Deadly Sins of International Business Blog

In a recent post, Australian business blogger Andre Sammartino reports that South African grocer Pick’n’Pay has sold off its Franklins supermarkets (”Australia’s Original Discount Grocer”) to the biggest Australian grocery wholesaler Metcash.  It’s not the first time that Franklins has been sold off after a somewhat unsuccessful takeover. In the late 1970s Franklins was sold to Dairy Farm International who then put it on the market again in 2001 (which was when Pick’n'Pay acquired it). Ironically, Franklin’s new owner Metcash was once South African-owned itself. Besides the mere fact, the interesting observation is the striking frequency with which retailers fail in international markets – WalMart in Germany (and some other countries), Marks and Spencer in the United States (and Hong Kong), Home Depot in Chile, The Gap in Germany, to name but a few. And even more interesting is the question why that is. Using common concepts from the strategic management literature, we could say that it’s either that those companies have not been ready for the markets or that the markets haven’t been right for those companies. The former fits nicely with the structure-conduct-performance (SCP) paradigm. The SCP, in essence, says that it’s all about figuring out how the industry you’re in works and then finding your spot and the selecting an appropriate strategy. Performance will result almost automatically. Assuming that global retailers know how their industry works (even in distant country markets), they must therefore simply have picked the wrong strategy (or executed it poorly). Or, in other words, they may simply not have been ready for the challenges presented by those markets. Under the resource-based view (RBV), we might assume that some of these global retailers possess unique resources and capabilities (that according to the theory should lead to superior performance), but failed to select those markets where these would actually be advantageous. Instead, they chose markets in which their resources and capabilities were not useful or even harmful to their success. So, if you are a retailer and you like theory: next time, do your homework! And if you’re a retailer and you’re more hands-on: well…. do your homework!

It looks like Honda’s China troubles are over for now. Its Chinese joint ventures, Guangqi Honda Automobile and Dongfeng Honda Automobile, will resume operations after having made significant concessions to workers who went on strike mid-May. There were complaints of working conditions and low wages. Honda agreed to raise wages by 25 %. Yes, twentyfive percent. Such a significant increase can only mean (or at least hint to) that Honda has been doing what many multinationals are often accused of – the exploitation of cheap local resources, such as labor. And in fact, workers at Honda or at similar plants earn as low as 1,000 Renminbi monthly, about 150 US$ and have not received a wage increase in five years. What’s the lesson to be learned? Moving production to a low-cost location is not necessarily a bad thing – after all, there’s very little choice for companies in some industries if they want to stay competitive. Besides, foreign direct investment is also helping the development of local economies. However, creating ever worsening wage disparities at foreign subsidiaries of multinational companies over time makes them less welcome than they may have initially been. Besides, in Honda’s case, the company has ambitious plans of growth in the Chinese market. Last year, it produced about 600,00 vehicles in China, but it is looking to increase its capacity by 30 percent to more than 800,000 cars by 2012. The expansion banks on increases in domestic purchasing power. And this is where being not locally responsible becomes a very short-sighted strategy – not only did Honda nothing to contribute to increases in purchasing power, it is also slaughtering its own image.

Other Japanese multinationals in China have recently announced similar increases in output – Nissan plans to produce more than one million cars by 2012, Sharp will double the number of retail outlets, fashion retailer Uniqlo intends to open 1,000 stores by 2020. What happened to Honda recently provides a good lesson for these Japanese companies and for all multinationals from other countries.

Consultant McKinsey  & Company reports on two seemingly unrelated facts of the global business world: first, many transnational mergers go down the drains, and second, the age of Asia continues to dawn. At the intersection of these two topics, evidence is emerging that Asian companies approach post-M&A integration slowly and cautiously, sometimes to the extent that there are no integration efforts at all. It may be too early to tell, but the hands-off approach that only focuses on a hand full of key performance indicators rather than on fully blown integration that often leads to distraction, inefficiency and demotivation, seems to generate better results. With stronger emphasis on the need for internal control, post-M&A integration seems to be a distinctly western objective. Maybe here’s a lesson to be learned from Asian companies? Maybe the fact that we better start to learn from Asia is a lesson in itself?

Having been in Iceland during the most recent eruptions of the volcano Eyjafjallajokull in Iceland has been an interesting experience, even with a view to international strategy. Academics and managers have come so accustomed to being in control that the only thing we worry anymore are issues that may be tricky, but still are manageable. Standardize or adapt? Send expatriates or promote locals? Export or invest? Most answers to these questions aren’t easy ones, but there are ways to handle them. Enter the volcano. Apart from it being a belittling experience if one sees the volcano spewing boulders, it is definitely worth a thought to bring the simple things back into the design of international strategies. Let’s not forget that there are events beyond our control that render any strategy, no matter how well designed useless.

Tomorrow, the trial against four executives of the UK-Australian mining giant Rio Tinto will open in Shanghai. The executives have been charged with stealing commercial secrets and receiving bribes and are facing up to 20 years in prison. Both the protection of intellectual property and anti-corruption laws are important domains of the legal environment in any market, so what’s wrong with enforcing these laws? Well, two things. The first is that the facts of the case are not quite clear. Not much has been disclosed about the case, but it seems that what the Chinese courts see as infringements on trade secrets may be what business insiders consider rather normal gathering of industry information. Secondly, the trial may turn out to be highly political and less factual. It is commonly accepted in China that judges weigh both legal and political aspects of cases and sometimes give precedence to the political aspects and interests, including the protection of local markets and companies. That the court hearings will take place behind closed doors certainly contributes to concerns that this may happen in this high profile case, too. Could all of this have prevented? Yes, maybe! Multinational companies such as Rio Tinto simply must be aware of the land mines that are buried all over China’s business environment and proceed with appropriate caution. In a way – to stick with the theme of this blog – it is a case of pride that often shows itself as ignorance concerning differences and threats in the external environment.