Capabilities do matter

One of the biggest questions in international business research is the relationship between multinationality and performance. It is still pretty unclear whether expanding internationally improves a firm’s profitability (or returns to shareholders), and whether the extent of expansion makes a difference. Recent stories on some of the world’s three largest fashion retailers paints an challenging picture.

First up, The Wall-Street Journal tells us that Spanish giant Zara (or rather their parent Inditex) is significantly outpacing US rival Gap with 10% sales growth over the past year versus Gap’s 23% decline.

These numbers are pretty convincing. One noticeable difference between the two firms is their level of internationalisation. Zara operates in 73 countries. Gap is in 6. Could that be the explanation for the divergence in performance?

Well, the news on Swedish competitor H&M muddies the water considerably. They have also announced a 12% profit drop (although sales did grow). These guys operate in 29 countries. We are this left in a bit of a conundrum. Is it the number of countries driving the story?

gap-storeIt would seem there is a clearer story in the area of margins. Inditex’s gross margin is 56.8% versus Gap’s 37.5%. H&M is also at 56.8% (but it is dropping, while Zara stays stable). These figures tell us that it is firm capabilities that are probably making all the difference.

Inditex and H&M run very tight ships, with super lean supply chains. This allows them considerable leeway in terms of lower pricing. Gap is less efficient, and also more exposed to the damaged and increasingly thrifty US consumer market. It cannot absorb lower prices at the consumer end quite as well. Put simply, it also just doesn’t deliver as exciting or new a product as its two European rivals.

hm-store1Turning quickly to H&M it is notable that they are bearing the brunt of rising costs from Asia more than Inditex. Inditex owns a great deal more of its production facilities and thus is less prone to suppliers leaning on them in tough times (and/or passing on costs). This also means Inditex must continue growing so as to make production investments worth it.

What’s the upshot of all this? Trying to find a general multinationality-performance relationship seems rather futile once we note the huge variations in other equally substantial strategy choices and the execution thereof.

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One Response to “Capabilities do matter”

  1. Steve Sammartino Says:

    This tells me it’s clear that it comes down to strategy and the execution of that strategy. Historically there have been enough examples of both highly international and highly localised firms doing well / poorly. The thing which is always clear is their execution of the strategy which creates a winning situation.

    I think profitability in tough times comes back to classic substitutes and presence there of. Zara seems less substitutable do to the speed of their new lines in a fashion market…

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