching Plan
The SoftBank-Sprint case requires a teaching plan that will encourage students to have discussions and class presentations. Also important are group-based activities, analysis, and simulations.
Discussion Questions and Answers
1. What are your views of SoftBank’s acquisition of Sprint in the U.S.’s telecom industry? Right from its inception, SoftBank wanted to grow by acquiring other firms in global markets. The company became a big name in the early stages of the Internet revolution. On many occasions, SoftBank remained one of the first-mover firms regarding buying technology companies. SoftBank was always interested regarding going beyond Japan. This could be attributed to Son’s entrepreneurial ambitions and personal networks which he developed in the early days of his career. In the last ten year, SoftBank developed a strong interest in the U.S. telecom market. This plan was finally materialized when the SoftBank-Sprint merger was materialized in 2013. 2. Investigate and discuss SoftBank and Sprint’s core competencies in Japan and the U.S.? As an established brand, SoftBank’s core competencies are in the areas of technology, customer service, logistics, and market reachability. The company is a household name in Japan and remains -2-
a market leader in many segments. On the other hand, Sprint has a good brand name and competitive infrastructure in the industry. The company is the third largest carrier in the U.S. after AT&T and Verizon. In 2013, AT&T had 109,460,000 subscribers with a market share of 34.4 percent. Verizon carried 101,150,000 subscribers and a market share of 31.8. As the third largest wireless carrier, Sprint maintained 53,252,000 subscribers with a market share of 16.7. These figures reveal that it will a while for SoftBank to strengthen its position in the U.S. telecom industry. In the area of wireless broadband coverage in 2013, Verizon stood first followed by Sprint and AT&T. Consumer growth is expected to saturate in the U.S. These trends will definitely impact all the three carriers that compete in the telecom sector. 2 3. Analyze and discuss the changing telecom industry (as of 2020) in the U.S.? According to the S&P NetAdvantage data published in January 2014, the industry’s “wireless penetration rate” in 2002 stood at 48 percent and increased to 83 percent in 2007. In 2013, this penetration rate reached to 104 percent which was a strong factor behind SoftBank’s ambitious plans for the U.S. telecom market. 3 Although the telecom industry in the U.S. has surged in its consumers, competition in the sector remains a major roadblock for new entrants. The industry is highly segmented and competitive in prices. According to industry analysts, in the coming years, the U.S., wireless companies will seek growth through acquisitions, economies of scale, new technologies, infrastructural investments and competitive services. 4 These changes will impact SoftBank and others in their future growth plans. At the same time, opportunities will be available to those telecom firms that employ new technologies and price cuts. 4. What lies ahead for Sprint in the telecom sector? Sprint continues to be a major telecom firm in the U.S. although it lags behind AT&T and Verizon in market share. To deal with its limited clout in the market, the company is interested in merging with Germany’s T-Mobile which maintains a good infrastructure and networks in the U.S. This move can help the company to secure its market position and future growth. 5. What did you learn from the SoftBank-Sprint merger? The SoftBank-Sprint case is a timely exercise in the telecom industry that deals with growth, heightened competition, and corporate strategies. In the case, we learn that M&As are important particularly in global expansion. We also learn that the telecom industry continues to grow and expand in global markets, creating millions of new consumers. The case sheds light on two telecom firms that remain competitive in Japan and the U.S. because of their niche strategies and business models. At the same time, the telecom industry in the U.S. is an industry that is expected to slowdown in its multi-faceted segments and value chains. The industry is made up of three large firms that remain intertwined in their local markets. Finally, SoftBank’s acquisition of Sprint shows its appetite for the U.S. market and was the main factor behind its market entry into the U.S. -3-
Analysis
The SoftBank-Sprint case is a timely exercise in international management and global strategy. The case is particularly useful when dealing with M&As, organic growth, and internationalization. Within these perspectives, companies’ core competencies and corporate strategies play an important role. SoftBank is definitely in a better position in Japan because of its large-scale network, established brands, and infrastructure. By being the third largest carrier in the U.S. market, Sprint had struggled in its market share and growth. This was a major factor behind negotiating with SoftBank for long-term growth and survival. At the same time, both companies displayed acceptable growth plans and growth potential. SoftBank’s leadership is definitely focused on long-term plans and its capital base. Both firm are familiar with their respective markets, customers, and value chains. At the same time, SoftBank is in a stronger position because of its large market base and network of companies in Japan. SoftBank also has an efficient business model that makes the company to be a competitive player. As of 2019, SoftBank and Sprint are expected to seek growth and expansion in the U.S. by seeking a merger with T-Mobile. If approved, the tip-up can be a win-win strategy for both firms.
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Appendix Supplementary Readings Globalization Bohn, T., Brakman, S., & Dietzenbacher, E. (2018). The role of services in globalization. World Economy, 41(10), 2732–2749. Dewhurst, M., Harris, J., & Heywood, S. (2011). Understanding your 'globalization penalty'. McKinsey Quarterly, (3), 12-15. Eckhardt, G. M., & Mahi, H. (2012). Globalization, consumer tensions, and the shaping of consumer culture. Journal of Macromarketing, 32(3), 280-294. Jensen, T., & Sandström, J. (2011). Stakeholder theory and globalization: The challenges of power and responsibility. Organization Studies, 32(4), 473-488. McCann, P., & Acs, Z. J. (2011). Globalization: Countries, cities and multinationals. Regional Studies, 45(1), 17-32. Morselli, A. (2018). From the Nation-State to a World Society: An Institutional Reading of Globalization. Journal of Economic Issues (Taylor & Francis Ltd), 52(3), 653–675. St. John, Edward, P. (2013). Social justice and globalization. Harvard International Review, 35, 45-49. Potrafke, N. (2019). The globalization–welfare state nexus: Evidence from Asia. World Economy, 42, 959–974. 2019. van Jaarsveld, D. D., & Zuberi, D. M. (2011). Globalization and the service workplace. American Behavioral Scientist, 55(7), 815-822. Wood, S. (2014). The transformation of employment relations in Europe: Institutions and outcomes in the age of globalization. Industrial & Labor Relations Review, 67(3), 1045-1048. The World Bank. (2018). Doing business 2018, Washington, DC: The World Bank. Zhang, Y., & Roelfsema, H. (2014). Globalization, foreign direct investment, and regional innovation in China. Journal of International Commerce, Economics & Policy, 5(3), 1-25.
Global Strategy and Internationalization Issues Argote, L. (2015). An opportunity for mutual learning between organizational learning and global strategy researchers: Transactive memory systems. Global Strategy Journal, 5, 198-203. Bhattacharya, A. K., & Michael, D. C. (2008). How local companies keep multinationals at bay, Harvard Business Review, (March), 85-95.
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Cuervo‐Cazurra, A., Mudambi, R., Pedersen, T., & Piscitello, L. (2017). Research methodology in global strategy research. Global Strategy Journal, 7(3), 233-240. Cuervo‐Cazurra, A., Mudambi, R., & Pedersen, T. (2018). The boundaries of the firm in global strategy. Global Strategy Journal, 8(2), 211-219. Etgar, M., & Rachman-Moore, D. (2010). Geographical expansion by international retailers: A study of proximate markets and global expansion strategies. Journal of Global Marketing, 23(1), 5-15. Ghemawat, P. (2007). Redefining global strategy: Crossing borders in a world where differences still matter, Boston, Massachusetts: Harvard Business School Press. Griffith, D. A. (2010). Understanding multi-level institutional convergence effects on international market segments and global marketing strategy, Journal of World Business, 45(1): 59-67. Hennart, J-F. (2009). Down with MNE-centric theories! Market entry and expansion as the bundling of MNE and local assets. Journal of International Business Studies, 40, 1432-1454. Holburn, G. L. F., & Zelner, B. A. (2010). Political capabilities, policy risk, and international investment strategy: evidence from the global electric power generation industry. Strategic Management Journal, 31(12), 290-1315. Lee, H. S., & Griffith, D. A. (2012). Transferring corporate brand image to local markets: Governance decisions for market entry and global branding strategy. Advances in International Marketing, 11(23), 3965. Li, J. (2011). Rethinking international and global strategy. Global Strategy Journal, 1(3‐4), 275-278. Tallman, S. (2009). Global strategy, New York: John Wiley & Sons. Turner, C., & Gardiner, P. D. (2007). De-internationalization and global strategy: the case of British Telecommunication (BT), Journal of Business and Industrial Marketing, 22(7), 489-497. Wilson, K., & Doz, Y. L. (2012). 10 rules for managing global innovation. Harvard Business Review, 90(10), 84-90. Yip, G. S. (2003). Total global strategy II, New York: Prentice Hall.
Strategic Management-Related Areas Bettis, R., Gambardella, A., Helfat, C., & Mitchell, W. (2014). Quantitative empirical analysis in strategic management. Strategic Management Journal. 35, 949-953. Huesch, M. D. (2013). Are there always synergies between productive resources and resource deployment capabilities? Strategic Management Journal, 34(11), 1288-1313. Lafley et al., A. G. (2012). Bringing science to the art of strategy. Harvard Business Review, (September), 56-66.
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Mintzberg, H., Ahlstrand, B., & Lampel, J. (1998). Strategy safari: A guided tour through the wilds of strategic management, New York: The Free Press. Porter, M. E. (2008). The five competitive forces that shape strategy, Harvard Business Review, (January), 79-93. Posen, H. E., Lee, J., & Yi, S. (2013). The power of imperfect imitation. Strategic Management Journal, 34(2), 149-164. Reeves, M., Love, C., & Tillmanns, P. (2012). Your strategy needs a strategy. Harvard Business Review, (September), 76-83. Siggelkow, N. (2002). Evolution toward fit, Administrative Science Quarterly, 47(1): 125159.
Telecommunications Industry Amin, A., Al-Obeidat, F., Shah, B., Adnan, A., Loo, J., & Anwar, S. (2019). Customer churn prediction in telecommunication industry using data certainty. Journal of Business Research, 94, 290–301. Arrive, T. J., Feng, M., Yan, Y., & Chege, S. M. (2019). The involvement of telecommunication industry in the road to corporate sustainability and corporate social responsibility commitment. Corporate Social Responsibility & Environmental Management, 26(1), 152–158. Asimakopoulos, G., & Whalley, J. (2017). Market leadership, technological progress and relative performance in the mobile telecommunications industry. Technological Forecasting and Social Change, 123, 57-67. Coussement, K., Lessmann, S., & Verstraeten, G. (2017). A comparative analysis of data preparation algorithms for customer churn prediction: A case study in the telecommunication industry. Decision Support Systems, 95, 27–36. Guo, L., Zhang, M., Dodgson, M., & Cai, H. (2017). An integrated indicator system for patent portfolios: evidence from the telecommunication manufacturing industry. Technology Analysis & Strategic Management, 29(6), 600–613. Okoeguale, K., & Loveland, R. (2018). Competition and merger activity in the U.S. telecommunications industry. Journal of Financial Research, 41(1), 33-65. Stadnicka, D., & Ratnayake, R. (2017). Enhancing performance in service organizations: A case study based on value stream analysis in the telecommunications industry. International Journal of Production Research, 55(23), 6984-6999.
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Endnotes 1
For more information on SoftBank’s evolutionary growth, see: Anwar, S. T. (2002). Softbank Corp.: Internet and Web-related acquisitions, market expansion and global strategies in 2001/02, in Deresky, H., Global Management: Strategic and Interpersonal, Upper Saddle River, New Jersey: Prentice Hall: 336-351.
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For more information, see: Snyder, K., & Young, J. Y. (2019). Industry surveys: Telecommunications, (January), New York: CFRA, S&P Global; Nef, W. C. (2019). Sprint Corp., New York: Value Line, Inc. 3
Ibid, p. 1.
4
Ibid, p. 1.
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8B18C012
Teaching Note DAIMLER CHINA: FACING A MEDIA FIRESTORM
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Wolfgang Messner and Hyo Jin Yoon wrote this teaching note as an aid to instructors in the classroom use of the case Daimler China: Facing a Media Firestorm, No. 9B18C012. This teaching note should not be used in any way that would prejudice the future use of the case.
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This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Version: 2018-05-01
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Copyright © 2018, Ivey Business School Foundation
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CASE SYNOPSIS
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Rainer Gärtner is the chief executive officer (CEO) of Daimler Trucks and Buses China Ltd., the Chinese heavy-duty segment of the multinational automobile manufacturer Daimler AG (Daimler). Two years into his latest promotion, Gärtner faces a discomforting situation that could bring an abrupt halt to his career. In November 2016, an unfortunate incident in a neighbourhood parking lot, where Gärtner lost his temper, led to fierce outrage in the local and worldwide media, not only over his inappropriate conduct but also the Daimler corporate culture.
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Gärtner and a Chinese driver, who were both trying to park in the same spot at the same time, engaged in a quarrel that ended with Gärtner screaming racial slurs and using pepper spray on bystanders. The case delves into what could have caused the volatile scene, especially given Gärtner’s long-standing corporate experience in different parts of the world. It gives a brief overview of the Chinese automobile industry and Daimler’s entrance into the Chinese market, underscoring China’s prominence as the major source of revenue for Daimler. Given the importance of the Chinese market, the media reaction to Gärtner’s racial tirade brings home the possible consequences for Daimler.
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The situation became delicate, given the explosive viral spread of the incident in the media and a separate yet related episode involving Günther Oettinger, the European Commissioner for Digital Economy and Society from Germany, whose racial outburst caused diplomatic tension between Germany and China. The case concludes by highlighting the drop in Daimler share price following the incident. What should Daimler’s next move be to restore its brand image? LEARNING OBJECTIVES
After completing this case, students should be able to do the following: • •
Describe how frustration can build in international assignments, especially expatriate assignments. Suggest how corporations can prepare their employees for cross-cultural assignments to mitigate the risk of culture shock.
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Appreciate how a social media firestorm can influence brand value, and counter with an appropriate corporate communication strategy. Estimate the costs of making employees redundant, and recognize differences between countries caused by different legal requirements.
POSITION IN COURSE
The case is appropriate for undergraduate, graduate, and executive education courses in international management, intercultural communication, and international human resource management.
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RELEVANT READINGS
Charles W. L. Hill, International Business: Competing in the Global Marketplace, 9th Edition (New York, NY: McGraw-Hill/Irwin, 2012), Chapter 19: Global Human Resource Management, 614–641.
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The case can be used as a supplement to a classical textbook chapter on global human resource or expatriate management, such as the following:
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Geert Hofstede, “Dimensionalizing Cultures: The Hofstede Model in Context,” Online Readings in Psychology and Culture 2, no. 1 (2011): 1–26. Robert House, Mansour Javidan, Paul Hanges, and Peter Dorfman, “Understanding Cultures and Implicit Leadership Theories across the Globe: An Introduction to Project GLOBE,” Journal of World Business 37, no. 1 (2002): 3–10. Erin Meyer, “Getting to Si, Ja, Oui, Hai, and Da,” Harvard Business Review 93, no. 12 (2015): 74–80.
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To position the class discussion about cultural differences between Gärtner (originally from Germany) and his host country China, it may be useful to have students look at frameworks of distinguishing cultures while preparing the assignment questions:
After the case discussion, it is worthwhile to assign readings on the Developmental Model of Intercultural Sensitivity (DMIS) and the acculturation curve. Both topics make for good exam questions:
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Milton J. Bennett, “A Developmental Approach to Training for Intercultural Sensitivity,” International Journal of Intercultural Relations 10, no. 2 (1986): 179–196. Geert Hofstede, Culture’s Consequences: Comparing Values, Behaviors, Institutions, and Organizations across Nations (Thousand Oaks, CA: Sage, 2001), 424–429.
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ASSIGNMENT QUESTIONS
1. Rainer Gärtner’s racial tirade not only led to a firestorm on social and mainstream media around the world, but also sent Daimler’s share price on a downhill journey. What should Daimler do now? 2. Can Daimler fire Gärtner? What is the legal situation? Is it ethical to fire him? 3. A seemingly small quarrel about a parking space started Gärtner on an aggressive tirade. Why was this the last straw? What could have caused Gärtner’s frustration? 4. How can companies prepare their expatriates and international sojourners to prevent such dire situations?
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TEACHING PLAN
The exhibits in the case and teaching note are available in the accompanying PowerPoint presentation for easy classroom adoption (see Ivey Product 5B18C012). ANALYSIS 1. Rainer Gärtner’s racial tirade not only led to a firestorm on social and mainstream media around the world, but also sent Daimler’s share price on a downhill journey. What should Daimler do now?
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CEO Country head, China Head of public relations and communications Head of (international) human resources
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This question can be rephrased as “How does Daimler decide internally on the next course of action?” There will likely be myriad suggestions from students that are completely detached from corporate reality. The realistic first step at Daimler would be a conference call with the following key decision makers:
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It is unlikely that Gärtner would be on this first call because a decision about him needs to be made.
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Role Play
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The conference call opens the possibility for a role play, which is especially suited for a class with international students from Germany (or Central Europe) and China (or Asia). Ask for volunteers, and try to have a German student play the role of CEO and a Chinese student the role of country head in China. The other two roles can be played by students from any nationality.
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Give the students about 10 minutes to prepare for the call, especially what they want to achieve on the call given the role they are playing in the organization. Ask the other students to join the role players for this preparation. It is helpful to join the team around the head of international human resources and brief students on the legality of firing Gärtner (see Question 2). Then join the team of the CEO, which is likely to have already developed suggestions. It is important to explain that the CEO is going to lead and moderate the discussion and demand a go-forward plan, but not dominate the discussion by proposing a solution in the first place. The other two roles are not as critical for a realistic outcome of the conference call; these students are usually able to establish goals on their own. The simulated conference call will take about 20 minutes, in which students will likely come up with all kinds of unrealistic solutions, such as taking the Daimler share from the stock market. It is the CEO’s job to turn unrealistic or polemic suggestions down. If this does not happen, the instructor should quickly step in and clarify this point. Suggestions such as hiring a public relations firm will also not work, because the time bomb of the falling share price needs to be stopped immediately. A multinational company like Daimler has established communication departments and external partners. At this point, it is also not appropriate to start a fact-finding mission on what really happened in the parking lot, since it will not stop or revert the negative public relations. Corporate decision-making and action is required.
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Realistic suggestions include the following: • • •
End Gärtner’s expatriate assignment in China and call him back to Germany. Communicate this action with a press release. Fire Gärtner immediately and deal with potential legal implications later. Communicate this action in a press release. Any of the previous two measures, plus have the CEO immediately fly out to China to address the public and press jointly with the country head in China.
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If there are students from different nationalities involved in the role play, cultural predisposition will probably influence how they participate in the discussion, and how much initiative they show in finding a solution. This can be a good learning experience in intercultural communication strategies.
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Case Update
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As a follow-up to the role play, the instructor can give information on how Daimler reacted in this case (see the What Happened section of this teaching note). This brings the discussion to the next question.
Reasons for Firing an Employee
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Is there a valid legal reason for Daimler to fire Gärtner? What are the costs of firing employees? Is it ethical to fire Gärtner?
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This discussion can be structured as three distinct parts:
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2. Can Daimler fire Gärtner? What is the legal situation? Is it ethical to fire him?
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Whether you can legally fire employees is not an easy question. The law is relatively and increasingly protective of employees. Fired employees are frequently suing their companies for wrongful termination, creating nasty and expensive lawsuits with negative publicity for the company. The following reasons generally hold up when firing employees: 1
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Consistent incompetence—An employee does not do a competent job and has been given reasonable opportunity to succeed. Violation of company policy—An employee has, in a meaningful way, violated clearly established company policies, such as anti-harassment, discrimination, or confidentiality. Repeated unexcused absenteeism or tardiness—Unexcused continual absence or tardiness jeopardizes an employee’s ability to complete important tasks. Note that medical conditions need to be accommodated, or at least attempted to be accommodated. Physical violence—An employee is committing or threatening physical violence. Employers have to take reasonable steps to ensure a safe work environment for everyone. Drugs and alcohol—An employee is under the influence at work. Note that some prescribed drugs may also cause these conditions, which requires a milder response by the employer. Illegal acts—An employee has committed illegal acts, such as theft or accounting embezzlement. Falsified information—An employee has deliberately lied on an employment application or resume, for example, listing fake degrees or jobs never held.
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Gärtner’s actions could fall under two points on the above list: Violation of company policy and Physical violence. However, the quarrel about the parking space happened in Gärtner’s private domain, rather than at the workplace. Therefore, there does not appear to be a valid legal reason for Daimler to fire Gärtner. Severance Payment
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If Gärtner is made redundant by Daimler (but there is no valid legal reason to fire him), Daimler would work with him to agree on a severance pay provision to avoid lengthy court proceedings and negative publicity. The minimum amount awarded by German courts is 50 per cent of a monthly salary per year of service. However, depending on Daimler’s previous practice and the strength of the case, this amount can be significantly higher. 2
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Ethical Aspects
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Regardless of the legal situation, is it ethical for Daimler to fire Gärtner? To motivate a discussion, it is helpful to ask students what they have learned from the case.
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Students’ responses tend to fall into two categories. Some students point out that companies are in the business of making money. By making money, they ensure not only their economic survival, but also the financial well-being of their employees and shareholders. Other students are likely to emphasize that, irrespective of the profit question, being ethical, just, and fair to everyone makes a company a “good” company. In the long term, this strategy may be worth a lot more.
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Respect core values as the minimum ethical standard, which includes the golden rule of reciprocity: Do not do to others what you don’t want done to yourself. Respect (local) law, customs, and traditions. Take context into consideration when deciding what to do.
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Generally, ethical behaviour should be guided by three principles: 3
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Companies should not only pay attention to the content of a decision (Is it ethical? Is it right?), but also to how it is implemented and communicated (Is it leading to success or failure?). Companies such as Daimler need to consider both perspectives when deciding on a course of action and manage the consequences of their actions (see Exhibit-TN 1). 4 3. A seemingly small quarrel about a parking space started Gärtner on an aggressive tirade. Why was this the last straw? What could have caused Gärtner’s frustration?
Two models help to focus this discussion: (1) the acculturation curve and (2) DMIS. Acculturation Curve When having to adjust to a new environment, positive excitement about the thrill of doing something new is often followed by anxiety, irritation, and frustration. Intercultural encounters and expatriate assignments are prime examples of people being moved outside their comfort zone and into a new environment. This process of meeting another culture and the cultural modification of an individual by adapting to or even borrowing traits from the new culture is known as acculturation. It is worthwhile to highlight this definition to students.
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The word “acculturation” was first introduced by John Wesley Powell (1834–1902), a U.S. soldier, geologist, and explorer of the American West, in his book Introduction to the Study of Indian Languages (Smithsonian Institution, 1877). 5 It consists of the parts ad- (a prefix meaning toward; ad usually becomes ac before c, k, or q), culture, and -ation (a noun suffix meaning the action or process of doing something). Acculturation has a few quite closely related terms, which all refer to changes caused by cross-cultural contact. The Merriam-Webster dictionary explains the differences between them:
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Acculturation is often tied to political conquest or expansion, and is applied to the process of change in beliefs or traditional practices that occurs when the cultural system of one group displaces that of another. Assimilation refers to the process through which individuals and groups of differing heritages acquire the basic habits, attitudes, and mode of life of an embracing culture. Amalgamation refers to a blending of cultures, rather than one group eliminating another (acculturation) or one group mixing itself into another (assimilation). 6
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When people are moved into a new environment, there is a quite natural and subconscious tendency to repeat successful response and behaviour patterns that worked well earlier. People simply assume that what they are used to and familiar with is the one and only right way. When they think that anything different cannot be accepted as right, they end up with judgment. When they are getting stuck with their assumptions and judgment, they feel confused and insecure, but also frustrated and shocked. 7 This shift of feelings over time can be shown in a U-shaped curve with four phases (see Exhibit TN-2), which was first described by Sverre Lysgaard in 1955 as one of the first models of intercultural adjustment. 8
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Working with foreigners is perceived as positive and truly enriching in the sense of being an eye-opener on how things function outside of one’s own cultural mindset. Entering a neutral mindset—that is, working with foreigners—is just about as good as working with home-culture-only colleagues. Staying within a negative mindset. The sojourner continues to experience problems, either at the workplace or on the private home front. The former can be related to project deliverables or team collaboration, while the latter can be seemingly small things like language, food, or climate.
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There is usually a short phase of euphoria at the beginning of the acculturation curve. When moving into a new environment, one hopes for many things, but reality usually looks quite different. Few things turn out as planned. This difference between positive anticipation and negative experience ultimately leads to frustration and a decline in performance, commonly referred to as culture shock (phase II). Through acculturation (phase III), the international sojourner needs to overcome culture shock and move toward a more positive state of mind. In phase IV, the sojourner can be in a spectrum of stable states: 9
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Not everyone needs to perceive a new culture as a shock; however, everyone needs to adjust and learn to be effective in a new situation. Gärtner spent about a year in China after participating in a corporate leadership development program, promotion, and relocation from South Korea. Ask students in which phase of the acculturation curve he might be. A likely response (based on the events described in the case and the time spent in China) is the second phase (culture shock). Private life in China is different from South Korea. Even though they are Asians, South Koreans are different from Chinese. Gärtner has to go through a new acculturation process. Unknowingly, he continues to use behaviours in China that earlier worked for him in South Korea and Germany. He gets stuck in the process, which leads to irritation. His outburst about all Chinese being bastards is a clear sign of frustration.
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Some students may doubt that South Korea and China are very different in terms of cultural values. It is possible to use the culture dimensions of the GLOBE study (or the Hofstede dimensions) to work out the differences between South Korea, China, and Germany (Gärtner’s home country). 10 Developmental Model of Intercultural Sensitivity Stages and strategies of dealing with cultural differences are described in cultural growth models, such as DMIS, created by Milton J. Bennet in 1986 (see Exhibit TN-3). 11 DMIS helps to explain how international sojourners feel about and go through cultural differences by using ideas from constructivist psychology and communication theory:
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The underlying assumption of the model is that as one’s perceptual organization of cultural difference becomes more complex, one’s experience of culture becomes more sophisticated and the potential for exercising competence in intercultural relations increases. By recognizing how cultural difference is being experienced, predictions about the effectiveness of intercultural communication can be made and educational interventions can be tailored to facilitate development along the continuum. 12
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DMIS maps this journey of going through cultural differences on a developmental continuum of six stages, ranging from ethnocentrism to ethnorelativism. Ethnocentrism is the belief that one’s own culture, people, and worldview are the centre of the world, while ethnorelativism admits that differences exist and are valid. People who have reached the ethnorelative stage generally do not perceive cultural differences as a shock. Therefore, culture shock is not an objective reality but is related to an individual’s subjective intercultural developmental stage. More or less familiarity with particular cultures does not change one’s level of sensitivity, although it affects the breadth of competence one can enact. Ask students in what stage of DMIS they would consider Gärtner to be (see case Exhibit TN-3).
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Given the case facts, Gärtner is most likely on the second stage (defense). A person in this stage is characterized as generally perceiving cultural differences as threatening, creating negative stereotypes with negative attributes to foreigners, and perceiving their own culture to be superior. Using pepper spray against someone is akin to a defensive action.
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4. How can companies prepare their expatriates and international sojourners to prevent such dire situations?
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Brainstorm with students on what kind of intercultural interventions are available; that is, how can companies help their employees move toward a more ethnorelative stage? Students usually come up with the following ideas: • • • •
Intercultural training (one-to-many in a classroom) Coaching (one-to-one) Competency assessments in the form of questionnaires Experience through exposure to other cultures
Motivate students to bring a logical flow to these interventions and draft an intercultural competence development model. Intercultural competencies can be developed in four steps: (1) assess competencies and provide training; (2) experience the challenge; (3) collect feedback and monitor performance; and (4) support coaching. 13
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The first step is to assess an international sojourner’s intercultural competences and position in the cultural growth model. The second step is about learning-by-doing through real-life cultural exposure. The key to cultural growth is real-life challenge. 14 In many international organizations, the cycle stops here. However, if steps 1 and 2 are not followed up, international sojourners are likely to fall back to their old patterns in which they used to be comfortable. Therefore, in a third step, a sojourner’s actual performance in an intercultural setting should be closely monitored, and, in a fourth step, supported with individually designed coaching activities.
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It is useful to discuss the various forms of intercultural training with students because they may be involved in organizing an intercultural intervention measure for their companies. Intercultural training is a formal effort to prepare employees for job success through more effective interpersonal relations when they interact extensively with individuals from other cultures. The objective is to help employees cope with all sorts of incidents in a different culture. 15
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Culture-general and didactic training: Explains how culture influences communication and collaboration styles, management and leadership practices, and interpersonal behaviour. Culture-specific and didactic training: Imparts specific information about a country’s history, economy, society, and the business environment. Language courses and cultural assimilator exercises are the most prominent forms. Culture-general and experiential training: Lets participants experience the invisible grip of culture through simulations and self-assessments. Culture-specific and experiential training: Gives participants an idea of the values, attitudes, and expected norms of a specific culture through role plays and contrast-culture comparisons.
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In the 1970s and early 1980s, preparing people for intercultural encounters was viewed as a process of orientation to behavioural differences in social interactions. In the late 1980s, it was realized that people need to be prepared for more than just to live abroad, and the focus shifted to introducing and practising culturally appropriate behaviour. Today, intercultural training can be differentiated by two criteria: the process or method (didactic as opposed to experimental) by which the training is delivered, and the content (culture-general as opposed to culture-specific) of the training: 16
The intercultural training business is unregulated; there is no certification that allows human resources departments to easily distinguish between providers.
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Formal training in intercultural communication and its academic concepts Working and living in the target culture for a number of years, making the industry and workplace dynamics just about as important as culture Recent real-life exposure to the target culture—especially important for emerging markets, where the industry is changing fast
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Wrap up the discussion with the following characteristics of a good intercultural trainer:
It is not necessary for an intercultural trainer to be a citizen of the target country. WHAT HAPPENED
One day after the incident, Daimler Trucks and Buses China Ltd. apologized in an email statement, indicating it was “deeply sorry” and emphasizing that “such an incident reflects in no way the values of Daimler AG.” 17 As public criticism mounted, however, Daimler was forced to make an immediate
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announcement that Gärtner was removed from his post. 18 Although the decision stopped the storm in the Chinese media, Daimler did not make any comments on whether Gärtner was completely released from the company or was pending to another post. The British tabloid newspaper The Sun claims to know that he was not fired. “He was removed from his job in China and now faces an investigation into his behaviour in Germany.” 19 There was no further investigation into the matter by Chinese authorities. 20
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As of January 2018, Gärtner had completely vanished from professional and social media; his LinkedIn profile was no longer accessible, and Daimler’s press communication department did not respond to inquiries about Gärtner. It is therefore likely that Gärtner no longer works for Daimler, and that the two parties have agreed on a settlement.
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EXHIBIT TN-1: DECISION-MAKING FRAMEWORK SHOWING ETHICAL AS WELL AS IMPLEMENTATION AND COMMUNICATION PERSPECTIVES
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Source: Created by the authors with information from Ashish Nanda, Thomas J. DeLong, and Stephanie L Woerner, Tim Hertach at GL Consulting Series, Teaching Note, reference no. 5-801-029 (Boston, MA: Harvard Business School Publishing, September 22, 2000).
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8B18C012 EXHIBIT TN-2: ACCULTURATION CURVE
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The acculturation curve describes the change of feelings over time when an individual meets another culture and goes through a process of modification by adapting to or even borrowing traits from the new culture.
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Source: Created by the authors with information from Geert Hofstede, Culture’s Consequences: Comparing Values, Behaviors, Institutions, and Organizations across Nations (Thousand Oaks, CA: Sage, 2001); Sverre Lysgaard, “Adjustment in a Foreign Society: Norwegian Fulbright Grantees Visiting the United States,” International Social Science Bulletin 7 (1955): 45–51; Wolfgang Messner, Intercultural Communication Competence (Bangalore, India: GloBus Research, 2013).
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8B18C012 EXHIBIT TN-3: DEVELOPMENTAL MODEL OF INTERCULTURAL SENSITIVITY
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DMIS maps the journey of going through cultural differences on a developmental continuum of six stages, ranging from ethnocentrism to ethnorelativism.
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Source: Created by the authors with information from Milton J. Bennett, “DMIS: The Developmental Model of Intercultural Sensitivity,” IDR Institute, 2014, accessed December 7, 2017, www.idrinstitute.org/page.asp?menu1=15; Wolfgang Messner, Intercultural Communication Competence (Bangalore, India: GloBus Research, 2013).
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ENDNOTES AllBusiness.com, “When Can You Legally Fire Employees?” New York Times, August 25, 2008, accessed December 8, 2017, www.nytimes.com/allbusiness/AB11480372_primary.html?pagewanted=print. 2 “Termination of an Employment Contract in Germany,” How to Germany, accessed December 8, 2017, https://www.howtogermany.com/pages/termination-employment-contract.html. 3 Thomas Donaldson, “Values in Tension: Ethics Away from Home,” Harvard Business Review 74, no. 5 (1996): 48–62. 4 Ashish Nanda, Thomas L. DeLong, and Stephanie L Woerner, Tim Hertach at GL Consulting Series, Teaching Note, reference no. 5-801-029 (Boston, MA: Harvard Business School Publishing, September 22, 2000). 5 Gregory Lewis McNamee, “John Wesley Powell: American Explorer, Geologist, and Ethnologist,” Encyclopædia Britannica, accessed January 25, 2018, https://www.britannica.com/biography/John-Wesley-Powell; “Acculturation,” Merriam-Webster, accessed December 7, 2017, https://www.merriam-webster.com/dictionary/acculturation. 6 “Acculturation,” op. cit. 7 Wolfgang Messner, Intercultural Communication Competence (Bangalore, India: GloBus Research, 2013). 8 Geert Hofstede, Cultures and Organizations: Software of the Mind (New York, NY: McGraw-Hill, 1991); Sverre Lysgaard, “Adjustment in a Foreign Society: Norwegian Fulbright Grantees Visiting the United States,” International Social Science Bulletin 7 (1955): 45–51. 9 Wolfgang Messner, op. cit., 52–53. 10 Robert J. House, Paul J. Hanges, Mansour Javidan, Peter W. Dorfman, and Vipin Gupta, Culture, Leadership, and Organizations: The GLOBE Study of 62 Societies (Thousand Oaks, CA: Sage Publications, 2004); Geert Hofstede, Cultures and organizations: Software of the Mind (New York, NY: McGraw-Hil, 1991). 11 Milton J. Bennett “A Developmental Approach to Training for Intercultural Sensitivity,” International Journal of Intercultural Relations 10, no. 2 (1986): 179–196; Milton J. Bennett, “DMIS: The Developmental Model of Intercultural Sensitivity,” IDR Institute, 2014, accessed December 7, 2017, www.idrinstitute.org/page.asp?menu1=15. 12 Milton J. Bennett, “DMIS: The Developmental Model of Intercultural Sensitivity, op. cit. 13 Robert F. Bruner, Robert M. Conroy, and Scott A. Snell, “The Development of General Management Capabilities in a Global World,” In Leadership Development in a Global World, ed. Jordi Canals (Houndmills, UK: Palgrave Macmillan, 2012), 3–28; Boris Groysberg and Amanda Cowen, Developing Leaders, Harvard Business School Background Note (Cambridge, MA: Harvard Business School, 2007); Wolfgang Messner, “Measuring Existent Intercultural Effectiveness in Global Teams,” International Journal of Managing Projects in Business 8, no. 1 (2015): 107–132. 14 Boris Groysberg and Amanda Cowen, op. cit. 15 Richard W. Brislin and Tomoko Yoshida, Intercultural Communication Training: An Introduction (Thousand Oaks, CA: Sage, 1994); P. Christopher Earley, “Intercultural Training for Managers: A Comparison of Documentary and Interpersonal Methods,” Academy of Management Journal 30, no. 4 (1987): 685–698. 16 Dharm Bhawuk and Richard Brislin, “Cross-Cultural Training: A Review,” Applied Psychology: An International Review 49, no. 1 (2000): 162–191; W. Gudykunst and M. Hammer, “Chapter 5, Basic Training Design: Approaches to Intercultural Training,” in Handbook of Intercultural Training, eds. Dan Landis and Richard W. Brislin (New York, NY: Sage, 1983); Dirk Holtbrügge and Katrin Schillo, “Managing from a Distance: Virtual Delegation to India,” in Rightshore! Successfully Industrialize SAP Projects Offshore, eds. Anja Hendel, Wolfgang Messner, and Frank Thun (Heidelberg: Springer, 2008); Wolfgang Messner, “Measuring Existent Intercultural Effectiveness in Global Teams,” International Journal of Managing Projects in Business 8, no. 1 (2015): 107–132. 17 “Daimler Expresses Regret over Chinese Parking Row Involving Senior Manager,” Reuters, November 21, 2016, accessed March 19, 2018, www.reuters.com/article/us-daimler-china/daimler-expresses-regret-over-chinese-parking-row-involvingsenior-manager-idUSKBN13G19O. 18 Chris Buckley, “Daimler Executive Is Removed after Accusations of Insulting Chinese,” New York Times, November 22, 2016, accessed December 12, 2017, https://www.nytimes.com/2016/11/22/world/asia/china-daimler-rainer-gartner.html. 19 Rhodri Phillips, “Park and Riled: Daimler’s Boss’s ‘Racist Meltdown’ in Chinese Car Row Causes Outrage after German Exec Is NOT Sacked,” The Sun, November 23, 2016, accessed January 22, 2018, https://www.thesun.co.uk/news/2243594/daimler-bosss-racist-meltdown-in-chinese-car-row-causes-outrage-after-germanexec-is-not-sacked/. 20 “Daimler Chief Removed after ‘Racist Rant’ in China,” BBC News, November 22, 2016, accessed January 25, 2018, www.bbc.com/news/business-38062059.
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Daimler China: Facing a Media Firestorm [From accompanying PPT]
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Daimler Share Price (DAI)
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Daimler China: Facing a Media Firestorm [From accompanying PPT]
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Ethics of Business Decisions
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Daimler China: Facing a Media Firestorm [From accompanying PPT]
Culture Shock
IV Stable State
Acculturation
a b
Time
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Euphoria
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Daimler China: Facing a Media Firestorm [From accompanying PPT]
From Resistance …
… to Openness Integration
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Minimization
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Adaptation
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Defense
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Denial “denigrate”
“preserve”
“learn”
• A person’s own vision of the world is unchallenged and at the centre of reality. • Through physical and social isolation from other cultures, one remains unaware of differences.
• Differences are perceived as threatening. • Negative stereotypes are created, and other cultures are attributed with undesirable characteristics. • One’s own culture is perceived at the apex of evolution.
• Differences are buried under cultural similarities in an attempt to preserve the centrality of one’s own world view. • It is assumed that all humankind is ruled by common basic principles, which guide values, attitudes, and behaviours.
N
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“avoid”
Ethnocentric Stages
• A new way of seeing cultures. • Differences are to be explored and no longer perceived as threatening. • Eager questioning of people from other cultures in order to learn about differences.
“understand”
“enjoy”
• Accepting cultural differences means that thinking and behaviours can be (temporarily) adapted—without feeling threatened. • Situations are perceived through the eyes of members from other cultures. • One’s own behaviours are adjusted so they are perceived as appropriate by the other culture.
• After prolonged periods of living and working in various cultures, an integrated person can adapt to differences, and define their own culture in different ways. • Ability to evaluate and judge in a given cultural context. • Differences are lived as essential and stimulating.
Ethnorelative Stages 5
HROB/175
IBS Center for Management Research
Teaching Note:
Cirque du Soleil’s Global Human Resource Management Practices This teaching note was written by Syeda Maseeha Qumer and Debapratim Purkayastha, IBS Hyderabad.
2015, IBS Center for Management Research. All rights reserved. To order copies, call +91 9640901313 or write to IBS Center for Management Research (ICMR), IFHE Campus,Donthanapally, Sankarapally Road, Hyderabad 501 203, Telangana, India or email: info@icmrindia.org
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HROB/175
Cirque du Soleil’s Global Human Resource Management Practices TEACHING NOTE ABSTRACT Cirque du Soleil (Cirque) is a Montreal-based entertainment company recognized the world over for high-quality, artistic entertainment. About 150 million spectators have seen a Cirque show since 1984 and as of 2014 it ran 20 shows globally across five continents. Cirque redefined the circus industry by blending creative craft, dance, and street performances with magnificent costumes, music, and lighting to develop opera-styled shows and excluding animals from its acts. From its modest beginnings as a small group of street performers, Cirque grew over the years into the world’s biggest theatrical performance company with over 4000 employees from over 50 different countries representing 25 nationalities. It fostered a culture of risk-taking and creativity and considered people an important asset of the company. The case discusses the global human resources practices of Cirque including recruitment and selection, training and development, compensation, etc. The case also describes the culture at Cirque and how it managed the cultural diversity of its workforce. Cirque provided its employees with a creative environment that encouraged them to express their ideas, challenged their limits, and allowed them to grow both professionally and personally. Employees were offered competitive salaries, bonuses and promotions, group insurance, paid holidays, and free meals. Cirque also encouraged artistic creativity among its employees by giving them an opportunity to showcase their artistic skills by holding exhibitions and cultural arts events. However, some analysts felt that, going forward, one of the biggest issues for Cirque would be addressing challenges in its global HR practices and preserving its culture.
TEACHING OBJECTIVES AND TARGET AUDIENCE: This case study is designed to enable students to: 1. Study the global HR practices at Cirque and examine its key elements. 2. Understand the importance of talent/people in gaining a competitive edge. 3. Analyze the challenges before Cirque in maintaining its creative culture. 4. Explore ways in which Cirque could manage the cultural diversity of its workforce. 5. Understand how a company can put in place an effective global talent management system. This case is meant for MBA students as a part of the Global Human Resource Management/ Strategic Human Resource Management/ International Management/ Strategic Management Course. It can also be used in an Organization Behavior /Training and Development course as shown in the following table: 1
Cirque du Soleil’s Global Human Resource Management Practices
TEACHING THE CASE In an HR specialization course/Organization Behavior course, this case study can be used to illustrate the best practices of a company and how they can be used to gain competitive advantage. The instructor should ensure healthy participation by the students and interact with them to keep the discussion going. He/she can conclude the case by giving a summary of it and mentioning any special observations resulting from it. Some broad assignment questions are listed here: 1. Discuss the global human resource management practices of Cirque. Discuss the challenges faced by Cirque in managing its global employee base. 2. Critically analyze the culture at Cirque. How, according to you, has the culture fostered creativity and teamwork in the company? 3. People from five continents and more than 50 nationalities are represented within Cirque. How does the company manage such culturally diverse talent to gain competitive advantage? 4. What steps should Cirque take to retain its employees and preserve its culture?
SUGGESTED SESSION PLAN Discussion pastures Introduction
Time 05 min
Discussion on Q1
Cirque’s HR practices and challenges
15 min
Discussion on Q2
Cirque’s organizational culture
10 min
Discussion on Q3
Cultural diversity at Cirque
10 min
Diversity and its impact on competitive advantage
10 min
Managing cultural diversity to gain competitive advantage
10 min
The theory behind reducing turnover and preserving its creative culture
15 min
Discussion on Q4 Summary
05 min
Total
80 min
ANALYSIS 1. Discuss the global human resource management practices of Cirque. Discuss the challenges faced by Cirque in managing its global employee base. With the advent of globalization, organizations have become global in their approach. This has increased the workforce diversity, leading to the development of a Global Human Resource Management system. Cirque as a company has a global human resource strategy with a very strong emphasis on performance and creativity. The HR department at Cirque has a strategic role in balancing key policies that apply globally but are adapted to incorporate local practices and conditions. As a global organization, it is difficult to have a centralized management system due to the fact that every country has its own rules and legislation. Therefore, Cirque decentralized its management system. It has four headquarters, one each in Amsterdam, Montreal, Singapore and Las Vegas, which handle the overall HR activities. Cirque adapts to local cultures without compromising on its global identity. In the context of its global HRM practices, the core competencies are centralized and the other operations are decentralized. Owing to the presence of cross cultural groups, Cirque maintains a high degree of coordination and cultural control among its divisions.
2
Cirque du Soleil’s Global Human Resource Management Practices
To support its creative approach, Cirque implements some practices which focus on recruiting and selecting talented people, developing them, managing their performance, and making efforts to retain the best performers. Some of the activities and best global HR practices the company follows are: Recruitment and Selection •
Cirque adopts a global recruitment policy that is driven by a geocentric approach whereby the company, although it is a single global entity, recruits worldwide to all positions. Nationality is overlooked in favor of talent. In such an approach, people are recruited based on their skills and experiences, irrespective of their nationality.
•
Recruitment and selection practices are adapted to the host nation’s hiring laws. Hiring practices such as non-discrimination among prospective candidates are carefully monitored so that the company does not violate such laws.
•
Cirque hires artists based on individual competency and casts the right person for the right job. In its recruitment for both performance and corporate roles, Cirque places emphasis on five major attributes – creativity, commitment, responsibility, team play, and passion.
•
Cirque follows a rigorous selection process. The exercise involves talent scouts, casting agencies, and casting directors. While recruiting performance staff, Cirque looks into worldwide talent, particularly from the sporting arena.
Training and Development •
Cirque adopts a competency-based training approach. Training and development programs are tailored to suit local practices. Artists take part in workshops such as creative improvization, acting, vocals, and rhythm. These workshops provide a first-hand experience of what it is like to be part of a show. All candidates learn how to apply their own stage make-up and have practice sessions to perfect their art.
•
To supervise performer training programs, the Creative Studio at its Montreal headquarters employs close to one hundred trainers from around the world. These trainers specialize in fields such as dance, theater, singing, and acrobatics. Physiotherapists and fitness specialists are available on site to keep the performers in good health, enhance their physical ability, and ensure an ideal environment for their development.
•
Cirque offers new hires developmental opportunities to learn and grow. For instance, it started a program called ‘TapisVert’, as part of which young employees could work alongside senior managers for a specified period and also get involved in the creation of new shows.
•
Cultural training is imparted to employees to be culturally literate and adapt to other cultural environments. For example, Cirque developed “An Introduction to Life in Japan”, a highly interactive training program, designed to make the performers aware of the local customs, differences in communication style, Japanese greetings, and even navigation on the public train system in Japan.
Compensation and Benefits •
Cirque offers its touring performers competitive salaries and vacation policies, performance bonuses, a paid trip home once a year, lodging and transportation, medical, dental, disability and life insurance coverage, gourmet buffet-style meals, and free tickets to any Cirque show.
•
Circus artists have the added benefit of traveling globally and meeting people from a variety of cultural backgrounds. 3
Cirque du Soleil’s Global Human Resource Management Practices
•
Cirque offers access to free schooling for children of artists who are part of the touring shows and education opportunities for adult performers who have been with the show for at least a year.
•
Artists can establish careers, create families, and have stability, all based on their talent, a rarity in the entertainment industry.
Retention •
Cirque offers a creative work environment where artists are free to cultivate ideas they are passionate about and grow both professionally and personally.
•
Employees holding similar positions in different divisions are encouraged to form practice communities in which they can share their work methods and approaches.
•
People are allowed to work on things they want to do instead of what they have to do.
•
Cirque respects the individuality and the particular point of view of each employee with the goal of maintaining a workplace free from any form of discrimination
Communication •
At Cirque, communication is transparent and open.
•
An open communication policy is practiced. It includes integrating the global perspective of its employees to ensure transparency. For instance, when there is a significant new HR policy of change, HR managers travel to each of the touring shows to collect the feedback of employees on the change.
•
Within the organization, every employee has a voice and is kept constantly updated about the happenings at the company.
Career Transition •
Cirque provides career development opportunities for retiring performance artists to stay within the organization.
•
It has a career transition program called Crossroads to help artists pursue their dreams and look for an alternative career after their performing years are over.
•
A career development advisor is always available to the artists. The advisors provides the artists with the required support to come up with a career plan taking into account various aspects like aspirations, needs, skills.
Challenges •
One of the challenges for Cirque in maintaining its global employee base is cross-cultural adaptation, managing different workforce values and differences in management style. Managing human resources in different cultures, economies, and legal systems presents some problems.
•
Cirque’s global approach to recruitment has led to problems such as cross-cultural issues around practices and behaviors. Cirque’s geocentric approach to staffing has led to increase in costs as employees who are culturally adaptable and efficient in their work are pricey. Moreover, there is the expense of relocating employees and their families for touring shows. As a geocentric staffer, Cirque needs to have strong policies for managing communication and cultural diversity in order to avoid cultural clash. For instance, the first time Cirque toured Japan, it had a high number of staff complaints due to the cultural differences, particularly around the stoic response of the Japanese audiences. 4
Cirque du Soleil’s Global Human Resource Management Practices
•
There are concerns over the employment of expatriates. Cirque has to deal with certain issues when it hires expatriate employees on its shows. Some of these issues include home sickness, inconvenience, and the stress of living in an unfamiliar culture.
•
Culture shock is another issue. At Cirque, many artists face a difficulty in relocating to unfamiliar cultures. For some employees adjusting to a new environment is stressful. Amidst new cultures, many employees experience culture shock and stress characterized by homesickness, irritability, and depression.
•
Talent management is a challenge for Cirque as it has to attract, develop, and retain employees from diverse fields and cultural backgrounds. For a truly global organization like Cirque that operates in multiple countries and across cultures, developing a talent management system is complicated. It needs to figure out how to respond to local demands while maintaining a coherent HR strategy and management approach.
2. Critically analyze the organizational culture at Cirque. How, according to you, has the culture fostered creativity and team work in the company? Cirque thrives on a culture of risk and creativity which is evident in the size and grandeur of its shows. As Cirque is in an industry (entertainment) where innovation and creativity are crucial to success, it offers artists the freedom to express their thoughts and bring their dreams to life. At Cirque, the people are the driving force. Cirque has nurtured an environment which is conducive to productivity, creativity, and personal growth. As the work environment has a great influence on the quality of life and health of employees, Cirque offers them an open, secure, and inviting atmosphere to stimulate creative thought and action. Cirque respects its people and values their diversity. It provides good work conditions by showing no discrimination, offering competitive salary packets, respecting the individual opinions, and recognizing the work of the individual. Employees are encouraged to work outside their comfort zone and take risks. Work at Cirque is based on sharing and dialogue, and rooted in deep passion. The company’s mission is to invoke the imagination – capturing and executing dreams and desires; provoke the senses – The comprehensiveness of the creative process; and evoke the emotions of people – The intersection of business, art, and passion. At Cirque, every show is built on a solid foundation of teamwork and there are no heads, only employees helping and sharing with each other. Cirque is like one extended family where the focus is on harmony and relationships are familial. Employees know they are valued and have a strong sense of belonging. Creative synergy is encouraged and recognized. Touted to be a “fantastical playground”, Cirque offers the protection and support that artists need to take risks. Cirque’s culture is based on involvement, communication, creativity, and diversity which are seen as keys to innovation. The company’s ability to adapt and change and to tolerate uncertainty has helped it maintain a culture of innovation. At Cirque, artists are free to express their ideas and creativity. The company offers its employees several developmental opportunities that allow them to learn and grow and prevent them from stagnating by working in one position for too long. At Cirque, artists can establish careers, create families, and gain stability all based on their talent, a rarity in the circus industry. According to Swedish researcher Goran Ekvall, the characteristics of an innovative culture are as follows:
5
Cirque du Soleil’s Global Human Resource Management Practices
Table: Characteristics of an Innovative Culture 1. Challenge and involvement
Resources 2. Idea Time
Safety
Curiosity
How involved, motivated and committed are the employees to the long-term goals and success of an organization? Do people have enough time to think about ideas before being obliged to act?
3. Idea Support
Are there enough resources freely available to try new ideas?
4. Trust & Openness
Do people feel safe and trusted while speaking their minds and offering their viewpoints? Are they supportive and respectful to each other?
5. Playfulness
How relaxed is the workplace? How much fun and ease are there in the workplace?
6. Conflict Levels
To what degree do people engage in inter personal conflict, make decisions, and resolve issues?
7. Debates
To what extent are employees allowed to express, put forth their ideas for consideration and review?
8. Freedom
Are employees free to define their work, exercise choice, and take initiatives in their day-to-day activities?
9. Risk Taking
How much do managers tolerate uncertainty and ambiguity, and is it considered all right to fail? Are employees rewarded for taking risks?
Source: Stephen P. Robbins, Mary Coulte, and Niharika Vohra,Management (10th Edition, 2010),Pearson Education India
3. People from five continents and more than 50 nationalities are represented within Cirque. How does Cirque manage such culturally diverse talent to gain competitive advantage? Cirque has a workforce of more than 4000 employees, including 1300 performers, from over 50 different countries and they speak 25 different languages. The artists come from different countries such as Eastern European countries, Canada, Russia, India, and China but no group is favoured over another. The presence of different nationalities in Cirque’s workforce creates a wonderful diversity. According to the company, it is the diversity in the organization that brings forth innovative ideas and leads to a greater acceptance of differences. Operating in a global environment means dealing with people from different cultures, races, backgrounds, or sets of values. This can be challenging to any business. Cirque addresses any such challenges directly by developing a cultural awareness program. The program includes an employee assistance program which provides access to professional help and counselling for touring professionals, and there is a language training program for performers. Cirque as part of its global HR policy has introduced cultural adaptation policies. For instance, the company found that in some cultures greeting by kissing each other on the cheeks was acceptable, while in others it amounted to sexual assault. 6
Cirque du Soleil’s Global Human Resource Management Practices
Many organizations are finding that diversity and multiculturalism can be a source of competitive advantage. Organizations that learn to manage diversity have high levels of productivity and respond better to changes. Similarly, Cirque has used the diversity and multiculturalism of its workforce to gain competitive advantage (See the following Table) Table:
Diversity and its Impact on Competitive Advantage 1. Cost argument
Organizations that learn to manage diversity and multiculturalism have high levels of productivity and low levels of turnover. As each of these have a direct impact on costs, such organizations remain more competitive
2. Resource Acquisition argument
Organizations that manage diversity and multiculturalism become known among diverse groups as good places to work and hence attract qualified employees from among these groups. Organizations which attract talented employees from all segments of society are likely to be more competitive.
3. Marketing argument
Organizations with a diverse and multicultural workforce are able to understand different market segments better.
4. Creativity argument
Organizations with diverse and multicultural workforces are more creative and innovative, characterized by multiple perspectives and ways of thinking. This generates new ideas and new ways of doing things.
5. Problem-solving argument
In a more diverse organization, there is a larger pool of information and a higher probability of identifying better solutions to a problem.
6. Systems flexibility argument
To manage a multicultural workforce, organizations become more flexible, which in turn allows organizations to respond better to changes in its environment (reactions should be faster and cost less)
Source: Management (8Th Ed.) By Ricky Griffin Dreamtech Press, 04-Jul-2005
Managing Diversity Organizational policies: The starting point in managing cultural diversity is the policies an organization adopts which directly or indirectly affects how employees are treated. For instance, the extent to which Cirque embraces the principle of equal employment opportunity and how it responds to problems that arise from differences among people sends its employees a message. Organizational practices: Diversity can be managed through a variety of ongoing practices and procedures. For instance, on tours, Cirque holds cultural exchanges which bring people together, help them to discover each other, and to work on common activities. These include a cultural show or a buffet of nations where everyone is invited to taste foods from different countries, etc. Creating the right culture and environment: Creating the right environment for people of different cultural backgrounds is important for managing diversity. If people feel valued regardless of their background, it will lead to increased commitment and productivity, enhanced work relationships, and retention of the best employees. Mere tolerance is not enough; sometimes organizations need to bring co-workers together to discuss their misconceptions and even hang-ups. For instance, Cirque offers an Employee 7
Cirque du Soleil’s Global Human Resource Management Practices
Assistance Program (EAP) for its touring professionals. This program is designed to provide professional help and counselling for international artists who suffer from high levels of mental stress and frustration. It also includes helping the performers overcome the challenges of cultural clashes. Open communication: Open communication allows employees to be prepared to learn with an open mind. With transparent communication, co-workers begin to distinguish among facts, beliefs, values, and personal experience. Cross cultural training: Cross cultural training is imparted to employees to understand the culture of the countries where they are touring. For example, in Japan, culturally, Cirque performers had a tough time getting used to the stoic and formal behavior of the audience. The spectators provided little feedback to the artists who were used to a more enthusiastic response. The HR department at Cirque received many complaints and resignations from the artists. As a solution to this problem, Cirque developed “An Introduction to Life in Japan”, designed to make the performers aware of the local customs. Cultural adaptability: Employees need to modify their behaviour when working with people from other cultures by swallowing personal pride and setting aside egos. Where an employee is experiencing a change of culture, psychological adjustment is important to performance, job satisfaction, and retention. Cirque introduced cultural adaptation policies. For instance, HR found that in some cultures, greeting by kissing each other on the cheeks was acceptable, while in others it amounted to a sexual assault. Experts felt that going forward, Cirque has to adopt a multi-cultural model that seeks to understand cultural differences rather than overlook them. Tolerance and acceptance of other cultures and nationalities is fundamental to Cirque. It should function as a cohesive social whole and see to it that no employee is exploited because of his/her race or ethnicity. Cirque should focus on developing a ‘meta-ethic’ approach as proposed by Judith N Martin, Thomas K Nakayama, and LA Flores (2001) based on three principles: •
The humanness principle – talks about respect for all, empathy and identification with others.
•
The dialogic principle – stresses the centrality of human relationships and mutual support we must give
•
The principle of speaking ‘with’ and ‘to’ rather than ‘for’ and ‘about’
4. What steps should Cirque take to retain its employees and preserve its creative culture? People are the engine of Cirque. It offers artists and creators the necessary freedom to imagine their most incredible dreams and bring them to life. Cirque rewards its people very well, allows them to operate in an open environment, respects the individual, and offers room for individual inputs, growth and accomplishments. However, employee turnover at Cirque, particularly on touring shows, averages about 20% annually. This is attributed to difficult working conditions, which include many relocations and a large number of shows each week. This issue is of strategic significance for Cirque. The first important problem is the financial cost incurred due to high turnover and absenteeism. Companies lose all the money invested in recruiting and training when an employee leaves. In addition, high turnover means employees are constantly in the learning stage instead of performing at full potential. Moreover, in the entertainment industry, talent is rare to find and difficult to replace. 8
Cirque du Soleil’s Global Human Resource Management Practices
In order to reduce turnover, Cirque should take certain steps such as recruiting people who like traveling. Recruiting youngsters could also be another way of reducing the turnover rate as young people generally do not have family obligations and are often ready to travel and adapt to other environments. The company should also observe employee satisfaction by talking to ex-employees, in particular through surveys, and find out what led to their leaving the organization. They should also take feedback from their current employees in order to know what measures have to be taken to make Cirque a better workplace. The turnover rate at Cirque can be analyzed through the unfolding model of employee turnover developed by Tom Lee and Terry Mitchell (1994). The voluntary turnover model recognizes multiple decision paths coupled with distinct cognitive processes. Some turnover paths are initiated by a shock. A shock is a specific event that triggers someone to think about leaving his/her job. Shocks may be specific to a person (such as a pay raise denied) or they may be general, affecting all employees (like a merger). They may be job related (such as a promotion denied, an attractive alternative job offer) or otherwise (for instance, winning a lottery, the loss of a loved one). The unfolding model identifies four major turnover paths which are differentiated by the different combinations of (a) the presence or absence of a shock as a turnover initiator (b) presence or absence of a scripted action plan for a specific shock, (c) the relative level of dissatisfaction in the decision process, (d) the presence or absence of an alternative job (Refer to Figure I). The first path (Path #1) in the unfolding model is initiated by a shock and a scripted action plan for leaving is already in place. For instance, a female employee leaves after becoming pregnant. This path is not initiated by job dissatisfaction, and no job search is involved. Voluntary leavers following this path may not be dissatisfied employees. The second path (Path #2) also involves a shock, but with no plan in place. For example, an individual is passed over for a promised promotion, and leaves without a job search. The reasons for quitting are more impulsive ones. Dissatisfaction may be relatively high because these kinds of shock are often of a negative nature. The third path (Path #3) also starts with a shock, but is different from the second path in that the person considers alternatives and leaves, usually with a better alternative in hand. An example is an unsolicited job offer. Often, these employees are not dissatisfied with their job but leave for a better alternative. Unlike the first three paths, the fourth path does not involve a shock. Instead, some people get dissatisfied with their jobs for various reasons and this accumulates over time, triggering the decision to leave. This path is the main focus of most traditional turnover models. The unfolding model describes two different ways in which dissatisfaction leads to quitting. Some discontented employees leave their jobs without searching for an alternative (Path #4a), while other dissatisfied people look for an alternative job (Path #4b). In either case, job dissatisfaction is the main turnover initiator. However, it is the cognitions that bring about the decision to stay or to leave. According to this model, focusing on the shocks is less likely to be successful than focusing on the cognitions. In case of Cirque, coping with shocks is more difficult when employees are cut off from their support systems, mainly friends and family. At Cirque, the turnover is greater on tour because events that occur on tour may have greater shock value than the same events occurring at home.
9
Cirque du Soleil’s Global Human Resource Management Practices
Figure I
Unfolding Model of Employee Turnover
Source: Lee T. W., Mitchell T. R., Wise L. & Fireman S, An Unfolding Model of Voluntary Employee Turnover, Academy of Management Journal, 1996.
Based on the unfolding model of employee turnover, a three-pronged approach can help reduce employee turnover at Cirque: •
Conducting realistic job previews before a person joins the tour as realistic images are less likely to be violated by shocks than unrealistic images.
•
The training of immediate supervisors to handle shocks and manage turnover. How supervisors handle the shock events is vital in shaping how the employees’ cognitions will develop.
•
The offering of professional support services during tours. A psychologist should be hired on tour in order to provide support to all employees.
10
Cirque du Soleil’s Global Human Resource Management Practices
References & Suggested Readings: 1.
Nicola Middlemiss, “Behind the Scenes: HR at Cirque du Soleil,” www.hrmonline.ca, December 23, 2014.
2.
Pat Donnelly, “Laliberté Optimistic about http://montrealgazette.com, December 19, 2014.
3.
Alexandra Berzon, “Cirque du Soleil’s Next Act: Rebalancing the Business,” www.wsj.com, December 1, 2014.
4.
“HR Goes to the Circus,” www.hrmonline.ca, November 2014.
5.
Seth Kahan, “Cirque du Soleil: Bringing Innovation to Life,” http://hrleadsbusiness.org, July 25, 2014.
6.
Mathew Bass, “Guy Laliberte Success Story – From Homeless Street Performer to Multi Billionaire Owner of Cirque du Soleil,” http://successgroove.com, December 30, 2013.
7.
Kelia Scott, “What Happens in Vegas Cirque Du Soleil Doesn’t Stay There,” http://wcinsights.com, October 31, 2013.
8.
Howard Stutz, “Cirque du Soleil, MGM Grand Hotel Cited for Safety Violations in Death of Aerialist,” www.reviewjournal.com, October 29, 2013.
9.
“Is the Sun Going Down on Cirque du Soleil?” www.independent.co.uk, January 18, 2013.
10.
Nelson Wyatt, “Cirque du Soleil Announces 400 Layoffs,” www.thestar.com, January 16, 2013.
11.
Howard Sherman, “Premature Vultures www.huffingtonpost.com, January 1, 2013.
12.
Kristie Lu Stout, “How Cirque du Soleil Scouts Clowns, Trapeze Artists and Gymnasts,” http://edition.cnn.com, September 12, 2012.
13.
Lucy Jones, “Cirque du Soleil: Life is One Big Balancing Act,” www.telegraph.co.uk, January 9, 2012.
14.
“Cirque du Soleil Cashes in on Magic,” www.independent.co.uk,March 20, 2011
15.
MehrdadBaghai and James Quigley, “Cirque Du Soleil: A Very Different Vision of Teamwork,” www.fastcompany.com, February 4, 2011.
16.
Glenn Collins, “Run Away to the Circus? No Need. It’s Staying Here,” www.nytimes.com, April 28, 2009.
17.
J.J. Smith, “Promoting Creativity is Cirque du Soleil’s Business Strategy,”
18.
www.shrm.org, March 4, 2008.
19.
Michelle V. Rafter, “A Master Act of Coordination,” www.workforce.com, December 11, 2007.
20.
ArupaTesolin, “Igniting the Creative Spark at Cirque du Soleil,” www.hr.com, June 18, 2007.
21.
https://www.cirquedusoleil.com/en/~/media/about/globalcitizenship/pdf/Review/Review2006.pdf
11
Cirque
Circle
du
Soleil’s
Cirque
Future,”
du
Soleil,”
Cirque du Soleil’s Global Human Resource Management Practices
22.
Cindy Waxer, “Cirque du Soleil’s Balancing Act,” www.workforce.com, January 5, 2005.
23.
“Le Cirque du Soleil: How to Manage Growth,” www.portailrh.org, September / October 2001.
24.
Gillian Flynn, “1997 Global Outlook Optimas Award Profile: Cirque Du Soleil,” www.workforce.com, August 1, 1997.
25.
Jeffery L. Covell, “Cirque du Soleil Inc.,” www.answers.com, June 02, 1997.
26.
http://www.visionaryleadership.com/docs/Seth-Kahan-CirqueSum12.pdf
27.
https://static01.cirquedusoleil.com/en/~/media/press/PDF/cds/cirque-du-soleil-atglance.pdf
28.
http://www.indeed.co.in/cmp/Cirque-Du-Soleil/reviews?fcountry=ALL&start=20
29.
http://www.jobmonkey.com/uniquejobs/cirque-du-soleil/
30.
http://www.indeed.com.sg/cmp/Cirque-Du-Soleil/reviews
31.
https://www.cirquedusoleil.com/en/jobs/casting/work/career-transition.aspx
32.
http://www.glassdoor.com/Reviews/Cirque-du-Soleil-Reviews-E7495_P2.htm
33.
www.cirquedusoleil.com
12
BENV/039
IBS Center for Management Research
Teaching Note:
IKEA’s Challenges in Russia This teaching note was written by Hadiya Faheem, under the direction of Debapratim Purkayastha, IBS Hyderabad.
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BENV/039
IKEA’s Challenges in Russia TEACHING NOTE ABSTRACT This case is about Sweden-based furniture retail giant IKEA Group’s (IKEA) entry into and expansion in Russia. When IKEA entered this key emerging market as part of its international expansion strategy, it had to face several roadblocks when setting up stores, inaugurating them, and even while advertising them. According to the company, its strict adherence to its principle of non-tolerance for corruption did not go down well with Russian authorities who were largely believed to be corrupt. Since IKEA refused to pay bribes, it had to deal with the bureaucratic difficulties of getting permits for setting up its stores. While the bureaucratic system added to its troubles in Russia, there were also instances of support from authorities, whether local or federal, and of difficulties being smoothed out, which enabled the company to get things done faster than in any other country in the world. Over the years, the company expanded and experienced success with its stores in Russia. Some of them, in fact, became the top grossing stores in the world for IKEA. It was also in Russia that the company introduced its successful new business model, wherein its furniture stores were operated not as standalone stores but as part of large shopping and entertainment complexes. While IKEA tasted success in Russia, it was mired in several controversies: its executives were accused of taking kickbacks and engaging in corruption, while its ethical and environmentally sensitive image was also questioned as it was criticized for utilizing ill-defined Russian logging rules to cut down old growth forests. Despite several hurdles, IKEA planned to invest US$2.1 billion in the country since it sensed tremendous potential in the Russian market due to an increase in the disposable incomes of middle class consumers. However, the business environment in the country was fraught with risk for the company.
POTENTIAL AUDIENCE This case is intended for use in the MBA/MS level programs as part of courses on Business Environment/ International Management/ Business Ethics course.
TEACHING OBJECTIVES This case is designed to enable students to: •
Understand the issues and challenges in entering and expanding operations in an emerging market
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Analyze IKEA’s entry into Russia and how it tackled bureaucratic challenges while setting up its business in the country
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Understand the trade-offs faced by companies like IKEA while operating in emerging markets like Russia
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Develop strategies that could help IKEA to grow its business in an emerging market like Russia. 1
IKEA’s Challenges in Russia
IMMEDIATE ISSUES •
Drive growth; Invest and expand in the Russian market
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Comply with regulations in international markets
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Maintain its ethical stance in emerging markets where taking bribes is the norm.
SUGGESTED TEACHING APPROACH The moderator can start off this discussion by explaining what an emerging market is and asking students to name markets that they think can be called emerging markets. Later, they can discuss the unique business conditions of these markets and how they can turn into an opportunity or a threat for a market entrant. Later, the students can be asked to discuss the issues facing multinationals in the emerging markets. Following that, the discussion can veer toward IKEA’s foray into Russia and the bureaucratic challenges it faced in the country while setting up its stores. He/she can then discuss how IKEA tried to bypass these challenges and how it made a mark in the Russian market. The groups can discuss the questions given to take the discussion further. The analysis of the discussion questions can be presented by one of the groups, and an interactive session can follow. The moderator can lead the discussions and then conclude with a summary of the highlights of the case.
PROPOSED SESSION PLAN •
Introduction of the case – 10 min
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Class discussion for question 1 – 20 min
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Class discussion for question 2 – 20 min
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Class discussion for question 2 – 20 min
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Summary – 10 min Total expected session time: 80 min
SUGGESTED QUESTIONS FOR DISCUSSION 1. Critically analyze IKEA’s foray into Russia. In what ways was it successful? 2. Discuss the challenges faced by IKEA and how the company tackled these challenges and made a mark in the Russian market. 3. Since IKEA continued to face several bureaucratic challenges in Russia, the retailer planned to halt its expansion in the country. What should IKEA’s business strategy be in the future?
ANALYSIS 1. Critically analyze IKEA’s foray into Russia. In what ways was it successful? Ingvar Kamprad (Kamprad), founder of the IKEA Group (IKEA), had been keen to do business in Russia since the 1960s, when it was still the Soviet Union. IKEA felt that Russia was a highly suitable market for the company as it was part of the BRIC (Brazil, Russia, India, and China), consisting of nations with the highest growth rates. The high economic growth in turn fuelled the demand for consumer goods. However, the company was unable to enter the country for quite a few decades for several reasons. In fact, the unstable economic scenario in Russia prevented many Western retailers from investing in that country. IKEA was forced to postpone its Russian entry plans, first due to the collapse of the Soviet Union in 1991 and then 2
IKEA’s Challenges in Russia
because of the breakout of the Russian constitutional crisis in 1993. Moreover, the company faced a crisis even after its decision to set up business in Russia, namely, the ‘Russian Financial Crisis’ or the ‘Ruble Crisis’. This crisis of 1998 caused many foreign investors to encounter heavy losses. After facing several setbacks, in 1998, Lennart Dahlgren (Dahlgren), a prominent IKEA employee, was asked to oversee the setting up of IKEA’s operations in Russia. Dahlgren stated that he, like many others in the West, had harbored several negative opinions about Russia, including the thought that the country was teeming with poor people. He quickly abandoned this view and came to realize that there was a large retail opportunity waiting to be tapped. In the early 2000s, a market report from AT Kearney, a global market consulting firm, stated that in terms of retail expansion, Russia was the top country in the world. Russia, being a part of the erstwhile USSR also had comparatively developed infrastructure, which reduced the problems associated with product distribution and supply chain management. In March 2000, IKEA’s first store in Russia was opened at Khimki, a city in the Moscow region. The inaugural day drew a large crowd of 40,000 shoppers and two weeks later the stocks in the store had been emptied by avid customers. People waited for an hour to get into the store and all the roads leading to it were backed up with traffic for miles around. Analysts believed that by the time IKEA opened its first store there was a lot of pent up demand in Russia, especially from the middle class. It was a time of transition in the country, with the rising middle class looking to abandon the old world Soviet-era furniture in favor of the modern Scandinavian furniture showcased by IKEA. The factors that contributed to the success of IKEA in Russia included the following: •
Its offering of simple, sturdy furniture at affordable rates in Russia encouraged consumers to buy furniture as buying furniture in the country otherwise required them to save several months of their salary.
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The internal layout at IKEA worked in favor for the retailer as customers could ‘walk around’ unimpeded by shop assistants, in addition to handling the merchandise. They were even encouraged to try out the mattresses and sofas for themselves – something the consumers had never seen before in Russia.
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Its logistics expertise, business model (Mega malls), vertical integration, and ability to leverage economies of scale were other reasons.
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IKEA also emphasized on providing efficient customer service. Through its stores, IKEA offered several amenities such as a free shuttle service from select places, a playroom for children, and coffee to customers who came in early.
In the first year of its operations, IKEA reported sales of more than US$100 million in Russia, three times more than the company had expected. IKEA’s Khimki store became one of its top 10 grossing stores in the whole world. The rousing response to the store’s opening encouraged IKEA to formulate ambitious plans for expansion. The Russian consumers seem to like IKEA products. At times, the company also made unusual gains in the market. For instance, in 2014, IKEA’s high sales in Russia were attributed to the economic slowdown in the country as consumers swarmed IKEA stores and other Western retailers in anticipation that the prices would rise sharply. Faced with the prospect of losing savings and of possible future high price increases, they started purchasing durable products. 2. Discuss the challenges faced by IKEA and how the company tackled these challenges and made a mark in the Russian market. IKEA, with its roots in Sweden, which is considered to be one of the least corrupt nations in the world, struggled hard to traverse the corruption-laden Russian economy. Russia had corrupt systems at both the regional and national levels, with the country being placed in the 135th position in Transparency International’s 2017 Corruption Perceptions Index. Bribery was 3
IKEA’s Challenges in Russia
like another taxation system in the country, which benefited the political elite, including the police and the Federal Security Service (FSB), the primary domestic security agency of the Russian Federation. Some of the challenges faced by IKEA in Russia were: •
IKEA realized that Russia had a highly corrupt bureaucracy, which demanded bribes for getting anything done. However, in accordance with IKEA’s policy of zero tolerance for corruption, the company decided that it would not give in to the corrupt system. Time and again it refused to bow to pressure from officials demanding bribes. In this context, it was ready to put up with delays in store openings, put a stop to its expansion plans, and even incur other additional costs.
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The business environment in Russia dictated that IKEA constantly faced problems from government officials in the fire, health and safety, electricity, tax, customs, and other related departments with regard to its stores. In one instance, IKEA was asked to pay bribes for getting an electricity connection. It got past this problem by deciding to hire large diesel generators to power its stores. This became the standard practice for the company for most of its stores in Russia.
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When IKEA opened its first store in Moscow, the city authorities did not give it permission to advertise the store in the Moscow metro. IKEA was required to secure 300 permits to construct a mall in Russia, which left plenty of room for the officials to demand bribes.
In 2009, IKEA announced that it would not expand further in the country until it got permission to set up two stores in Ufa and Samara. Officials refused to give approval in Samara stating that the walls of the store were not in a condition to withstand hurricane-force winds, notwithstanding the fact that such weather conditions had never been experienced in that region. According to Kirill Kabanov, Head of the NGO National Anti-Corruption Committee in Moscow, the reason for the non-opening of the stores was IKEA’s refusal to give bribes to safety inspectors. In addition to these challenges, the company’s employees became embroiled in several controversies. The company found that some of the IKEA officials were bowing down to the all-encompassing corruption in Russia, which weakened the company’s stance against corruption. It discovered that the key executives responsible for renting the diesel generators had hyped up the rental charges in collaboration with the generator rental company, causing the company a loss of several million dollars. Though they had not committed any personal indiscretion, their decision their decision to overlook a corrupt transaction between a subcontractor of IKEA and an electricity company official to resolve a power supply issue at IKEA’s St. Petersburg mall, did dent its reputation for non-tolerance of corruption. While the company set high ethical standards, it appeared as if many of its officials were ready to bend the rules to get things done. IKEA’s image took a further beating when reports on its alleged unethical logging practices surfaced. In early 2012, a Swedish public service television came out with an investigative report that claimed that IKEA’s subsidiary Swedwood was cutting down several hundred acres of old growth forests every year. This revelation caused several global conservation groups to condemn IKEA’s logging practices. IKEA refuted the allegations and claimed that it was logging wood according to local guidelines. It is important for companies like IKEA, that are operating in international markets, to not only adhere to the laws and regulations of the host country, but also to adhere to the same set of ethics they propound in developed markets. IKEA should show greater responsibility in sourcing wood without taking advantage of defunct environmental guidelines in countries such as Russia and China, in which it mostly logs wood. 4
IKEA’s Challenges in Russia
Overcoming challenges In its early days, IKEA preferred to keep a low profile, avoiding any direct confrontation over the corruption issues dogging its every move. As in the case, Alexei Slesar said, “In the early days when they entered the market they took the expression ‘do as the Romans do’ too literally”. Its officials gave in to the dubious schemes concocted by the local authorities to trick it of its money. In the case of the off-ramp, the company agreed to pay US$5 million more than the estimated cost, even though the construction had taken three times longer than expected. IKEA donated US$30 million to aid elderly people and hired a contractor endorsed by the regional government when permission to construct a warehouse was withdrawn. Kamprad later claimed that IKEA had been swindled to the tune of US$190 million because of the failure of Russian authorities to keep their word to provide electricity to its stores. However, as the situation deteriorated, IKEA started taking a stronger stance against corruption and was quite vocal in its criticism of the corrupt system in the country. This included going to the press, inaugurating a store in direct defiance of the authority, and finally threatening to put a freeze on its business expansion in Russia more than once. It also took strict action against its own officials who had succumbed to corruption, which communicated to all its stakeholders that IKEA had zero tolerance for corruption. It is difficult in ensure adherence to the corporate culture in diverse geographical markets, but if a company has clear policies that are communicated well, it can be achieved. For this to succeed, it is also important to “walk the talk”, as actions speak louder than words. IKEA being a private company and its unique ownership structure that stood for independence, long-term approach, and continuity also helped the retailer take a strong ethical stance against corruption in Russia. According to Kamprad, the complex structure “would survive wars, political upheaval, or just plain old executive incompetence.” (See Case Exhibit III). 3. Since IKEA continued to face several bureaucratic challenges in Russia, the retailer planned to halt its expansion in the country. What should IKEA’s business strategy be in the future? Despite facing several challenges in Russia, in 2015, IKEA reported that its global sales for the year ended August 2014 stood at €29 billion. According to IKEA, the growth was fueled by China and Russia as they were the company’s fastest growing markets. IKEA had 8 of its 10 largest stores in the world in China whereas in Russia it had a chain of 14 complexes, which accounted for 7% of the company’s turnover for the year ended August 2014. While the retailer had ambitious plans to expand in Russia, another problem surfaced at IKEA in December 2016 when the Russian court ordered the retailer to pay US$7.8 million to Russian businessman and former contractor of IKEA, Konstantin Ponomaryov, in a decadelong legal dispute over supply of power to stores in the city of St. Petersburg. Before this ruling was given in favor of Ponomaryov, IKEA in August 2016 had announced plans to invest US$2.1 billion in Russia. However, after the court’s order, IKEA warned that it would delay the investment as it wanted to work in a “fair and transparent business climate” and accused the authorities of attempting “to use illegal methods to extract further money from the company.” Future Strategy While IKEA was likely to face more problems in future as the corrupt system tried to make the company ‘like everybody else’, the fact that Russia was part of the BRIC (Bangladesh, Russia, India, and China) could not be ignored since it was seen as the engine of growth for Europe, being far ahead of its closest Central and Eastern European competitors, Turkey and Poland. Russia rated highly in terms of drawing foreign direct investment (FDI), with foreign investors
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IKEA’s Challenges in Russia
being attracted to its rich natural resources, growing domestic market, and rising middle class with large disposable incomes. Going forward, IKEA planned to boost its local online business. By the end of FY August 2019, the retailer planned to open 100 pick-up points in Russia. The company also planned to enter other international markets. In August 2018, it entered the Indian market by launching its first store in Hyderabad, capital city of the southern Indian state, Telangana. The company planned to rent out its furniture offerings in Japan for customers who were not ready to purchase those items. In November 2018, IKEA announced plans to open its first and largest store in the Philippines by 2020 with an investment of US$133 million. The retailer aimed to set up its first store in Greater Manila with 5 million households to cash in on an economic boom and rising incomes. While there are other international opportunities, IKEA is expected to increase its investments in Russia in the future despite the risks in the business environment.
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IKEA’s Challenges in Russia
Suggested Readings: 1.
Graham H.J. Roberts, “Consumer Culture, Branding and Identity in the New Russia: From Five-year Plan to 4x4,” Routledge, 2016.
2.
Christiane Prange, “Market Entry in China: Case Studies on Strategy, Marketing, and Branding,” Springer International, 2016.
3.
William B Gamble, “Investing in Emerging Markets: The Rules of the Game,” Springer Science +Business Media LLC, 2011.
4.
Michael Czinkota, Ilkka Ronkainen, “International Marketing,” Cengage Learning, 2007.
5.
Brad Kleindi, “International Marketing,” Cengage Learning, 2006.
References: 1.
Cliff Venzon, “World’s Largest Ikea to open in the Philippines,” https://asia.nikkei. com, November 20, 2018.
2.
“IKEA Looking for Partnerships with Russian Companies,” www.pymnts.com, October 11, 2018.
3.
“Corruption Perceptions Index 2017,” www.transparency.org, February 21, 2018.
4.
“Ingka Holding B.V and its Controlled Entities Yearly Summary FY17,” www.ikea. com, 2017.
5.
“ÏKEA Centres Russia – MEGA,” https://mega.ru, 2017.
6.
“IKEA launches Online Sales and builds Giant Distribution Center in Russia,” www.ewdn.com, May 18, 2017.
7.
Sergei Porter, “IKEA to Slash Russian Prices amid Economic Crisis,” https://themosco wtimes.co, January 26, 2017.
8.
Natalia Ischenko, “IKEA Reduces Prices in Russia,” www.vedomosti.ru, January 25, 2017.
9.
Anna Ringstorm, “Record Sales for IKEA Group as Online Investment Pays off,” www.reuters.com, September 13, 2016.
10.
“IKEA May Delay Investment In Russia after Court Ruling,” www.rferl.org, August 31, 2016
11.
“Ikea Threatens to cut Investments in Russia after Losing Court Battle,” https://retail. economictimes.indiatimes.com, August 31, 2016.
12.
Ivana Kottasova, “IKEA is making Loads of Money in Russia. Wait, what?,” https://money.cnn.com, September 10, 2015.
13.
Jennifer Rankin, “Ikea Marches on as Sales Rise to €32bn,” www.theguardian.com, September 10, 2015.
14.
Hiroko Tabuchi, “As Profit Slows, www.nytimes.com, January 28, 2015.
15.
Jennifer Rankin, “Ikea Sales Driven up by Growing Chinese Middle Class,” www.theguardian.com, September 9, 2014.
16.
Adam Sherwin, “Ikea Faces Boycott after it Removes Lesbian Couple from Russian Magazine to Comply with Putin Laws,” www.independent.co.uk, November 21, 2013. 7
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IKEA’s Challenges in Russia
17.
Annie Kelly, “Ikea to go ‘Forest Positive’– But Serious Challenges Lie Ahead,” www.guardian.co.uk, December 14, 2012.
18.
Augusto Come, “Corruption, Corruption, Corruption,” www.opendemocracy.net, November 29, 2012.
19.
“IKEA Cooperates with Investigation www.rapsinews.com, July 18, 2012.
20.
“IKEA’s Freeze Curtails Medvedev’s Goal,” www.themoscowtimes.com, March 15, 2011.
21.
Svetlana Smetanina, “Addicted to Russia,” http://rbth.ru, February 23, 2011.
22.
“Ikea Owner ‘Distressed’ over Russian Expansion,” www.thelocal.se, December 11, 2010.
23.
Lennart Dahlgren, “The Basics of Doing Business in Russia,” http://blogs.hbr.org, October 25, 2010.
24.
Maria Antonova, “Ex-IKEA Boss Bares Russia’s ‘Chaotic Reality’”, www.sptimes.ru, March 26, 2010.
25.
Andrew E Kramer, “Ikea Fires 2 Officials in Russia Bribe Case,” www.nytimes.com, February 15, 2010.
26.
“Why IKEA is Fed up with Russia,” www.businessweek.com, July 2, 2009.
27.
Jason Bush, “IKEA Turns Sour on Russia,” http://www.spiegel.de, June 25, 2009.
28.
Curt Hazlett, “Russia is an Alluring but sometimes Scary Place for Western Retailers,” www.icsc.org, May 2005.
29.
Andrew Osborn, “In Fear of His Life: Ikea’s Man in Moscow Tells of Threats and Bribes,” www.independent.co.uk, December 15, 2004.
30.
James Schofield, “Ikea Wows the Russians,” http://news.bbc.co.uk, February 22, 2002.
31.
Colin McMahon, “Russians Flock to Ikea http://articles.chicagotribune.com, May 16, 2000.
32.
“Milestones in our History,” http://inter.ikea.com.
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