Managing Diversity

The author depicts the cultural challenges faced by a Swiss expatriate who has been sent to
Egypt.

Managing Diversity to counter lack of Intercultural Competence in International Business

Executive Summary

Reviewing academic and non-academic literature, a paradox comes into sight: plenty of material
concerning the importance of intercultural competence in international business relationships and
performance in foreign markets can be found. At the same time, the same literature supplies
evidence of costly failures of international firms venturing overseas, pointing out the lack of
intercultural competencies as a key component of the failures.

The most convincing viewpoints found in the literature suggest that this issue hasn’t been
addressed correctly yet, due to outdated concepts of culture, which ignore dynamics,
complexities and focus on cultural differences.

To solve the paradox, this paper recommends the creation of highly multicultural teams in
international business firms, suggesting this as the most effective way to acquire intercultural
competence through daily experience in organisations. In such teams, diversity is valued and
treated as a resource rather than a threat. We conclude that those firms who will be able to create
the necessary capacity to manage workforces with different cultural backgrounds and identities
will gain a real competitive advantage in our growing globalised world.

Introduction

The topic treated in this paper came to my mind talking with my friend Ciro. He is a Swiss event
manager working for an important international hotel chain. After working in Switzerland for
over ten years with great success, his company moved him to Egypt, as responsible for events in
their resort on the red sea. No specific instruction was given to him regarding how to manage the
intercultural differences he would necessarily encounter. And indeed he did. His new boss was
Swiss, but all of his subordinates and most of his peers, Egyptians.

One of the first things that struck him in his new work environment was how his Egyptian peers
treated their subordinates. Orders were given in a very unfriendly manner, and if the work was
not completed in an adequate way they would shout and threaten the neglectful.

Ciro was well known in Switzerland for being a very gentle and polite boss, his subordinates
most appreciated his relational qualities, the way he treated them as equals and how he always
took into consideration their ideas and remarks.
He talked about his perplexities with his Swiss ethnocentric boss, who simply replied:
“Egyptians are lazy if you don’t treat them this way they will not work”. Unhappy with this
answer, Ciro decided to try out his usual egalitarian management style in Egypt. He then held his
first meeting with his direct reports and asked them to express the ideas they had about possible
events to organise in the next future, but everybody kept silent. When he finally came up with a
banal idea, everybody supported it without further discussion. This meeting model repeated
itself, again and again, nobody ever seems to have initiative.

Despite his discouragement, Ciro had friendly manners with his subordinates and once he
dispatched the work he didn’t continuously check it up, convinced that personal responsibility
would be sufficient.

He soon realised that work wasn’t completed, that his friendly manners were interpreted as
weakness and that he was the one expected to have ideas, as he was the boss. Ciro finally
understood the importance and the extent of cultural differences existing between Egypt and
Switzerland.

Ciro’s experience is not an isolated case, and lack of awareness of cultural differences have
caused serious issues when not addressed correctly. Malcolm Gladwell, in his book “Outliers:
The Story of Success”. (2008) gives an intercultural interpretation of the repeated crashes of
Korean Air in the 1990s. Boeing and Airbus design aeroplanes where pilots and co-pilots are
meant to act as equals in the cabin, but Korean culture doesn’t permit co-pilots to correct errors
done by hierarchically superior pilots, and if an irreverent co-pilot dared criticise a pilot, he
probably wouldn’t be heard. According to Malcolm Gladwell, cultural difference in Korean
culture is at the origin of the repeated air crashes and losses of hundreds of lives. Korean Air
finally figured out the nature of their problem and fixed it.

On the other hand, in the academic field, there is a great deal of research done on intercultural
management and debates are intense. Geert Hofstede has been one of the most influential
researchers in this field. In the early 1980’s he conducted a study on how values in the workplace
are influenced by culture. His study was first conducted in IBM covering 70 countries.
Subsequent researchers have covered other multinational firms and countries.

Hofstede (1980) developed a model that identifies four primary dimensions to assist in
differentiating cultures: power distance, individualism/collectivism, uncertainty avoidance, and
masculinity/femininity. According to Hofstede (1991), culture refers to the collective
programming of the mind, which distinguishes the members of one group or category of people
from another. Each dimension is based on a continuum, so those actual situations are not just
polarised between high and low but may be anywhere in between.

Actually, Hofstede’s dimensions validate our examples. Power distance is defined as “the extent
to which the less powerful members of organisations and institutions accept and expect that
power is distributed unequally. This represents inequality but defined from below, not from
above. It suggests that a society's level of inequality is endorsed by the followers as much as by
the leaders.”(Hofstede, 1980). Ciro comes from Switzerland, where the power distance indicator
is very low, 34, while Egypt stands at the other end of the rule, scoring 80. This difference in
power distance is a possible and plausible explanation of the difficulties encountered by Ciro in
his new job. South Korea’s power distance indicator stands in between, rating 60 but it comes
with a very high uncertainty avoidance index: 85, indicating the society’s low level of tolerance
for uncertainty. When these two dimensions are combined, it creates a situation where leaders
have virtually ultimate power and authority, and the rules, laws and regulations developed by
those in power reinforce their own leadership and control. It is, therefore, understandable that the
situation in the cockpit between pilot and co-pilot was not at all egalitarian, as the designer of the
aeroplanes supposed it was.

Numerous subsequent studies have used one or more of Hofstede’s dimensions to measure
cultural distance and other researchers such as Cameron & Quinn (1983) or Trompenaars (1993)
have developed different models. More recently the extensive GLOBE study (2004) determined
how leadership values are culturally contingent.

Another influential researcher in intercultural management is Nancy Adler (1991). She asks
whether organisational culture can moderate or even erase the influence of national culture. Her
researches demonstrate that organisational culture, on the contrary, magnifies national cultures,
making the latter’s impact on work behaviours more pronounced. Adler’s observations support
the conclusion that national culture outweighs organisational culture.

All these studies tend to demonstrate that in international business, relations between colleges,
with competitors and with clients are highly dependent on cultural values.

Nevertheless, despite the effects of cross-cultural differences on international business are widely
acknowledged, international firms continue to experience costly failures when venturing
overseas. Indeed, according to academic and non-academic literature, companies are struggling
to succeed in the global multicultural environment. A high number of failures have been
documented in areas such as international joint ventures, mergers and acquisitions (Rottig, 2007;
Arikan, 2004) and expatriate assignments (Hill, 2001; Storti, 2001;). In many cases, a lack of
intercultural competence appears to be the prime cause of the failure.

Discussion

Keiretsu News (2006) reports that “There is a startling high failure rate for newly acquired or
merged businesses. Within 18 months of closing, 80% of large cap, 50% of small cap, and 80%
of micro cap transactions fail to meet stakeholder objectives. Separately, Mergerstat.com spent
two years tracking results from the 8,224 domestic transactions conducted in 2001. The study
estimates that a staggering $560 billion of business value was destroyed due to M&A failure.”.
Doug MacDonald (2005) points out that failures in mergers and acquisitions and joint ventures
rate somewhere between 40 and 80%.

Daniel Rotting conducted a study aimed to identify key difficulties that may cause such high
failure rates of cross-border mergers and acquisitions, and developed a typology of strategies to
facilitate the management of these problems His study indicates that cultural distance alone
cannot define international acquisition performance. He argues that the consequences of culture
on international acquisition performance are of a more complex nature and that “it is not cultural
distance per se, but the ineffective management of cultural differences that may be the main
reason for the high failure rates of international acquisitions.” (Rotting, 2007, p2.).

Apud, Lenartowicz and Johnson (2003) conducted a three-stage study to establish the extent of
academic research in cross-cultural issues in international business; the degree to which top
business schools incorporate these issues in undergraduate and graduate business programs; and
the awareness of and responsiveness to these issues by practitioners. They found a low level of
intercultural competence among business practitioners and consultants and an apparent failure in
the dissemination of existing intercultural knowledge in business schools and by corporate in-
house and external trainers.

In addition, until a few years ago it was widely acknowledged that intercultural competence was
necessary for expatriates leaving their homeland and facing new situations abroad. Recent
articles in the business literature suggest that in today’s hypercompetitive global marketplace
intercultural competence should be spread out to all levels of the organisations. Martha Frase’s
puts it in these words: “Increasingly, companies will find that to grow, they will have to expand
into international markets and be able to function effectively in cultures that may be little-known
to them. Such companies will have to elevate their familiarity with other customs and languages,
and their newfound cross-cultural awareness will have to permeate not only corporate ranks but
all the levels below down to the employees who carry on the enterprise day after day, dealing
with counterparts in other countries without even visiting those places.” (Frase, M., 2007)

From current academic and non-academic literature, it is clear that many multinational firms fail
in their overseas assignments due to intercultural communication problems: academic and
business authors have identified a lack of intercultural competence as a key factor in the failure
of international business. This paper intends to identify possible solutions to improve
intercultural competencies in international business, but in order to pursue, we first need to
clarify the concepts of culture and intercultural competence.

Culture is often seen as a shared meaning system. Researchers such as Hofstede and
Trompenaars have built their models on a classic concept of culture, where culture is seen as
homogeneous inside a nation and stable. As pointed out by Søderberg and Holden (2002),
“culture is seen as something that members of a community (e.g. an organisation or a nation)
“have” or “belong to”. In such a picture, cultural differences are inevitably seen as sources of
conflict, problems and misunderstandings.

This limited view of individuals belonging preeminently to a given culture, where people are
classified according to a single criterion and thus have a single dimension, is nevertheless
criticised by numerous researchers in the intercultural communication field. Amartya Sen
(2006), for instance, proposes a more complete model, where individuals belong simultaneously
to numerous groups, such as « Woman », « vegetarian », « lawyer », « lover of jazz » and «
heterosexual ». Identity is multidimensional and cannot be reduced to a single aspect. We are
different in different ways and we are capable of interacting in a variety of ways. For Amartya
Sen, our identity is not defined by destiny, given by birth, nationality or religion. On the
contrary, each person is free to compose his own identity according to multiple dimensions.
Belonging to a community may determine an essential part of this identity, but it may not define
ultimately a person.

Furthermore, nations are not as stable and totally separated one from another as Hofstede’s
model supposes. Important internal dynamics occur, and the official culture is always in
competition with alternative cultures present in the country or organisation. The competition
with alternative cultures eventually alters the official culture which is therefore in constant
evolution. The presence of diversity is the seed for future change, and a rigid view of culture
does not correspond to reality. Besides, the notion of multicultural nations is widely amplified in
our fast globalising world.

In this context, culture is not only a source of misunderstanding and conflict, but a source of
competitive advantage, and intercultural competencies, are not confined to enhancing
intercultural or cross-cultural awareness and negotiation skills but they are the necessary skills

to “facilitate and direct synergistic interaction and learning at interfaces, where knowledge,
values and experience are transferred into multicultural domains of implementation” (Søderberg
and Holden, 2002, p113).

With these concepts in mind, let us now try to identify possible solutions to the lack of effective
intercultural competence in an increasingly interdependent and culturally diverse business world.
Many articles indicate training as the main area of improvement, but while training is based on
outdated concepts of culture, its efficiency is necessarily limited.

Apud, Lenartowicz and Johnson (2003), give an alternative explanation: failure can be ascribed
to an ethnocentric perspective. Ethnocentrism affects intercultural competence, such that strong
ethnocentrism inhibits effective intercultural communication. For this, they argue, “there is no
quick fix available. No amount of individual training will get managers beyond the awareness
and understanding stages if there is an organisational culture that fails to promote the merits of
developing global expertise.”

Lowe, Moore, and Carr (2007) go further, according to them, “all knowledge contributions are
captive of one privileged view, tolerant of a second marginalised view and denigrative or
ignorant of a third view. In other words, all knowledge is captive of blind prejudices.”

The solution proposed in this paper includes learning of intercultural competence, avoids single-
paradigm myopia and, if well managed, can be a strategic resource for success. This solution was
not only inspired by current academic and business literature, but also by the initial example of
Ciro, our Swiss manager in Egypt. After a few months of frustrating work, Ciro finally decided
to gradually modify the structure of his group. As people left or were transferred to other units of
the hotel, he hired people to form totally different backgrounds also considering the diversity of
the clientele. Besides, he paid attention to gender, academic backgrounds and age brackets,
ending up with a highly diverse team. At the beginning, managing this team resulted difficult
because misunderstandings and discussions were frequent, but after a year the group had created
its own norms and values, every individual was accepted and appreciated as a positive feature of
the team. Discussions were always frequent, but with time they became more and more
constructive. The team ended up being very creative and successful.

We argue in this paper that the most effective solution for building and spreading intercultural
competence is the creation of multicultural project teams at all levels of organisations.

Multicultural teams provide the highest learning potential for intercultural competence.
Cooperation and daily work in such teams create tacit knowledge. Diverse teams have intrinsic
multiple views and as problems must be discussed until a solution is found, this forces to
consider the existence of differences in mentalities and to build consensus. Intercultural learning
does not consist in changing one's own culture, but in understanding that other ways of seeing
are also valid and that for effective interaction, a compromise needs to be found.

Anne Bartel-Radic (2006) investigated under what conditions people develop intercultural
competencies in a business context. Her findings confirm the strong link between intercultural
interaction in a global team and the acquisition of Intercultural competence, while interaction
with foreign customers, for instance, does not create intercultural competence. Anne Bartel-
Radic explains her results: “simply meeting people from other cultures is far from being a
sufficient condition for the acquisition of intercultural competence. The acquisition of
intercultural competence is encouraged by positive emotion and the desire to learn. Critical
reflection on one's own culture is also necessary, which means a profound change in mindsets
occurs.” In global teams, interaction takes place in a common context, among equal team
members, over a long period of time, and it is unplanned. People are forced to open their eyes, to
see, to understand that the others exist and that they have competencies. Values eventually
change, moving toward elements of intercultural competence, such as tolerance and an
acceptance of difference.

Søderberg and Holden (2002) have similar findings, asserting that: “The key engine of learning
is the multicultural team, out of whose diversity comes an eclectic set of perspectives, a set of
interchangeable lenses.”

Multicultural teams, because of the different perspectives they contain and broader cognitive
frame, are also better prepared for problem-solving compared to homogenous groups (Hong, L.&
Page, S.E., 2002). For the same reasons, highly diverse teams possess increased creativity and
flexibility.

Other researchers have tried to find a direct correlation between team heterogeneity and
performance, but the relation seems to be more complicated. Earley and Mosakowski (2000)
studied the effects of heterogeneity in trans-national teams through a qualitative field study. The
results demonstrate that highly heterogeneous teams (where no clear sub-identities exist) are
outperformed in the short term by more homogenous groups but on the long run, the high
heterogeneous groups which are able to create a third culture outperform all the others. Thereby,
there are two supplementary factors that play an important role: time and the capacity to create a
third culture.
A common understanding is constructed over time through interaction, which makes for the
group a "community of interpretation". The third culture or hybrid team culture “consists of an
emergent and simplified set of rules and actions, work capability expectations, and member
perceptions that individuals within a team develop, share, and enact after mutual
interactions.”(Earley and Mosakowski, 2000) This emergent shared culture offers a common
sense of identity and facilitates individual and team performance, communication and learning.
For this third culture to emerge, the team must have very clear goals and objectives, and these
must be shared by all members of the group.

As we have seen, high diversity in business teams presents interesting advantages, but let us
analyse the drawbacks of such teams. A common saying states that “too many cooks spoil the
broth”, what is the truth in this saying?

Heterogeneous groups certainly are more difficult to manage that homogeneous groups, at least
initially. Even language can become an issue, and understanding each other might not always be
immediate. Furthermore many basic concepts, such as time or holding a meeting, will need to be
clarified, while within a homogeneous group these concepts would be implicit. Roles and
responsibilities need to be extremely clear because of possible different interpretations. As
Marie-Therèse Claes (2009) noted, Dr. Carol Kovach researches demonstrate that cross-cultural
groups represent the most effective groups, but at the same time, they also represent the less
effective ones. Diversity can cause lack of cohesion, mistrust and miscommunication. Sub-
groups can appear in a heterogeneous group, compromising the team’s identity and in
multicultural groups conflict appears to be a logical outcome.

This fault line can eventually be turned into positive. A conflict is a particular form of interaction
including destructuration and restructuration and plays an important role in gaining awareness. In
this sense, conflict, going with positive conflict management, is seen as valuable and
constructive.

Conclusion

Although multicultural teams are more complex to manage than homogeneous teams, they
present real advantages for the acquisition of intercultural competencies. Diversity, if correctly
managed, appears to be a valuable resource to face our globalised and hypercompetitive business
world, and our multicultural societies turn up to be an unsuspected reservoir of talents.

Managing diversity efficiently implies the emergence of a third culture which ultimately defines
the team identity and helps to manage the process. Investing in the management of multicultural
teams is worthwhile. It will give multinational companies a strategic and competitive advantage,
and an excellent return on investment.