German Engineering, Swiss Chocolate and Cheese, American Computers, Finnish Cell Phones: Domestic Conditions and Global Competence

When asked to name a product associated with a specific country, people are generally quick to respond. There seems to be a clear sense among people worldwide about which companies from which countries dominate industries. For instance, German companies dominate engineering based industries, whereas Switzerland is clearly associated with dairy-based products such as chocolate and cheese in addition to banking, precision instruments, and pharmaceuticals. Why? How do companies from a specific country develop superior competence in specific industries?

Michael Porter (Harvard Business School) addressed this question and published his findings in The Competitive Advantage of Nations (1990). He conducted a four-year, ten-nation study of the patterns of competitive success in leading countries. The findings support the results of previous research that companies achieve competitive advantage through acts of innovation. Porter’s primary contribution from this research is the conclusion that a nation’s capacity to innovate is affected by four broad attributes, the “diamond” of national advantage: 1) factor conditions; 2) demand conditions; 3) related and supporting industries; and 4) firm strategy, structure, and rivalry. These factors represent the domestic conditions companies face, that affect the level and type of innovation companies engage in.

Switzerland, chocolate, and cheese – the first component in the diamond, factor conditions or endowments play a role here. Porter differentiates between basic and advanced factor endowments. Basic factors are domestic conditions such as climate, land, natural resources, and population size. Advanced factors include education, infrastructure, and technology. During the agricultural phase of economies, the economic development of Switzerland was constrained by the type of land (rocks, not fertile) available. As a result, the Swiss agriculture was founded on a focus on dairy rather than on farming – resulting in superior expertise of “anything dairy related” and a competitive advantage in that area. Important to note is that Porter concluded that for sustained economic development advanced factors are more important than basic factors.

What about German engineering? Demand conditions in the domestic market direct where companies will place the relative emphasis with respect to product characteristics. What is most important to domestic consumers? Product quality, price, innovativeness, customization, or variety? Consumer preferences are in part based on the cultural characteristics. Germans are known to avoid risk and to prefer structure and predictability. Hence, German consumers look for products that are reliable, high quality, precise. German companies have been challenged to meet such preferences and have developed a competitive advantage based on the technical expertise that allows them to design and deliver products with such characteristics.

In the U.S., computer-related industries are well developed and internationally competitive. This has been a great advantage for American computer manufacturers, hardware and software. Silicon Valley is the world’s most famous industry cluster! Porter’s third factor, supporting and related industries, addresses the importance of outstanding, innovative domestic suppliers for companies to be innovative and develop competitive advantage.

Finally, Porter found that the competitive strategies that companies choose depend – to some extent – on their domestic, cultural context. For example, members of the top executive team in European companies, especially North European, tend to have a technical background. CEOs in European companies tend to have a Ph.D. in the relevant technical field and, hence, focus their attention on the technical aspects of the products rather than on the bottom line and short-term financial aspects of the company.

What about Finland and Nokia’s success? It seems that the climate in and the geographic location of Finland, basic factor endowments, are most useful in explaining this company’s competitive advantage! Finland’s harsh climate, the land covered by snow much of the year, required innovation as to wireless communication – more than in many other countries.

In conclusion, the companies that dominate certain industries in the global economy where able to develop competitive advantage based on the domestic conditions they were “blessed with.” In addition, countries that make investment in and development of advanced factors, such as infrastructure and education a priority create the conditions that are most important to domestic companies in their pursuit of competing successfully in the global market.

What do you think? Please share your thoughts in the comment section below!

Yvonne Stedham, Ph.D.

Yvonne Stedham is professor of management, a 2010 University of Nevada, Reno foundation professor, and co-director of the Center for Corporate Governance and Business Ethics in the College of Business. She received a Ph.D. in business and an MBA from the University of Kansas, Lawrence, Kansas and undergraduate degrees in economics and business from the Rheinische Friedrich Wilhelms University, Bonn, Germany. She teaches undergraduate and graduate courses in international management and human resource management at the University of Nevada, Reno and the School of Management in Ingolstadt, Germany.

Her research focuses on cross-cultural aspects of management and business ethics. Stedham serves on the State Council for the Society for Human Resource Management (SHRM) as well as on the Nevada World Trade Council (NEWTRAC). She provides consulting and training services to many companies, locally, nationally, and internationally.

The Cultural Context of Business and Management Practices

Undoubtedly, companies around the world operate in a global context. In his highly successful book, The World is Flat, Thomas Friedman highlights the processes underlying globalization and discusses the implications of the increasing interdependence of countries and companies. He points out that, in addition to considering the economic, political, and technological components of the global business environment, understanding cultural characteristics and their impact on business and management practices is critical to effectively operating in a global context.

For example, many Americans might think that the cultural differences between Germany and the U.S. are relatively small. However, the differences are substantial enough to result in significant differences in management and business practices. An American company that recently created a joint venture with a German company has been facing numerous challenges in integrating the two companies. Most of the challenges are a result of the cultural differences between the two countries. Among others, the American company identified the following issues:

 

–        Structure – German firms typically have a much more rigid organizational structure and hierarchy than American firms. The need to follow the hierarchical lines for communication and decision-making is cumbersome and causes inefficiencies.

–        Technical Emphasis – German employees emphasize the technical aspect of everything. Although technical aspects do play a primary role in the U.S., Germans consider technical issues as most important to the exclusion of everything else.

–        Timelines – In the U.S. “time is money” and decisions must be made as quickly and efficiently as possible. The primary concern is with speed as opposed to quality and effectiveness. Hence, American customers have much less “patience” with respect to delivery times, communications, and service issues than German customers

These three challenges can be attributed to cultural differences between Germany and the U.S. with respect to expectations about risk-taking and the need to avoid uncertainty. As opposed to the American culture, the German culture is characterized by a relatively high level of uncertainty avoidance. Societies high in this cultural characteristic tend to create processes, rules, and systems that increase the predictability of behaviors and outcomes. High uncertainty avoidance cultures, such as Germany and Japan, place a strong emphasis on quality and technical aspects of products in order to minimize the potential for unexpected results at all cost. Similarly, rigid organizational structures require employees to follow preset procedures and rules that provide guidance and must be adhered to by all. Finally, the time required for making decisions is much longer in high uncertainty cultures than in low uncertainty cultures as in high uncertainty cultures all possible options and potential consequences must be considered before a course of action can be chosen.

Although some commentators on globalization have promoted the idea of cultural convergence among countries, the evidence does not seem to support this idea. Norms and values are deeply rooted and are the foundation on which societies are built; they give them their identity. I do not believe that cultural convergence and, hence, common management and business practices will become reality in the foreseeable future. However, I do agree that on the macro-level rather than on the micro-, the interpersonal, level similarities are prevalent. These similarities are driven by the global legal and technological conditions. Therefore, companies in different countries may have similar technological processes (macro-level) but the impact on behaviors in the work environment (micro-level) will continue to differ by culture.

In conclusion, knowing and understanding cultural differences will facilitate effective international business endeavors by allowing companies to anticipate and effectively address issues with their global business partners.

Yvonne Stedham, Ph.D.

Yvonne Stedham is professor of management, a 2010 University of Nevada, Reno foundation professor, and co-director of the Center for Corporate Governance and Business Ethics in the College of Business. She received a Ph.D. in business and an MBA from the University of Kansas, Lawrence, Kansas and undergraduate degrees in economics and business from the Rheinische Friedrich Wilhelms University, Bonn, Germany. She teaches undergraduate and graduate courses in international management and human resource management at the University of Nevada, Reno and the School of Management in Ingolstadt, Germany.

Her research focuses on cross-cultural aspects of management and business ethics. Stedham serves on the State Council for the Society for Human Resource Management (SHRM) as well as on the Nevada World Trade Council (NEWTRAC). She provides consulting and training services to many companies, locally, nationally, and internationally.