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Eight Types of Corporate Crisis and the Role of National Culture

November 7, 2013 • Finance & Economics, Global Business, STRATEGY & MANAGEMENT

A crisis is a defining moment in any organization’s life. Below, Kai Hammerich and Richard D. Lewis consider eight of the most typical sources of an existential corporate crisis to better understand root causes and highlight the influence of national culture.

Acrisis is a defining moment in any organization’s life. Will it prevail or falter? Overcoming a crisis often embeds deep values in the psyche of the corporation. A company facing financial disaster where, in its view, it was mistreated by the banks, may decide never again to be reliant on external funding – if it survives the experience. However, some organizations like P&G, Siemens, Shell, GE and Exxon have prevailed over many decades, and continue to add value to society. By enhancing insight into their own cultural strengths and history, we believe more companies could prosper for longer.  Here are eight of the most typical sources of an existential corporate crisis to better understand the root cause and highlight the influence of the national culture.

 

Strategy v. competition: being “outplayed”

This is a classic business situation, where the competition simply had a better strategy and “outplayed” the organization. Any organization, whether in the embryonic period or in the maturity period, can suffer from choosing an unsuccessful strategy. The mid-size Danish toy company LEGO floundered when an unsuccessful strategy of brand and product diversification in the late 1990s led to financial disaster – perhaps the creativity and managerial informality of the Danes defocussed them on the mundane challenges in the core business. A new CEO refocused the company on its roots and today the company is more successful than ever – and the crisis may well have revitalized the company beyond what would have been possible without it. Similarly, a start-up company often has to change its business model and strategy several times before hitting a successful one. But even if you have the right strategy, you also have to execute it well to succeed.

 

The effect of national traits on poor execution

Many industries evolve to maturity with only few global winners of similar size. Consequently, executing well is the key to staying competitive. There can be multiple reasons for poor execution, some of which are rooted in the national culture. It could be the culturally based misjudgements of Asian companies acquiring declining European brands, not fully realizing the impact and rigidity of local employee laws or different attitudes to employee empowerment and involvement. Or it could be a European or American company entering a new market assuming that the work practices that were successful in the home market will make them successful in the new market too. It happened for American Walmart in Germany who assumed that American retailing habits – such as saying ‘Welcome ’ or bidding farewell with a ‘Have a good day’ at the entrance to a customer were appropriate for the more formal Germans. Or it could be a derailing cultural dynamic that prevents the company from executing the strategy. If the organization needs to execute a strategy that requires capabilities that are at odds with its national profile, it may find that challenging. A company from informal and pragmatic Denmark executing a strategy requiring disciplined process execution could struggle against companies from countries with a stronger process orientation. Likewise a Korean company that needs to execute a strategy of being creative and diverse may find this challenging as the Korean educational system is more focused on memorization than on developing individual thinking. However, in both cases you may be able to identify leaders from that country with the appropriate personal competencies who can guide the effort with success. People fortunately come with a broad range of personal capabilities, whatever their national upbringing. Failure of execution may also simply be caused by the fact that a competitor was more urgent and sharper at the game.

 

Technology disruption
A technology disruption is essentially when a new technology replaces an old one. At every technological transition point, old players were left behind and new emerged, though sometimes it can take decades for such a transition to take place. Sony and Nokia both grew to global dominance in the first technology cycle, then were challenged by a technological disruption as their industries entered a new period. In Sony’s case it was the transition from mechanical technologies to digital technologies and in Nokia’s case it was the transition from customized embedded software and highly specialized components to operating systems and content-based ecosystems, more akin to what was used in the PC industry. In both cases, the companies understood the potential for disruption, but either dismissed it or didn’t react forcefully in time. The forces of disruption are omnipresent across borders. One could argue that being agile, open and flexible may prepare a company better for dealing with a disruption. What the management and the board should watch out for is the emergence of a derailing cultural dynamic that may make the company less open and agile to recognize a threat of disruption. Given that P&G only had one new successful product category launch in 15 years, this should have alerted the board and the management to the fact that something was amiss. American short-termism, arrogance rooted in success and corporate power play may have played a role in this; however, national culture can only explain some dynamics, definitely not all of them.

 

Process disruption
Another key source of disruption is through a transformation of the work processes and work practices. Online retailing is a good example of the impact of the supply-chain revolution that has changed the face of retailing globally. At one level it is of  course based on a technology disruption; however, to embrace this, new technology companies had to redefine their workflow completely. New players like American Amazon and eBay are radically different from the traditional retailer. They employ different people – who are often young, analytically minded and brilliant at mining Big Data. As a consequence they have developed succinctly different corporate cultures from the established competitors in book publishing and traditional retailing. For Toyota, unique work practices deeply rooted in the Japanese culture helped Toyota gain a sustained competitive advantage over a 20-year period or more. It proves the point that an established player can innovate in a mature industry when bringing a different perspective to the “game” that is being played. Toyota, for instance, established a supply chain of primarily Japanese companies that they would work closely with, sharing technologies and giving financial support at times. This structure was consistent with Toyota viewing itself as a typical Japanese vertical keiretsu, seeking harmonious relationships with its partners. The structure contrasted the more adversarial relationship Western automakers had established with their suppliers. It enabled Toyota to remain nimble and agile for a long period, while in particular American car manufacturers pursued a strategy of vertical integration. That strategy in turn laid the foundation for establishing bloated and inefficient bureaucracies, as most visibly seen in the case of GM, which over time made them less competitive.

There can be multiple reasons for poor execution, some of which are rooted in the national culture… If the organization needs to execute a strategy that requires capabilities that are at odds with its national profile, it may find that challenging.


Success – the success crisis

That success can lead to disaster has been known for centuries and is often referred to as corporate hubris. Hubris indicates an overconfident pride and arrogance that is associated with a lack of humility, though not always with the lack of knowledge. Hubris often becomes visible through a cultural dynamic that is fuelled by national influences. In essence once a company believes in its own infallibility, it risks closing its eyes to external threats and thereby opens the gate for disaster – and that can happen in any culture or country.

 

Time – if you don’t move forwards you move backwards

Economic theory dictates that over time returns will revert to normal. A new product may start out commanding a higher return, maybe through patent protection, but ultimately competition or the end of the patent will ensure that returns revert to normal. The art of business is to create market situations where the company can command a higher return to the shareholders on their investments. However, the gravity of competition and innovation also means that if you don’t move forwards – invariably you move backwards. This goes for all of us as individuals and for corporations.

Fifty years ago, owning a small car dealership for a young entrepreneur was as attractive as starting a PC dealership in the 1980s or a specialized social website in 2012. Today, car and PC distribution are mature industries, dominated by large players, with little room for the entrepreneurial owner. The independent retailers find it more and more difficult to compete with the larger and more efficient chains. When radio and TV were a novelty, they were sold by specialist shops and educated sales people. Today they are just two of many product lines sold by electronic goods retailers and increasingly sold online.

 

Change of leadership

The founders and their family-related successors have a deep and often permanent influence on the success and embedded values of an organization. Some companies like P&G and Samsung have been blessed with talents within the family that could lead the company for up to three generations or, in rare cases, even longer. However, if a company is to exist beyond the founders, ultimately it will need to transition from a founder to a managerial regime. This transformation is always a testing point in time for the organization. If it coincides with a “crisis,” it can exacerbate that crisis.

In the technology sector, three out of five of the highest market cap companies are still founder led. IBM successfully moved to a managerial regime in 1971, while Apple only did it in 2012. Microsoft, Google and Oracle are still founder led. If Apple is hit with a disruptive trend or crisis in coming quarters, this may well turn into an existential crisis, as the company seeks to establish a new managerial regime. In the 1990s, Apple failed partly because it moved to a managerial regime too early in its lifecycle. If the consumer electronics industry continues to innovate at the current rate, the success of Apple this time will depend on its success with truly inculcating continued innovation in the organization, both from a cultural and organizational perspective. Managing the transition to a managerial regime is a key responsibility for the board of any family or founder-led business that transgresses national borders – and it can never be taken lightly.

National culture and corporate culture are simply one lens through which one should analyze a company and its performance.

Navigating a transformation point

As a company rushes through the lifecycle phases from embryonic innovation to being a mature global company, ultimately it will face a transition point that will require it to fundamentally change. This is where the perils of failure will be most prominent. Predicting the severity of the next transition point is a key responsibility for the management and the board, which until now has been taken quite lightly – “we will handle it when we get there” seems to have been the instinctive response.

Whether increased pace in international business is an indication of a shorter corporate lifecycle – only the future will tell. In the digital era, Web 2.0 companies need to go global in a few short years to be successful and some even speak about companies needing to be “born global”. In social media- based segments, the company that gets there first often becomes the winner in its segment; just look at companies like Google, Amazon, eBay, Yahoo, LinkedIn, Facebook and Twitter. However, even for these digital giants, transformation points have to be navigated. They have expanded at a mind-boggling pace, creating enormous shareholder value in the process which, however, may mask underlying issues. In some countries such as China, India and Russia, local competition with a better understanding of the consumers and local politics has blocked the dominance of the digital giants and some have not yet expanded beyond their initial single-line-of-business and one-size-fits-all models.

The challenge for the board is not simply analyzing the present situation and identifying potential derailing cultural dynamics, it is also a question of understanding “where the ball will bounce” in the next period. A central question for the leadership and the board in any corporation should be: What will the effect on our corporate culture and values be, once we have implemented the new work practices dictated by our strategic imperatives? This is a very sensible exercise when considering profound changes in work practices, and can help to significantly reduce the execution risk.

National culture and corporate culture are simply one lens through which one should analyze a company and its performance. It doesn’t replace other perspectives, but adds a complementary view to the currently more popular business strategy and execution orientation. This rational perspective has become prevalent in particular in companies in Western countries and among their business advisers and bankers. In recent years the cultural perspective has been dismissed over other, easier-to-measure, factors but should never be overlooked by boards and management.

Reprinted by permission of Wiley. Excerpted from Fish Can’t See Water: How National Culture Can Make Or Break Your Corporate Strategy by Kai Hammerich and Richard D. Lewis. Copyright 2013. All rights reserved.

About the Authors
Kai Hammerich received his M.B.A. from Northwestern University, Kellogg Graduate School of Management and his M.Sc. in economics from the University of Aarhus, Denmark.  Based in London, he is a consultant with the international search firm Russell Reynolds Associates. Hammerich has conducted numerous CEO and board-level assignments for major global companies.  He has in-depth experience advising clients on how to align a company’s talent portfolio with its overall business strategy and company culture. Hammerich has been nominated by BusinessWeek as one of the most influential search experts worldwide.

Richard D. Lewis is a renowned British linguist and founder of Richard Lewis Communications – a language school for executives as well as a company that advises on cross-cultural business issues.  He is the creator of the Lewis Model of Cross-Cultural Communication and author of many books including the bestselling When Cultures Collide:  Leading Across Cultures.

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