Might multinational managers be the problem?

My recent US trip was principally motivated the big annual conference of international business scholars – the AIB. I spent five sunny days in San Diego presented, discussing and pondering the nature of multinational activities, strategies and impact with 900 or so other academics. There were a range of fascinating sessions and papers.

An opening session featured some IB luminaries – Pankaj Ghemawat and Udo Zander – discussing the nature of the global business environment (notionally the rather non-controversial Flat versus Spikey debate). Both made strong arguments that none of the purported globalisation we’ve seen in recent decades is particularly unprecedented when we look at a time frame of a century or more, nor is international trade and production as integrated or connected as most people assume. They presented some conflicting implications of this however.

Ghemawat argued that firms run the risk of assuming the world is flat and thus adopting big, bland reductionist strategies that will satisfy no consumer’s needs and will stumble in the face of genuine country and regional differences.

Zander argued a more complex and controversial position. In his tale, only a small number of multinationals manage to build temporary innovation and knowledge advantages that they can leverage via global cloning (i.e. advantages that are sufficiently transferable and applicable across multiple markets). Other multinationals will struggle to adapt to to local needs and thus fail (or at least underperform).

So far, there’s not much new in this perspective. Even his explanation for the barriers to firm adaptation/learning aren’t surprising – the multinationals are burdened by the organisational history/institutional memory and current wisdom is sticky.

Where it gets intriguing is the examples he gave of subsidiary managers in markets steadfastly refusing to change their strategy in the face of years of failure and repeated suggestions to adapt and learn.

This begs the question, as does Ghemawat’s characterisation of strategies being too simple, are multinational managers the handbrake on multinational success?

Perhaps we have placed too much weight on the size of the challenges in international business, and too little on the failure of managers to tackle these challenges. Firms may be failing more because of the weaknesses of their managers rather than any insurmountable liabilities of foreignness or risks of doing international business.

As scholars we spend too little time looking at failures and too much time looking at the winners. Perhaps the winners are just those who stuffed it up the least. Might we learn more from the mistakes?

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More belt-tightening

Answering one’s own question is possibly a sign of madness, but I have found a response to my question about what other products are hurting because of income elasticity.

Australian retailer of snazzy suits, shorts and ties Herringbone has collapsed in the past week. It seems fine clothing for merchant bankers, lawyers and the like is not quite as big a market as it was 12 months ago. Like champagne, consumers apparently find it very hard to justify such luxury as their income falls.

The search for further examples continues.

Following up on cars and caring

Further to two posts from last week (on the Australian auto industry subsidy package and on the collapse of childcare giant ABC Learning), two relevant articles have popped up in the business press.

This piece in The Economist provides valuable insights into the growth of car manufacturing in emerging markets, in particular the BRICs (Brazil, Russia, India & China). It does highlight the huge pull towards these markets for the major global car manufacturers, and also the limited scope to truly globally integrate their operations. The attraction of untapped consumer markets have pulled the firms into each market. Trade barriers and the need for product adaptation have played a major role in these MNEs manufacturing in each of these countries also. The output levels (and more importantly the growth rates) talked about here far swamp those in Australia (around 2.5m cars per year in Brazil, 6m in China, 1.5m, 2m in Russia compared with 1m in sales in Australia, but only about 300,000 vehicles produced).

And on the ABC Learning front, every journalist worth their salt is now calling on their immense powers of hindsight to demonstrate why the firm was bound to fail. This article makes a couple of interesting points regarding the failure of the childcare firm to achieve any economies of scale from consolidation, and the illusory nature of growth generated via acquisitions.

I’m not so convinced that firm wasn’t able to lower some of it labour costs or “achieve economies of scale in purchasing power or marketing power”. I also struggle to take any journo seriously who tries to use this downright fallacious argument to support his case: “Corporate farming has never overtaken family-run operations because a family will run their business on a much tighter budget and will endure leaner returns than any corporation just to ensure their survival.” Not sure what his definition of overtaken is, but corporate farming (and childcare) has certainly been growing at a faster rate that family-run operations in Australia for quite a while now.

As simple as ABC?

Running a business with booming demand (much of it funded through the public purse), and a big lead in market share and accessibility to consumers should be a license to print money.

That was certainly the logic behind the strong growth of stock market darling ABC Learning over the past few years down here in Australia. This firm modernised, aggregated and expanded a previously mum-and-dad (excuse the pun) business – childcare. They eventually ran more than 1200 childcare centres in Australia (upwards of 20% of the market), and another 800 or so in New Zealand, the US and the UK. Alas, it is has all gone very badly in the past 6 months or so for the firm and its founder. As of yesterday (November 6, 2008), they have gone into receivership (comparable to US-style Chapter 11).

So what went right and wrong?

In terms of the external environment in which this firm (let’s use Porter’s Five Forces) operated it looked like a great scenario:

– desperate buyers in the form of working parents often starved of local alternatives and increasingly subsidised by a complicit government

– low-paid employees with limited bargaining power

– a substantial first-mover advantage from securing properties in prime locations (creating a barrier to entry at the local level) and developing arrangements to supply services to corporate clients

– few relevant substitutes (stay-at-home parenting, nannies or grandparents)

– limited industry rivalry due to considerable market share advantage and the localised nature of competition.

So what wrong?

Here we see the issue of inadequate internal resources and capabilities. The systems and routines don’t appear to have been in place to adequately assess the merits of new properties and business lines (the firm had diversified into early primary education and also toys). General mangerial nous seems to have been scarce (it is a much bigger task running 1200 centres and 16000 employees than the 40 centres when the firm first went public). The financial management now looks incompetent (if not downright fraudulent). The international expansion was bold, but here also it may be that the firm underestimated the complexity of engaging in very different institutional environments, and mismanaged the huge financial risks of high borrowing in multiple currencies.

All in all, it turns out babysitting ain’t as easy it looks.