Case Study: The Martinez Construction Company in Germany

Contents

List of Abbreviations

Introduction

Case Study Questions

Bibliography

Appendix

List of Abbreviations

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Introduction

This case study is about a company called Martinez Construction, a well-established construction company located in eastern Spain. The company was founded in the mid-1940s and has been in the hands of the Martinez family since then. Most probably the company was a small- to medium-sized enterprise (SME) with a limited amount of resources and capital operating in one country so far. After the fall of the Iron Curtain between Western and Eastern Europe and the reunion of West and East Germany (1989), Martinez Construction thought about the development of Germany as new foreign market for expanding their business operations.

Case Study Questions

- What was the basis for Martinez’ decision to enter the international market? Was it proactive or reactive? Why?

The reason for a company to become a multi-national enterprise (MNE) can have multiple reasons. One is to diversify the own business operations in order to minimize risks and uncertainties of the home market business cycle. This was in fact the main reason for Martinez Construction to take the decision to expand into a foreign marketplace. Recent declines in contracts made the management aware of making the own business more independent of the local economic conditions. Therefore the decision for internationalization of Martinez Construction was rather reactive. Just as real business implications were recognized the management became alert and thought of suitable countermeasures.

Rugman and Collinson^[1] name four more reasons for becoming a MNE. These are to enter growing and promising markets with a high number of potential consumers, reducing costs by setting up operations close to the foreign consumers in order to eliminate transportation expenses, setting up operations in the home countries of major competitors in order to attack them on their home ground and hence encounter the threat of increasing competition in the own home market, or last but not least to overcome protectionism of markets or countries (tariff and non-tariff barriers) by serving the market from within.

The management of Martinez Construction believed that the only solution for the survival and further growth of the company was the expansion into the international marketplace. As mentioned in the Introduction already, the attention was drawn on the new East German states because of cheap labor and raw materials.

- Were the Spanish prepared for the problems faced in the negotiations? If not, what might the Spanish have done to be better prepared?

Companies which operate only in one country are usually not challenged dealing with lots of economic, cultural and legal variables. A MNE however operating in foreign markets needs to deal with all the implications which evolve out of these variables. Therefore the social and cultural differences between countries are very important and need to be considered when one wants to do successful business.

To mention this first, the Spanish were not prepared well at all for acquiring a foreign company neither for having negotiations with the German Treuhandanstalt (THA).

The initial idea for expansion to Germany was based on a quite blue-eyed approach. It arose when the CEO of Martinez Construction met relaxed and happy German tourists in Spain. But probably they did not consider that the people they met were West Germans because the East Germans were not allowed to travel so far. The mentality however is quite different between the East and West Germans, as Martinez Construction later on experienced with the new acquired employees – they were not as happy anymore as the German tourists. And second, because of many German companies started to conduct business in Spain he thought of the new Eastern German states as ideal market because of cheap labor and raw materials. The choice of Martinez Construction to expand into the German marketplace was neither based on rational facts nor on clear developed objectives. Martinez Construction did not conduct thoroughly a market selection based on a number of market selection criteria which will influence the company’s sales and profitability. The selection was made on the experience and gut feelings of one person, the CEO. The Spanish were not having a clear and well-developed strategy for an international expansion and how to assert a competitive advantage in a foreign marketplace. Although, in the 2nd step the management of Martinez Construction conducted lots of research about different market entry strategies into the German marketplace which finally ended in the idea of acquiring a company from the THA. But “there is no substitute for a personal visit to size up the market firsthand […]”^[2] which the Spaniards obviously did not do. They were not confirming their initial assumptions regarding the market potential. According to Keegan and Schlegelmilch, a market selection can not simply rely only on information based on secondary sources, because there are always certain kinds of information which only can be found out when visiting the potential market personally^[3], e.g. look at suppliers, distributors, sub-contractors, the basic fabric and order situation of the Eastern German states, and in the case of an acquisition also the existing management and employees. Therefore it is indispensable to gather additional data during a personal visit to finally get a go or no-go decision on the chosen market. The Spaniards followed a rather ethnocentric strategy which means that they relied on the values and interests of their parent company when formulated and imagined the expansion into the German market^[4]. They probably were – even if it was unconsciously – too much counting on their own culture in decision making, in human resource management and the overall corporate culture of a multinational company. And obviously their approach was not very successful.

Based on their blue-eyed expansion approach, the Spanish did not think of any emerging intercultural communication issues because they always met friendly Germans in Spain with whom they were able to communicate very well.

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Figure 1: The negotiation process^[5]

The negotiation itself with the THA however lacked a solid preparation. First, Juan Sanchez, who was selected to lead the negotiations with the THA, had no experience with German business so far. The negotiator selection was based on personal attributes (friendliness) and expertise which the Spanish thought is sufficient to build the necessary trust in the business relation.

The next step in the negotiation process according Gawlik is the relationship building. The Spanish delegation felt being pressurized by the THA because they were too focused on business and less on establishing personal relationships with the business partners – which is an important step in the negotiation process for the Spaniards. The Spanish expected the same business negotiation style as they are used to in their home country. They did solely rely on their expertise and business know-how and were less prepared on cross-cultural communication. They could have got better information about how the Germans act and react in business situations. They could have trained their people with courses and trainings and improved their intercultural management skills. These trainings could have been taken locally or by sending the management team to Germany first to get to know the country and the people at first hand. The Spanish management delegation should have informed them about their potential business deal beforehand in much more detail, preventing the feeling being pressurized in their decision-making because of lack of information. They should have first asked the THA for all additional information before the start of the negotiation process. This would have given the Germans more time for preparation and information collection.

- How did the Spanish interpret the actions of the Germans?

It is a critical skill for a business person to understand the culture in a country or region in which he is doing business. A successful outcome of the business operations strongly depends on considering cultural differences. According to Hofstede, culture is “the collective programming of the mind that distinguishes the members of one category of people from those of another”^[6]. Cultures differ widely in the basic values of their citizenships as Hofstede has analyzed with his 5 cultural dimensions.

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Figure 2: Comparison of the 5 cultural dimensions of Spain and Germany^[7]

Figure 2 shows the comparison of Spain and Germany according to those 5 dimensions:

PDI: Power Distance Index

IDV: Individualism ↔ Collectivism

MAS: Masculinity

UAI: Uncertainty Avoidance Index

LTO Long-Term Orientation

A detailed explanation of the meaning of these 5 dimensions is listed in the Appendix, Table 1.

Communication between two persons and their way of understanding each other is therefore strongly dependent on their cultural background. It can be differentiated between high-context cultures (read between the lines, no explicit expression of feelings and thoughts) and low-context cultures (feelings and thoughts are expressed more explicitly, personal and business relationships are more separated)^[8]. Obviously, the Spanish are more of a high-context culture with focus on building trust and relationships, whereas the Germans are a low-context culture with direct and open communication.

[...]

^[1] Rugman, A., Collinson, S. (2006), p. 44ff.

^[2] Keegan, W., Schlegelmilch, B. (2001), p.268.

^[3] Keegan, W., Schlegelmilch, B. (2001), p.268.

^[4] Rugman, A., Collinson, S. (2006), p. 145.

^[5] Gawlik, R. (2006), http://bpz.ae.krakow.pl/index.php?option=com_docman&task=doc_download&gid=1093, p.3

^[6] Keegan, W., Schlegelmilch, B. (2001), p.78ff.

^[7] Source: http://www.geert-hofstede.com/hofstede_dimensions.php?culture1=83&culture2=34

^[8] Walsh (2007b), p.41.