culled from:ceo.com
Social scientists have spent years stressing the importance of context, but a recent article in the Harvard Business Review suggests that it’s time for business leaders to get serious about the topic.
As business professionals, we’re interested in applying what we learned in business school to various problems that need to be solved. Unfortunately, people assume that best management practices transcend geographic borders, languages and cultures. That just isn’t the case, argues Tarun Khanna.
More often than not, standard business processes require more than just tweaking in a new market. A radical rewiring of the company’s core business strategies is needed to match the demands of local conditions. Business leaders, however, often make the mistake of overestimating what they know about succeeding in foreign countries.
Global companies that fail to adapt to changing conditions in unfamiliar markets simply won’t succeed. Here are some keys to developing a healthy dose of contextual intelligence in your business.
Why knowledge gets lost in translation
Khanna was first made aware of contextual intelligence by studying the profitability of different global industries. In the 1990s, empirical economists began studying how similar industries fared across OECD member countries. Because the industries’ structures were similar, economists concluded that they would deliver similar economic returns.
Their hypothesis couldn’t be further from the truth. Instead, Khanna found that it was impossible to predict how an industry would perform in one region based on its returns in another region.
Take the cement industry, for instance. The underlying strategy and technology available to manufacture cement is similar everywhere, but the political and cultural context matters a lot more than you might think.
Local institutions touch every step of the cement manufacturing process. Unions might impede plant operations, corrupt materials suppliers might be diluting the mixtures and the finished product might be sold in bulk or in individual bags. At the end of the day, Khanna argues, the institutional context is a better indicator of profitability than how good a cement maker is at his or her job.
That’s because developing countries often don’t have the “specialized intermediaries” that allow businesses to grow: courts that resolve disputes, venture capitalists who lend money, etc.
What it means for business leaders
As a business leader how do you cultivate contextual intelligence? And how do you communicate that vision to your company when you’re entering unfamiliar territory? Khanna has several suggestions.
1. You don’t know everything
The first step is to accept that you know less than you think you do. Embrace the fact that your operating model will need to undergo some major changes in order to adjust to the institutional realities of the market you are entering.
2. Examine your assumptions
Many business leaders believe that all countries will eventually arrive at a free-market economy. There’s mounting evidence, however, that suggests that state-managed markets like China’s are here to stay for a while. In order to succeed in today’s economic climate, business leaders must recognize that the Chinese economic model is an efficient one.
In addition, cognitive biases like overconfidence reinforce the tendency to rely on simple explanations for complex problems. Learn to parse the thorny dimensions of an issue.
3. Think like an entrepreneur
It’s not enough to identify and eliminate your mental biases. Build better models and frameworks to address region-specific roadblocks. This will require you to think on your feet like an entrepreneur. Develop the ability to act swiftly based on trial and error.
4. Don’t expect rapid change
When it comes to change, institutions move at a glacial pace. Some technological advances, such as the use of mobile phones, occurred much more rapidly than expected. That being said, on average, countries take decades to adopt new technologies invented elsewhere. For instance, after the Asian financial crisis of the late 1990s, analysts expected Korean businesses to shift away from an overreliance on bank debt. The shift eventually occurred, but decades later than businesses had predicted.
5. Collect your own data
Many business leaders make the mistake of relying on outsiders to conduct market research. Managers, Khanna argues, should try to conduct their own experiments to learn about the local context in which the business is operating. What academics refer to as WEIRD (Western, educated, industrialized, rich and democratic) societies might differ from other communities in terms of how they think about fairness, cooperation and the concept of self. By studying how a particular culture does business – and what kinds of incentives people respond to – your organization will gain a more nuanced understanding of how to operate.
6. Stick with it
When it comes to institutional change, you can’t rush. You need to invest time and resources to acculturate your employees to the local context. Take time to educate the company and your employees will sharpen their business prowess.
To develop contextual intelligence, you need to acknowledge the limits of our knowledge. The worst misstep you can take is to assume you have all the facts you need to run an operation in an unfamiliar market. Learn to ask the big questions and slowly you will gain the knowledge base you need to tackle region-specific problems
