Deadly Sins of International Business Blog

Development aid, social entrepreneurs and micro-finance – all seem to run into similar problems of getting their products and services to their target groups in emerging markets, post-conflict zones, or developing nations. With the kind permission of the author, Tielman Nieuwoudt of the Supply Chain Lab, the following is a re-post of an article that discusses how the sometimes very long last mile in these areas can be managed successfully. Tielman is an experienced supply chain manager who has multi-year expertise in various industries in some of the most difficult and exotic countries around the globe, including many African and Asian nations. Here’s what he suggests:

Territory and road infrastructure – Gain a clear understanding of the road conditions and travel time required for delivery. Also, consider seasonality and how the rainy reason will affect your distribution. Not all roads are passable during the rainy season and your mode of transport, e.g. four wheel drive, may also change. Road infrastructure and seasonality will also impact your network design, e.g. designing routes.

Service delivery point growth – In a number of African markets there are aggressive plans to expand and increase the footprint of health facilities. It is important to understand what impact this will have on the supply chain or pipeline.

Distribution centers (DCs) or cross docking – In Africa, distribution distances tend to be large and DCs limited. Overnight routes and driver per diems can increase costs and reduce truck utilization. Evaluate the need for more DCs and the role cross docking can play in streamlining distribution processes and reducing cost.

Demand planning – Tanzania has moved from a push system (demand determined at central level) to a pull system (demand determined at health facility level).  Health workers at health facilities are responsible for submitting demand requirements (or R&R forms). Common problems include delays in submitting forms and limited capacity or capability to complete forms.  It is important to identify and understand bottlenecks. Determine what can be done to simplify the process, e.g. limit the pull to certain Stock Keeping Units, and help reduce the workload for health workers, e.g.  introduce regional demand coordinators.

Ordering cycle – Review the ordering cycle (or frequency) and order groupings, if any.  Assess unplanned orders and volume per drop for each segment, e.g. health facilities versus dispensaries.

Scheduling – Ad hoc deliveries need to be evaluated, especially at the “last mile” level.  Ensure that documented scheduling is in place.

Delivery process– Determine how long on average the delivery process takes (time) and review the written guidelines for delivery. For example, in Tanzania all goods received in villages need to be checked by the Village Health Committee.  It is a good system to ensure checks and balances, but has the potential to create delays due to committee members not being available.

Use the right vehicles – The Landcruiser is widely used but not always the right vehicle for the job.  A number of African countries have poor infrastructure but Landcruisers, with high capital costs, are not always required. See my previous post on this issue.

Distribution incentives –Review how incentivizing employees can drive efficiencies. Incentives could focus on truck turn around time, loading and dispatching.

The use of 3^rd party distributors – 3^rd party distributors (3PLs) can play an important role in distribution.  Local operators allow you to tap into a lower cost structure and can also provide greater flexibility.

Fourth party logistics (4PL) or transport agents – A 4PL is defined as an organization that assembles resources, capabilities, and technology of its own organization and other organizations to design supply chain solutions. In Africa, health facilities tend to have limited capacity and capability to identify and manage 3^rd party distributors. 4PLs or agents have the potential to play an important role here and help reduce the workload for health workers. Local operators or 4PLs are also in a much better position to negotiate better transport rates and manage scheduling.

Throughout the last few years, I have taught a number of courses on international business that included an applied project during which students develop international market entry strategies for international markets. Over time, I started to notice that they all experience the same types of challenges, usually very different from those of established companies. First, many start-ups operate in narrow niche markets that often don’t exist in their home countries, so that going international is not an option, but a built-in necessity. As early internationalizers, however, they often are still in the process of developing their technologies, products, or services. As we have learned from Igor Ansoff more than 50 years ago, it’s probably not the best thing to be in a place where new product meets new markets. Start-ups therefore must make sure that they are ready before they approach markets, especially international markets where enough will go wrong even without failing value propositions. Second, much of the start-ups’ resources go into research and development. This doesn’t only divert resources away from much needed business development activities, but it also breeds a certain mindset that values scientists and engineers more than marketers and business developers. This often creates market myopia. Third, when selecting international markets, start-ups with potential in multiple industries or distribution channels are often faced with the difficult decision between industry-focus (or channel-focus) and country focus. It’s hard to give good advice on this, but it’s probably the question if you’d rather know everything about one thing or a little bit about everything. While the industry focus will help start-ups to build valuable industry-specific knowledge, to establish network relationships, and to get word of mouth going, it will also mean that a lot of business development time will be spent on planes, traveling between countries. And each time, new country-specific environments will have to be dealt with. Under the country-focus, on the other hand, they only need to learn about a new, strange land with strange people once, and they’ll probably penetrate the market deep into the last, dark corners. But then again, boundaries between industries may often be more difficult to bridge than the borders between countries, and resources may be wasted learning about new industries and squeezing the last bit out of those industries that are only a distraction. Fourth, different countries react differently to technological innovations. Some embrace them, others fear them, so why don’t start-ups avoid the latter and enter the former? Well, the innovation-ready countries are often already crowded with competitors and if they’re not, they will be. Too bad that the ones that your competition shies away, too, are exactly the ones that are skeptical of everything new. Foreign start-ups are of course hit by the double whammy – they are strangers offering strange new things. Fifth and finally, the types of innovations that start-ups create often require significant education of customers. Business developers, sales reps, or distributors (particularly when they are paid commissions and when they are thousands of miles away) are not really interested in spending years educating the market, especially not for free. They want to close that sale today so that the commission shows up in their accounts tomorrow. So, start-ups, don’t leave the creation of the pull to sales, have a good strategy around this.

I’m sure that there are things to be added to this list, so this is to be continued…

I am probably trailing behind a lot of people, certainly behind some of my students who just introduced me to a wonderful interactive site, called “The World’s Best Countries“. The very sophisticated interface and the tasteful graphics make it a real pleasure to enjoy profound data in categories such as health, education, quality of life, economic dynamism, or political environment – either by country, by region, or comparative. If you haven’t seen it yet, go visit.

The race is on. India just announced that it will allow foreign majority ownership in its retail industry. This paves the way for global retailers such as Wal-Mart, Tesco, Carrefour, or Metro. And it’ll be a brutal race, too. One might think that a retail market that is estimated at around $ 400 bio this year and is expected to double within the next four to five years will have enough room for all players. However, with the retail industry being largely devoid of any significant national players, this will be all about first-mover advantage. Maybe it’ll even turn out okay for the second in the race, as sometimes it needs a trailblazer to deal with all the nitty gritty groundwork before someone else reaps the benefits from the efforts of others. But nos. 3 and 4 will certainly find entry a lot more difficult. Wal-Mart which already has a joint-venture with Indian conglomerate Bharti will definitely be a serious contender for the top spot in the race – if they manage to learn from some of the mistakes they have made in other markets such as Germany or Korea. As attractive as the Indian retail market is, it is certainly also a market that will have lots of surprises and difficulties for foreign retailers – from differences in consumer behavior to challenges in dealing with Indian employees.

You have certainly heard of Adidas, Bayer, Henkel, Linde, or Siemens – all German companies and major players on world markets and a major source of pride for most Germans. Well, think again. It’s been a while since I read this feature about foreign ownership of German companies in a German weekly. For the vast majority of the 30 largest German companies that are part of the DAX stock index, foreign ownership has increased between 2001 and 2008. The smallest increases were at Deutsche Bank (3.8 %), ThyssenKrupp (9.2 %), and Volkswagen (9.9 %), and the largest at energy giant RWE whose foreign ownership shot up by 200 % (from 15 % to 45 %), Deutsche Post (233.3 %), and steel giant Salzgitter which increased foreign ownership almost five-fold. The only company where foreign ownership actually decreased was Lufthansa, where it fell by 33.1 %. On average foreign ownership for the largest German companies listed in the DAX rose by an astonishing 97.9 %. What’s most interesting is that for 21 of the 26 companies for which data is available foreign ownership is larger than 40 %. For 15 it is even larger than 50 %. Professor Ghemawat is certainly entitled to his own opinion, but this sounds all pretty global to me….

As has been announced a few days ago, Walt Disney is plunking down about $300 mio to acquire a major stake in the Russian Channel Seven with the objective of entering the Russian market. This is their second attempt. About three years ago, Disney had plans to acquire a 49 percent stake in Russian Media-1 TV. Back then, the acquisition was not approved by the Russian Antitrust Agency which cited “problems with Disney’s paperwork”. It looks like Disney has learned an important lesson about Russian culture and has figured out how to work with the country’s bureaucracy. Why is Disney so eager to enter the Russian market? Is it a case of cultural imperialism that US companies are often accused of? Very unlikely. The simple fact is that growth rates in Russian TV advertising are between 20-30% whereas they have been relatively slow in the West. After a Swedish and a Luxemburg-based group, Disney is now the third foreign investor in Russian TV.

Who would have ever thought? Not only is Volvo in Chinese hands, now Saab is, too! Zhejiang Youngman Lotus Automobile Co. and Pang Da Automobile Trade Co. of China have announced that they will purchase insolvent Saab for approximately 100 million Euros. What remains to be seen are two things – first, if the Chinese will really be able to pull off the deal. Not too long ago, another Chinese carmaker’s plans to take acquire Hummer from General Motors have been barred by Chinese authorities. Second, if the deal comes through, will Swedish and Chinese cultures be compatible with each other?

A while ago, a student of mine (yes, I’m also a professor at a business school), has written an interesting term paper. The general topic was – of course – failure in international business, and the student who was working for a US-based mid-sized cosmetics company decided to focus on cosmetics in Japan. The outcome was not surprising, but still highly interesting. Highlighting three foreign companies’ (Avon, Mary Kay, Boots) failed attempts at entry into the Japanese market, there seemed to be recurring patterns. Avon’s Japanese adventure started as early as 1969. For a number of years, Avon struggled as it failed to understand the Japanese consumers – the product portfolio was too Western, the low price strategy didn’t appeal to the market, and Avon’s distribution strategy that relied on the ‘Avon Lady’ was a complete cultural mismatch. Avon eventually worked out all the kinks, but in 2010 decided to exit the Japanese market by selling its business to a TPG, a private equity firm, as there were questions about future competitiveness. In one interview, the head of Avon’s Japanese operations, Terrence Moorehead, also characterized decision-making behavior in Japan as rather cumbersome. Mary Kay entered Japan in 1994 only to pull out again seven years later. Products had to be reformulated due to legal and cultural restrictions, but more importantly for Mary Kay, the entire company’s mission didn’t align well with the Japanese environment. Boots Cosmetics is of course a bit different from Avon and Mary Kay as it is a chain of drugstores and not just a cosmetics manufacturer. Having said that, 40 % of their revenue comes from the sale of cosmetics, mostly their own brands. In all fairness, Boots tried to be intelligent about bridging the huge differences that set Japan apart from other markets where they had been successful before. However, their choice of a joint venture partner – Mitsubishi – may have been less than ideal. Mitsubishi had access to capital and was well respected in Japan, but didn’t have experience in the drug store retail or in the cosmetics business. Mitsubishi’s might may also have lured Boot into a type of entry that was ‘too much, too fast’. Japan is often considered one of the most advanced markets in Japan – a fact that often lets foreign companies underestimate the difficulties associated with it.

Interesting piece in the McKinseyQuarterly about metrics for Chinese exports. Very much in line with my recent postings, this contributes a bit to the debunking of the China myth. Don’t be afraid! All will be good!

Looks like Deutsche Boerse and the New York Stock Exchange are in their final stages of negotiations over a takeover by the Germans. Price-tag: about 10 billion. Upside: synergies and better competitive position vis-a-vis emerging stock exchanges in other parts of the world. Downside: integration is never easy. Neutral: the home of capitalism is no longer American.