We’ve all heard stories of cringe-worthy cultural faux pas in the world of business. It could be a Western business executive who accepts a business card from a Japanese counterpart and proceeds to put it in his back pocket — an action that is seen as highly offensive in Japan. Or a male executive travelling to an Islamic country who reaches out to shake hands with a woman who is wearing a hijab — which is considered, to say the least, inappropriate.

It’s not just individual executives who are subject to such cultural errors. Large, sophisticated multinationals are not immune. In 2018, Dolce & Gabbana posted three videos on Chinese social media to promote its latest fashion show. The videos showed Asian women dressed lavishly in D&G clothing eating pizza, spaghetti and cannoli with chopsticks. At the same time, a voice could be heard mispronouncing English words in a way that mocked the Chinese way of speaking. While the ads were removed within 24 hours, the blowback was intense, and the brand was damaged significantly.

Elsewhere, Walmart has faced difficulties in its German operations. The company required its sales associates to smile at customers — a practice that had always worked well in the North American context. What they didn’t realize is that this practice makes German shoppers feel extremely uncomfortable, because in their culture, smiling at a stranger is viewed as flirting. Walmart also had to drop its famous "Give me a W" chant during morning meetings at its German operations. As one union representative put it: “People found the practice very strange. Germans just don’t behave that way.”

There are also endless examples of companies making blunders by not thinking through translations of their marketing slogans and product names across cultures. The marketing of Italian mineral water Traficante became an instant hit in the Spanish underground, as the name translates into “drug dealer.” In China, the famous KFC “Finger Lickin’ Good” campaign became “Eat Your Fingers Off.” And the American Dairy Association’s “Got Milk?” campaign translated into Spanish as, “Are You Lactating?” Perhaps most egregiously, Ford Motor Company’s “Every Car Has a High-Quality Body” campaign translated into “Every Car Has a High-Quality Corpse.”

A lack of understanding and sensitivity to cross-cultural differences have cost companies dearly, both in direct financial costs and in terms of reputational capital. And this is set to grow as cross-cultural business collaborations continue to increase. Already, nearly 90 per cent of corporate employees in OECD countries have completed work as part of an international team. As a result of all this, firms face ever-increasing competitive pressure to hire individuals with cross-cultural competencies. Achieving such competency is not easy. Understanding culture has been compared to an iceberg: the majority of what constitutes a culture is located below the waterline, undetectable to the human eye. Yes, culture includes objectively observed features like food, language, dance, art, music, games and sports. But it extends far beyond observable features to include perceptions, beliefs, roles, social expectations, behaviour and values.

The fact is, most of today’s executives fall well short of truly understanding the cultures they are seeking to operate in, and as a result, they underperform. The antidote? Cultural intelligence (CQ). CQ is a multidimensional concept with a different and complementary form of intelligence to both IQ (intellectual intelligence) and EQ (emotional intelligence). It can be defined as "a specific form of intelligence focused on an individual’s ability to grasp and reason correctly in situations characterized by cultural diversity." Put simply, it is the ability to function effectively in culturally diverse settings.

Christopher Earley (University of Technology/Sydney) and Soon Ang (Nanyang Business School) pioneered the concept of cultural intelligence and have studied its three essential facets: cognition (the ability to develop patterns from cultural cues); motivation (the desire and ability to engage with others) and behaviour (the capability to act in accordance with cognition and motivation). Within this framework, organizational CQ is comprised of four components:

COGNITION: Involves the knowledge a company and its executives have about how cultures are similar or different. It is the degree to which you understand how culture influences how people think and behave. While companies may have superficial knowledge about a culture, it becomes imperative for them to understand values, norms and social interactions to successfully navigate their entry into a market for global expansion. A failure to account for these differences will undermine the success of any global expansion.

Within this component, meta-cognition involves an awareness of biases and assumptions and an ability to plan for multi-cultural interactions. The importance of planning prior to executing a global strategy cannot be emphasized enough. Entering a new market requires preparation and awareness of different perspectives; checking assumptions and making adjustments along the way during intercultural connections.

MOTIVATION: Authenticity is incredibly important in interactions generally, but even more so in a multicultural setting. As such, motivation — encompassing one’s level of interest, persistence and confidence during multicultural interactions — is necessary to ensure that global managers learn and adapt to new situations. Having confidence and a genuine interest in culturally diverse experiences will create value over the long term, both for the seasoned executive and the organization.

BEHAVIOUR: Putting the above components together results in appropriate behaviour — an inherent ability to adapt when working in a multicultural context. This ability includes flexibility in one’s communication style, both verbal and nonverbal and the ability to adapt to different cultural norms to be successful in foreign markets. Interestingly, individuals with high IQ or EQ don’t necessarily have high CQ. Both IQ and EQ are subject to local values, norms and behaviours and vary across cultures. CQ mitigates the likelihood of making errors to begin with, as well as enabling the identification of issues before any damage is done.

Building organizational CQ

The challenges of dealing with cultural diversity in the global economy go well beyond developing the capabilities of those directly engaged in international business. Research shows that although some executives and managers within a particular organization may have an acceptable level of CQ, that does not mean their organization shares this fluency.

As one executive put it, when Canadian executives go to New York or Los Angeles for business, they are beginning the ‘game’ at third base. Given the long business history between the two countries, there is automatic trust and familiarity. As such, the pathway to an agreement or new deal is relatively clear and quick.

In sharp contrast, when Canadian executives travel to Dubai, Shanghai or Delhi, that same level of familiarity and trust does not exist. The road to an agreement is therefore both less clear and has a much longer horizon. It is often the case that executives return from a foreign trip to face disappointment and criticism for not ‘bringing home a deal.’ In many cases, deals are not even concluded after the third or fourth trip. The main reason for this disconnect is that senior management has failed to understand the importance of cultural context across countries, leaving the firm unable to expand successfully into foreign markets.

Increasingly, corporations seeking to do business abroad have enhanced their cross-cultural collaboration capabilities by developing international teams or harnessing the power of multicultural teams in their domestic market. Research shows that such approaches can enhance global performance, the effectiveness of marketing campaigns, business negotiations, employee recruitment and retention and overall global leadership.

Individuals with CQ have the ability to actively think about people, situations and issues while in different cultural settings. For example, a Western global executive with high CQ would be culturally aware and mindful about the appropriate time to speak during meetings with Asian colleagues. In this instance, CQ is the relevant capability and required for effective cross-cultural communication. Individuals with high CQ are consciously aware of the cultural differences and have the motivation and drive to adjust their mental models to the experience or situation and exhibit appropriate behaviour.

Multinationals such as McDonald’s, Apple and CocaCola understand the importance of CQ and have successfully transitioned into foreign markets. These companies have gone well beyond the naive ethnocentricity of assuming that they can simply replicate their business practices in foreign markets. As an example, the Big Mac is not made of beef in India, a market where cows are considered sacred animals. Like many other leading restaurant chains, they have adjusted their menus across the countries they operate in to accommodate local customs.

In Canada, one major focus for the federal government is to diversify the country’s trade partners. Given Canada’s history of dependence on the U.S. market, its protectionist history and resulting productivity challenges, Canadian companies have largely been unable to venture abroad. At present, three-quarters of Canada’s exports go to the U.S. This concentration is the result of proximity, size, shared history, culture, language and a free trade agreement. While this relationship has delivered significant prosperity and security to Canadians, it also comes with risks. A few years ago, when Donald Trump threatened to terminate the free trade agreement, Canada’s vulnerability was laid bare.

To successfully undertake a global expansion, several steps are required. First, it is essential that companies do their research and obtain knowledge of the foreign market prior to entry. This goes well beyond just reading about the country. It involves having on-the-ground experiences, developing strong interpersonal connections within the market and in the process, learning about the culture and other unique features of the country. In other words, it involves being culturally intelligent both at the individual manager level and at the company level.

Second, companies need to have the drive and persistence to delve deeper and go beneath the ‘iceberg’ to understand the country’s culture of work and the corporate environment. Managers and employees must understand cultural differences in addition to cultural nuances such as the values, norms and religious beliefs of the market.

Third, the company and its employees must demonstrate appropriate behaviour when interacting in culturally diverse settings. Leaders with high CQ know the importance of local cultural norms in business meetings, methods of communication, punctuality and many other nuances that differ across countries and cultures.

While this article has focused on the importance of cultural intelligence for successful business expansion, there are of course other important aspects to success. Target, for example, learned the hard way when it ‘cut and pasted’ its U.S. strategy and subsequently failed in Canada. While there were many layers to the scenario, a failure to understand cross-border supply chain challenges was central in this case.

In today’s global economy, most companies, HR professionals and managers recognize the importance of global business initiatives. Companies have significant global contact and must coordinate across borders and exemplify a global mindset in order to succeed. While technical skills are often the focus in employees, it is ‘soft skills’ like the ability to communicate with culturally diverse others where organizations and employees often fail. CQ is perhaps the most important missed ingredient for multicultural and global team effectiveness. Some might even call it the skill of the century.

This article first appeared in the Winter 2024 issue of the Rotman Management magazine.