The significance of cross-cultural negotiation skills for the success of international mergers and alliances - Essay Example

Critically assess the significance of cross-cultural negotiation skills for the success of international mergers and alliances It is customary to use the term M&A (Mergers and Acquisitions) rather than ‘mergers and alliances’ when referring to the phenomenon of two or more business entities joining together to form one enterprise for the greater good of all the major investors and shareholders (Brett 2001). However, in today’s complex international corporate business scene, some inter-firm linkages are not restricted to acquisitions in the strict technical sense, and may be more correctly referred to by the broader term ‘alliance’. These alliances fall short of being ’takeovers’ since there is some degree of autonomy exercised by the other, (or usually) junior partner(s) to the alliance. This is where the term ’cross-cultural’ acquires significance in discussing negotiating skills essential for the success of international mergers and more specifically for success in acquisitions and alliances (Lewis 1996, Svensson 2000, Torp et al.,1998)). More often than not, mergers and acquisitions are types of corporate businesses which amalgamate to form one single legal entity. The word alliance may cover activities like joint ventures, technology sharing agreements, and (seemingly in danger of violating anti-trust laws by price fixing) cartels, but not necessarily forming a single legal entity. Mergers and acquisitions among business firms have occurred within state boundaries before they became an international phenomenon. It perhaps speaks volumes for the lack of negotiating skills by one party or the other, when it is reported that 60 - 70 percent of M&As failed to deliver on what had been expected financially, as the outcome of the liaison. Less than a fifth of international M&As are said to create added value to the resulting organization. At the least, domestic mergers and acquisitions can expect shared traditions, regulatory laws, and custom and practice, which presumably make it easier for two or more parties to agree on common business aims and work towards achieving them. Even so, the high failure rate reveals the difficulties in reaching effective synergy. How much more difficult must it be for an international merger or acquisition to be effective when there is so much more room for misunderstandings arising from cultural diversity, and the absence of a shared set of beliefs. It is also well to remember that intercultural negotiation does not only happen in deal-making between or across nations. There are also differences between the cultures of an organization, for example, when it is already a global player, and another organization within the same state boundaries which only caters to a domestic market. Mergers and acquisitions are said to occur in waves. In the 1990s there was a surge of international activity in this sphere which was regarded historically as the fifth wave of M&As. At the beginning of the 21st century we could be witnessing the sixth wave. The emergence of China and India as global players in trade and industry signals an increasing emphasis on cross-cultural negotiation skills in the steady march towards corporate expansion and growth via internationalization and globalization. Transnational corporations (TNCs) are the vehicle through which much of this is accomplished. A recent UNCTAD report stated that 29 of the world’s largest economic giants are TNCs. The annual value-added business performance of the 100 biggest TNCs exceeded that of some nation states. In 1970 there were about 7000 non-financial TNCs investing directly in other developed or developing countries. By 1992 there were 37,000 with 170,000 foreign affiliates. By the end of 1998 there were 60,000 parent companies with more than 500,000 affiliates. The latter accounted for $11 trillion worth of output. Against this, the total world trade amounted to only $7 trillion. In a short period of 30 years …transnational production had become a far more important way of helping foreign lands reach goods and services than international trade itself. The rise of TNCs had transformed world trade. (Confluence, Jan/Feb 2007). Having established the increasing diversity and international scope of modern business practice it behooves us to take a closer look at the variables in cultural differences among nation states that are relevant from the point of view of the skilled negotiator. Before that, it is necessary to understand what negotiation means. Broadly defined, negotiation is a process in which two or more parties with disparate interests seek to come to a common consensus with the goal of reaching agreement for mutual benefit through a series of interactions and focused communication. Geert Hofstede (1980, 1996) carried out field research to ascertain how cultural differences influence values in the working world, an awareness of which would help improve international negotiations in every arena of commercial activity. Hofstede identified first four, and later added another, to arrive at five broad dimensions that make for cultural differences in societies. They are: Power Distance Index (PDI) defined as ‘the extent to which the less powerful members of organizations and institutions (like the family) accept and expect that power is distributed unequally.’ Individualism (IDV) defined as ‘the extent to which the society is organized around individuals or the group.’ Masculinity (MAS) defined as ‘the extent to which cultures hold values that are traditionally perceived as masculine or feminine.’ Uncertainty Avoidance Index (UAI) defined as indicating ‘to what extent a culture programs its members to feel either uncomfortable or comfortable in unstructured situations.’ Long-Term Orientation (LTO) is described simply as societies having a sense of history (derived from Confucius). Looking at these dimensions in greater detail, when Power Distance Index is high, it refers to the degree that the population of a country is socially stratified with some members habitually exercising power and control over others. They are more status conscious and respect age and seniority. In low power distance countries there is more equality of opportunity, and societal members treat each other as equals with greater social mobility. There is also a preference for making decisions in a consultative manner. Low power distance countries include Canada, UK and USA, while high power distance countries include Japan, Malaysia and South Korea. Individualism when rated high, reveal societies that value the individual’s rights and freedom to achieve personal goals. When rated low, there is in evidence close ties among family and other groups where the membership of the group overrides individual choice and personal achievement. There are reciprocal obligations between and among people, more so than in an individualistic society. Examples of individualistic societies are the US, UK, Canada and Australia, while most Asian and Latin American countries (Japan, Singapore, Brazil and Mexico) are rated as collectivistic cultures. Masculinity measures the degree of assertiveness, control and competitiveness, traditionally regarded as masculine characteristics while a modest, caring and nurturing role is regarded as having feminine characteristics. Masculine cultures tend to be more task oriented and value independent decision making. Feminine cultures value cooperation and quality of life concerns. Societies reveal differences in the degree to which they subscribe to these values and behaviour patterns Japan, Latin American countries and Australia are examples of masculine cultures whereas Norway and Sweden are examples of feminine cultures. Uncertainty Avoidance Index taps into the capacity to tolerate uncertainty and ambiguity as against need for reassurance in established customs, regulations and structures. People in uncertainty avoiding cultures are more often than not fundamentalist in their beliefs and likely to be more emotional than the free-wheeling types among the people scoring low on this index. Negotiators from high uncertainty avoidance cultures are less comfortable with ambiguous situations and seek reassurance in detailed explanations (e.g. most Asian and some Arab countries). Cultures that are comfortable in handling risk may have fewer people involved in making decisions and they act quickly (e.g. Canada and USA). Long-Term Orientation when high makes for people who are thrifty and patient and who commit themselves to long term goals. They also have a strong work ethic. When low on this index, people are respectful of tradition although their short term orientation may make it easier for them to embrace change more readily. There is also a concern for what is recognized as ’face’ in Asian countries related to the teaching of the Chinese philosopher Confucius. Hofstede and collaborators have been refining these measures and testing them in several countries all over the world since 1967. Indeed, it is possible to get up-to-date country profiles on these dimensions on the Hofstede website on the Internet (http:// www.geert-hofstede.com ). Let us now look at instances of cross-cultural negotiation training offered which has been influenced by Hofstede’s research. Negotiation.org.uk stresses the importance of such training. There are two negotiators dealing with the same potential client in the Middle East. Both have identical proposals and packages. One ignores the importance of cross cultural negotiation training believing the proposal will speak for itself. The other undertakes some cross cultural training. He/she learns about the culture, values, beliefs, etiquette, and approaches to business, meetings and negotiations. Nine times out of ten the latter will succeed over the rival. This is because 1) It is likely they would have endeared themselves more to the host negotiation team and 2) they would be able to tailor their approach to the negotiations in a way that maximizes the potential of a positive outcome (http://www.negotiation.org.uk/cross_cultural_negotiation.php). A British communication consultant and trainer recounts her own direct experience to illustrate the point. In my first experience of working in France, I blithely scheduled the period immediately after noon to make local telephone calls just as I used to do in London, where lunch was often just a quick sandwich break around 1 pm. In a Homer Simpson-like moment of recognition, it dawned on me that this was the sacred French lunch break and, of course, nobody was ever in their office. I had tried to salvage a little of my old, familiar routine in order to feel more comfortable with the working day and was in denial about this great French tradition. I really didn’t want to see that the French could abandon two or three hours in the middle of the day to non-work activity. (Brenda Townsend Hall, http://www.sideroad.com/Cross_Cultural_Communication/working-abroad.html She adds that ‘it’s not sufficient to know about differences on an abstract level, we need to experience them to recognize them, and this transitional period takes time. But it also requires a willingness to see.’ (op cit). In other words, this communications consultant advocates ‘cultivating cultural fluency’ (Noringer, 2001). ‘Between fifteen and forty percent of US managers sent to overseas operations have been failures, a situation resulting in their premature return.’ (http://elearn.mtsac.edu/rjagodka/Articles/art_12_3.htm ). Here is another consultant summarizing the ‘Most Common Challenges for American and Mexicans Working Together’: Cultural Traits Meaning in Mexico Meaning in the U.S.A. TIME Time is relative; schedules and plans are adaptable. Less relative in areas of northern Mexico Time consciousness is imperative; deadlines and commitments are firm BUSINESS RELATIONSHIPS Focus on the human side in order to accomplish task: build trust and kinship. Less necessary in northern Mexico Human interaction is brief, focus is on the task; avoid interruptions and distractions. COMMUNICATION Indirect, contextual, diplomatic and physical; ‘Yes’ and ‘No’ are not absolutes. Direct verbal and written statements Focus is on the content (facts, numbers, and explicit meanings); ‘Yes’ or ‘No’ are absolutes.. HIERARCHY, STATUS & SOCIAL CLASS Hierarchical systems and deference to authority; upper management is responsible for most decision-making; social classes are obvious. Currently changing. Equality and egalitarianism are the preferred social modes, even with a hierarchy; decision-making is distributed at different levels; most Americans see themselves as members of an egalitarian middle-class © 2001 Miranda-Johnston Cross-Cultural http://www.cerosscultural.com/tips.html . In situations requiring face to face negotiation it is a well established fact that about 70 percent of the communication is attributable to nonverbal factors (Le Bron 2003). A negotiator’s body language must not be at variance with what he/she says in words. Cultural norms as to what is acceptable in terms of eye contact, personal space and touch, crossing one’s legs, exposing the soles of feet, whether to shake hands, kiss or bow when meeting and greeting, have all been noted as problematic areas of concern across cultures. However, as more and more of the processes of intercultural negotiation become commonplace across the globe, there is likelihood that these differences would tend to get ironed out (Trompenaars et al.). In the example above, the differences observed between the north, and the Mexico of the south, points to the possibility of such change. The acquisition of negotiating and business skills is not a one way street. Increasingly we hear reports of Middle Eastern negotiators educated in the West. The Sunday Times (29/04/07) reported on the activities of ‘the American -educated businessman’ Mohammed Alabbar of Dubai calling him the ’Desert Capitalist‘ who ‘spent £250m acquiring Hamptons, the London estate agency, and linked up with Reuben brothers, the billionaire London-based property magnates, in a bid to buy Chelsea Barracks. He will soon open a branded Armani hotel in London, part of a £500m joint venture to develop a dozen hotels worldwide.’ Yet, deeply held values and practices of a culture which define its identity may not be so easily shaken off. In modern Dubai ‘(T)here are no democratic elections, press freedom is curtailed, and the decision to ban trade unions recently prompted Human Rights Watch to describe Dubai’s 250,000 strong army of Asian workers as “deportable, forced labourers”.’ (op cit). It cannot therefore be stressed too much that understanding the culture and psychology of an organization and its people when negotiating across cultures is of the utmost importance in reaching a conclusion satisfactory to all parties. In military terms, the process has been compared to gathering reliable intelligence before committing troops to action. In summary therefore: The negotiating environment must be designed by taking into account the cultural and ideological differences between parties to the negotiation. The differences in the legal infrastructure of two or more states in the frame could create problems unless these are reviewed and kept in the foreground. There is also the impact of varying degrees of bureaucracy causing unforeseen delays. International financial markets can be very volatile and may create insecurity while negotiations are in progress. Finally, political instability is endemic in some parts of the world and may impact on the economy of these states without warning. These are some of the imponderables that can affect the success or otherwise of international mergers and alliances and there are no easy answers to such problems except the vigilance and enterprise of each individual participant to the transaction. (> 2500 words) Bibliography Brett, J.M.(2001) Negotiating Globally: How to Negotiate Deals, Resolve Disputes and Make Decisions Across Cultures, Josey Bass Wiley. Confluence, South Asian Perspectives, 6:1, January/February 2007. Hofstede, G. (1980) Cultures Consequences: International differences in work related values. Newbury Park, CA: Sage. Hofstede, G. (1996) Cultures and Organizations: Software of the Mind. International Cooperation and its Importance for Survival. New York: McGraw-Hill. Le Bron, M. (2003) ’Cross-cultural Communication’ in Beyond Intractability, (eds.) Guy Burgess & Heidi Burgess, Boulder: University of Colorado. Lewis, R.D. (1996) When Cultures Collide: Managing Successfully Across Cultures Nicholas Brealey Publishing Ltd., UK. Noringer, T. (2001) International Communication, TX: University of Texas Press. The Sunday Times, ‘Business’, April 29, 2007. Svensson, R (2000) Success Strategies and Knowledge Transfer in Cross-border Consulting Operations, Kluver Academic Publishers. Torp, J.E. Gertsen, Martine, Sodeberg, A. and Gertsen, Martin (eds.) (1998) Cultural Dimensions of International Mergers and Acquisitions, (De Gruyter Studies in Organizations), Walter de Gruyter Publishers. Trompenaars, A., Hampden-Turner, C. and Trompenaars, F.(1997) Riding the Waves of Culture: Understanding Diversity in Global Business, Nicholas Brealey Publishing Ltd (UK) & McGraw-Hill Publishing (US). < http://www.negotiation.biz/ > < http://www.geert-hofstede.com/ > < http://www.negotiation.org.uk/5_steps_to_powerful_negotiating-feature-article.php > < http://www.negotiation.org.uk/cross_cultural_negotiation.php > < http://elearn.mtsac.edu/rjagodka/Articles/art_12_3.htm > < http://www.mjcrosscultural.com/tips.html > < http://www.beyondintractability.org/essay/cross-cultural/communication/ > < http://www.sideroad.com/Cross_Cultural_Comunication/working-abroad.html > < http://www.negotiation.biz/comercial_infrastructure.htm > Read More