Cultural Risks in Global Business

Globalisation has outpaced the ability of many organisations to manage the accompanying cultural shifts. The focus has been on overcoming legal, political, technological, and economic barriers, while cultural barriers are often unacknowledged or discounted.

Ignorance of cultural differences can result in weak market share, low or negative return on investment, missed opportunities, and reputational damage as well as legal challenges, productivity losses, expatriate failure, and the premature termination of contracts, joint ventures, and partnerships. The misunderstandings, tensions, and biases caused by cultural differences can even lead to outright failure.

The main cultural risks facing global businesses include:

1. Failing to Adapt Global Business Models to the Local Market

Consumer attitudes and behaviours are highly influenced by culture. When a company moves into a new market, business models should be modified to reflect local preferences, customs, and habits. For example, changes should be made to product and service offerings, pricing, and marketing. Unless local cultures drive business models, foreign businesses have a high risk of failure. The costs associated with failure in a foreign market can be significant: on average, international retailers absorb seven years of losses before they shut down or sell their operations to a local competitor.

The "one-size-fits-all" approach to international business is flawed. International success requires a glocal mindset. Glocalisation refers to the interface of globalisation and localisation. Whereas globalisation involves standardised worldwide processes, products, and services, localisation involves processes and product offerings tailored to meet specific local markets. The hybrid of standardisation and adaptation is glocalisation, which involves the integration of local features and global ideas, products, or processes. Glocalisation recognises that economic synergies are limited by deeply ingrained cultural systems resistant to change.

2. Failing to Identify Regional and Subculture Differences

Cultural barriers may be just as relevant intranationally as internationally. Within emerging markets, there are significant regional variations in consumer preferences and market conditions, yet within-country differences are often overlooked—four-fifths of multinationals report that their offshore decision-making occurs at the country rather than the city level.

Subcultures are not limited to regional or ethnic variations. For example, consider the different consumer profiles of males and females in the United States. Although females account for 88 percent of retail purchases, marketing campaigns often overlook differences in male and female consumer behaviour and thinking. Moreover, female consumer habits and preferences vary across generational, ethnic, and occupational groups. Companies that fail to recognise the cultural diversity of their markets risk missing important consumer segments.

In fact, cultural barriers are often amplified within a national context because they are assumed to be irrelevant: research on mergers and acquisitions shows that social integration is more problematic in domestic contexts than in international contexts. 

3. Failing to Understand Local Business Practices

Cultural barriers don't only occur at the customer interface. International business success also requires an in-depth understanding of local business customs. Without a full appreciation of how business is done in a foreign market—including economic, political, regulatory, and cultural influences—new entrants can quickly find themselves on the back foot with stakeholders.

4. Failing to Adapt Management Practices Across Cultures

Most, if not all, management theories, models, and practices are laden with culture-specific assumptions. No organisational theory is universal, yet the cultural assumptions underlying management practices are often unacknowledged. Ideas are transferred to other cultural environments without consideration of cultural variations. But when practices are translated across cultures without adjustment for cultural differences they can fail—and may even lead to losses.

5. Failing to Identify New Opportunities

Cultural barriers may result in missed opportunities. There are examples of well-established North American or European companies that have overlooked the potential of certain developing markets, failing to establish an early market presence and leaving them unable to catch up to other foreign companies or local competitors. Other companies have withdrawn from emerging markets prematurely, damaging relationships and leaving a legacy of weak commitment in the process.

6. Failing to Understand Local Legal and Ethical Issues 

Global companies face a complex web of legal and ethical issues. In 2012, Hermès lost a trademark case in China after a fifteen-year battle with a local firm Foshan. In 1995, Foshan had registered a Chinese-character trademark with similar pronunciation but a slightly different written form than the Hermès name in Chinese.

Another example from China is the custom of guanxi: the establishment of long-term reciprocal relationships via the giving of gifts. Guanxi is critical for establishing the trust that underpins successful business in China, but home-country laws (for example, the U.S. Foreign Corrupt Practices Act or the U.K. Bribery Act) may prohibit global organisations from engaging in this practice. When this is the case, foreign companies must seek alternative means of fostering trust.

7. Failing to Adapt Human Resource Management to Local Markets

Cultural ignorance may threaten a firm’s ability to attract, retain, and leverage its pool of global talent. When foreign companies employ local staff, human resource policies need to be adapted to reflect the cultural profile of local employees. Factors that influence employee motivation, job satisfaction, and organisational commitment vary across cultures. In addition, conflict resolution and giving and receiving feedback differ widely across cultures, with significant implications for performance-appraisal.

8. Ineffective Diversity Management

Research shows that workforce diversity is a double-edged sword. Diverse teams may either improve or detract from performance.

On the positive side, the successful integration of diverse perspectives fosters innovation and creativity, inclusive workplaces attract and energise top global talent, a diverse workforce can better understand and respond to the needs of varied customers, and employee diversity can increase access to new suppliers and other stakeholders.

But unless carefully managed, diverse workgroups may experience greater conflict and less trust and cohesion than homogenous teams. Companies need to effectively manage cultural conflicts, bias, and discrimination. Those that do not address those internal tensions will fail to leverage the advantages of a diverse workforce and may face costly discrimination claims.

Diversity issues vary from one country to the next and they are often more complex outside the United States. Global diversity programs must accommodate for variations in historical, social, political, cultural, and legal contexts. Adaptations may be required to diversity program content, rationale, language, and methods.

9. Stakeholder Conflict

Diversity increases the complexity of our exchanges. It enhances the potential for language and other communication barriers and it heightens the risk of ambiguity, value conflicts, and reasoning and decision-making differences. In addition, stereotypes and other forms of bias can threaten rapport and stifle the exchange of information and ideas. 

10. Assignment Failure

Expatriate research indicates failure rates of between 15 and 25 percent, and even up to 70 percent in some regions.

It is estimated that the total direct costs of a four-year expatriate posting may be as high as USD2 million. In addition, expatriate failures may lead to relationship or reputational damage in the host country.

At an individual level, expatriate failure may lessen self-confidence. It can also increase stress on the expatriate and family and contribute to marriage strain or break-ups. Plus assignment failure has negative implications for job performance and career advancement.

Most expatriate failures are not due to technical or professional incompetence. The main causal factors involve difficulties with cultural adaptation: culture shock, spousal adjustment, communication barriers, interpersonal conflicts, lifestyle changes, local business practices, and isolation.

Shorter-term global talent mobility solutions include virtual assignments, cross-functional teams, short-term business travel, or external partnering. With less time for establishing relationships, cultural skills may be even more critical on these assignments. 

Decreasing Business Risk with Cultural Intelligence

Cultural Intelligence is an individual’s capability to function and manage effectively in culturally diverse settings—the collection of knowledge, skills, and abilities that enable an individual to detect, assimilate, reason, and act on cultural cues appropriately. 

Individuals with high Cultural Intelligence display four main competencies:

• CQ Drive is the willingness to work with others from diverse backgrounds. It includes an ability to overcome explicit or unconscious bias and the capacity to persist in challenging intercultural settings—even when the individual feels confused, frustrated, or burnt out.
• CQ Knowledge is an understanding of culture and cultural differences. That involves more than awareness of variations in language, customs, and appearance. Core cultural differences like values, assumptions, and beliefs are often invisible but cause the most problems—and are frequently overlooked.
• CQ Strategy is the ability to flex mentally. With high CQ Strategy, individuals are not confined to a single worldview. They are open to new or integrative ideas.
• CQ Action is the ability to flex verbal and non-verbal behaviour. CQ Action decreases the risk of miscommunication and helps an individual respond to diverse others in a manner that conveys respect and builds trust and rapport.

As a tool for managing any form of cultural diversity, whether national, gender, generational, ethnic, health status, sexual orientation or other subculture, Cultural Intelligence helps turn a business risk into a strategic strength.

Companies with leaders and workers who have high Cultural Intelligence are more agile. These organisations can quickly adapt processes, products, and services to capture new opportunities and respond to change across diverse markets.

Cultural Intelligence also promotes successful intercultural relations, both inside and outside the organisation. This improves business performance through enhanced innovation, increased workforce engagement, and more effective partnering. 

For further reading on the competitive advantages of Cultural Intelligence, please refer to my earlier article 'Managing Disruption with Cultural Intelligence'.

The original version of this article with research citations can be found here.

Invitation to Share

I am eager to learn about your successes and challenges managing cultural differences. Please feel free to share in the comments below or contact me directly at [email protected].   

About the Author

Felicity Menzies is an authority on Cultural Intelligence and diversity and inclusion in the corporate environment. Felicity’s interest in the role of culture in business began during her tenure as the Head of Private Bank, Westpac, in Singapore. There she led a culturally diverse team of bankers serving a multinational client base and learned firsthand how Cultural Intelligence is a necessary component of business success. 

As Principal at Culture Plus Consulting, Felicity now applies her business acumen and intercultural expertise to help global organisations respond effectively to the opportunities and challenges presented by diverse workforces, unfamiliar markets, and rapid shifts in the competitive landscape. 

Cultural Intelligence Training—Build the knowledge, skills and abilities for effectiveness across diverse cultural settings. 

Consulting—Leadership support for instilling the skills and practices throughout your organisation that maximise the potential of Cultural Intelligence. 

Assessment—Diagnose the intercultural strengths and development needs of your workforce. 

Coaching—Guidance to individuals and workgroups seeking to understand their intercultural strengths and weaknesses and to develop their Cultural Intelligence. 

Mentoring—Expert advice and peer support to senior executives as they navigate their real-life ongoing diversity challenges. 

Keynote Speaking—Empower your network by engaging our expertise for your event or seminar.

Felicity has more than 15 years of experience in financial and professional services with blue-chip companies, and has held senior positions in business development, project and change management, relationship management, and financial and operations control.

Felicity is an accredited facilitator with the Cultural Intelligence Centre and the author of the forthcoming book, The Competitive Advantages of Cultural Intelligence (CQ): Four Competencies for International Effectiveness and Sustainable Global Growth. Felicity has been a member of Chartered Accountants of Australia and New Zealand since 1995, and holds a Bachelor of Commerce and a Bachelor of Arts in Psychology. 

CQ is a registered trademark of the Cultural Intelligence Center.