Hitting the Wall: Nike and International Labor Practices

Hitting the Wall: Nike and International Labor Practices - An article discussion per Debora Spar case study

Written for Thunderbird School of Global Management - Summer 2011

1.  Does Jeff Ballinger have a convincing argument about Nike?  Does Nike have a convincing response?

What is so interesting about a case like this and our main subjects - Nike and Ballinger - is that there are two completely biased approaches to business. Nike obviously had little regard for CSR in the beginning and not many would argue they had a pioneering attitude toward CSR. Ballinger no doubt held motives in a blatant search for a big name firm to make his case of "Western companies...are exploiting low-wage, politically repressed labor pools". That being said, do these biased parties have a convincing argument?

Regarding his argument, we defined Ballinger’s thesis statement as such: "any company has a significant obligation towards even its lowliest workers".  We find this to be a convincing argument both from a moral and financial perspective. These companies are benefiting financially from the low wages paid to workers in international manufacture plants which is allowing the company to have large profits. Although exhibit 4 in the case illustrates how the total wages in relation to the cost of living in the country is not quite as dire as Ballinger and other activists contend, it does seem Nike can pay higher wages, additional benefits and safe working conditions to the factory workers in these countries. Although this would present an additional expense to the country, it seems that with a Net Income of $451.4 million in 1999 the company can afford to incur in this expense. Although I agree with Ballinger on multiple counts, it does seem that he personally dislikes Nike and what the company stands for and wants t make an example of this company by using his "one country-one company" strategy. When there are countless multinational corporations employing Indonesian and Vietnamese laborers which are paying lower wages than Nike.

Ballinger did not need to look very hard to find bribery in Indonesia covering up labor violations including low wages and unhealthy work environments. The question was really not "did Ballinger have a convincing argument", but, how was one man going to get the word out about this. Although it took nearly a decade, from labor strikes lending a spotlight on the issue to Ballinger's big break publishing the "pay-stub versus Michael Jordan" article in Harper's Magazine, the message finally hit the mainstream who obviously deemed the argument "convincing".

Using the Value Chain Model supplied by Porter and Kramer, we can see how Ballinger makes his case. He attacks both Nike’s Indonesian Support Activities (Human Resource Management – compensation system) and its Primary Activities (Operations – sporting apparel and equipment assembly). However, he does this by making comparisons that are, in my opinion, only partially objective. Although safety standards and the age at which a person may start working can be transferred fairly equally across national boundaries, wages simply cannot. It is entirely reasonable to ask a company not to expose its employees to poisonous fumes or to have 11-year olds working in its factories. On the other hand it is totally unreasonable to assert that a “fair” wage in a developing country should be close to average wages in the developing world.

On the other hand, Nike's representation of a response is one of the world's greatest PR blunders ever. Nike would have done better to hire Kathy Lee Gifford to apologize for them - as she did regarding her own discovery of a clothing line manufacturing plant in Honduras she reported - then all of the several steps they took. If a single, initial "response" could be defined it was "without an in-house manufacturing facility, the company simply could not be held responsible for the actions of independent contractors". This response was echoed in all of the half-hearted efforts the next few years that Nike took to simply band-aid the issue including the internal Code of Conduct and Memorandum of Understanding, the Ernst & Young audits, Apparel Industry Partnership, internal Labor Practices Department, to the Andrew Young audit.

But then, why should Nike have really been concerned with coming up with an effective, convincing response? It was in the middle of a decade with annual double-digit growth and a true sense of invincibility. Unfortunately this does not cleanse them of their sins nor of the fact that their response was incomparably unconvincing.

In conclusion, Nike, a company that knows how to achieve goals and growth, could have easily achieved a convincing response if it desired to do so. The problem with the firm in the beginning of this struggle was a complete lack of understanding and foresight on the part of Phil Knight and Nike Management to proactively tackle this issue before it became out-of-hand.

2.  How well has Nike handled the publicity surrounding its labor practices? Could or should the company have done anything differently?

We found that Nike’s handling of the publicity was horrendous.  Initially, Nike flat out denied any obligation to rectify the exploitation of their suppliers' workers. When pressures began to mount, Nike half-heartedly hired an auditor to audit their overseas suppliers. Then when Nike's exploitation practices hit mainstream, as evidenced by Nike being the subject of the Doonesbury comic strip, they tried to do damage control by hiring Andrew Young to conduct an evaluation of its code of conduct. This again was another failure as critics ridiculed Young's report as it strayed from the accepted convention (format and methodology). Nike failed to respond with sincerity up until their financial success slowed.

Nike failed to consider one of the key components of the diamond framework used in the article written by Porter and Kramer; Context for Firm and Strategy and Rivalry. In the United States it is relatively safe to assume that a subcontractor won’t use underage workers or expose its employees to hazardous working conditions because there are regulatory entities in place to monitor such activities. However, in the developing world, this is a very dangerous assumption. The consequences of this mistake were significant. Many journalists and activists portrayed the company as exploiters of workers in poor countries. American customers expressed their outrage in the media and with their wallets by boycotting Nike products.

An interesting point that this case made was that Kathy Lee Gifford was linked to a clothing line produced in Honduras by child labor. The case illustrated that Gifford immediately apologized for the issue, taking full responsibility. Not only that, but with true sincerity Gifford cried and wept, basically begging for Americans' forgiveness.

"The public" is generally forgiving when famous people or corporations are sincere and up-front - they become "real" to us and it is easier to forgive them. Nike should have taken extreme action as a corporation. Phil Knight should have been Nike's Gifford and the company should have enforced manufacturing requirement changes immediately. Nike's problem - they did not believe at the time that anything could slow them down or harm them.

Also, in order to address the complaints made regarding its labor practices, the company should have proactively mentioned there was a problem with conditions in the factories and outlined how it was providing additional training for its employees and managers and working with its partners to ensure all factories were safe. In order to address the perception that the company paid inadequate wages, Nike should have constantly communicated the findings from the study conducted by students from the Tuck Business School which found the company paid adequate wages. Since the study found that "factory workers, after incurring essential expenditures can generate a significant amount of discretionary income". Finally the company should continue to look for ways to improve the conditions of its factories and the livelihood of its workers.

3.  What is a “fair’ wage in Vietnam? How should Nike think about it?

Our group found several angles to answer this question:

1. Livable Wage Approach – A "fair" wage in Vietnam should at the very least be the minimum wage in Vietnam, whatever that may be. I would contend, however, that Nike should go above the minimum wage to a livable wage such that a two income family should be able to support itself.  Nike should think of it from its employee's perspective. What is the wage that they need to make to afford a decent standard of living? Given that this a profit driven company, this perspective is likely going to be taken to the extreme so that the wage paid is minimized. I'd contend that whatever the wage needed to afford a decent living, Nike should match it and go above it by a certain percentage so as to give employees a reason to want to work at Nike.
2. Free Trade Approach – A fair wage in any country is the wage in which employees will work and the company can pay - the balance between supply and demand like any fair trade. In a trade, both parties the supplier and buyer are better off because of the trade or else they would not agree to the trade. This premise holds the assumption that neither supplier nor buyer are coerced or forced into the trade. In other words, the trade is completely free of conditions that both parties do not agree to.  Nike should think about wages in Indonesia as they do when they offer an endorsement deal to Michael Jordan. They should take into account all factors to set the price of the deal to have Michael Jordan endorse their brand.  With that being said, costs that should be taken into account in Indonesia to set the wage offer to the working population might be: total cost of goods sold goal, minimum wage requirements, and the cost of negative press causing a negative reputation and image.
3. Wage is not the Issue – The term fair wage is an unfair term that implies there is a magic number that all sides will agree is sufficient based upon the type of work being performed. The problem is that outside of market forces, this magic number is almost impossible to accurately determine. Rather than hypothesize about a number, I would point to the fact that the factory is fully staffed. This serves as evidence that the majority of workers perceive it is worth their time to continue as employees. I think the wage issue was actually the catalyst for hostilities in other areas to surface. If the workers in the plants were all adults and the safety conditions were satisfactory, I think Nike could have pointed to market forces as a reasonable driver of wage rates. However, when safety was clearly an issue and “underage” workers were prevalent in subcontractor’s facilities, the wage issue appeared to be one more ingredient in Nike’s recipe for better profits at the expense of workers in developing countries. I think Nike needs to “own” its value chain and not blame subcontractors when confronted by critics. If the company creates a global standard for its total value chain (i.e. safety, age of workers, etc.) it can then, regardless of local conditions, build an organization that proactively seeks to hold all members of its production processes to a standard that is more acceptable to the world community.
4. Total Uses Approach – In order to adequately assess what a fair wage would consist of in Vietnam, Nike should conduct a similar study to the one conducted by Tuck students in Indonesia to estimate the cost of total uses which is specific to Vietnam. After that study is conducted, Nike should set wages which at a minimum meet the uses total of the group with the highest total. For example, if the uses of married workers living at home are the highest, the minimum wage for Vietnamese workers should be that of this group.  Nike should update the uses total every year to meet inflation targets, and conduct a new study every 3 years in order to ensure the uses total being applied is accurate. Additionally to avoid backlash abroad, Nike should publish its wage formula and communicate to its critics that although these totals are low by US standards they provide adequate living conditions for its Vietnamese factory workers.

Strategy & Society: The Link Between Competitive Advantage and Corporate Social Responsibility

Strategy & Society: The Link Between Competitive Advantage and Corporate Social Responsibility - An article summary per Porter and Kramer

Written for Thunderbird School of Global Management - Summer 2011

Summary

A very wise, Nobel Prize winner once said, “The social responsibility of business is to increase its profits."  Porter & Kramer’s “Strategy & Society: The Link Between Competitive Advantage and Corporate Social Responsibility” obviously agree with this statement where they argue “successful corporations need a healthy society” and “…a healthy society needs successful companies”.  However, they disagree with the four prevailing justifications for CSR explaining that they all “focus on the tension between business and society rather than on their interdependence”.  These justifications include the moral appeal and duty to be a good citizen, sustainability emphasizing environmental and community stewardship, the explicit permission from government and community to operate – which they call “license to operate”, and reputation of brand, company, stock and employees.

            Porter & Kramer argue that a company must integrate society into their business strategy by identifying key points of intersection.  “Inside-out linkages” are where business and society meet through daily operations and create a positive or negative consequence.  “Outside-in linkages” are “external social conditions” that influence corporations.  These linkages are also the authors’ evidence to why CSR is important.

            The writers propose “creating a social dimension to the value proposition”, almost as if the “new bottom line” is represented by Net Income (Economic), Social, and Environmental returns.  And when the three value proposition segments are mutually-beneficial to each other, a firm has found the “most strategic CSR”.

Extension

            Personally, I was very displeased with this article and would like to suggest an extension.  In preparation for the reading I was hoping to learn why Porter & Kramer – very brilliant business strategists – believed how to implement CSR, but also a much better understanding of why it is important.  Without having a staunch opinion about CSR, and learning from economists like Milton Friedman, I was optimistic to hear why it was so important to today’s corporations in regards to strategy and success.  I didn’t feel I learned that from this article.

            Porter & Kramer identified the “four justifications for CSR” and denounced them all as missing the mark because they did not identify that society and corporations are actually interdependent, not in tension.  At this point the reader would expect to hear why then CSR is justified and important to today’s companies.  Instead, the discussion moved quickly into how to integrate business and society needs.

            There were several examples of companies merging the interdependent needs like Nestle in India, McDonalds and waste creation, DuPont and energy savings.  There is no doubt that these were beneficial to both society and the companies who modified their activities.  There is no doubt that we would all take steps to better our business and society if a given activity would accomplish both objectives.  However, I suppose that I was really just hoping that these two strategy experts would explain to me why CSR is important and an element to my business that I cannot and should not leave on the drawing board – disproving the Milton Friedman’s of the world.   

Blue Ocean Strategy

Blue Ocean Strategy - An article summary per Kim and Mauborgne

Written for Thunderbird School of Global Management - Summer 2011

Summary

Blue Ocean Strategy and Blue Ocean Strategy: From Theory to Practice, both authored by W. Chan Kim and Renee Mauborgne, identify industries by metaphoric ocean environments – red ocean versus blue ocean.  A red ocean is comprised of abundant competitors vying for market share of an established industry and demand, “…as the space gets increasingly crowded, profit and growth prospects shrink. Products become commoditized. Ever-more-intense competition turns the water bloody.”  Kim and Mauborgne campaign that by creating blue oceans a company can compete in “uncontested market spaces where the competition is irrelevant” by supplying customers with a giant leap in value, securing new, sustained demand.

            Cirque du Soleil, Ford and the Model T, Yellow Tail brand wine, Apple and many others have created blue oceans. Interestingly, these new, uncontested markets are not historically due to revelations of new technology.  The majority of cases, like all of those listed above, are the result of “value pioneering” – a leap in value offered to customers at the same or lower costs.

            To assist companies in developing blue ocean strategies, Kim/Mauborgne have “developed practical methodologies” like The Strategy Canvas.  The Canvas establishes the current competitive factors that industry players – characterized by differing business models – are investing in.  The Four Actions Framework, and The Eliminate-Reduce-Raise-Create Grid are tools utilized to ask and answer questions that may lead an organization in the creation of a blue ocean.  Fundamentally, what to eliminate, reduce, raise (increase), and create.

Application

            I’m certain epiphanies and “ah-ha” moments are typical when companies utilize the frameworks listed above in an effort to create their blue ocean.  In applying these tools to my company, which is my role as Director of Business Development, I believe I am on to something big.  Our company conducts crane, rigging, lifting, and load handling training for major corporate workforces.  After conducting a Strategy Canvas with a new value-addition I am envisioning, I see a giant opportunity to offer our customers an enormous leap in value.

            Customers like Boeing, NASA, and the US Army have large workforces.  They might send a couple people to our training center this month, and then we train 50 employees at their facility next month.  We have always managed the data and records (transcripts) of their students – much like a university does its students.  However, being that our customers are businesses (organizations), the “payer” is often managing dozens if not hundreds of people that come through our courses.

            The blue ocean is to open the records to the decision-makers via an online interface that not only supplies managers with all the data on their employees, but allows them to build out and apply “training paths” per employee, division, or even role.  This Training Manager Application allows customers to solve one of their biggest riddles: “How should we go about training all of these people, and how do we track the training they receive?”

            This may sound pity at the moment, but I have just requested an SOW to begin the IT work to create this application.  I will begin market research as well, however, several interactions with other customers has indicated that this is a major issue they are all facing.

Amazon.com - External and Internal Competitive Analysis

Amazon.com - External and Internal Competitive Analysis

Team-Written for Thunderbird School of Global Management

Amazon.com, Inc. is the world's largest online retailing company headquartered in Seattle, WA. Founded in 1994, Amazon started as an online bookstore and quickly became popular as it received high marks on several internet rankings. A few years later, in line with founder and CEO Jeff Bezos' goal of having the "earth's biggest selection[i]", Amazon diversified their company to include a myriad of products ranging from DVDs to software to clothing to furniture. By focusing on the customer satisfaction and having the "earth's biggest selection", Amazon has been able to grow from a garage operation to the company it is today generating $34.2 billion in sales in 2010.[ii]

Rivals - Amazon.com has grown tremendously since its start in Jeff Bezo's garage in 1994. Amazon's primary competitors are the online retailers that also provide a wide range of products. These competitors can include companies that are purely internet-based (overstock.com) or companies which have physical and online stores. (Wal-Mart, Costco).

Threat of Substitutes

As much as e-commerce has grown, there will always be a threat of substitutes from the physical world. The traditional brick and mortar stores provide a customer experience that is virtually impossible to replicate in the online digital world. For example, when buying clothes in stores customers elect to try on the item before making the purchasing decision. This activity is not available to any of the online clothing retailers. Additionally, online retailers are often unable to provide the real-time customer service of the brick and mortar store employees.

The threat of substitutes not only comes from the physical world but also the digital world. As Amazon strives to provide a wide variety of products, it cannot compete with specialty online stores. These specialty stores can customize their website to better display and assist the consumer in their purchasing decision, where as Amazon may not be able to in order to preserve the “look and feel” of their website. Auction websites like ebay.com or local listing websites such as craigslist also offer the consumer alternate ways of purchasing a similar or same product.

New Entrants

Currently, there are high barriers to entry for Amazon’s two largest businesses, online retailing and e-readers. In the online retailing space, Amazon is the 800-pound gorilla, with sales revenues three times larger than Staples, the next largest online retailer. As such, Amazon has tremendous brand awareness and compliments its online storefront with an extensive network of over 50 distribution centers worldwide. However, companies such as Shoprunner.com provide an example of the types of threats Amazon can expect to see in the future. Shoprunner.com is the online storefront for a collection of established brick-and-mortar retailers that seek to access online customers without making the types of concessions required of Amazon partner stores.

Books, or eBooks sold through Amazon’s proprietary Kindle technology, are currently a huge source of growth for Amazon with few viable competitors. Last June sales of Kindle eBooks exceeded sales of paperback and hardback books on Amazon for the first time in history. Companies such as Apple, HP, and Samsung have a history of technology innovation that virtually guarantees competitive platforms for eBooks will emerge and evolve causing additional competition for Amazon.

Suppliers

Amazon’s original core business was selling books and music. Now the company operates retail sites for companies like Target, bebe, Timex, and LaCoste. With increased volume and profitability in online retailing, Amazon has demonstrated its model can help partners leverage the power of Amazon’s brand and infrastructure. Being the world’s largest online retailer gives Amazon tremendous leverage with its suppliers. In many ways, Amazon is to online retailing what Wal-Mart is to brick-and-mortar retailing. Suppliers chose Amazon because they believe Amazon will provide a conduit to more online customers than anybody else. Ultimately, Amazon’s ability to grow and maintain profitable partnerships relies on its continued ability to add customers.

Publishers are currently eager to be part of Amazon’s fast growing e-reader segment. As Amazon’s Kindle technology is one of the few established technology platforms and channels for eBooks, Amazon’s position should be strong for the next few years. However, as stated in the “New Entrants” section, Amazon is vulnerable to competitive products and technologies from companies like Apple, HP, and Samsung. Suppliers will gravitate toward the delivery technologies that customers prefer and, for now, customers prefer the Kindle experience.

Buyers

Historically, online shoppers have been fickle. With few current incentives to remain loyal, online shoppers gravitate to low-price vendors, free shipping, and easy-to-navigate websites. To date Amazon has clearly met the aforementioned criteria. To stay in the good graces of online consumers, Amazon must ruthlessly control its prices and solidify its brand. Perhaps due to its return policies, buyers have also demonstrated a willingness to trust Amazon, which naturally works in its favor.

The future behavoir of eBooks customers is more difficult to predict. Currently, they are smitten with the Kindle’s simple display and Amazon’s electronic format for “the printed word”. On the other hand, new technologies are constantly arriving and today’s Kindle could be tomorrow’s Palm Pilot.

The VRIO Analysis has been applied to the following areas: Research and Development, Organizational Culture, Customer Relations, Incumbent Advantages and Branding.

Research and Development:

The Research and Development area has proven extremely valuable for Amazon. This area has led the company to implement customer experience features such as “Listmania” and the “Wish list”. This features not only help customers find the desired product information, but also allow customers to determine which products they find most valuable. Additionally, the Research and Development area has led to such product breakthroughs as the Kindle, which has caused a revolution in the publishing industry and given the company a significant competitive advantage. Although the R&D department has created tangible benefits for Amazon, these advantages are not rare, as several other companies such as Barnes and Noble and Sony offer e-readers with similar technology and companies such as Google and Netflix, offer customer features which are similar to “Listmania” and “Wishlist” which make customer recommendations based on previous searches and/or purchases.

Our group finds these technological innovations are costly to imitate because of the high level of R&D spending required to build a product such as the Kindle, as well as the technological expertise required to refine and improve search algorithms. As it pertains to organizational fit, the features and products created by the R&D area fit perfectly with the organization as a whole, as these benefits are aimed at improving the customer experience and enhancing the ease with which customers can shop in the Amazon site.

Organizational Culture:

In reviewing the list of company values on the Amazon site[iii], values such as bias for action, frugality and leadership are stressed. Our group considers the company culture to be a valuable part of Amazon’s competitive advantage since these values highlight the company’s ability to quickly implement changes and utilize resources efficiently. Although important, our group does not consider these values to be rare as several companies have values which stress leadership, action and the efficient use of resources. We also do not find this competitive advantage to be costly to imitate, as these values are listed in the company’s website and are thus public knowledge.

Since the values for the organization seek to improve the customers experience by empowering employees to act fast, exhibit leadership skills and utilize resources efficiently, our group sees a direct connection between these values and Amazon’s position as an industry leader.

Customer Relations/Reputation:

Harnessing and maintaining this competitive advantage is critical to Amazon, since the company both relies on its customers to post customer reviews online and to purchase products on its website. Our group does not find this to be rare competitive advantage, as several companies focus on improving customer relations for its customers. This competitive advantage is not costly to imitate as companies simply need to have a clear sense of what customer expectations are, and meet those expectation on a consistent basis. Our group does see a strong organizational fit between customer relations and the company’s reputation as Amazon’s stated goal is to be “Earth’s Most Customer-Centric Company” and this goal can only be achieved by having strong customer relations with customers.

Incumbent Advantages

Amazon launched its online store near the birth of the consumer internet as we know it today in 1995. There were a mere 15 million internet users in 1995, today there are over 2 billion (a 12,500% increase in user adoption[iv]). Amazon.com gained first entry advantages and holds tremendous value by opening its online bookstore, subsequently selling music, toys, and more, and then opening up to private sellers on the site. Only one company can be the “first entry” in an industry – a very rare title. This incumbent advantage cannot be imitated by a retailer; however, a firm like Google, for instance, is also leveraging an incumbent advantage in web search to span into Google Shopping. Incumbency played a major role in Amazon’s growth strategies – far before most competitors even entered the space – Amazon acquired start-ups like IMDB (movie reviews), Alexa Internet (web traffic data), and Zappos (shoe and apparel retailer). By becoming the biggest and best early on, Amazon diversified and gained a tremendous upper-hand over potential competitors with grand economies of scale and an incredibly well organized conglomerate where all activities fit the corporate vision of internet retail and services – large data centers, diversified portfolio of subsidiaries and partners, and internal R&D project like Amazon Web Services (cloud storage). As an incumbent of this magnitude, the ability for competitors to imitate Amazon is incredibly slim.

Branding

One of the greatest decisions Amazon made was changing its brand name from Cadabra before it became mainstream. Named after one of the greatest rivers in the world is the reason why Amazon’s brand is now valued at nearly $5 billion[v]. The brand name and the establishment as the first major, successful online retailers created an equation for growth and long-term value. The Amazon brand name is exceptionally rare – for instance even though some usability metrics might find Amazon below The Book Depository (an Amazon subsidiary), Amazon’s brand recognition is far superior generating millions more in sales than usability[vi], proving the brand is rare and difficult to imitate in the online retail space.

Conclusion:

Amazon has successfully grown from a small web based book seller to a hugely successfully company selling everything from books to clothing to music. Amazon has positioned itself as a low cost alternative to brick and mortar companies which sell the same products. By leveraging economies of scale, Amazon has particularly been adept at keeping supplier price pressures at bay, while capturing an increasing large share of consumer sales. As the company faces strong competition from both online and retail based companies such as overstock.com and Wal-Mart, it will need to continue to refine its competitive offerings in order to provide the best customer experience possible.

Amazon’s long term success will be dictated by its ability to identify and anticipate consumer needs and trends, as it did with the Kindle and created products and services which allow the company to profit from those opportunities.

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[i] Amazon.com, "Press Release - Amazon.com Introduces New Logo; New Design Communicates Customer Satisfaction and A-to-Z Selection"

http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-newsArticle&ID=70550&highlight=

[ii] Internetretailer.com, "The Top 500 List"

http://www.internetretailer.com/top500/list/

[iii] Amazon site: http://www.amazon.com/Values-Careers-Homepage/b/ref=amb_link_5763692_2?ie=UTF8&node=239365011&pf_rd_m=ATVPDKIKX0DER&pf_rd_s=left-4&pf_rd_r=1ZH89YB0AQTGCHS2MHD4&pf_rd_t=101&pf_rd_p=1298548502&pf_rd_i=239364011

[iv] Internet World Stats - http://www.internetworldstats.com/emarketing.htm

[v] BusinessWeek. Best Global Brands. http://images.businessweek.com/ss/06/07/top_brands/source/65.htm

[vi] http://econsultancy.com/us/blog/3777-amazon-relying-on-brand-credibility-instead-of-good-usability

The Emerging Giants

The Emerging Giants - An article summary per Khanna and Palepu

Written for Thunderbird School of Global Management - Spring 2012

Summary

Khanna and Palepu nicely outline the reasons why emerging market corporations have significant advantages in their home markets as well as on the world stage. They also explain why well-established multinational corporations (Western, Japanese, and Korean) often have difficulty conducting business in emerging markets.

Although established MNCs have access to terrific talent and capital markets, high technology, and well-known brands back home, the authors utilize a simple, yet impactful model of the emerging market’s Product and Factor Market to explain why these MNCs find it difficult to succeed against local companies who know how to take advantage of the local market.  For instance, when MNCs enter emerging markets, they are often only able to tap into a small portion of the Product and Factor Market because they fail to adapt.  

They are only able to work inside of the “global tier” markets where they can only sell to the few customers who are willing to pay international prices for international quality products with international attributes.  Also, regarding the factors of production in the “global tier”, MNCs can only access talent who demand international salaries.  Local companies tailor products to meet local needs in the “glocal and local tiers” which are much larger markets than the global tier, and they are able to find adequate talent at these levels with fewer dollars spent.

These advantages in the product market – knowing the customers – and the resource market create vast opportunities for locals and difficulties for newcomers.  The authors also present this theory regarding filling the institutional voids that often occur in emerging markets.  MNCs are hard-pressed to capitalize on these opportunities because they also require significant local talent and knowledge.  In addition, governments often protect these institutions for local management in the end anyways. 

Integrate

Freakonomics authors Tim Levitt and Stephen Dubner touch on the concept of “home-field advantage” related to American Football and found that 57% of the time, the home team does win.  Of course this is due to a number of factors, but this is a very simplistic and similar concept to Emerging Giants.  Another similar theory is that of National Advantage which reveals that specific countries or regions come to dominate an industry or market due to the inherent capabilities and attributes of the people and resources of that region.

Emerging Giants does identify competition in two places – first “at home” and also, “on the road”.  It is obvious to readers when emerging giants are playing on their home fields the inherent advantages that they have when visiting multinationals come to compete against them – access to talent, lack of regulatory bodies and solid supply chains.  Khanna and Palepu even explain that MNCs often fail to properly handle the sheer differences in the opponent’s home field because executives are “ill-equipped to deal with such voids”.

Then, National Advantage fits nicely as well when emerging market companies do expand abroad because they have learned how to best leverage their home market to create competitive advantage solid enough to compete in global markets.  Companies like Haier and Infosys have discovered how to best leverage their home country talent and resources to find business models that are almost unbeatable even “on the road”.

Collaborate with Your Competitors

Collaborate with Your Competitors - An article summary per Hamels, Doz, and Prahalad

Written for Thunderbird School of Global Management - Spring 2012

Summary

This article describes several major tenants regarding the nature of Competitive Collaboration as well as patterns of behaviors, motivations, and goals of alliances made between Western and Asian competitors.  While analyzing over a dozen collaborations Hamels, Doz, and Prahalad explain that they were out to determine the ways in which companies gained from the collaboration (“shift of competitive strength”) – a measure of success.  Quickly they identify that longevity of the alliance is not believed to be a reliable success measure.  Instead they focused on how competitors used collaboration to increase their “internal skills” and technology while they guard against over-transferring of information.

The best collaborators adhere to four principles to remain successful: collaboration is certainly still competition and there will likely be a winner and a loser, harmony in the collaboration is not very important, defend against competitive compromise with disciplined employees, and learning from your partner is among the most important themes.

Some general themes regarding behavior and motivation are portrayed.  For instance, when only one partner out of two is dedicated to learning, competitive compromise eventually will ensue because mutual gain is only possible for a period of time.  Furthermore, for collaboration to succeed, both sides must offer value but protect against giving the farm away.  Lastly, a discussion of competency transfer versus technology transfer marked that Asian companies, who are usually very competent and have incredible process values, are often hard to learn from because process values are “normally deeply-woven fabrics of employee training, systems…”  Western companies’ technology is usually more easily learned and adopted.

Concluding, the authors recommended that Western companies enhance their capacity and receptivity to learn.  Methods like competitive benchmarking and instituting internal information clearinghouses are terrific ways to learn and disseminate knowledge in an organization.

Extend

This article was well put together, however I felt that the opinions and findings lacked significant background information.  I’m certain that the research contains a great deal of case study supporting evidence that reached conclusions like: Asian companies value learning more than Western companies, that Western companies need to improve their receptiveness to learning, and Western companies’ traits (i.e. technology) are more easily adopted and learned than Asian companies’ traits.  These conclusions based on case studies, which are all rather cultural findings, lack compulsory research that would better support the conclusions.  I would recommend that the authors better support their findings by applying some of the following research to the cases they researched.

It would be helpful for the authors to conduct sociological or anthropological research to validate the three aforementioned conclusions to see if there is any supporting evidence as to why Asians might be more receptive and successful to learning during collaboration than Western counterparts.  It might be found that Asians are more humble, receptive, open, and eager than Westerns in general.  These sorts of traits might be justifying the case study findings.  It might be found for instance that North Americans and Europeans have become complacent and lazier than their ancestors from 200 years prior.

Fundamentally, extended research to better understand the personalities and culture of the two competing groups would better solidify the conclusions than a seemingly unproven method for determining who wins during competitive collaboration and why.

Tap Your Subsidiaries for Global Reach

Tap Your Subsidiaries for Global Reach - An article summary per Bartlett and Ghoshal

Written for Thunderbird School of Global Management - Spring 2012

Summary

In analyzing the headquarters and subsidiary relationship the authors outline failed strategies of subsidiary management, the roles and responsibilities of subsidiaries, and how headquarters should effectively shape and direct this relationship.  Poor subsidiary management was epitomized in the article by the example of EMI, who after invented and brought to market the CAT scan failed to capitalize and after seven years, was took over by a competitor.  EMI failed in three ways: 1) Lacked the ability to adapt to market preferences away from the HQ home country, 2) Lacked the resources to scrutinize data and create responses in multiple world markets, and 3) Lacked the motivation and empowerment in overseas subsidiaries’ managers.  In short, many companies fail in these ways due to a United Nations Model approach to sub-management (symmetrical treatment of all subsidiaries) and the HQ Syndrome (subsidiaries are simply local implementers of HQ decisions). 

Interestingly, the article highlights how Proctor & Gamble’s European business unit comprised of an HQ in Brussels and subsidiaries in several Euro nations transitioned from a failed UN Model approach to a successful structure.  P&G created “Eurobrand” teams that were headed up by a country general manager who represented the leadership of a specific product.  The team included counterpart managers from other country subs who also had interest in the success of the product.  This approach was successful because it gained the commitment and knowledge of local managers and built interdependent relationships between subsidiaries.  The P&G example transitioned the article into the differing roles of subsidiaries and headquarters.

Typically there are four roles subsidiaries have – strategic leader, contributor, implementer, and black hole.  A strategic leader is a partner of HQ; a highly competent sub, located in important markets that help recognize demand shifts, develop and implement strategy.  Contributors are also highly competent subs who help build strategy but are located in relatively unimportant markets.  Implementers are not exceptionally competent or located in strategic markets; they carry out the corporate strategy and generate satisfactory revenue.  Black holes’ purpose are to provide a local presence to maintain global position – they often have difficulty competing in their country and typically are utilized to be in the highly competitive market that might deliver industry shifts that HQ needs to know about.

Critique

It is difficult criticizing a paper after three days of query that may have taken years to author.  Nonetheless, I felt as if this article has oversimplified the HQ-Subsidiary relationship.  The authors main message is that corporate HQs should disseminate responsibility of lead and contributing roles to subsidiaries and the resources, decision-making ability, and corporate access required to do so.  In short this seems like a cookie-cutter solution to how to structure the relationship with overseas subsidiaries.

Take Apple Inc. for example – the company’s worldwide HQ is in California, USA.  Manufacturing is conducted mainly in Asia while there are subsidiaries in the world’s major markets that oversee retail outlets and distribution.  My assumption is that there is not much that transpires around the Apple world without HQ’s approval. 

I would prefer the article to discuss the potential relationship structures based on industry of the corporation as it seems that a manufacturer like Apple, or a logistics company like UPS might benefit by differing structures than Philips, P&G, or EMI.

I believe it is important to empower people to perform, innovate, and develop – even people who make up a subsidiary – however, in some business models it doesn’t seem that the recommended structure is a one-size-fit-all solution.  The authors might reexamine the article and ensure that they do not fall into the UN Model, symmetrical treatment fault on the other end of the spectrum.

Organizing for Worldwide Effectiveness

Organizing for Worldwide Effectiveness - An Article Summary per Bartlett and Ghoshal

Written for Thunderbird School of Global Management, Spring 2012

Summary

Like analyzing the differences, advantages, and disadvantages of centralized and decentralized governments of the world, Bartlett and Ghoshal have outlined their thoughts on companies utilizing “centralized hubs” and “decentralized federations” for their corporate global strategy.  The dichotomy is well-illustrated with the comparison of Matsushita, a Japanese company that has been successful with a central-control structure to its global business, and Philips, a Dutch company whose success is characterized by strong, independent subsidiaries for a global strategy.  In a short analogy, Matsushita is to Global Strategy as Philips is to Multinational Strategy.

The article explains reasons for Matsushita’s success through these points: a) Gaining the input of subsidiaries into management processes by creating strong linkages to and from home office, b) Ensuring that development efforts were linked to market needs through “market mechanisms” that spur innovation, and c) Properly managing responsibility transfers from development to manufacturing to marketing by, for example, graduating engineers through departments along with the products they have been developing.  On the other hand, Philips successfully managed locally by: a) Employing exceptionally talented, entrepreneurial expatriates who thrived with autonomy, b) Forcing tight functional integration within subsidiaries by incorporating people at technical, commercial, and financial levels in decision-making processes, and c) Dispersing responsibility along with decentralized assets creating nearly-autonomous business unit-subsidiaries.

The authors offer that these two strategies have pitfalls and argue that the most successful global corporations will maintain a Transnational Strategy, characterized by three traits: a) Interdependence of resources and responsibilities among organizational units, b) A set of strong cross-unit integrating devices, and c) A strong corporate identity and well-developed worldwide management perspective.

Extend

The Social Revolution has been the only one of its kinds to topple entire governments (Arab Spring), build an encyclopedia 50 times the size of the largest print version (Wikipedia), and created a user base that would be the 3^rd largest country in the world, today, if it were a country (Facebook).  In these three cases, technology has been the enabler that has created such movements and corporations that are following suit in how they collaborate are paving the way of the future in business as well.

The Transnational Strategy is successful due to its flexibility and characterized by companies that are well connected.  Specifically, the article authors note that this strategies second trait’s pillars include tightly controlled operating systems, people linking processes, and decision forums.  This is all collaboration that the social web has been predicated on.  Companies who adopt tools that connect their “global people” have already seen strides – Dell Computers utilizes salesforce.com, a cloud-based, customer relationship manager (CRM) tool that they use internally to manage global sales and support inside one “org”.  Dell also utilizes this tool for communication between these groups, collaboration with R&D, and communicating/controlling corporate global strategies.

The pressures that decentralized companies like Philips (e.g. poor communication tools, protectionism, and “frozen assets”) are no longer an excuse for companies to become more collaborative and implement transnational strategies.  Today, businesses have no excuse to remain either centrally-controlled or completely federated.  Ten years from now those that do not make the adjustment to the Transnational Strategy will be kicking themselves much like Arabian deposed rulers and Encyclopedia Britannica are today.  They ignored the capabilities available to even small businesses today through the cloud that will transcend their administrative heritage more cost-effectively through connecting their people, processes, and systems.  

Serving the World's Poor, Profitably

Serving the World's Poor, Profitably - An Article Summary per Prahalad and Hammond

Written for Thunderbird School of Global Management, Spring 2012

Summary

“The willingness of big, multinational companies to enter and invest in the world’s poorest markets” is the one factor that Prahalad and Hammond argue is key to alleviating poverty, securing safety, and completing recovery from the global recession.  Interestingly, the authors make this notion and compliment it by saying that MNCs, if they do so, will greatly “enhance their own prosperity in the process”.  This is because the market in question contains over 4 billion people; although the segment earns less than $2,000 per year, the assumption that there is no market potential and that “the poor” do not spend on anything besides basic needs is flawed and narrow – the aggregate buying power of this segment is very large and their spending behavior is actually quite similar to middle-class consumers.  The article points out and overcomes many misperceptions about the poor than establishes the business case for MNCs.

Because growth is very difficult to obtain in mature markets, the article offers several factors that are favorable regarding investment in products and services for the poor.  Poor markets are under-served although the segment is hungry for low-priced, high quality products and services - aggregate prices can be 10 to 500% more for varying items, from water and food to phone calls and credit.  Also, there are plenty of cost saving opportunities by investing a company’s operations and the workforce of the poorer regions of the world.  And because the market is under-served, companies are already making significant innovations to serve this niche.

Lastly, a main theme of the article is the fact that managers must rethink their misconceptions, “The biggest change…has to come in the attitudes and practices of executives.”  They must appreciate the vast potential of the poor market and invest internally in people who are comfortable developing these markets.  Without these psychological changes, MNCs will continue to only slowly dip their toes in the water.

Integrate

In the article, “Tap Your Subsidiaries for Global Reach” Bartlett and Ghoshal identify the major reasons companies fail to compete globally through their subsidiaries.  Namely, MNCs often lack the ability to adapt to market preferences in the “host country”, lack the resources to scrutinize data and create responses in multiple world markets, and lack the motivation and empowerment in overseas subsidiaries’ managers.  In respect to “serving the world’s poor profitably” Prahalad and Hammond identify that a shift in mindset of manager’s is preliminarily necessary, followed by structural, organizational changes.

Bartlett and Ghoshal have also identified that “strategic leader” subsidiaries are partners of headquarters and highly competent groups located in important markets that help recognize demand shifts, develop and implement new strategies.  Without a doubt, these two articles align well and are demanding the same thing and strategy of MNCs – to invest in poor markets and to do so by tapping local knowledge through host country research and development groups, sales units, and distribution.  MNCs have tremendous economies of scale and undisputedly powerful supply chains that if adapted well, could provide for cost-effective products and services in the poorer markets of the world.

The Competitive Advantage of Nations

The Competitive Advantage of Nations - An Article Summary per Michael Porter

Written for Thunderbird School of Global Management, Spring 2012

Summary

Interestingly, Michael Porter, an expert in corporate competitive strategy, examines the reasons why certain nations exceed and excel in certain groups of industries over others in “The Competitive Advantage of Nations”.  Porter goes far beyond the factors of production to explain why the Swiss excel in banking and the Americans in movies.  Prevailing thinking on the subject claims that factors like labor costs, interest and exchange rates, and economies of scale are the salient factors in determining national success.  Porter disagrees and demands that real competitive advantage is spurred by innovation applied to the “Diamond of National Advantage”.

Certain nations are capable of industry dominance when their nations have created and fostered favorable determinants including factor conditions (factors of production), demand conditions (home market demand levels and characteristics), related and supporting industries (strength of the value stream), and firm strategy, structure, and rivalry (typical corporate characteristics and amount of competition).  A nation is typically unable to achieve industry supremacy without a commitment to innovation in these determinants and will find it difficult to compete if one of the four are lacking.

Porter also defines the proper role of government, companies, and leadership in growing national advantage.  He falls in the middle of a nationalism and classical liberal approach to governance as he views the Japanese government, “at its best”, is a role model in fostering innovation and growth.  However, he notes that, “like government officials everywhere” the Japanese can become too involved and disruptive to innovation.  Companies, like governments, should focus on fostering internal innovation and its leaders should “believe in change” and continuous improvement.

Extend

With this approach, understanding the specific determinants that foster success in specific industry groups, it would be interesting to learn about which determinants foster success in more specific microcosmic skill sets, trades, thought processes, and more.  Porter’s current approach takes a grandiose look at entire nations of the world; it would seem evident that it would be important to certain people which areas of the world (and why) create the top electrical engineers, theories on physics, baseball players, etc.

Porter could extend his theory on national advantage to somewhat of a “regional advantage” approach that helps people define where and why the best of the best originate.  In short, it would seem that Porter’s Diamond might apply well to hotbeds of thought and skills – factor conditions, demand conditions, supporting industries, and strategy/structure/rivalry all seem to apply still.  Perhaps Porter’s theory applies so well because National Advantage can really be construed as human advantage on a large level.

So, to take this understanding of what fosters terrific results for nations in competitive industries, why not try to understand where companies, governments, non-profits, and educational institutions might look for the top talent in a specific skill set?