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New York: McGraw-Hill, pp. 365–383. 226 Corporate Reputations, Branding and People Management CHAPTER Corporate reputation and branding in global companies: the challenges for people management and HR 7 Introduction Both of us have substantial experience of working and research- ing in multinational enterprises (MNEs), so the kinds of mistakes that Wal-Mart seems to have made in Germany (see Box 6.3) are well-known to us. Nevertheless, we still find them surprising, espe- cially given the insights provided by the huge volume of literature in the popular business press and experience of expatriate man- agers concerning international differences. So, in this chapter we want to share some of our experience and personal research in MNEs with you (see, for example, Hetrick, 2001), as well as highlight the most important findings from research on inter- national HRM, reputation management, corporate branding and CSR. In Chapter 6, we introduced the idea of embedded systems and the all-important lesson that context matters in transferring prac- tices. This is supported by the general drift in the strategic man- agement literature and practices of many MNEs from global to local solutions to meet increasingly differentiated markets. Workforce segmentation, discussed in the previous two chapters, is merely a manifestation of this general trend. At the same time, however, this book has stressed the trend towards corporateness, reflecting the simultaneous needs for these organizations to bal- ance integration (a strong corporate identity and image) and differentiation (local identification and responsiveness). Global companies are also required to transfer their knowledge and learning rapidly between the parent company headquarters (HQ) and its subsidiaries, among subsidiaries and, increasingly, from subsidiaries back to the parent (HQ). How well they achieve this knowledge transfer often determines their long-term success and depends on the nature of the balance between corporate- ness and differentiation. Yet, as we have seen, operating in inter- national environments adds levels of management complexity to MNEs, especially when dealing with the problems of differences in national cultures and institutional frameworks. These prob- lems have been graphically labelled, the ‘liability of foreignness’. 228 Corporate Reputations, Branding and People Management Key concept: The liability of foreignness This has been defined by Zaheer (1995) as ‘the costs of doing business abroad that result in a competitive disadvantage for a multinational enter- prise (MNE)’. These costs broadly refer to all of the additional costs a firm operating in a market overseas incurs that a local firm would not incur. Four such categories of costs are likely to arise: (1) costs directly associ- ated with distance, such as the costs of travel, transportation and coor- dination over distance and across time zones; (2) firm-specific costs based on a particular company’s unfamiliarity with and lack of roots in a local culture and business system; (3) costs resulting from the host country environment, such as the lack of legitimacy of foreign firms and eco- nomic nationalism among governments and people; (4) costs imposed by home country governments on doing business overseas, such as the Reputation management and corporate branding are even more essential strategies for MNEs than for large domestic busi- nesses, especially when addressing the inherent profitability prob- lems raised by the liability of foreignness. Economists argue that information asymmetries are one of the most important con- straints preventing the efficient working of free markets. Why, for example, would you want to buy British education if you live in the USA, especially since you are unlikely to have the equivalent knowledge of, or access to information about, a remote British university as you would about an American one based in New York or Boston. Perhaps naturally, you would be unlikely to have as much confidence in their degrees, or place as much trust in their ability to deliver personal service as you would with your local uni- versity. It is for just this reason that university education has traditionally remained a largely domestic business, though this changed during the 1990s when the major university celebrity brands began to export their services overseas, with Harvard being the best example. University business schools, in particular, have been at the forefront of investing in reputation management and corporate branding since they are the most powerful market mechanisms for dealing with such information asymmetry over trust and confidence issues. And, in line with the central thesis of this book, universities are also investing heavily in HRM because they realize good reputations and strong corporate brands rely on their talent and on how well and how sensitively they manage their people and overseas affiliates. This is a lesson that Wal-Mart apparently failed to learn in Germany. In this chapter we will discuss the additional problems faced by MNEs in global reputation management and branding, since they make up a substantial element of world trade. We will exam- ine the different HR strategies they commonly adopt and illus- trate these with our research. As you will see, there is a strong element of ‘best practice’ in the proposed solutions, which focus Chapter 7 Corporate reputation and branding in global companies 229 restrictions on high-technology or weapons sales to certain countries. The relative importance of these costs and the choices firms can make to deal with them will vary by industry, firm, host country and home country. Regardless of its source, the liability of foreignness suggests that, other things being equal, foreign firms will have lower profitability than local firms and, perhaps, a lesser chance of survival. on balancing the needs for integration and differentiation. However, readers should be aware that best practice always has to be qualified by the question: in whose interests? For, as we shall see in Chapter 9, there is a major difference of opinion in whose interests companies should be run – shareholders or the wider communities in which MNEs operate? Globalization The general trend to so-called globalization and a world dom- inated by MNEs has become a fact, at least according to some influential commentators (Friedman, 2005). Globalization, how- ever, is an over-used and ambiguous concept that variously means (1) a smaller world resulting from communications, (2) conver- gence of economies along the lines of the American Business Model, or (3) Americanization of cultures, tastes, politics and products – the so-called ‘McDonaldization of Society’ thesis. We will use it in a more specific sense to refer to the internalization of markets and the dominance of such markets by international companies, many but not all of which are American. More than half of world trade occurs within and among these corporate giants (Yeung, 1998). Some of the world’s largest MNEs hold total assets and generate income comparable to the wealth of a num- ber of national economies. Over the course of a few decades some MNEs, such as Daimler–Chrysler, Fords, Toyota, Wal-Mart, GE, Citigroup, Mitsubishi, Siemens, IBM, Exxon and BP (and Microsoft, which is ubiquitous but not seriously large) have evolved to highly sophisticated networks transcending national boundaries and becoming household names in virtually every corner of the global economy, so-called transnational companies. MNEs also probably employ more than one-fifth of the world’s workers outside the agricultural sector in the industrialized countries. Estimates in 1999 suggested that there were 53 000 multinational companies, controlling about 450 000 subsidiaries and selling goods and services worth an estimated $9.5 trillion (Edwards et al., 1999). The total number of workers employed by MNEs worldwide was also thought to be around 70 million with some 29 million working for foreign subsidiaries (Royle, 1997). 230 Corporate Reputations, Branding and People Management These companies typically share some key characteristics. Some of these characteristics, as we have seen, embody a care- ful balancing act between the needs of integration and differ- entiation, including: 1 The need to pursue a degree of uniformity in areas such as branding, manufacturing processes, core ser- vices such as IT and HR, and increasingly image and reputation to support their business strategy. 2 ‘Best practices’ in the form of knowledge and learn- ing to reap the benefits of being large. 3 A degree of decentralized decision-making to reflect local markets and idiosyncratic tastes, and cultural and institutional differences, whilst simultaneously central- izing many ‘best practice’ human resource processes on recruitment, talent and performance management to build a global corporate reputation. 4 Employee mobility through expatriate assignments and short-term secondments, and cross-border management to instil company practices and values. 5 The development of core business processes and the move away from country-based operations towards line of business or product/service divisions. For example, when Shell changed its business from oil extraction to retailing and re-focused on centres of excellence around the world, HR had to arrange the staffing, the proced- ures and the policies to help implement the change in place and embed it within the company. Do MNEs differ in the ways they operate? What is special about the strategies of MNEs from, say, equally large, domestic operators, or firms with only a limited inter- national exposure through exporting or franchising? One way of answering this question is to refer to the well-known model in Figure 7.1 for balancing the integration–differentiation prob- lems (Perlmutter, 1969). This framework has been used to analyse different approaches to international management, especially HR management (see Figure 7.1). Chapter 7 Corporate reputation and branding in global companies 231 ■ Ethnocentric approaches are characterized by organ- izations that have little interest in either developing a strong corporate culture across subsidiaries/markets or in establishing a strong local identity. Often they have a strong belief in the virtues of their own culture and insti- tutions and seek to export them overseas. The approach to staffing, deployment and development is focused on head office interests and its predominant need to main- tain financial control. ‘Exporting’ home managers to run local subsidiaries with little or no thought given to the role and training of local managers is the usual approach to management ‘development’. They may even see educating local managers as a dangerous strat- egy (too much knowledge!). This resonates with political or economic colonial/imperialist styles of management. ■ Polycentric approaches are characterized by firms that have little knowledge of local product and/or labour markets, or believe in the importance of differentiation above all else. Such an approach is evident in the hiring of local managers, developing them locally, and ‘letting them get on with the job’ with minimal interference. 232 Corporate Reputations, Branding and People Management Polycentric Geocentric RegiocentricEthnocentric High Low High Needs for differentiation Needs for integration Figure 7.1 Classifying approaches to international management development and deployment. ■ Regiocentric approaches are characterized by a strong emphasis on regional integration, such as having a strong regional brand, or a regional corporate culture that reflects product and or labour market features. Japanese firms setting up in Europe were good examples. Managers tended to be recruited from home office, deployed in a particular region and edu- cated into a regional mindset. ■ Geocentric approaches are characterized by a belief that nationality has no place to play in modern business and that home office ‘imperialism’ is bad for business because it promotes monocultures and inhibits change. High needs for integration and differentiation are thought to be reconcilable but such organizations are relatively rare. They believe in recruiting managers from inside or outside the company, regardless of national- ity, and in developing them to have a global mindset through education in international (academic and/ or corporate) business schools and through frequent assignments in different countries. As you might expect, the geocentric strategy has been held up as the ideal model because it attempts to combine and bal- ance the theoretical ideals of integration and local responsiveness (see Box 7.1 on UBS). However, there is rarely a one best way of doing anything, whether it is governing world affairs, organizing economies, playing football or managing international busi- nesses. Like all ‘metanarratives’, at various points in time and space, they have been found wanting, even the American Business Model which has been exported to much of the rest of the world by the International Monetary Fund (Kay, 2004). Usually, it is bet- ter to think in terms of ‘small stories’ (see Chapter 8), which are embedded in the institutions and cultures of parent company nationality and the idiosyncratic features of the host country. For example, even the ethnocentric approach has advantages and still dominates the HR strategies of many internationalizing organiza- tions. It has some historical justification since it was the basis of the British Empire’s strategy for most of its 200-year dominance of world affairs (although there have been periods and places when Britain pursued a more polycentric strategy, for example, in North America). It has also been a strategy employed by many US Chapter 7 Corporate reputation and branding in global companies 233 . 365–383. 226 Corporate Reputations, Branding and People Management CHAPTER Corporate reputation and branding in global companies: the challenges for people management. Portfolio/Penguin. Greenwald, B. and Kahn, J. (2005b) All strategy is local, Harvard Business Review, Sept–Oct, 94–107. 224 Corporate Reputations, Branding and People Management Griffin,