March 10, 2013
Here in Chicago, where locals intuitively know a wink and a nod might have as many different meanings as Tom Skilling has descriptions for precipitation, we should well understand the difficulties faced by companies looking to do business in emerging markets around the world.
It's not just language. It's nuance. It's culture. It's knowing what must be done to win over would-be partners, employees and customers, and what can never be done — even if that refusal comes at a cost.
Any business of a certain size seeking continued growth eventually must expand its horizons beyond our borders and even our hemisphere. That's a given. Yet not everyone travels well. Many companies have tripped over legal, cultural and ethical land mines, triggering pushback overseas and drawing Foreign Corrupt Practices Act scrutiny here at home.
"It's a significant challenge that does pose not only a challenge but risk," said Mike Flores, vice president of worldwide development for Oak Brook-based McDonald's Corp., an icon of global expansion. "But like anything else, if you're able to find the secret sauce, it's a great opportunity."
McDonald's is famous for its secret sauce.
The fast-food giant recently announced it is expanding its franchise operations in Russia, where it has had outlets since 1990, reaching deeper into provincial areas beyond the major cities. But if that is emblematic of the upside potential of international expansion, other recent headlines point up the dangers.
Deerfield-based bourbon-maker Beam Inc. said last month that it spent $4.2 million last year on an internal investigation, primarily looking into allegations of possible bribes to government officials in India, and it shared its findings with U.S. agencies that had not yet determined what if any action to take. Peoria-based Caterpillar Inc. had to take a $580 million noncash charge after determining that a mining company it acquired in China had engaged in years of accounting misconduct.
Deerfield's Mondelez International, meanwhile, is reviewing an accusation that its Cadbury unit avoided millions of dollars in taxes in India by claiming to produce candy there at a factory that didn't actually exist.
Because of the ongoing investigation, Mondelez deemed it inappropriate to discuss the details of the inquiry beyond saying it is cooperating with authorities. But the company — which gets more than 40 percent of its net revenue from emerging markets in the Asia Pacific region, Latin America, the Middle East and Africa — said in a statement from spokesman Michael Mitchell that "a compliant and ethical corporate culture, which includes adhering to laws and regulations in the countries in which we operate, is integral to our success."
The global marketplace, it turns out, is not all that different from the skein of Midwestern railroad burgs courted generations ago by traveling salesmen whose mantra — "You've got to know the territory" — was immortalized in Meredith Willson's "The Music Man."
"The first key is to learn the differences (in a foreign market), understanding what's expected," said Andy Molinsky, author of "Global Dexterity" and an associate professor at Brandeis University's International Business School. "Some will say, when in Rome, act like the Romans. That's the spirit of having to accommodate; you're there and you have to play by their rules. But then you'll talk to other people who say: You have to be yourself. If you're yourself, and you're authentic, you'll do well. There are problems with both. If you suppress who you are, it can be very uncomfortable and, over time, may not be sustainable. The problem of the other side is it ignores that there are different cultural roles."
But in some of those faraway cultures what's expected are bribes, kickbacks and other conduct frowned upon in the United States, where the Foreign Corrupt Practices Act was established in the post-Watergate wave of reform legislation.
"The FCPA not only includes what you would expect in terms of direct-payment prohibitions, but also indirect-payment prohibitions," said Mike Koehler, a Southern Illinois University law professor who runs the website fcpaprofessor.com, monitoring enforcement of the act. "In other words, a company can face exposure based on the acts of its various third parties — agents, distributors, joint-venture partners and so on — and there are many places in the world where you cannot do business without engaging a third party. It's an actual legal requirement in several countries."
Flores of McDonald's said that "markets where they play by different sets of rules" pose a threat "up and down the chain of transaction." It's necessary not only to make clear what expectations are in terms of ethics — but in quality and consistency of goods and services — from everyone the company deals with as well as "the next point of contact up or down the chain with them." Because of the emphasis McDonald's places on a uniform customer experience, a factor in expansion beyond corporate compliance also is the need to develop dependable supply chains.
"Whereas in the short term that can often mean we have to wait things out and miss some short-term opportunities, over the long haul … we find that the right people do actually want to deal with us because they see that we are around, we have staying power and over time we do create value," said Flores, who noted McDonald's gets advice on overseas partners from Coca-Cola, a fellow global marketer with which it has long done business.
India and China have obvious potential. "It's taken us a moment to get our business model right there — in terms of business strategy, in terms of where we develop, the type of units, getting the menu right, all of that," Flores said. "But right now we feel like we're in a position where we've really gotten that right, and in both markets we're rapidly scaling up.
"Russia, we figured out pretty well pretty quick. We've got the right model, the right relationships with developers and we've certainly strengthened the supporting structures and networks. As you start to get beyond the major cities, like in the areas where there's mineral extraction, there's huge opportunity. We've now built a supply chain that's allowed us to get into there."
But you've got to know the territory.
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