How to successfully operate an iron ore sales workforce in The Republic of China: Assignment for MBA Paper: By Torrance

Mayberry

Contents

Executive Summary .................................................................................................. 3 Introduction............................................................................................................... 4 Adopting a China centric approach............................................................................ 4 Prudent Management of Conformance....................................................................... 6 Understanding and Managing Partnerships ................................................................ 7 Workforce Strategy ................................................................................................... 8 Conclusion ................................................................................................................ 9 References............................................................................................................... 11

Executive Summary The purpose of this report is to provide advice to Rio Tinto about how to successfully operate an iron ore sales workforce in The Republic of China. In the interconnected world economy old ineffective business activities must give way to new business activities to ensure organisations are best positioned to recalibrate risk to operate successfully in foreign destinations.

The disillusionment that challenges created between Rio Tinto and China are not insurmountable. The reality is that misunderstandings happen and relationships sour. The factors brewing beneath the surface that negatively affected the partnership with China relate to social dynamics that are inherently uncertain. Prudent management practices must be applied to ensure the sales workforce can safely navigate through the likely impacts social dynamics undoubtedly will continue to have on the business.

Adapting to the uncertainty inherent in social dynamics will require the organisation to embrace a new way of working. The adoption of the advice in this paper suggests that Rio Tinto adopts a China-centric approach. The sales strategy encompasses modern data driven approaches by creating a new data science capability and adopting a geocentric workforce approach. This will move the organisation beyond measures that are primarily financial in nature to include demographic, cliodynamics, psychographic and geodemographic analysis. It will ensure business activities at Rio Tinto corporate and operations in Shanghai, China will be best positioned to infer accurate relationships from social dynamics on the ground in China. This will enable Rio Tinto to adapt and respond ethically to the likely social challenges of operating in foreign destinations.

Conformity to a code of ethics must empower the sales workforce to walk away from a deal. This challenges the status quo where today the business drivers are primarily financial in nature. Adopting this papers advice enables the organisation to maintain homeostasis in its desire to get the best deal, while decreasing the likelihood of contention in social dynamics, preserving Rio Tintos 'face'.

Introduction Operating a global organisation in foreign destinations brings with it a whole range of risks that can generate disillusionment. Many factors in global business are known, but there are many more that are unknown. International management challenges are likely to be political, social, cultural, tax related, regulatory, legal, or financial. The challenges experienced between Rio Tinto and The Republic of China were no exception and they all go beyond just ethics and law (Garnaut and Coorey, 2009). Although ethics and law are significant in themselves, they do not fully describe the challenges that organisations need to understand to recalibrate risk and become more scrupulous in managing risk in foreign destinations.

The aspiration to promote a business model that is inclusive and participatory for all stakeholders requires business activities to change and adapt regardless of the conditions in domestic or foreign markets. The factors brewing beneath the surface still remain as they were in China. The likelihood of these management challenges resurfacing is high while the primarily financial drivers for business activities will continue to influence outcomes.

This challenge is not isolated to Rio Tinto. Every global organisation must exercise prudent management practices that ensure they can navigate through a fluid international business ecosystem comprising both certainty and uncertainty. Underpinning advice in this paper is a key assumption that every global organisation must continually scan their new environment for additional risks that are likely to impact foreign operations and effectively manage those risks.

Adopting a China centric approach The factors brewing beneath the surface that negatively affected the partnership between Rio Tinto and China relate to social dynamics that are inherently uncertain. Adapting to the uncertainty inherent in social dynamics will require the organisation to embrace a new way of working. The adoption of a China-centric approach will help Rio Tinto successfully change and adapt to social factors on the ground in China. 4

Without a China centric approach the uncertainty of human or social factors will continue to place Rio Tinto in a precarious situation in China. The reality of

conducting business globally is that organisations will always need to be more responsive to challenges in an adaptive manner.

The primary drivers of activity at Rio Tinto were predominantly financial in nature. The primary driver that motivated the behaviours of the sales workforce in China can be described as a balance sheet view of the business world. This view is centred on assets like land, machinery, money and so on, and influenced negotiations (Rivers, 2013, in press). This needs to change to ensure their China centric sales workforce have more tools at their fingertips to influence buying decisions during negations.

This is not to suggest a financial data driven approach to negotiating agreements was incorrect. On the contrary, this method is only one dimension that will be used in combination with salient social dimensions to ensure every angle is analysed holistically. For instance: CISA Chief, Shan Shanghua publicly stated a goal that the price of iron should be reduced by more than 40%; the Chinese governments decision to replace Baosteel with CISA to negotiate with the Rio team; CISAs Secretary Generals lack of experience in international business; the political appointments of the Chinese team of negotiators; the rules of China's domestic market enabling large mills to buy more iron ore at a fixed price and then on selling the ore to smaller mills are relevant illustrations of valuable signals that were not recognised by Rio Tinto as potential social dynamics that would affect business.

Social dynamics as intangible assets went untapped in China. The value of social dynamics will no longer be separated in the formulation of price and decision making processes during negotiations when adopting a China centric approach. This will bring a sense of dynamism that will have an endless supply of intelligence based on sound science encompassing every viable source both public and private.

Modern analysis methods can fuse new Big Data Technologies in the organisation to move beyond measures and techniques that were unable to measure the value of social dynamics. 5

The new possibilities to exploit the value of social dynamics will include demographic, cliodynamics, psychographic and geodemographic analysis of the entire business ecosystem. This will ensure the sales workforce is better equipped to infer accurate relationships of affective (i.e. emotional) value on the ground in China and around the world.

Prudent Management of Conformance The adoption of a China centric approach requires Rio Tinto corporate to introduce a code of ethics that goes beyond a set of guidelines codified in a document. The success of a China centric approach requires more support at Rio Tinto corporate to ensure, in future, partnerships that are established by the sales workforce flourish. Four metaphors from a Kenny Rogers song, The Gambler, describe the thinking that needs to be adopted in the ethics framework. In business negotiations, fostering behaviours that provide for decisions to be taken as to when to hold 'em, when to fold 'em, when to walk away and when to run are critical for conformance to a common standard. This simple suggestion is the appropriate ethical behaviour the organisation can embrace and measure.

Of course, this will challenge the status quo as business activities embedded in the sales workforce today are influenced by, among other things, a benchmark price that accounts for 70% of iron ore sales in Asia. Undoubtedly, these estimates are based on forecast revenue.

Conformance to a code of ethics that embraces the simple behaviours suggested above and applying modern data driven processes will enable conclusions to be reached using a newly created data science capability. This will empower the sales workforce to walk away from a deal when the evidence shows that it is appropriate. As the new capability unearths meaningful answers to questions that are social in nature, Rio Tinto corporate and Shanghai operations will understand the likely impacts on the relationship and the balance sheet. This ensures the sales workforce is no longer negotiating without modern instruments and measurements that can assist in understanding social dynamics.

Rio Tinto must address the current business model and analyse internal stakeholders holistically to identify and acknowledge the biases that exist which lead to particular decisions. They must understand the biases they use in their own decision making go beyond the workplace. The effects of information inside and outside Rio Tinto collectively affect how the sales workforces mental models (conscious/unconscious) form. This encompasses historical information and associations that people use to take shortcuts in the decision making processes.

It is quite normal for people to take shortcuts in decision making. It assists in simplifying decision making to ensure people do not have to go back into the same context or situation each time to experience a situation anew.

However, taking shortcuts in decision making creates distortion and biases by categorising people in groups or segments. Subsequently this shuts out a whole lot of information that might actually be useful in understanding business impacts to change and adapt.

Unknowingly people make misjudgements or infer inaccurate relationships that can lead to misunderstandings as shown during iron ore negotiations with China. The distortions or unconscious beliefs of the sales workforce in Rio Tinto is not the problem, not knowing the biases exist is the problem. Rio Tinto needs to

acknowledge that biases and distortions exist to ensure everyone knows what they are.

Afterwards Rio Tinto will need to interrogate the biases and realign the decision making processes with the desired value system beyond a financial view to ensure partnerships in Asia and globally prosper. This will also ensure the global sales workforce can operate from the same ethical standards.

Understanding and Managing Partnerships An in depth understanding of China's traditions is very significant for establishing lasting business partnerships. A loss of face to the Chinese influenced events that exacerbated the problem, led to actions of public shamming of Rio Tinto and the jailing of four employees. The tit for tat or eye for an eye, tooth for a tooth is a 7

response to real emotions of wrong doing. Rio Tinto did not consider the impact a loss of face would have on the partnership and negotiations.

This cultural dynamic was never going to be unearthed as the business drivers that were primarily financial in nature excluded social dynamics (Garnaut, 2009a). In the perception of the Chinese, Rio Tinto operated a climate of business priorities that were less about ensuring a win-win. Although Rio Tinto was the party that won the negotiations, in the end the organisation lost face from the public shaming. The organisation had to invest more time, money and effort to deal with the unintended consequences.

Workforce Strategy Organisations that adopt a polycentric approach must understand advantages and disadvantages a workforce of this kind has on operations. This approach considers social dynamics in a host country are unique and this vantage point is significant to ensure enduring business relationships. This was reflected in the organisations

ability to partner with locals to collect data about domestic iron ore production. This assisted Rio Tinto Corporate in refining its financial model to improve on the models accuracy (Freed and Garnaut, 2009).

Advantages of a polycentric approach enabled the organisation to get some early wins on the board. The climate and workforce locally hired in the host country brought into the Shanghai office local preferences and techniques needed to ensure Rio Tinto corporate could get a foot hold in China. Empowering the local team in Shanghai to make major decisions based on their understanding and awareness of the domestic market enabled staff to, among other things, to validate or invalidate Chinese government reports on steel production.

One disadvantage of adopting a polycentric approach is that organisations can lose influence over the workforce in host countries. This affected Rio Tintos ability to successfully coordinate the business activities in the Shanghai office. It was a major limitation preventing conformance to a code of ethics and the organisation from

reaching its full growth potential in China. The desire to empower a polycentric sales workforce in host countries and promote a culture of knowledge sharing may have a detrimental effect in that they could choose not to share the true intent of their activities. This does not bode well for global organisations that want a workforce to conform to a common code of ethics.

An enabler of the China centric approach will hinge on building a future workforce based on a geocentric framework. This approach addresses the biases of home or host country preferences and it aligns to a modern data driven approach described above. Going forward it will provide the organisations with the appropriate workforce and staffing policies to sustain a newly created data science capability that is based on a persons advanced skills and how they can be used to promote the organisations long term goals. Achieving this is not going to be easy or straightforward. Transforming the organisation into a unified global entity that operates a common global ethical standard, will require the organisation to evolve its analysis methods to reduce the play of chance in conducting and operating business around the world. The newly created data science capability will ensure the organisation establishes a climate of collaboration that is grounded in behaviours that will serve the best interests of the organisation, its shareowners, and foreign or domestic markets where business is conducted.

Conclusion The reality of conducting business in domestic or foreign destinations is that relationships go sour and misunderstandings happen. Global organisations like Rio need to not only acknowledge and integrate bias, but they must introduce modern data driven methods like psychographic, cliodynamics and behavioural geodemographics that facilitate a data driven culture that exploits both social dynamics and financial measures. To establish this paradigm the organisation will have to embrace a new way of working to support a China centric approach.

A data science capability will be needed to embed modern data driven practices and statistical thinking into business activities at Rio Tinto Corporate and in Shanghai

China. This will ensure meaningful answers to questions that were previously out of reach can be accurately answered. It will enable the organisation to maintain

homeostasis ensuring the desire to get the best deal will not increase conflict as a consequence of social dynamics.

In future, business activities at Rio Tinto corporate and Shanghai China will be better positioned to infer accurate relationships of social dynamics on the ground in China to adapt and respond ethically to unintended consequences that impact operations.

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References Rivers, C. (2013, in press). Walking the blurry line Negotiating deals in China and staying out of jail. IN Rambaruth, P., Stringer, C., Everett, A. and Serapio, M., Dynamics of International Business: Asia Pacific Business Cases, Cambridge University Press, Cambridge, U.K.

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