Focus on good management of cultural risk

This text is part of the special Research section

Companies operate in a globalized market and themselves rely on an increasingly diverse workforce. They must therefore become experts in the art of managing cultural risks. However, this threat remains little explored.

What exactly is cultural risk? “This is the opportunity or the loss suffered by the company due to an understanding or, on the contrary, a lack of understanding of its internal or external cultural environment”, summarizes Nadège Firsova, lecturer and researcher in management. at the University of Quebec at Trois-Rivières.

She adds that in today’s fast-paced and interdependent global economy – where people from different cultures mingle in organizations – culture, as a risk factor, can have a profound impact on business operations. ‘a business, especially on its international operations. If these risks are not identified, analyzed and managed properly, they can adversely affect a company’s performance.

Breaking your teeth

The abortive adventure of The Home Depot in China constitutes a textbook case of mismanagement of cultural risk. In the 1990s, the Chinese government relaxed the rules governing its real estate market. For the first time since 1949, citizens could own their own house, renovate it and decorate it to their liking. In the next 15 years, the Chinese economy grew strongly, creating a middle class with money to spend.

The Home Depot saw a tantalizing prospect in this conjunction between a booming real estate market and powerful economic growth. The American giant has taken over Chinese home improvement company Home Away. However, in China labor is much cheaper than in North America. The Chinese therefore carry out few renovations themselves and instead hire contractors.

“The culture of cheap labor in China has stifled the DIY culture on which The Home Depot built its business model,” says Nadège Firsova. Due to a poor adaptation of its business strategy to this cultural difference – and to many others – the promising project failed. In 2012, The Home Depot closed its last seven Chinese stores.

Treat culture as knowledge

While realizing that cultural differences have an effect on businesses, executives and even international trade specialists tend to emphasize either the cultural issues within a business or the cultural challenges of foreign markets. . In her doctoral thesis in administration defended last June at the University of Quebec in Trois-Rivières, Nadège Firsova presents a strategic framework for cultural risk management that combines these two aspects.

This is essential because, properly mastered, culture can generate business opportunities for a company. “To remain competitive, organizations can count on culture as a usable resource,” says the researcher. Seen as a resource or organizational knowledge, culture can be integrated into the company’s knowledge management. “

In the framework it offers, cultural risk management therefore constitutes a form of use of knowledge and helps to deploy resources while respecting the cultural conditions of the markets. The pandemic has clearly shown that in a crisis situation, companies must seek out all the tools in their possession to remain competitive.

A strategic advantage

Culture represents an intangible asset, a sustainable competitive advantage when it is well understood and mastered. To achieve this, the company can count on both internal and external resources. Internally, knowledge manifests itself through organizational resources held by individuals. They take many forms, such as documents, databases or management practices.

The company can also rely on the knowledge gathered from its external environment through interactions based on the knowledge and expertise of its customers, suppliers and other partners. The organization then absorbs this knowledge and transforms it into added value for customers and stakeholders. This creates other new knowledge, which can be converted into innovations.

“The effect of cultural risk management is the result of the quality of internal knowledge sharing and organizational efforts to manage external knowledge,” says Nadège Firsova. This process creates benefits for all stakeholders in the business. “

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