One sign that a country has a dynamic industrial base is its ability to produce companies that lead their fields worldwide. The United States has Google and Microsoft, the United Kingdom has Virgin Group, Germany has Bayer, Japan has Toyota. What can we expect to see out of China?
Despite achieving astonishing growth rates, few Chinese companies have developed brand names that are recognized beyond Chinese borders. The problem is that Chinese companies lack “soft power,” an asset that every big international company exploits in one form or another. Hard power and soft power are concepts originally applied to countries by Joseph Nye, former dean of Harvard University’s Kennedy School of Government; in that context, the former refers to countries’ use of military and financial might to impose their will, whereas the latter indicates an ability to gain influence based on culture. In business, hard power refers to the use of scale, financial might, and a low-cost position to win business, secure acquisition targets, and gain distribution access. By contrast, soft power is the capability to attract and influence customers, employees, and, indeed, stakeholders of all kinds: to make them want to be part of the company’s mission and business activities. It is based on a deep understanding of what different stakeholders value and how the company can fulfill those needs — whether through a seductive and aspirational brand, a heroic mission, a distinctive talent development approach and company culture, or a willingness to be a genuine part of the community.
This proposition is crucial, especially for companies that want to grow in the global marketplace. Customers, for instance, do not just buy the technologically superior or lowest-cost product; they seek out brands that offer emotional or aspirational connections, such as BMW’s link to the U.K.’s swinging 1960s in the launch of its Mini (and enhanced by the option of putting the Union Jack on the roof or even the wing mirrors). Similarly, top-notch managers want more than stellar compensation; they want to work with the best people, enjoy personal development, and be part of a grander design. Regulators and governmental officials look at businesses not simply for their profit-making potential, but for the contribution they can make to national and local policy objectives, such as the development of the local economy and infrastructure, improvement of the environment, or creation of new jobs. Finally, even investors are increasingly incorporating perspectives such as corporate social responsibility into their investment decisions. In short, soft power embraces a company’s values, whereas hard power deals with its market muscle.
In business, soft power has four dimensions. Companies can:
Establish themselves as technology or innovation leaders, as the South Korean electronics manufacturer Samsung has done with cell phones.
Cultivate a management/leadership mystique, as Toyota has done in manufacturing with the 14 principles of “the Toyota way.”
Develop a reputation as a responsible and influential citizen, such as General Electric’s emphasis on environmentally friendly products or Burger King’s promise to treat animals more humanely.
Appeal to customers’ aspirations and sense of themselves, as Apple did in turning the iPod into a status symbol.
Most Chinese companies are still figuring out which levers of soft power to pull — and how to pull them.
They are also in the early stages of their efforts to demonstrate values-based leadership and management, the platform of soft power that underpins the four dimensions and is especially critical to international expansion. As companies expand overseas, they need to manage effectively in different cultures, where, for example, the importance attached to hierarchy and to personal relationships compared to that of professional relationships varies widely. Japanese and Korean companies have found this transition especially challenging as they’ve expanded overseas. Toyota, for instance, has announced initiatives that focus on adapting and strengthening its values in far-flung business units, such as in the United States — where Toyota’s core internal processes of continuous improvement, partnership with suppliers, and incremental design are not necessarily ingrained in the local culture. Chinese companies are just starting to face that challenge.