The importance of culture

2

Table of Contents

  The Importance of Culture  1

Table of Contents .................................................................................. 2

  Abbreviations  3

1.  Executive Summary  4

2.  Introduction and Background  5

3.  Findings  7

3.1  Definition of Culture  7

3.2  Cultural Dimensions  8

3.2.1  High versus Low context Culture  9

3.2.2  Monochronic versus Polychronic Time  9

3.2.3  Silent Language  9

3.2.4  Hofstede s five cultural Dimensions  10

3.2.5  Maruyama s epistemological Types  10

3.3  Culture and Business  11

3.3.1  Face to Face Level  12

3.3.2  Company to Company Level  12

3.3.3  Company to Customer Level  13

4.  Conclusion  15

3

Abbreviations

DTI Department of Trade and Industry

GDP Gross Domestic Product

IAS International Accounting Standards

IBM International Business Machines

M&A Mergers and Acquisitions

MNEs Multinational Enterprises

PEST Political, Economic, Social and Technological

SEC Securities and Exchange Commission

UK United Kingdom

UNESCO United Nations Educational, Scientific and Cultural Organization

US United States of America

US GAAP Generally Accepted Accounting Principles

WTO World Trade Organisation

4

1. Executive Summary

This report provides an analysis and evaluation of the significance of a study about cultural diversity in cross-border business. Additionally, it identifies the possible advantages and disadvantages that companies will be confronted by when deciding to sell internationally. The method of analysis for this report included a review of the current literature available in libraries and on the internet.

The major findings indicate that an understanding of cultural diversity is of paramount importance in order to be successful in exporting, since people’s behaviour and tastes differ widely from country to country. Thus, culture has a strong impact on communication, products and their promotion. Conducting a study regarding culture enables companies to meet consumer needs, to use the marketing mix more efficiently and to set up successful foreign network channels.

On the other hand, by exporting, companies may meet the challenges of face to face communication with foreign people, collaborating with foreign companies and convincing foreign consumers about their products. Beyond this, companies should overcome the temptation of ethnocentrism and adapt their business method to local requirements.

In detail, companies should conduct a study concerning culture which should be included in a PEST framework (political, economic, social and technological analysis). Companies should, based on the culture and PEST analysis, adapt their business methods to each culture. Moreover, employees should be prepared to engage in international business. They should be able to speak different languages and handle diverse cultures effectively. They also need to foster a consistent level of understanding and application of cultural diversity. Additionally, foreign distributors

5

should be engaged and foreign partners should be found. Further, before starting negotiations the companies’ negotiating teams should gather background information about their counterparts.

This report also investigated the fact that cultures shift over the years. Thus, companies should regularly analyse markets and react to any changes over the years to come.

2. Introduction and Background

This report critically outlines the importance of a study of “culture” in conducting cross-border business and it identifies how culture may affect companies. The report commences by presenting the significance and opportunities of international trade for

UK companies. Following, the main findings are outlined in section three. To begin,

the cultural elements are shown before the cultural dimensions are pointed out and analysed in detail. Subsequently, possible problems of exporting are stressed. This report concludes by summing up the most important findings and suggesting some recommendations for the future. The research for this report included a review of the current literature available in libraries and on the internet and aims to explain the importance of a study about “culture” and how companies may be affected by this.

International trade is of particular importance for UK companies 1 . According to the national statistics, the value of UK trade in exported goods and services over the period of October 2005 till October 2006 accounted for approximately £323 billion (National Statistics, 2007). In this context it should be mentioned that during the same period Welsh companies realized about £9.2 billion by exporting. This was an increase by 4.9% compared to the previous four quarters. Thereby, the US (18.3%), Germany (14.2%) and Ireland (10.5%) provided the largest export markets for Welsh products. Additionally, metals was the highest value export product sector for Welsh

1 In 1998 UK merchandise exports amounted to 25% of gross domestic product at 1990 prices (Nobes

and Parker, 2006).

6

companies. It amounted totally to £1.9 billion, which was a rise by 11.8% to the previous twelve months (Statistical Directorate, 2007).

These above-mentioned figures demonstrate that there are already many Welsh companies that are successfully conducting cross-border business. Selling goods internationally would provide several opportunities for companies. Exporting might boost their stagnated profit and may turn around their declining turnover. Further, as a consequence of additional overseas demand and gaining competitive advantage, potential higher sale figures, selling profitably excess capacity and elongating the length of product life cycle might be achieved. Moreover, by marketing goods internationally companies have the possibility of diversifying their business. Thus, the overall business risk can be minimized since they will less rely on their UK home market. Beyond this, products that are prohibited to sell in the UK may be distributed in foreign markets where such a restriction does not exist. Further, as a result of exporting in growing markets, companies will have to increase their produced number of pieces. Consequently, economic of scale and scope can be generated as unit costs will fall and bargain power will increase (Darling and Seristö, 2004).

However, the reverse side of exporting is that companies will be confronted with different customers’ behaviour. With the aid of a PEST 2 analysis companies can assess potentials foreign markets 3 . This term stands for political (regulations, tariff and non-tariff barriers, and political stability), economic (size of population, GDP, per capita income, inflation, taxation system), social (languages, religions, values and attitudes) and technology (the way of distributing, advertising, and ordering products) analysis (Whitelock and Jobber, 2003). All these four factors are strongly affected by the dominated culture prevailing in each country. Thus, in the following, cultural differences are outlined as it may be the most critical aspect for companies to be successful in conducting international trade.

2 The UK government is a great help to undertake a PEST analys is. For instance, the Department for

Trade and Industry (DTI) provides information on almost all foreign markets (Dawes, 1995).

3 This analys is is of paramount significance as one reason for failure of exporting is to identify target

foreign markets (Fillis, 2002).