Which global approach a business should take is a recurrent topic here at InCultures. As export consultants and trainers on cultural competence, we help our clients adjust to local markets with efficient localization. Particularly when we deal with businesses that deal with several markets, we use a clustering approach. Companies often consider and study the feasibility of maximal centralization. Still, the centralized system does not usually work very well for global businesses with so much diversity in the markets and ways of working.
So which global approach should businesses take on the globalization vs localization issue – clustering geographically, for example?
I can see why this problem arises in all international companies. Most managers in these companies find themselves struggling with different types of business globalization or localization issues at one time or the other.
First, let’s assume you run a small exporting business. Typically you start with one export manager, who handles all export markets. When the business grows, you hire another export manager to run some new markets. All the markets have their own needs and ways of working. The sales channels keep your managers busy with various important requests for their specific market.
In a real-world scenario, we know that you’d also be looking at your company’s economic and managerial efficiency. Even if you understand that complete country-by-country localization and adaptation would be ideal to meet the exact needs of the market and its people, the demands on your resources are also significant.
I can identify at least two problems that arise here. First, to maximize efficiency and save resources, it makes sense to decide it is time to create policies for working with export markets and sales channel partners in those countries. Now you have to determine if you want one policy or many policies? Naturally, a centralised approach to sales channel support programs, for example, would look like a great option. But when you try to implement it, you quickly realize the centralized system you plan based on your cultural background and how things work in one country won’t work so well in the other countries.
The second problem arises when you avoid having too fragmented an approach and managing so many different markets separately. Naturally, you feel that clustering them together would help. That would be meeting mid-way between complete centralization and single market adaptation.
Great. So now all you have to do is pick the nominator for clustering each country. But what is a good nominator? Most companies go for geographical clustering, where one manager is responsible for a particular geographical region and is expected to manage and lead the business within that cluster effectively.
In this article, I’ll explain the main reasons why this approach doesn’t work very well and cover another way of clustering that will provide better results and still allow you to compromise between the two extremes of complete localization and centralization.
What’s the story with Geogprahic Clustering?
Let’s imagine you want to pre-cluster the global business world, for example, into the Western countries, Middle East, Asia, and so on, and then divide countries into smaller clusters of neighbouring countries. In the real business world, there is no universal Western or Asian management style. Just look at some of the countries in Europe, such as France, Germany, Sweden, and the UK, and you will see very different leadership and management expectations, negotiations styles and ways of conducting business.
It is crucial to understand that neighbouring countries can be culturally very different. Thus, clustering countries into geographical regions is not always the best approach if you want to improve the performance of the managers in charge of these areas and your business success in those different markets.
So let’s look at an example of geographic clustering.
Centralization without considering culture can lead to disaster – a real-life story by a colleague
“To increase its shareholder return and create synergy, the board of directors of a globally operating company decided to merge its local marketing, sales and service operations in the Netherlands, Belgium, Luxemburg, France, and Germany into one Western Europe Region. The aim was to centralize all management and support functions in Brussels and only keep sales and (some) service operations in each country.
The HR Manager responsible for post-merger people integration knew about previous similar decisions in the business sector and therefore explored best practices. Most competitors recommended not to integrate these country operations because the cultural differences are too significant. Despite this advice, the board decided to integrate them.
With the support of one of the Big Five consulting firms, the company structures, (IT) systems and processes were centralized, aligned, integrated, newly developed, rolled out, and implemented. In addition, large numbers of management, support staff, sales and service staff were made redundant or transferred to Brussels.
Within six months after the major changes turnover figures started to plunge.
For example, the company lost 40% of turnover in one major product group.
The analysis concluded that work processes and systems were not aligned with market and client practices, staff competencies, and cultural differences between the country operations.
Centralized payment terms didn’t match local client practices, and centralized opening hours for order handling weren’t aligned with client opening hours. As a result, clients walked away ‘en masse’.
A 360-degree management survey failed to provide reliable results, i.e., poor performing countries scored high. Job rotation between countries didn’t work in Belgium and France. Different management styles of regionally appointed managers lead to ineffective results, i.e., hierarchical managers were ineffective in Germany, Luxembourg, and the Netherlands.”
So let’s stop here for a moment.
When things go this wrong, we should ask ourselves what different interventions, models, and action steps will help us find solutions and fix the cultural issues?
What’s the story with Cultural Clustering?
Let’s think about our original scenario for a moment. To avoid problems with globalization, you want your managers to be as effective as possible. Therefore, you need to know what type of management and leadership, communication and negotiation styles and principles work best in the manager’s responsibility area countries.
But in the situation we just talked about, the countries in the cluster formed around geography were not very similar from this perspective. So, therefore, it is more beneficial to cluster countries by similarities in their culture to achieve this goal.
So how do you do that?
Huib Wursten’s 7 Mental Images (7 MI) of National Culture developed based on the scientific Hofstede 6D model is a clustering model designed to help you with this. It groups countries into 6 clusters plus one (Japan) that doesn’t fit within any cluster.
The additional value to simple geographic clustering is clear: the countries are clustered based on cultural value dimensions in this model. This way, countries with similar kinds of cultural behaviour are clustered together. The cultural behaviour, on the other hand, is reflected in all business and working situations, for example:
- Expectations for management and leadership style
- Autonomy vs control aspects
- Approach to business planning
- HR processes
- Negotiation styles
- Behaviour in meetings
- Conflict resolution styles
- Sales process
- ‘Strictly business’ or personal relationship building
To give some typical examples, HR functions, customer service centres, and other regional centres are easier to manage within clusters with similar values and behaviour.
Clustering the world this way based on culture ends up being far more effective than clustering countries geographically. One reason for this is that you are ultimately dealing with people, not “countries”. So when the goal of clustering is to design systems for organisation and management for global businesses, a cultural model allows a manager to develop strategies that work well across the countries in your cluster through compromise between local and global approaches.
Solving issues arising from business globalization with cultural solutions
Let’s get back to the case study for a moment. So far, we have seen why geographic clustering instead of cultural clustering can even lead to a disaster. So how to solve the issues?
What were the interventions?
- All management layers and regionally operating professionals were trained in cross-cultural leadership and collaboration over a period of one year. During these training sessions, substantial cultural differences were revealed in the thinking and behaviour of people.
- The Regional Board asked for further advice after clients started flocking away ‘en masse’. The advice was to re-structure operations according to the region’s three culture clusters, create an ‘entente’ structure instead of full centralization, and restructure cross-cultural project management and job rotation.
- The client was supported in drafting a culturally neutral staff satisfaction survey.
- Part of the centralization was reversed to align with local cultural, market and competence differences. Job rotation was limited to countries where it proved to work.
- The 360-degree assessment was abandoned and replaced by F2F interviews.
- Situational leadership styles were trained and developed.
- Within eight months after the different interventions, the previous revenue levels recovered with mainly new clients.
- Due to mutual respect, synergy flourished, and new corporate and local process improvements and customer loyalty programs led to a 15% increase in net profit within two years after the interventions.
I want to emphasize that management techniques or philosophy, practices, and skills that work well in one culture are not necessarily appropriate in another. Why? Because management deals with a reality that is man-made. People build organisations according to their values, and societies are comprised of institutions and organizations that reflect the dominant values within their national culture.
Considering all that, the cultural clustering of countries with similar values and behaviour works better than geographical clustering.
Interested in applying the model and its implications for finding solutions to your multicultural challenges? Book a free call with me, and let’s talk about how we can help.
Curious about what the cultural clusters in the 7 Mental Images model are?
So here are the 7 clusters:
1. Contest cluster (UK, US, Australia, New Zealand)
2. Machine Cluster (Germany, Austria, German Switzerland…)
3. Solar System (France, Spain, Northern Italy, Poland…)
4. Network cluster (Scandinavia, Finland, The Netherlands, Baltic states)
5. Pyramid cluster (Brazil, Russia, Turkey, The Arab Emirates, Morocco etc.)
6. Family cluster (China, India, …)
7. Japan (which does not fit into any other cultural cluster)
For an in-depth look, get the book: The Seven Mental Images of National Culture: Leading and Managing in a Globalized World? It contains much more on the topic.