Cases

M&A

The first wave of foreign direct investment (FDI) in China, in the 1980s, mostly took the form of joint ventures (JVs). A second wave followed in the 1990s in the form of wholly foreign-owned enterprises (WFOEs). Now a third wave of FDI—cross-board mergers and acquisitions (M&As)—is gaining strength. Consider the forces driving this third wave. China has a massive appetite for FDI; it is one of the world’s largest FDI recipients. Yet, M&As account for only 10% to 15% of FDI flowing into China, compared with approximately 70% of FDI outside of China that takes the form of M&As. One reason for this disparity is that, until China joined the World Trade Organization in 2001, national regulations often encouraged (or required) foreign entrants to form JVs or set up WFOEs, while explicitly discouraging M&As. But China has since gradually loosened the regulations that govern foreign takeovers of Chinese assets, especially state-owned enterprises (SOEs), and has made explicit moves to attract foreign M&As. In many industries, including financial services and manufacturing, constraints on M&As are just now being lifted. At the same time, Chinese firms are increasingly engaging in cross-border M&As of their own. To the extent that the Chinese government supports the outbound M&As, it must in most cases clear the path for inbound M&As, according to international norms of reciprocity. Given the environment, how should foreign companies proceed? In many ways, strategies for M&As in China overlap with those for M&As elsewhere. But recent research has uncovered some idiosyncrasies that are specific to acquisitions in China. First, Chinese SOEs are rife with organizational slack. Government agencies have restructured some SOEs to reduce underutilized resources and to make the SOEs more attractive M&A targets for foreign firms. While slack usually indicates inefficiency, in certain firms, some slack—such as unabsorbed cash flow in the form of depreciation funds, reserve funds, and retained earnings—may indicate the potential for increased performance, enhancing targets’ attractiveness. Second, it is well known that many Chinese SOEs maintain three sets of books: one set that exaggerates performance, so they can brag to administrative superiors; one that underreports performance, for tax purposes; and one that is accurate, for managers themselves. Acquisition targets are likely to show foreign negotiators the bragging books initially. As a result, foreign firms need to be aggressive in conducting due diligence to uncover an accurate picture of targets’ assets and resources. This is particularly relevant when investigating slack. Finally, most Western firms launching JVs and WFOEs in China have believed that ethnic Chinese managers—those from overseas Chinese economies, such as Hong Kong and Taiwan, who are well versed in the local language—were the best choice for running their operations in China. Meanwhile, they have presumed that Western managers would be less effective because of language and cultural barriers. But evidence from recent research suggests the opposite: Using surveys, interviews, and other tools, researchers find that ethnic Chinese managers hired by Western companies to run these businesses are, on average, less effective than their non-Chinese counterparts, as measured by the length of their tenures and attainment of performance goals. How could this be? One reason appears to be that ethnic Chinese managers often struggle with an ambiguous managerial identity: Western corporate headquarters views them as “us,” while local Chinese employees also expect them to be “us.” When these managers favor headquarters on issues where headquarters and locals conflict—such as whether Western employees and locals should receive equal compensation or whether chopsticks or forks should be used at company banquets—local employees may regard them as traitors of sorts. That corrodes employees’ trust, ultimately undermining ethnic Chinese managers’ performance. On the other hand, employees give Western managers the benefit of the doubt. They expect these managers to behave differently, to commit cultural errors, and to show allegiance to the parent firm. This tolerance by local employees of Western managers’ differences can enhance these managers’ confidence and performance. Of course, not every non-Chinese manager outperforms every ethnic Chinese manager. It is clear, however, that managerial effectiveness in China does not depend on one’s ability to use chopsticks. This point is crucial as more M&As flow into China and more acquiring companies staff their target firms’ management.

SIEMENS How can Siemens tap into and rejuvenate its 475,000 employees’ comprehensive knowledge and expertise that is geographically dispersed in 190 countries? Since 1998, Siemens has developed a knowledge management (KM) system, Share Net, that endeavors to put its employees’ combined knowledge to work. The Share Net initiative went through four steps. Step one was concept definition. Share Net was envisioned to not only handle explicit knowledge, but also tacit knowledge. To overcome the drawbacks of traditional repository-based KM systems, the new system had to integrate interactive components such as a forum for urgent requests and a platform for sharing rich knowledge. The Share Net team wanted to avoid the usual Siemens practice of rolling out initiatives from Munich, Germany, to the rest of the MNE—such a practice often backfired. The second step was the global rollout for 39 countries in 1999. Siemens addressed the bias of both global integration and local responsiveness by adopting a “glocal” approach. While strategic direction was maintained in Munich, ShareNet managers were appointed to local subsidiaries. Importantly, these ShareNet managers were not expats from the headquarters, but rather people from the subsidiaries assigned to become the nucleus in their regions. To jump start the system, ShareNet managers held local workshops, and encouraged participants to post an unsolved problem as an urgent request that would be sent to all users worldwide. Without exception, by the end of the day, the posting would get at least one reply, and inevitably, the person who had posted it would be “stunned.” Not surprisingly, every workshop was followed by an increase in urgent requests from that country. To be sure, resistance was extensive. In Germany, attitude toward the English-only ShareNet was negative initially. Some employees thought that a Germany based firm should use German. Although the English proficiency of German employees was relatively high, many employees still dared not post a question in a forum where thousands of people could see their grammatical or spelling errors. Over time, such resistance was gradually overcome as users personally saw the benefit from using the system. The third step was generating momentum. Many people said: “I don’t have time for this.” Others put it more bluntly: “Why do I have to share?” In 2000, Siemens provided incentives for local country managers, and rewarded a country’s overall participation. For a successful sale resulting from ShareNet collaboration, a bonus was given to both the country that had contributed the knowledge and the country that used it. Individuals were rewarded with various prizes, such as mobile phones, books, and even trips to visit knowledge exchange partners. The fourth step was sustaining performance. By 2002, ShareNet had 19,000 users in more than 80 countries, supported by 53 ShareNet managers in different countries. Yet, not everything was rosy. The post-“9/11” downturn forced corporate-wide layoffs. After restructuring, the ShareNet team was trimmed to less than ten members worldwide. To demonstrate the value added, the ShareNet team documented €5 million in direct profits that had been generated by the KM system. On balance, ShareNet was considered a huge success.

PLAN A AT MARKS & SPENCER Founded in 1884, Marks & Spencer (M&S) is a leading UK retailer. In 2007, it had 70,000 employees, 570 stores in the United Kingdom and 240 stores in 34 other countries, serving approximately 16 million customers. It had 2,000 suppliers, over 20,000 farms, and 250,000 workers who helped produce products carried by M&S. In 2007, M&S launched an ambitious, corporate-wide Plan A—a five-year plan that addressed some of the biggest social and environmental challenges with 100 concrete commitments that it aspired to achieve by 2012. Every store had a dedicated Plan A champion. Plan A was divided into five areas, each with approximately 20 goals slated for achievement by 2012. These areas, with leading examples, were: • Climate change: becoming carbon neutral for all its UK and Irish operations • Waste reduction: sending no waste to landfill • Sustainable raw materials: tripling sales of organic food • Fair partnership with suppliers: introducing random checking of suppliers to ensure that M&S’s Global Sourcing Principles are being adhered to at all times • A healthy lifestyle for customers and employees: introducing more nutritionally balanced food, with more informative labeling, no artificial coloring, and a reduced amount of salt In Plan A’s first year (2007), M&S reduced energy-related CO2 emissions from its stores and offices by 55,000 tons, opened three pilot “ecostores,” and completed a carbon footprint assessment for its food business. Among its numerous actions, one example was an effort to reduce plastic shopping bags, which were always given away to shoppers free of charge. M&S argued that from an environmental standpoint, plastic bags are not “free” because they are not biodegradable and will be stuck in landfills essentially forever. Starting in April 2007, its 50 stores in Southwest England and Northern Ireland gave customers a free cloth Bag for Life. After four weeks, these trial stores started charging 10 pence (US$0.20) for each Bag for Life (which would be replaced free of charge when worn out), and 5 pence (US$0.10) for each plastic food carrier bag. The effect was immediate: in trial stores, the customers’ use of food carrier bags dropped by over 70% and M&S also sold eight times more Bags for Life than it did in 2006. Throughout all its stores, M&S cashiers simply asked shoppers: “Do you need a carrier?” Overall, between April and December 2007, M&S reduced its use of plastic bags by 11% across all its stores—a total of 37 million fewer bags given out. All profits from the sale of bags in 2007, over £80,000 (US$160,000), went to an environmental charity, Groundwork, to support environmental regeneration projects. Based on these successful trials, M&S rolled out its program to charge for shopping bags in all its UK and Irish stores in May 2008.Although clearly motivated by considerations for corporate social responsibility (CSR), M&S has been careful not to label this program a “CSR” plan. The committee in charge of Plan A is called a “How We Do Business” (HWDB) Committee. Where does the term “Plan A” come from? According to Plan A’s website: We’re doing this because it’s what you want us to do. It’s also the right thing to do. We’re calling it Plan A because we believe it’s now the only way to do business. There is no Plan B. After only its first year, Plan A already earned a number of kudos from various CSR groups. M&S led the global retail sector in the Dow Jones Sustainability Index. It was awarded the World Environment Center Gold Medal for Sustainable Business. In the UK, it received recognition from Greenpeace (top retailer for using wood from sustainable sources), from Compassion in World Farming (top retailer for high food animal welfare standards), and from the National Consumer Council (for operating market-leading green supermarkets). Yet, not all was rosy. In autumn 2007, some nongovernmental organizations (NGOs) challenged M&S, demanding that it be more aspirational in its commitments to improve labor standards. In response, M&S increased the number of labor experts from7 to 23 on the visitation teams for labor standards compliance and promised to do more.

Ford Motor Company was always more international than its two Detroit rivals, General Motors (GM) and Chrysler. In the 1960s, Ford of Europe was set up to consolidate operations in Britain and Germany. This structure was ahead of its time and was imitated by rivals. While the top brass at GM all featured American guys, Ford’s top management ranks have featured executives from Argentina, Australia, Britain, and Germany. In 1993, the rise of Alex Trotman, a Scot who had worked for Ford since 1955, as Ford’s chairman and CEO personified Ford’s international character. In the 1960s, while working for Ford of Europe, Trotman wrote a proposal on global consolidation that, while not implemented, would prove prophetic. It advocated many of the tenets that would later be incorporated into Ford’s global restructuring of themid-1990s—under Trotman’s leadership. Known as Ford 2000, the restructuring transformed Ford from several regional groups (Asia Pacific, Europe, North America, and South America) into one presumably seamless global organization with factories and sales companies reporting instantly across oceans spanned by broadband links. Ford 2000 drained power from the regions back to Dearborn (a Detroit suburb where Ford is headquartered). However, the end result, exemplified by a “world car,” the Ford Mondeo, proved disappointing. The Mondeo was a hit in Europe where drivers preferred more engine performance, but it flopped as the Ford Contour and Mercury Mystique in America where rider comfort was more preferred. Powerful regional managers and country heads naturally resented the loss of power. It simply did not make any sense for a factory manager in Cologne, Germany, to report to a global chief of manufacturing 3,000 miles away in Dearborn. However, few dared to declare the emperor naked. In 1999, Trotman passed the baton to the next CEO, Jacques Nasser, a Lebanese-born executive who grew up in Australia. Recognizing the problems associated with Ford 2000, Nasser quickly reversed large parts of Ford 2000. Europe and South America have gained regional power. Nasser went on a shopping spree, acquiring Volvo Cars from Volvo and Range Rover from BMW and consolidating Mazda in the Ford portfolio. Unfortunately, Nasser’s tenure was full of upheaval not only associated with Ford2000 and the serial acquisitions, but also with the faulty Bridgestone/Firestone tires that caused numerous Ford Explorer sport utility vehicles (SUVs) to accidentally roll over. Such upheaval caused Ford to take its eye off the ball. At the same time, Asian and European rivals turned up the heat on Ford by challenging it even in its stronghold markets for large SUVs and light trucks, where Ford had made most of its profits in the 1990s. As an executive, Nasser was widely viewed as too abrasive, alienating employees, suppliers, and eventually the Ford family that still controlled 40% equity. By 2001, Nasser was forced to resign by chairman Bill Ford (the original Henry Ford’s great grandson). From 2001–2006, Bill Ford acted as both chairman and CEO, but failed to turn the company around. Instead, the automaker continued its downward spiral and its US market share reached a historical low of16%. In 2006, Bill Ford hired Alan Mullaly as the new CEO. Mullaly used to head Boeing’s fabled commercial lane division. All eyes are now on Mullaly to see how Boeing’s best pilot can pull Ford out of a hard landing.

 

Pizza Patrón Eyes Mexico

Should the Dallas-based Pizza Patrón pursue its international expansion into Mexico by offering a master franchise, by acquiring an existing company, or by building a successful corporate store? In January of 2007, Antonio Swad, president and founder of Pizza Patrón, Inc., sat back in his office after his interview with BBC London and thought about the “Pizza por Pesos” initiative (accepting Mexican pesos in US-based pizza stores). Pizza Patrón had just launched this initiative and revolutionized not only the pizza industry in the United States but also made headlines in several countries around the world, including Mexico. After three years of franchising, Pizza Patrón became distinguished in the restaurant segment primarily due to its laser-sharp focus on serving the Hispanic community in the United States, and secondly because it started accepting pesos at all its locations. Swad was in a unique position and wanted to seize this opportunity and gain recognition as the premiere international Hispanic pizza chain. Growing the company through franchising was an ongoing project, but what about expanding his business model of serving the community while delivering value to customers? Mexico is a logical arena for Pizza Patron’s expansion, considering that60% of its customer base is Hispanic.2 The only question was how to accomplish this goal. Should Pizza Patrón pursue its international expansion into Mexico by offering a master franchise, by acquiring an existing company, or by building a successful corporate store? Company History Pizza Patrón, a privately-owned company, was established by Swad on April 16, 1986, in Dallas, Texas. His first store was in the Pleasant Grove area of Dallas under the name of Pizza Pizza. As operations began, Swad put all his experience into practice to ensure success. He focused on three important areas: product quality, service, and cleanliness. Pizza Patron’s customer base appreciates its high standards and most of all its commitment to consumer value. Swad was serving the community with an incredible value in its $4.99price points for a large pizza. He always believed in keeping prices low to broaden his customer base. A high percentage of the clientele was Hispanic, creating a communication barrier when taking orders and closing sales. So, to improve service, Swad hiredredominately Hispanic staff living in the store area. This step improved the relationship with customers. As a result, sales began to grow. Another contributor to Pizza Patron’s success was wad’s ability to motivate and nurture his employees. They referred to him as “El Patrón.” Doing a little research, he discovered Patrón meant “the benevolent leader of the community.” Here was an opportunity to connect with the community not only by delivering outstanding value and service but by also appealing to customers through name and experience. It was in late 1986 when the name was changed to Pizza Patron. The definition of his strategy also became clearer. Swad was now chiefly pursuing the Hispanic community. Two years later, he opened his second store in South Dallas’ Oak Cliff area, followed by the third and fourth openings in the same area. By 1990, Pizza Patrón was a Hispanic-friendly pizza chain with four locations operated primarily Hispanic employees. Local area marketing was used heavily to connect with the community. Improvement the operation was always under the assumption of increasing quality, service, and cleanliness. The Wing Stop While the Pizza Patrón was running smoothly, Swad began to explore a different endeavor: the chicken wing concept. Back in the 1990s, chicken wings were only sold in a few locations, but primarily in Hooters restaurants. Swad saw this as an opportunity and created a concept called WingStop. He began franchising in 1997. It took him six years to grow the chain from 1 to 100 stores in more than 12 states. WingStop now features chicken wings as a main entrée, combining the concept with planes and aeronautics as décor. During this time, Swad served as principal owner of the chain, and it was in 2003 that he decided to sell the company with one objective in mind—to make Pizza Patrón the premiere Hispanic pizza chain. It took Pizza Patrón a few months to develop a solid concept suitable for franchising, and several factors needed fixing before selling the idea. Improvements in menu, operations, lighting, and music were among the features reevaluated. Thus, Pizza Patrón, Inc., Licensed Company, was incorporated in August 2002 and began offering franchises in November 2002. The first franchise was sold in April 2003. As of August 2007, 65 stores thrived in five states: 60 franchises and five owned by Swad. Pizza Patrón establishments offer pizza in two sizes with a variety of toppings. They also sell beer at the Odessa, Texas, location. Although stores offer traditional pizza products, Pizza Patrón caters almost exclusively to Hispanic customers in middle-class neighborhoods. In 2005, Pizza Patrón developed its first dine-in location. By 2006, the first drive-thru window store was opened at its Grand Prairie, Texas, location. In addition, during 2007, 14 stores were under construction, while another 31 stores were in the site selection process. Pizza Patrón was confident that there would be 72 stores in various markets by the end of 2007, eventually surpassing the 100-store industry benchmark by the end of 2008 (see Exhibit 1 and Exhibit 2 regarding the growth of the firm). According to the National Restaurant Association, the restaurant industry in the United States has a 2007 projected value of $537 billion in retail sales. More than 935,000 locations serve more than 70 billion meals and snacks annually. This industry employs 12.8 million people and is the largest employer other than the federal government. “The overall economic impact of the restaurant industry is expected to exceed $1.3 trillion in 2007.” The pizza segment is considered the most competitive segment in the restaurant industry, where the barriers to entry and exit of competitors are very low.

ZARA BREAKS INDUSTRY RULES

Zara is one of the hottest fashion chains of the 21st century. Founded in 1975, Zara’s parent, Inditex, has become one of the leading global apparel retailers. Since its initial public offering (IPO) in 2001, Inditex tripled its sales and profits and doubled the number of stores for its eight brands, of which Zara contributes two thirds of total sales. Headquartered in Spain, Zara is active not only throughout Europe, but also in Asia and North America. As of 2008, the total number of stores was over 3,100 in 64 countries (the three newest countries entered were China, Serbia, and Tunisia). Zara stores occupy some of the priciest top locations: Paris’ Champs-Elysées, Tokyo’s Ginza, New York’s Fifth Avenue, and Dallas’ Galleria. Zara’s formidable rise around the globe has generated significant profits. In terms of sales, Gap is still bigger ($16 billion) than Inditex ($12 billion), but Zara’s 16.5% margins beat Gap’s 11%. Overall, Zara succeeds by breaking and then rewriting several rules about competition in the fashion retail industry. Rule number one: Avoid stock-outs (a store running out of items in demand). Zara’s answer? Occasional shortages contribute to an urge to buy now. With new items arriving at stores twice a week, experienced Zara shoppers know that “If you see something and don’t buy it, you can forget about coming back for it because it will be gone.” The small batch of merchandise during a short window of opportunity for purchasing motivates shoppers to visit Zara stores more frequently. In London, shoppers visit the average store four times a year, but frequent Zara 17 times annually. There is a good reason to do so: Zara makes about 20,000 items a year, about triple what Gap does. As a result, “At Gap, everything is the same,” according to a Zara fan, “and buying from Zara, you’ll never end up looking like someone else.” Rule number two: Bombarding shoppers with ads is a must. Gap and H&M spend, on average, 3%–4% of their sales on ads. Zara begs to differ: It devotes just 0.3% of its sales to ads. The high traffic in the stores alleviates some need for advertising in the media, most of which only serves as a reminder to visit the stores. Rule number three: Outsource. Gap and H&M do not own any production facilities. However, outsourcing production (mostly to Asia) requires a long lead time, usually several months ahead. Again, Zara has decisively deviated from the norm. By concentrating (most, but not all, of) its production in-house and in Spain, Zara has developed a super-responsive supply chain. It designs, produces, and delivers a new garment to its stores in a mere 15 days, a pace that is unheard of in the industry. The best speed the rivals can achieve is two months. Outsourcing is not necessarily “low cost” because errors in prediction can easily lead to unsold inventory, forcing retailers to offer steep discounts. The industry average is to offer 40% discounts across all merchandise. In contrast, Zara sells more at full price, and when its discounts, it averages only 15%. Rule number four: Strive for efficiency through large batches. In contrast, Zara intentionally deals with small batches. Because of its flexibility, Zara does not worry about “missing the boat” for a season. When new trends emerge, Zara can react quickly. More interestingly, Zara runs its supply chain like clockwork with a fast but predictable rhythm: Every store place order twice a week. Trucks and cargo flights run on established schedules—like a bus service. From Spain, shipments reach most European stores in 24 hours, US stores in 48 hours, and Asian stores in 72 hours. Not only do store staff know exactly when shipments will arrive, regular customers know that too, thus motivating them to check out the new merchandise more frequently on those days, which are known as “Z days” in some cities.

Buy or Make

The term “make-or-buy decisions” is a jargon that refers to decisions on whether to produce in-house(“make”) or outsource (“buy”). In manufacturing, firms would want to “make” if (1) the product contains a high level of proprietary technology, (2) the product requires close coordination in the supply chain, and (3) suppliers are less capable. On the other hand, firms prefer to “buy” (or outsource) when (1) strategic flexibility is necessary, (2) suppliers’ lower cost, and (3) several capable suppliers vigorously compete. In luxury car production, believe it or not, Porsche, Mercedes, and BMW have all used contract manufacturers to make entire cars (not just components). How they do it is interesting. Porsche has used Finland’s Valmet. However, such outsourcing does not involve Porsche’s high-end 911, Cayenne, and Carrera models. Valmet makes the Boxster, a luxury car in the eyes of many but which is nevertheless Porsche’s low-end model. In another example, Austria’s Magna Styr has assembled the Mercedes- Benz M-class SUV and the BMW X3.  This is like one electronics contract manufacturer making products for Philips and Sony side-by-side, except in the case of luxury car making, a lot more proprietary technology is involved. Given the sensitive nature of such outsourcing, BMW’s contract with Magna Steyr ran to more than 5,000 pages (!). Conflicts are still inevitable with contract manufacturers. To avoid overdependence on one contract manufacturer, Porsche has recently reclaimed one-third of the Boxster’s production back to Germany.

The Portman Ritz-Carlton, Shanghai

How does a five-star hotel differ from its lower tier competitors? How does the best five-star hotel stand out among its five-star peers? The answer is “People,” according to Mark DeCocinis, general manager of the five-star Portman Ritz-Carlton Hotel in Shanghai, China, which has been named the “Best Employer in Asia” by Hewitt Associates three times.

“Our priority is taking care of our people,” said DeCocinis in an interview. “We’re in the service business, and service comes only from people. It’s about keeping our promise to our employees and making that an everyday priority. Our promise is to take care of them, trust them, develop them, and provide a happy place for them to work.

The key is everyday execution.” One of the “secrets” behind the Portman Ritz-Carlton’s success is that the general manager interviews every prospective employee. This process of course is time-consuming on the part of the busy general manager. Yet, by doing that, the general manager is able to get a “feel” of the intangible nature of employee attitudes. In terms of the questions that the general manager asks, DeCocinis shared: “I usually ask them about themselves and try to make a connection. But the important question is: Why do you want to join? Whatever they say, the most important notion needs to be ‘I enjoy working with people,’ not just using the phrase ‘I like people’ . . . I really want to find out what motivates them. If the person smiles naturally, that’s very important to us, because this is something you can’t force.” In a culture featuring more reserved expressions, service personnel who smile naturally will indeed become valuable and rare resources appreciated by hotel guests.

The Portman Ritz-Carlton’s employee satisfaction rate is 98%, and its guest satisfaction is between 92%and 95%. To translate excellent HR management to better firm performance, the hotel’s performance goals are aligned with Ritz-Carlton’s corporate goal—from the company to the hotel, and from the hotel to each division. This means that everyone is part of the whole. Every employee comes up with a plan to reach the goal for the next year, measured by  guest satisfaction, financial performance, and employee satisfaction. The bonus at the end of the year is based on improvements. In China, many multinationals face a constant shortage of talent and high employee turnover. Yet, the Portman Ritz-Carlton has not only been able to attract, but also to retain high-quality talent to deliver excellent customer service and ensure profitable growth. What are its “secrets” behind its ability to retain such individuals? Among many secrets, DeCocinis pointed to one incident: During the 2003 SARS crisis, business started to deteriorate. By April, our occupancy rate, which should have been at 95%, dropped to 35% . . .

The first step was for me and the executive team to take a 30% pay cut . . . Then it got worse. In May, the occupancy rate was 17%–18%. We reduced the workweek to four days, and people were asked to take their outstanding paid leave days. And then, when these reserves were getting used up, that’s when everyone really pulled together. Employees who were single gave their shifts to colleagues who had families to support. Some employees were worried that their contracts would not be renewed given the low occupancy rates, we renewed them without a second thought . . . Our employee satisfaction rate that year was 99.9% . . .

This was one of those negative things that turned out to be extremely positive. Such a willingness to go the extra mile to ensure employee satisfaction is reciprocated by a loyal, dedicated, and hard-working work force that radiates the precious and rare smile in China. Within the Ritz-Carlton family of 59 hotels worldwide, the Portman Ritz-Carlton has been rated the highest in employee satisfaction for five consecutive years. It has also won the prestigious Platinum Five-Star Award by the China National Tourism Administration. It is one of three hotels in China, and the only Shanghai hotel, to receive this inaugural award, which is the highest hospitality award in China.

DANONE VERSUS WAHAHA: FROM ALLIANCE TO DIVORCE

In 1996, France’s Groupe Danone SA established five joint ventures (JVs) with China’s Wahaha Group, each of which Danone owned 51% and Wahaha and its employees owned the remainder. Founded in 1987, Wahaha has one of the best-known beverage brands in China. By 2006, the total number of JVs between Danone and Wahaha had grown from five to 39. A huge financial success for both Danone and Wahaha, their JVs’ revenues increased from $100 million in 1996 to $2.25 billion in 2006. These JVs, which cost Danone $170 million, paid Danone a total of $307 million in dividends over the last decade. By 2006, Danone’s 39 JV subsidiaries in China, jointly owned and managed by

Wahaha, contributed approximately 6% of Danone’s total global profits. In addition to the JV investments with Wahaha,

Danone also bought stakes in more than seven Chinese food and dairy companies, spending almost another $170 million (besides what was spent on Wahaha) over the past decade in China. In 2006, Danone became the biggest beverage

maker by volume in the country, ahead of rivals such as Coca-Cola and PepsiCo. At the same time, Wahaha also pursued aggressive growth in China, some of which was beyond the scope of the JVs with Danone. By 2006, Wahaha Group controlled 70 subsidiary companies scattered throughout China. All these subsidiaries use the same brand “Wahaha,” but only 39 of them had JV relationships with Danone. A major dispute erupted concerning Wahaha’s other (non-JV) subsidiaries. In 2006, after the JVs’ profits jumped 48% to $386 million, Danone wanted to buy Wahaha’s other subsidiaries. This would enable Danone to control the “Wahaha” brand once and for all. This proposal was rejected

by Wahaha’s founder Zong Qinghou, who served as chairman of the 39 JVs with Danone. Zong viewed this offer as unreasonable because the book value of the non-JV subsidiaries’ assets was $700 million with total profits of $130 million, while the price/earnings ratio of Danone’s $500 million offer was lower than 4. Zong also asserted that the buyout would jeopardize the existence of the “Wahaha” brand, because Danone would phase it out and promote global brands such as Danone and Evian. The heart of the dispute stemmed from the master JV agreement between Danone and Wahaha, which granted the subsidiary JVs exclusive rights to produce, distribute, and sell food and beverage products under the “Wahaha” brand. This meant that every product using the “Wahaha” brand should be approved by the board of the master JV. Danone thus claimed that the non-JV subsidiaries set up by Zong and his managers were illegally selling products using the “Wahaha” brand and and suppliers. However, Zong claimed that the original JV agreement to grant exclusive rights to use the “Wahaha” brand was never approved by the Chinese trademark office and so was not in force or effect. He further stated that Danone had not made an issue when Wahaha embarked on its expansion and openly used the subsidiary JVs’ assets—it seemed that Danone preferred Wahaha to shoulder the risk first. According to Zong, when Wahaha’s expansion proved successful, Danone, driven by greed, wanted to reap the fruits. Finally, Zong argued that forcing Wahaha Group to grant the exclusive rights for the “Wahaha” brand to the JVs with Danone was unfair to Wahaha Group, because the French company was actively investing in other beverage companies around the country and competing with Wahaha. The boardroom dispute spilled into the public domain when Zong publicly criticized Danone in April 2007. In response, Danone issued statements and initiated arbitrations against its Chinese partner in Stockholm, Sweden. Danone also launched a lawsuit against a company owned by Zong’s daughter in the United States, alleging that it was using the Wahaha brand illegally. Outraged, Zong resigned from his board chairman position at all the JVs with Danone. Wahaha’s trade union, representing about 10,000 workers of Wahaha Group, sued Danone in late 2007, demanding $1.36 million in damages. The union also froze Danone’s ownership in the JVs. This made the dispute worse, and revenues of the JVs only increased 3% in 2007, 17% less than the industry’s average growth. In late 2007, both sides spent most of their energy dealing with lawsuits and arbitrations. In December 2007, pressured by the French President and the Chinese Minister of Commerce, Danone and Wahaha reached an agreement to “call off all lawsuits and arbitrations provisionally and stop all aggressive speeches against the other party.” As of this writing (March 2008), no resolution was in sight—except the inevitable outcome: divorce. However, a Danone spokesman defended the JV strategy: “If we now have 30% of our sales in emerging markets and we built this in only 10 years, it’s thanks to this specific [JV] strategy. We have problems with Wahaha. But we prefer to have problems with Wahaha now to not having had Wahaha at all for the last 10 years.”

General Motors and Daewoo: Married, Divorced, and Married Again

In 1984, General Motors (GM) and Daewoo formed a 50/50 joint venture (JV) named the “Daewoo Motor Company,” each contributing $100 million equity. The JV would produce the Pontiac LeMans, based on GM’s popular Opel Kadett model developed by GM’s wholly owned German subsidiary Opel. Commentators hailed the alliance as a brilliant outcome of a corporate “marriage” of German technology and Korean labor (whose cost was low at that time). As a win-win combination, GM would tackle the small car market in North America and eventually expand into Asia, whereas Daewoo would gain access to superior technology. Unfortunately, the alliance was problematic. By the late 1980s, Korean workers at the JV launched a series of bitter strikes to demand better pay. Ultimately, the JV had to more than double their wages, wiping out the low-cost advantage. Equally problematic was the poor quality of the LeMans. Electrical systems and brakes often failed. US sales plummeted to 37,000 vehicles in 1991, down 86% from the 1988 high. However, Daewoo argued that the poor sales were not primarily due to quality problems, but due to GM’s poor marketing efforts that had not treated the LeMans as one of GM’s own models. Further, Daewoo was deeply frustrated by GM’s determination to block its efforts to export cars to Eastern Europe, which Daewoo saw as its ideal market. GM’s reasoning was that Eastern Europe was Opel’s territory. Gradually, Daewoo secretly developed independent car models, while GM initially was unaware of

these activities. Once Daewoo launched competing car models, the troubles associated with this JV, long rumored by the media, became strikingly evident. The picture of an “ideal couple” with a “perfect kid” (the JV) was now replaced by the image of a dysfunctional family where everybody was pointing fingers at each other. In 1992, GM and Daewoo divorced, with Daewoo buying out GM’s equity for $170 million. While GM exited the problematic JV, it was left without a manufacturing base in Korea. Daewoo, on the other hand, embarked upon one of the most ambitious marches into emerging economies, building a dozen auto plants in Indonesia, Iran, Poland, Ukraine, Uzbekistan, and Vietnam. In the process, Daewoo borrowed an astounding $20 billion, leading to its collapse during the 1997 Asian economic crisis. In an interesting turn of events, GM and Daewoo joined hands again. Despite its bankruptcy, Daewoo attempted to avoid GM and strongly preferred a takeover by Ford. But Ford took a pass. Then, GM entered the negotiation, eventually forming a new JV, called “GM Daewoo Auto and Technology Company,” with Daewoo’s Korean creditors in 2001. The terms of this marriage were quite different from the previous one. Instead of a 50/50 split, GM was now in the driver’s seat, commanding a 67% stake (with a bargain-basement price of $400 million)—in essence, a GM acquisition in disguise. This time, GM has fully integrated GM Daewoo into its global strategy, because GM now has uncontested control. GM Daewoo makes cars in South Korea and Vietnam and exports them to over 140 countries. One of the most decisive moves is to phase out the Daewoo brand tarnished by quality problems and financial turbulence, except in South Korea and Vietnam. GM has labeled a clear majority of cars built by GM Daewoo as Chevrolet, a brand that GM usually pitches as more American than the Stars and Stripes. In the United States, Latin America, and Eastern Europe, the GM Daewoo–built Chevrolet Aveo has become one of the best-selling compact cars, beating the Toyota Echo and the Hyundai Excel. In addition to finished cars, GM Daewoo also makes kits to be assembled by local factories in China, Colombia, India, Thailand, and Venezuela. In three years, GM Daewoo’s worldwide sales of cars and kits reached one million, up from 400,000 when GM took over. That makes GM Daewoo one of the best-performing units of the troubled Detroit automaker.

UNILEVER FIGHTS PROCTER & GAMBLE

With twin headquarters in the United Kingdom and the Netherlands, Unilever competes in three major geographical areas: Europe, the Americas, and Asia-Pacific-Africa (APA). Unilever contests in three product markets: foods (such as Knorr soups), personal care (such as Calvin Klein cosmetics), and fabric care (such as Omo detergent). Combining geographic and product dimensions, Unilever thus has presence in nine (3 × 3) specific markets. Its main global rival in these nine markets is the US-based Procter & Gamble (P&G), whose leading brands include Folgers coffee (foods), Pampers diapers (personal care), and Tide detergent (fabric care). A fundamental question for Unilever is: how to channel resources that can provide the best opportunities to outcompete P&G in this global “war”? Table helps answer this question. Because both Unilever and P&G dominate their home markets, room for further growth in Europe is limited and chances in the Americas are not great. Thus, growing the APA markets becomes imperative. Of the three product markets, Unilever can thrust into APA foods where P&G is still weak. For example, Hindustan Lever (HLL), Unilever’s Indian subsidiary, acquired several local firms, boosting its market share in ice cream from zero in the 1990s to 75% in the mid-2000s.In APA fabric care, because P&G’s strengths are strong, Unilever must assemble massive forces to launch price wars. In China where P&G is very strong, Unilever dropped the price of its Omo detergents by 40% in 1999. Because P&G was distracted elsewhere, it took two years to match

TABLE Unilever versus P&G

ATTRACTIVENESS TO                                                 UNILEVER P&G

Europe foods                                        High        Low

Europe personal care                            High        Moderate

Europe fabric care                                High        Low

Americas foods                                     Low         High

Americas personal care                         Low         High

Americas fabric care                             Low         High

Asia-Pacific-Africa foods                     High        Low

Asia-Pacific-Africa personal care         High        High

Asia-Pacific-Africa fabric care             High        High

Unilever’s prices, thus ceding its leading position as a foreign branded detergent in China to Unilever. India is a major APA fabric care market where Unilever is stronger, as HLL dominates the detergents market with a 40% share. The challenge there is how to defend its stronghold, where P&G has been launching a series of price attacks. In 2004, P&G slashed prices for Ariel and Tide detergents by 25%–50%, forcing HLL to respond similarly. By 2008, P&G clearly gained fabric care market share in India, and HLL’s growth slowed down. Overall, while winning or losing these “campaigns” does not guarantee that Unilever and P&G will win or lose the global “war,” systematic thinking focusing on one market at a time is helpful. In other words, strategists at Unilever and P&G plotting the battles need to simultaneously think global and act local.

Cisco

Founded in 1986, Cisco is a worldwide leader in networking for the Internet. Numerous rivals challenged Cisco, but none was threatening enough—until the rise of Huawei. Founded in 1987, Huawei distinguished itself as an aggressive company that led the telecommunications equipment market in China. It is remarkable that Huawei, despite being a non-state-owned company, was able to not only beat all state-owned rivals but also a series of multinationals in China. In 1999, Huawei launched an overseas drive. Starting with $50 million sales (4% of overall sales) in international markets in 1999, Huawei’s sales outside of China reached $11 billion (65% of overall sales) in 2006. What is Huawei’s secret weapon? Relative to offerings from competitors such as Cisco, Lucent, Nokia, and Siemens, Huawei’s products offer comparable performance at a 30% lower price. This is music to the ears of telecom operators. As a result, Huawei not only penetrated many emerging economies, but also achieved significant breakthroughs in developed markets such as Japan and Western Europe. As of 2007, Huawei served 31 of the world’s top 50 telecom operators, including Vodafone, Telefonica, KPN, FT/Orange, and Italia Telecom. Yet, North America remained the toughest nut to crack. In 2002, Huawei turned its guns on North America—Cisco’s stronghold. In Supercomm 2002 (a trade show) in Atlanta, Huawei’s debut in North America, two guests visited the Huawei booth and asked detailed questions for 20 minutes. Only after the two guests left did one of Huawei’s executives recognize that one of the guests was John Chambers, Cisco’s CEO. Chambers thus personally experienced the aggressive arrival of his archrival from China. Thanks to Huawei, Cisco’s sales in China peaked in 2001 at $1 billion and then never reached anything above $600 million. Correspondingly Cisco’s share in the Chinese router market dropped from 80% to 50%. In North America, facing suspicious buyers, Huawei offered “blind” performance tests on Huawei and Cisco machines whose logos were removed. Buyers often found that the only difference was price. Cisco’s response was both audacious and unexpected. On January 22, 2003, Cisco filed a lawsuit in Texas, alleging that Huawei unlawfully copied and misappropriated Cisco’s software and documentation. Cisco’s actions totally caught Huawei off guard—the first time it was sued by a foreign rival. Even the day of the attack was deliberately chosen. It was right before Spring Festival, the main annual holiday in China. Thus, none of the Huawei top executives was able to spend a day with their family in the next few weeks. The media noted that this lawsuit squarely put Huawei “on the map” as Cisco’s acknowledged enemy number one. Huawei’s response was also interesting. Huawei noted that as a firm that consistently invested at least 10% of its sales on R&D, it had always respected intellectual property rights (IPR). In addition to hiring top American lawyers, Huawei also announced a joint venture with Cisco’s rival 3Com several days before the court hearing in March 2003. Consequently, 3Com’s CEO, Bruce Claflin, provided testimonial supporting Huawei. By using an American CEO to fight off another American firm, Huawei thus skillfully eroded the “us versus them” feeling permeating this case at a time when “China bashing” was in the air. While both Cisco and Huawei fought in court, negotiations between them, often involving American and Chinese officials, also intensified. In July 2004, Cisco dropped the case. While the details of the settlement were confidential, both Cisco and Huawei declared victory. Huawei agreed to change the software and documentation in question, thus partially meeting Cisco’s goals. More importantly, Cisco delayed Huawai’s North America offensive by one and a half years. Huawei not only refuted most of Cisco’s accusations, but also showcased its technological muscle under intense media spotlight for which it did not have to spend a penny. In part thanks to this high-profile case, Huawei’s international sales doubled—from approximately $1 billion in 2003 to $2 billion in 2004. Clearly, Huawei rapidly became a force to be reckoned with. In December 2005, Chambers visited Huawei and for the first time met its CEO Ren Zhengfei. The former plaintiff and defendant shook hands and had friendly discussions like pals, as if nothing had happened between them.

Who’s Afraid of Google?

Rarely if ever has a company risen so fast in so many ways as Google, the world’s most popular search engine. This is true by just about any measure: the growth in its market value and revenues; the number of people clicking in search of news, the nearest pizza parlor, or a satellite image of their neighbor’s garden; the volume of its advertisers; or the number of its lawyers and lobbyists. Such an ascent is enough to evoke concerns— both paranoid and justified. The list of constituencies that hate or fear Google grows by the week. Television networks, book publishers, and newspaper

owners feel Google has grown by using their content without paying for it. Telecom firms such as AT&T and Verizon are miffed that Google prospers, in their eyes, by free-riding on the bandwidth they provide— especially when it is about to bid against them in a forthcoming auction for radio spectrum. Many small firms hate Google because they relied on exploiting its search formulas to win prime positions in its rankings but dropped to the Internet’s equivalent of Hades after Google tweaked these algorithms. And now come the politicians. Libertarians dislike Google’s deal with China’s censors. Conservatives moan about its uncensored videos. But the big new fear has to do with the privacy of its users. Google’s business model assumes that people will entrust it with ever more information about their lives, to be

stored in the company’s “cloud” of remote computers. These data begin with the logs of a user’s searches (in effect, a record of his interests) and his responses to advertisements. Often, they extend to the user’s e-mail, calendar, contacts, documents, spreadsheets, photos, and videos. They could soon include even the user’s medical records and precise location (determined from his or her mobile phone). More JP Morgan than Bill Gates Google is often compared to Microsoft (another enemy, incidentally), but its evolution is closer to that of the banking industry. Just as financial institutions grew to become depositories of people’s money, and thus guardians of private information

about their finances, Google is now turning into a custodian of a far wider and more intimate range of information about individuals. Yes, this applies also to all rivals such as Yahoo! and Microsoft. But Google, through the sheer speed with which it accumulates this treasure of information, will be the one to test the limits of what society can tolerate. It does not help that Google is often seen as arrogant. Granted, this complaint often comes from sour-grapes rivals. But many others are put off by Google’s cocksure assertion of its own holiness, as if it merited unquestioning trust. This after all is the firm that chose “Don’t be evil” as its corporate motto and that explicitly intones that its goal is “not to make money,” as its boss, Eric Schmidt, puts it, but to “change the world.” Its ownership structure is set up to protect that vision. Ironically, there is something rather cloudlike about the multiple complaints surrounding Google. The issues are best parted into two cumuli: a set of “public” arguments about how to regulate Google; and a set of “private” ones for Google’s managers, to deal with the strategy the firm needs to get through the coming storm. On both counts, Google— contrary to its own propaganda—is much better judged as just like any other “evil” money-grabbing company. Grab the Money This view has arisen because, from the public point of view, the main contribution of all companies to society comes from making profits, not giving things away. Google is a good example of this. Its “goodness” stems less from all that guff about corporate altruism than from Adam Smith’s invisible hand. It provides a service that others find very useful—namely, helping people find information (at no charge) and letting advertisers promote their wares to those people in a finely targeted way. (could-be prosecutors to prove it is doing something wrong. On antitrust, the price that Google charges its advertisers are set by auction, so its monopolistic clout is limited; and it has yet to use its dominance in one market to muscle into others the way Microsoft did. The same presumption of innocence goes for copyright and privacy. Google’s book-search product, for instance, arguably helps rather than hurts publishers and authors by rescuing books from obscurity and encourages readers to buy copyrighted works. And, despite Big Brotherish talk about knowing what choices people will be making tomorrow, Google has not betrayed the trust of its users over their privacy. If anything, it has been better than its rivals in standing up to prying governments in both America and China. That said, conflicts of interest will become inevitable—especially with privacy. Google in effect controls a dial that, as it sells ever more services to you, could move in two directions. Set to one side, Google could voluntarily destroy very quickly any user data it collects. That would assume privacy, but it would limit Google’s profits from selling to advertisers’ information about what you are doing and make those services less useful. If the dial is set to the other side and Google hangs on to the information, the services will be more useful, but some dreadful intrusions into privacy would occur. The answer, as with banks in the past, must lie somewhere in the middle; and the right point for the dial is likely to change, as circumstances change. That will be the main public interest in Google. But, as the bankers (and Bill Gates) can attest, public scrutiny also creates a private challenge for Google’s managers: Just how should they present their case? One obvious strategy is to allay concerns over Google’s trustworthiness by becoming more transparent and opening more of its processes and plans to scrutiny. But it also needs a deeper change of heart. Pretending that, just because your founders are nice young men and you give away lots of services, society has no right to question your motives no longer seems sensible. Google is a capitalistic tool—and a useful one. Better, surely, to face the coming storm on that foundation, then on a trite slogan that could be your undoing.

From Diversification Premium to Diversification Discount in South Korea

Large conglomerates (business groups), such as Samsung, Hyundai, LG, and Daewoo, are called chaebols in South Korea (hereafter Korea). They dominate the economy, contributing approximately 40% of Korea’s GDP as of 1996. In 1996, Samsung had 80 subsidiaries, Hyundai 57, LG 49, and Daewoo 30—scattered in different industries such as automobiles, chemicals, construction, electronics, financial services, insurance, semiconductors, shipbuilding, and steel. Why and how did chaebols, all from humble roots in focused industries, grow to become such sprawling conglomerates? The chairman of LG shared an intriguing story: “My father and I started a cosmetic cream factory in the late 1940s. At that time, no company could supply us with plastic caps of adequate quality for cream jars, so we had to start a plastic business. Plastic caps alone were not enough to run the plastic molding plant, so we added combs, toothbrushes, and soap boxes. This plastics business also led us to manufacture electric fan blades and telephone cases, which in turn led us to manufacture electrical and electronic products and telecommunications equipment. The plastics business also took us into oil refining, which needed a tanker shipping company. The oil refining company alone was paying an insurance premium amounting to more than half the total revenue of the then-largest insurance company in Korea. Thus, an insurance company was started.” What the story does not reveal is the visible hand of the Korean government, which channeled financial resources to fund chaebols’ growth. In the meantime, the government protected domestic markets from foreign competition. However, the cozy protected environment did not last forever. Because Korea’s eagerness to join the OECD prior to its accession in 1996 resulted in external pressures to open the economy, the government gradually removed import restrictions. In addition, capital markets became more open and vibrant. At the same time, labor costs rose sharply. Internationally, chaebol products were often stuck in the middle between high-end Japanese offerings and low-end Chinese merchandise. Confronting such rising environmental turbulence by the 1990s, chaebols increased their scope. The average number of affiliates of the top 30 chaebols grew from 17 per group in 1987 to 22 in 1996, a 30% increase. In the process, they took on a high level of debt, based on extensive cross-guarantees among group member firms. Banks were happy to provide loans, believing that chaebols were “too big to fail.” The debt/equity ratio ended up being, on average, 617% for the top 30 chaebols. In some extreme cases, New Core’s debt/equity ratio was 1,225%, Halla’s was 2,066%, and Jinro’s was 3,765%. Unfortunately, by the time the Asian economic crisis of 1997 struck, chaebols took an enormous beating. Their excessive borrowing and reckless growth were sharply criticized. Of the 30 top chaebols in 1996, close to half of them, including New Core, Halla, and Jinro, have gone through bankruptcy proceedings or bank-sponsored restructuring programs. Daewoo, ranked number four in 1996, has literally been broken up. All surviving chaebols have sold businesses and substantially reduced their scope. In retrospect, signs of chaebols’ troubles had been like writings on the wall before the crisis. There was indeed a time chaebol carried a diversification premium, with affiliates outcompeting comparable independent firms (about 10% higher sales during 1984–1987). However, rising environmental turbulence coupled with growing firm size proved to be a lethal combination. By 1994–1996, there was a diversification discount, with chaebol member firms selling at 5% less than comparable independent firms (Figure 9.10). Finally, the better developed external capital markets further eroded the chaebols’ advantage to operate an internal capital market. With hindsight, it is amazing to see chaebols being applauded as the champions of Korean economic development and a worthy organizational model for other developing economies to emulate prior to 1997. Since 1997, chaebols were often painted with a negative brush and blamed for the country’s economic crisis. Both positions seem extreme. Chaebols probably were neither “paragons” nor “parasites.” Their roles changed. Chaebols as conglomerates did add value during earlier days. But past some point of inflection (probably the early 1990s as shown in Figure 9.10), their drawbacks started to outweigh their benefits.

TOYOTA AS (ALMOST) NUMBER ONE

Over the past three decades, during which every automaker has been allegedly “learning from Toyota,” Toyota has widened the performance gap between itself and the rest of the pack. From humble roots, it has risen to (almost) become the number one automaker by volume in the world. The year 2007 marked the 70th anniversary of its founding and the 50thanniversary of its first exports to the United States. In 2007, Toyota sold 9.4 million vehicles globally, only about 3,000 fewer than General Motors (GM). In other words, Toyota almost dethroned GM, which has occupied the top spot since 1931. The media speculated that Toyota might have deliberately shied away from being number one to both avoid potential protectionist backlash in the United States and to keep its own employees from becoming too arrogant. Currently, Toyota is the most profitable automaker, while GM and Ford have been suffering huge losses. Market capitalization says it all: Toyota is now worth more than the American Big Three combined and more than Honda and Nissan put together. Toyota has evolved from being an exporter that made all its econobox cars in Japan to a far flung enterprise that now makes a full range of vehicles in Argentina, Australia, Brazil, Britain, Canada, China, the Czech Republic, France, India, Indonesia, Malaysia, Mexico, Pakistan, the Philippines, Poland, Russia, South Africa, Thailand, Turkey, the United States, and Vietnam. Its rise is neither quick nor inevitable. In the crucial US market, in 1970, Toyota had only a 2% sliver, whereas GM commanded 40%. Its market share moved up to 3% in 1980, 8% in 1990, and 9% in2000. Its US market share entered double digits for the first time only in 2006, when it rose to 13% and GM’s declined to 26%. In 2007, Toyota’s US market share grew to 16% and GM’s fell to 24%. Recently, Toyota’s growth has been accelerating. In 1995, it had 26 factories. In 2007, it had 63. In the past six years, Toyota added significant new capacity to make three million cars—the only other automaker to boost production that fast was Ford Motor Company, under the original Henry Ford in the early 1900s.As Toyota blossoms around the world, a leading challenge is how to keep Toyota “Toyota. “Recently, a series of un-Toyota-like quality problems have shown “cracks” in its armor. In 2007, America’s influential Consumer Reports magazine pushed three vehicles from its recommended list (the Camry V6 sedan, the Lexus GS, and the Tundra pickup truck) and opined that it would “no longer recommend any new or re-designed Toyota models without reliability data on a specific design.”

In other words, Toyota models are no longer automatically assumed to be reliable. Toyota executives are concerned because Toyota’s legendary quality reputation, which took decades to establish, could erode quickly. After being ranked 28th out of 36 vehicle brands by J.D. Power in a customer satisfaction survey in 2007, Toyota unleashed a program labeled “EM2” (everything matters exponentially) to take a hard look into its operations. To cope with its growing pains, Toyota has recently taken three crucial steps. First, it formally codified and disseminated the Toyota Way. For decades, Toyota had preached its principles, without writing them down, through socialization. However, the tacit and intangible nature of these principles made it very challenging for non-Japanese employees to grasp. In 2001, Toyota formally documented the “Toyota Way”—its core values centered on “continuous improvement” and “respect for people.” According to Toyota’s president KatsuakiWatanabe, it would serve as “a bible for overseas executives. “Second, Toyota beefed up training. Since rapid growth has led to 45% of its production being outside Japan, it has become harder to keep things the Toyota Way. Training centers have recently been set up not only in Japan, but also in Britain, India, Thailand, and the United States. At the factory level, Toyota has spent many years developing a cadre of 2,000 coordinators who act as teachers (sensei) for overseas operations. However, there are not enough of them. In response, Toyota has been retaining Japanese managers who are over 60 years old if they wish to continue to work. While some of them prefer not to work overseas, they nevertheless free up younger Japanese managers who can then be sent overseas. Finally, Toyota has realized that a one-way diffusion of knowledge from headquarters and Japanese plants to the rest of the world may not be enough. As a result, it is facilitating more learning and knowledge transfer among overseas subsidiaries, especially from more established subsidiaries such as Toyota Canada and Toyota Kentucky that have history of close to 20 years. It has sent employees from these subsidiaries to serve as coordinators overseas, the first time using non-Japanese sensei to train other non-Japanese employees.

Operational challenges in historical context: Chinese globalizers vs. their Asian predecessors

Today’s Chinese globalizers do face certain collective challenges arising from the unique historical context of their globalization efforts. Understanding this context helps clarify those challenges and illuminate certain fundamental lessons from the best practices of Chinese Global Champions. This section attempts to make a brief comparison between the circumstances in which corporate China is now building (and attempting to build) globalized organizations and the very different conditions faced by China’s Asian predecessors at the beginning of the current wave of globalization. The world in which companies from Japan and Korea began their globalization process 30 or more years ago was one in which the current wave of economic liberalization and the phenomenon of “globalization” itself (at least in its late-20th century version) were relatively new. Companies served primarily domestic, often protected, markets in systems of managed competition, and global competition barely existed in many industries. With the IT and communications revolutions, which have done so much to enable globalization, still in their early stages, products were highly standardized and consumers—with many fewer choices than they have today—were much less demanding. Japanese and Korean companies were motivated to globalize to gain access to the natural resources that they lacked and to reach larger markets. Today’s Chinese globalizers, by contrast, face an environment in which globalization itself has advanced to a degree scarcely imaginable a few decades ago. Open markets, intense global competition, and demanding consumers accustomed to ever better, cheaper, and more innovative products have created a far more challenging playing field for new globalizers than the one their predecessors encountered. Yesterday’s Asian globalizers, moreover, were entering the global marketplace at a relatively mature stage of their development, and a less demanding environment for globalizers enabled them to develop the skills needed for globalization at a measured pace. Today’s Chinese globalizers, by contrast, are relatively young companies that must be able to compete in the global arena right out of the gate. To be sure, today’s Chinese globalizers enjoy certain advantages over other countries that are still relatively new to the global arena. China’s immense and diverse domestic market, with fast growth in all industries (though unstable demand in some), has accustomed Chinese companies to serving a wide variety of consumers. Competition in the domestic market from MNCs since the opening of China’s markets to the world has forced Chinese companies to learn what it takes to compete and survive in today’s global marketplace. The Chinese capacity for innovation is a critically important advantage in China’s globalization toolbox. Still, the differences between today’s global environment and that faced by early Asian globalizers create much greater challenges for today’s Chinese globalizers than those encountered by their predecessors. China’s globalizing predecessors did not have to worry so much about balancing the competing demands of home country & host country, consistency & innovation, and control & empowerment. The home country/host country was much less of an issue when products were standardized, markets were more uniform, and issues such as sustainability were not yet on the horizon. Without as much need to innovate and adapt to local markets, globalizers could emphasize consistency over innovation and control over empowerment. In short, today’s Chinese globalizers do not have the luxury of being as single-minded as their predecessors were before yesterday’s choice of “either/or” became the requirement of “both/and.”

China Going Global

Despite the global economic and financial crises of recent years, corporate China continues its push for globalization. China now ranks third in the world for outward FDI (2012 data), with its fastest revenue growth over the period 2008-2012 coming from operations in North America and Europe. The top Chinese multinational corporations (MNCs) are increasing their overseas assets and overseas employment at rapid rates and are seeing greater revenue increases from overseas operations than from their Chinese counterparts. Moreover, today’s Chinese globalizers have even more aggressive plans for geographic and functional expansion soon. A survey by the World Economic Forum and Strategy & (formerly Booz & Company) of 125 leading Chinese globalizers shows that in the next five years these companies are planning to expand in virtually every region of the world and to extend their functional footprint outside of China as well. Our research on the success of leading Chinese globalizers has also found, however, that increased effort at globalization does not necessarily lead to increased output. Furthermore, companies with similar, perfectly sound globalization strategies do not necessarily achieve similar results. What distinguishes a group of companies, which the report identifies as “Chinese Globalization Champions”, from the rest of the pack is their ability to systematically tackle various operational challenges in the globalization process. In analyzing these challenges and how Chinese Globalization Champions overcome them, we developed a reference framework for a global operating model with four building blocks: Culture, Governance, Processes, and People. Successful execution in these four areas, in turn, allows Chinese Globalization Champions to address three sets of polarities or tensions that challenge all globalizing companies: Home Country & Host Country, Consistency & Innovation, and Control & Empowerment. Our research on how Chinese Globalization Champions successfully manage these three polarities in their operating models reveals several best practices in the areas of Culture, Governance, Processes, and People from which other Chinese globalizers can draw lessons. For Chinese companies setting up global operations for the first time, the initial challenge has always been overcoming cultural divides, stereotypes, and mistrust between Chinese and foreign personnel to create a harmonious and effective work environment. Another important cultural issue for many Chinese globalizers involves innovation, which has been a hallmark of their success in domestic markets that they want to transmit to the global organization. Best practices in Culture are: developing globally consistent values and behaviors, making strong local commitments, and implanting innovation genes. Governance—essentially the art of balancing control and empowerment—is a critical aspect of any operating model, and managing a globalized company adds much complexity to the challenge. Critical issues include maintaining enough control over a far-flung global organization while empowering the overseas management team, designing the organization for these purposes, and executing them at the operational level. Best practices in Governance are: empowering the overseas management team and building channels for rapid communication. A major challenge in global operations, which have much more complexity and uncertainty than domestic ones, is to strike the balance between consistency and innovation, and between empowerment and control, to enable adaptation and responsiveness to overseas markets with minimal risk. Globalizing companies face decisions about to what extent processes should be standardized or made flexible, and how to guard against the risks of too much flexibility. Best practices in Processes are: pushing for standardization on a global scale, allowing for flexibility in a controlled way, and implementing rigorous risk control mechanisms. Along with Culture, no component of the global operating model framework we are describing here is more important for managing the tension between home country and host country than People. This poses important questions about assembling global and local management teams, the right balance between local and expatriate employees, and issues such as compensation and career development. Best practices in People are: developing global teams from the very top, hiring and incentivizing local talent, and providing development for expatriates and deploying them on local teams. Today’s Chinese globalizers face certain collective challenges arising from the unique historical context of their globalization efforts. Yet, every Chinese globalizer also faces its own unique set of operational challenges that it must address in its own unique ways. Thus, it is important for companies to customize their solutions to their major operational challenges, while also taking a holistic approach by implementing the full range of best practices designed to deal with the operational polarities that pose the biggest challenges in their business context and stage of globalization.

McKinsey Profile and History McKinsey & Company, Inc. is a global management consulting firm, headquartered in New York City, USA. The company belongs to its 1,200 partners, 400 of which are directors. Every three years, the directors elect a man-aging director to represent the company globally. Once a partner retires, the company withdraws his shares. As of 2014, McKinsey has more than 100 local offices with equal rights in more than 50 countries. Between them, these offices speak over 120 languages and represent more than 100 nationalities. The firm serves as an adviser to businesses, governments and institutions and claims that over80% of Fortune’s list of the Most Admired Companies is among their clients. Between 2002 and 2014, McKinsey was ranked first on the “The Best Consulting Firms: Prestige” list on the Vault.com career intelligence website and was cited as the “most prestigious consulting firm of all” in a 2011 New York Times article. Being a private entity, the company does not publish many business figures. Forbes estimated their overall annual revenues at 7.8 billion USD in 2013. McKinsey is professionally organized into industry and functional practices. The practices are   of competence that concentrate on one field. They are organized as a network and share their expertise with colleagues worldwide. In this way, McKinsey hopes to maintain a global and closely interlinked web of functional expertise and industry knowledge. To understand McKinsey & Co.’s coordination mechanisms and development, it is worth looking at their company history: The precursor of McKinsey & Co as it exists today was James O. McKinsey & Company, founded in Chicago in 1926 and named after its founder James O. McKinsey was a certified public accountant and professor of accounting at the University of Chicago. His company specialized in accounting and advising managers, which was called “managing engineering” at that time. The entry of Marvin Bower into the company in 1933 was a milestone in the company’s development. After graduating from Harvard Law School in1928, he had already gained experience at the prestigious law firm Jones, Day. Bower remembers his close cooperation with the company’s senior partner: “I made it an immediate objective to learn why it [Jones, Day] had been so successful. From observation and analysis during my Jones, Day years began the formulation of the program that I later brought with me tackiness.” The firm’s professional approach, recruiting standards and the prominence of its partners in charitable, social and cultural organizations left their mark on Bower. Therefore, he established all these elements years later at McKinsey & Co when he was in charge. After James O. McKinsey’s sudden death at the end of 1937, the firm nearly is integrated. Extensive reorganizations and changes to the company structure in 1939 facilitated a prompt recovery. An essential contribution to the successful reorganization of the company is attributed to Bower, who was deputy manager of McKinsey’s New York Office at that time. One central element was the focus on management consulting which had been moved to a single, central location in New York. Accounting was abandoned. The primary emphasis was now on solving major management problems. The services were based on high standards of integrity, professional ethics and technical intelligence. Bower’s impact and his experience from his time at Jones, Day was also visible in the focus on human resources: The stated aim was to select, train and advance personnel so that the firm would be self-perpetuating. McKinsey & Co used the subsequent years to build the company’s economic base. In the 1940s the company grew rapidly in the US home market in terms of both clients and offices. In 1944, McKinsey & Co opened their first office outside of New York, in San Francisco, and between 1947 and 1951offices followed in Chicago, Los Angeles and Washington, DC. The first office outside of the US was opened in 1959 in London. In the following years the company transformed into an increasingly global consultancy, expanding into more than 50 countries. There was also enormous growth in the number of employees: McKinsey had only 15 consultants worldwide in1933 and 80 in 1950, but they had 700 employees at the beginning of the 1980s. During the dotcom boom of the late 1990s, McKinsey grew significantly: Between 1994 and 2001, the number of consultants doubled from 3,300 to 7,700. This growth placed high demands on the management principles and the coordination mechanisms of the company, a demand which continues today.

Management Principles and the One Firm Principle Even today, McKinsey’s management principles are based on the goals that Bower and his partners set for the firm in 1939. The main goal was to build affirm that would continue in perpetuity. Foundation was the next principle, encouraging “every individual to protect and build the firm’s future and reputation so that each generation of partners would pass the firm along to the next generation stronger than they had found it”. McKinsey states that the company’s work is based in values that oblige them to meet the highest professional standards. “Client first” is the primary principle of consulting. This idea is followed to such an extent that McKinsey only accepts orders when the consultants are convinced they can usefully contribute to the solution of a major problem. Likewise, if a client is no longer satisfied and is not benefitting from the consultation as hoped, the cooperation can be terminated at any time. A prerequisite for objective consulting is professional independence: the partners own McKinsey’s working capital. Once a partner leaves the company, McKinsey takes back his shares. This is to ensure that only active partners in the company who are bound by the company’s objectives have a vital interest in the business activity. Strict secrecy of customer information is essential for trustworthy cooperation. The security of this trust in the long run is part of the code of conduct that every partner accepts when joining the company. There has, however, been one violation of the code of conduct: In 2011, Anil Kumar, a former McKinsey partner, admitted leaking information learnt from McKinsey clients while working for the firm. McKinsey views entrepreneurial challenges as an independent outsider and always from the perspective of the top management. Solution and implementation strategies are individually coordinated with the client’s different needs, goals and company cultures – always in close cooperation with the client’s top-level management. Joining McKinsey as a consultant should provide individual development and be great career path if the consultant performs well. McKinsey has an integrated working atmosphere, free from any hierarchy. The company provides mentors, who assist the individual in his personal development, span his individual network and help him benefit from his colleagues’ expertise. All consultants are expected to uphold the obligation to dissent, meaning that constructive criticism is explicitly encouraged and should be expressed. McKinsey’s global business activity is a daunting management challenge. The “client first” principle requires that every regional entity internalizes the characteristics of the local market. At the same time, every local office and every consultant should share the same global company values. McKinsey tries to balance these by using a strategy the “one firm principle”. Despite being embedded into the cultural characteristics of every region, the individual McKinsey offices form one common firm that shares its principles and values worldwide. This means the company is strongly decentralized. Every region acts independently as far as possible and makes independent decisions. In this way, the company can take regional markets and their characteristics into consideration. On the other hand, every consultant knows the values they must live by and the code of behavior they must follow. Everyone is equally and intensively trained in these values and protocols. Everyone also knows that if an individualist in trouble, the group will expend every effort to help. The opposite of the one-firm approach is called the warlord model. It encourages internal competition, individual entrepreneurship, distinct profit centers, decentralized decision making and the strength that comes from stimulating many diverse initiatives driven by relatively autonomous operators. In contrast, McKinsey expect each office to put the overall organization’s best interest before that of the office itself – a principle that is not compatible with warlord firms. Coordination Mechanisms The one firm strategy at McKinsey is implemented via several coordination mechanisms. The following paragraphs used examples to list important formal and informal coordination mechanisms used by McKinsey & Co. Formal Coordination MechanismsMcKinsey is a decentralized organization. , management remains in the hands of the active partners, who are also McKinsey’s shareholders and manage the company in a consensus building style. The individual regions, represented by the respective managing partners, act mostly independently; however, they are bound by the goals and values of the company. In this way, McKinsey can reduce the confusion that often accompanies growth by applying formal policies instead of ad hoc decisions. The partners also preside over general affairs and the central control of the company. For these processes to be efficient, McKinsey & Co. established three committees in the 1950s: The executive committee was established to act for all the partners on matters requiring more than a small group of people. The planning committee was formed to discuss important management questions and make recommendations to all the partners. Finally, the profit-sharing committee was formed to expedite the allocation to profits to the partners (Bide 1996). In practice, these committees have proven efficient even when many partners are involved. The decision-making process takes longer but decisions are more likely to be accepted by firm members than if the leadership had acted unilaterally. This is another characteristic of the one-firm strategy. Other important formal coordination mechanisms characterize the one-firm strategy. One central element is recruiting. As a one-firm company, McKinsey invests a significant amount of senior professional time in its recruitment process and tends to be much more selective than its competitors. As a McKinsey partner noted in the 1980s: “It's not just brains, not just presentability: you must try and detect the potentially fully developed professional in the person, and not just look at what they are now. Some firms hire in a superficial way, relying on the up-or-out system to screen out the losers. We do have an up-or-out system, but we don’t use it as a substitute for good recruiting practices”. This strategy is still applied today. Thus, to ensure that all entities follow the same values and goals despite the decentralized organization, the company tends to “grow their own” professionals, rather than making significant use of lateral hiring of senior professionals. The young graduates are socialized during their time at McKinsey and internalize these values quicker than experienced consultants who only join McKinsey later in their careers. McKinsey also adjusts financial incentives to the employee’s coordination. Compensation systems (particularly for partners) are designed to encourage intrafirm cooperation and are based mostly on group performance, not individual performance. Promotions into a leading position require an associate to prove his long-term contribution to the firm and his impact to the team. Informal Coordination Mechanisms McKinsey uses several mechanisms to coordinate the decentralized regionals offices. The foundation of these mechanisms is the existence of shared values, which underpins sustained management effectiveness. The central goal is to establish extensive intrafirm communication, with broad use of consensus-building approaches.

Shared Values at McKinsey & Co. Put the client’s interest ahead of our own This means we deliver more value than expected. It doesn’t mean doing whatever the client asks. Behave as professionals Uphold absolute integrity. Show respect to local custom and culture, if we don’t compromise our integrity. Keep our client information confidential We don’t reveal sensitive information. We don’t promote our own good work. We focus on making our clients successful. Tell the truth as we see it We stay independent and able to disagree, regardless of the popularity of us views or their effect on our fees. We have the courage to invent and champion unconventional solutions to problems. We do this to help build internal support, get to real issues, and reach practical recommendations. Deliver the best of our firm to every client as cost effectively as we can We expect our people to spend clients’ and our firm’s resources as if their own resources were at stake to achieve these goals, McKinsey invests in firm-wide training, both to increase juniors’ substantive skills and as an important group socialization function. Part of this process is McKinsey’s two-week training program for new professionals. The program is run by one or more of the firm's senior professionals, who spend a significant amount of time inculcating the firm's values by telling Marvin Bower stories. The program is specifically designed as a global training program that rotates between the countries where McKinsey has offices. This not only supports the one-firm approach but also has a dramatic effect on the young professionals’ view of the firm. Part of these informal mechanisms is imparting company history. All young professionals are given a copy of Marvin Bower's history of the firm, Perspectives on McKinsey, which unlike many professional firm histories, is full of philosophy and advice and low on historical facts (Moister 1985). The goal is that McKinsey employees internalize the company values and work together for the well-being of the company (in contrast to companies that emphasize individual entrepreneurialism, autonomous profit centers, internal competition and highly independent activities). The criteria according to which new team members are chosen already fulfils this demand: McKinsey is looking for graduates that are not only smart, hardworking and ambitious but have also proven agreeable and able to work in a team. The goal is to prevent stardom.  Training themselves as belonging to an institution that has an identity and existence of its own, above and beyond the individuals who happen currently to belong to it. Guiding Principles at McKinsey & Company We operate as one firm. We maintain consistently high standards for service and people so that we can always bring the best team of minds from around the world—with the broadest range of industry and functional experience—to bear on every engagement. We come to better answers in teams than as individuals. So, we do not compete against each other. Instead, we share a structured problem-solving approach, where all opinions and options are considered, researched, and analyzed carefully before recommendations are made. We give each other tireless support. We are fiercely dedicated to developing and coaching one another and our clients. Ours is a firm of leaders who want the freedom to do what they think is right. Summary and Outlook McKinsey & Co is a consulting firm that wants to keep the balance between a global perspective and local activities. An essential part of coordinating the independent regional entities is the one-firm strategy. This is based on the idea that the company’s partners should take essential decisions together and by consensus, that the company’s values are more important than short-term success and that the team is more important than individual success. summaries the elements of the one-firm approach as follows: highly selective recruitment, a “grow your own” people strategy as opposed to heavy use of laterals, growing only as fast as people can be developed and assimilated, intensive use of training as a socialization process, rejection of a “star system” and related individualistic behavior,  avoidance of mergers, to sustain the collaborative culture. selective choice of services and markets, winning significant investments in focused areas rather than many small initiatives, active outplacement and alumni management, so those who leave remain loyal to the firm, compensation based mostly on group performance, not individual performance, high investments in research and development, extensive intrafirm communication, with broad use of consensus building approaches. This approach is supported by organic growth of these values in the company history. This leads to a strong culture and clear principles. Because all employees at McKinsey follow the same values and strive toward the same goals, every regional entity can act autonomously without fragmenting the global McKinsey network. Nevertheless, a decentralized organization depends on individual decisionmakers. The formal and informal coordination mechanisms have not always been able to keep up, particularly during the dotcom boom and the associated company growth. Therefore, even at McKinsey individual executives have taken advantage of their decision-making powers and acted in their personal interests instead the company’s. Paul Frigga, who worked at McKinsey in the late 1990s and now lectures on consulting at the University of North Carolina’s Kenan-Flagler business school asks one key question that McKinsey needs to answer in the future: “How do you maintain quality with growth?”

WALMART CASE

Wal-Mart is the world’s largest company ranked by sales. Its sales are as big as its main US rivals—Costco, HomeDepot, Kmart, Kroger, Sears, and Target—combined. In 2007, it operated 3,900 stores in the United States and 2,700 stores in Argentina, Brazil, Britain, Canada, China, Japan, Mexico, and Puerto Rico. Conspicuously missing from this list is Germany, from which Wal-Mart pulled out in humiliation in 2006 after ten years of struggle. Wal-Mart went to Germany in 1997, after acquiring two German store chains, Wertkauf and Interspar. Competitors naturally trembled, given Wal-Mart’s fear some reputation as a super low-cost competitor. Soon, Competitors found that they could breathe more easily, because Wal-Mart seemed to get nearly everything wrong in what experts called “a textbook case of how not to enter a foreign market.” Although the $370 billion German retail market was huge and lucrative, it was populated by formidable competitors, such as Metro, Aldi, and Lidl. As incumbents, they had been around for a long time and knew the needs and wants of German shoppers inside and out. Wal-Mart, having never competed in continental Europe prior to its 1997 entry into Germany, had to learn from scratch. Strategically, Wal-Mart found it difficult to flex its muscles. German shopping hours are short, so Wal-Mart had to forget about offering 24-hour shopping. Stores had to close on Sundays. What was worse, Wal-Mart had fierce competition from Aldi and Lidl, two aggressive discount chains. Wal-Mart was unable to undercut its rivals’ prices because Wal-Mart’s infrastructure in Germany, which for a while supported two costly headquarters, piled up too much cost without achieving economies of scale. On the people side, Wal-Mart also made a mistake by first appointing an American boss for Germany who spoke no German. In addition, he insisted that his German managers speak English. The next head, an Englishman, tried to run the show from Britain. These foreign bosses failed to connect with the German customers and employees. The insistence that staff smile at customers as brightly as possible and help them pack their shopping bags was a mistake in Germany since many Germans regarded such behavior from shop personnel with deep suspicion and felt uncomfortable. German employees felt equally uncomfortable and awkward when being told to follow a simple “American” wish: smile at customers. Wal-Mart did not give up without putting up a strong fight, though. After installing a German chief, Wal-Mart was savvier about the local market by catering to local tastes better—for example, offering a special on fresh carp, an Easter specialty. However, in Germany, Wal-Mart’s 95 stores failed to match Audi’s 4,000 in terms of convenience. In terms of prices, even when Wal-Mart could selectively undercut Audi, the price differences were often too little to motivate shoppers to travel the extra distance to a less conveniently located Wal-Mart store. While Wal-Mart enjoyed a scale advantage on globally sourced products, its bargaining power did not translate to regional brands of bratwurst and beer. Wal-Mart tried to improve distribution and build relationships with local suppliers, but it was stuck in the middle between improving existing store sales and building more new ones, which would be time consuming and costly. In the grocery market in Germany, Wal-Mart commanded only a 2% market share ($3.2 billion a year), whereas Audi boasted a 19% share. In its ten years in Germany, only once did Wal-Mart publish its financial results: It lost $550 million in 2003. By the time Wal-Mart sold its stores to Metro, another German rival, for an undisclosed amount in 2006, it declared that it would take a one-time charge of €1 billion on completion. Therefore, it is safe to assume that the mighty Wal-Mart never made a tiny profit in Germany.

 

Benchmarking is the process of comparing your results to peers in your industry. It is an essential business activity that is key to understanding competitive advantages and disadvantages. In some cases, benchmarking results are also used in promotion and sales materials. The following are illustrative examples of benchmarking.

Technology. A database firm benchmarks the query performance of products against the competition on a regular basis as part of their product development efforts.

Your example.

Financial. A utility provides investors with a comparison of financial metrics such as operating margins against industry averages.

Your example.

Marketing. An airline hires a consultant to benchmark customer service metrics such as customer satisfaction against key competitors.

Your example.

Processes. A telecom company implements a new process for provisioning and benchmarks its results against industry best practices.

Your example.

Markets. A trading firm benchmarks the decisioning and trading speed of its algorithms compared to what is known about the competition on the same exchange.

Your example.

Services. An ecommerce firm benchmarks its average fulfillment and delivery speed against key competitors.

Your example.

Cities. A city benchmarks its quality of life measurements against other cities in the region or world.

Your example.

Governments. A state benchmarks its healthcare costs and indicators of health such as life expectancy against other states in the same county.

Your example.

Products. A solar module manufacturer benchmarks the conversion efficiency of its products against other solar manufacturers on a global basis.

Your example.

Strategy. A social media firm benchmarks its spending on research & development against close competitors in the industry.

Your example.

Operations. An IT operations team benchmarks its uptime against a top competitor that published their uptime figures in a media report.

Your example.

Productivity. A data center is moving towards automating time consuming maintenance and support tasks. Before the project begins they seek employee productivity benchmarks from a consultant who is familiar with best practices in the industry.

Your example.

Retail. A shoe retailer compares their sales per square foot with industry peers.

OUTSOURCING is the transfer of an internal business function, process or project to a business partner. The following are illustrative examples. Manufacturing Shifting production to a contract manufacturer, often in another country with a lower cost base. This is extremely common in industries such as fashion whereby firms view their core capabilities as design and marketing with manufacturing outsourced to partners. Customer Support Outsourcing customer support functions such as call center services to a firm that specializes in these processes. When customer support is outsourced to a foreign country, it is common for customers to notice due to language differences. Human Resources Outsourcing human resource management processes or the entire function. For example, it is quite common to outsource payroll processing, benefits management and training. Legal It is common for a firm to maintain a minimal legal team and outsource legal matters and processes to law firms. Law firms themselves commonly outsource processes to legal service firms in foreign countries to reduce costs. Facility Management Outsourcing the management of facilities such as offices and data centers to a third party. This is typically done when facility management capabilities such as security, maintenance and building operations are viewed as non-core capabilities. Marketing The outsourcing of marketing functions in areas such as design, data analytics, market research, creatives, advertising, lead management and sales. For example, a firm might contract a market research firm to report brand and customer experience metrics on a weekly basis. Information Technology Outsourcing the development, operations and support of information technology. For example, an IT service company might completely support the systems, applications and infrastructure of a firm. IT service companies commonly follow standard service management practices with a help desk and service level agreement. Business Processes It is most common to outsource processes such as human resources or customer support that can be standardized across industries. It is also possible to outsource business processes that are specific to your firm. This is typically done when a process is labor intensive. For example, a newspaper that needs to manually review comments for spam might outsource this process to reduce costs. Process Outsourcing vs Project Outsourcing Process outsourcing applies to a repeated business function such as customer service. Project outsourcing applies to a one time process that creates a series of deliverables such as a software development project. Outsourcing vs Offshoring Outsourcing is the transfer of a business process or project to a third party. Offshoring is the transfer of a business process to a foreign country. Offshoring can be a type of outsourcing if you are transferring things to another company. It is also common for offshoring to be done as a captive model whereby you invest in capabilities in another country that you control. In other words, offshoring isn't necessarily outsourcing because it is common to offshore to organizations that you own. Outsourcing vs Insourcing Insourcing is the opposite of outsourcing. The term usually applies to taking a function that was outsourced and bringing it in-house such that work is performed by your employees. For example, a small fashion company may begin by using contract manufacturers but may decide to build its own manufacturing facilities as it grows. Outsourcing vs BPO Business process outsourcing, or BPO, is a common term for outsourcing at the process level. This can be contrasted with outsourcing a project such as a construction project. Outsourcing vs Privatization When outsourcing is done by a government, it is known as privatization because this represents a transfer of responsibilities from the public to private sector. This can be controversial because it may create lower quality jobs than the public sector. Private firms are motivated by profits while public services are mandated to serve the public good. This can produce very different results. In some cases, privatization resembles cronyism whereby important public infrastructure is transferred to the friends of the government. Privatization can also lead to a monopoly. For example, a firm may be sold the water infrastructure of a city on the premise that they can lower prices. Once in control, they may raise prices over time as they have no competition. Advantages of Outsourcing There are several potential advantages to outsourcing: Cost Outsourcing is often done to reduce costs. For example, outsourcing to a country with lower labor costs. Customer Service Outsourcing makes it clear that business units are customers. This can be contrasted with an internal function whereby users of a service may be viewed as peers. For example, an internal IT team may be viewed as inflexible and difficult to deal with by business units such that they prefer the services provided by external partners. Risk Transfer Outsourcing often results in the transfer of risks to a partner. For example, a partner may provide a service level agreement whereby there are penalties for certain types of failures. Scale The ability to scale up and down as required. For example, a firm with an IT department of 30 people can't easily double its workload. If you outsource to an IT services company with 70,000 employees they can easily scale up and down to handle any workload. Know-how Transferring processes and projects to a vendor that has more know-how in a particular area than your internal teams. For example, outsourcing digital advertising campaigns to a firm with sophisticated capabilities in this area. Focus Transferring functions that you view as non-core in order to concentrate on areas where you create the most value. For example, a design firm filled with creative people that outsources functions such as accounting that is doesn't view as creative. Disadvantages of Outsourcing There are several common disadvantages to outsourcing: Vendor Lock-in Outsourcing can be very sticky such that it is difficult to change partners. It is common for outsourcing partners to integrate with your firm, control your data and understand your processes better than you do. When you become completely dependent on a partner they may feel free to raise prices and/or reduce quality as they know it is difficult for you to leave. Risk Although outsourcing typically transfers a number of risks, it also typically creates a large number of secondary risks. For example, an IT function might be transferred from a nation with a highly stable political environment and developed IT infrastructure to a nation with unstable politics and unreliable infrastructure. Management Control An internal function can be completely directed and controlled by management. This is not true of an external partner. If you decide you want something changed at a partner company, this can require complex negotiations and a change in commercial terms. Culture In some cases, relationships between firms and their outsourcing partners become negative due to differences in organizational culture. Sustainability Firms may outsource to nations with low environmental, safety and quality of life standards. This is increasing viewed as a risk as firms are accountable for the full impact of their operations and can't bypass accountability by outsourcing it.

Five Successful Stories of Outsourcing

Story #1: Procter & Gamble

Product companies, such as P&G, have a big challenge performing in a very rapidly changing market. It is critical to bring out a new product ahead of many competitors. So one day, after decades of product race, P&G made a decision to outsource some R&D activities. The result exceeded all the expectations. Outsourcing boosted its innovation productivity by 60% and generated more than $10 billion in revenue from over 400 new products. Today, about half of P&G’s innovation comes from external collaboration.

Story #2: Unilever

While growing, transnational companies face dramatic operational problems. Well-known consumer products giant Unilever Europe, over the years, had expanded by country and division. As a result, different business groups and geographies operating across 24 countries were all using multiple ERP systems. In 2005 its leadership team made a strategic decision to integrate the company’s multiple business units into a single and create one ERP system across Europe. Not being a specialist in IT solutions, the company outsourced the development of ERP system to external party. As a result, these improvements have directly contributed to the € 700 million annual savings on operational activities.

Story #3 Mark McRae and his 30 companies

Here’s the story you probably haven’t heard of. Mark McRae is one of the Sunshine Coast entrepreneurs in Australia. He has successfully managed and own multiple businesses that is more than 30 companies! Having a wife and three children, he was still able to hire 1,300 people and generated $280 million in online and offline sales for his businesses. He says, that his secret is outsourcing. Mr. McRae wasn't afraid to outsource to various countries, such as Malaysia, the Philippines, South Africa, the USA, and India. As a result, he enjoyed the benefits of working with global talents.

 “Outsourcing can give you access to a dizzying array of highly skilled professionals from all over the world. For example, to produce a professional documentary, I hired a script writer in the USA, film crew from Canada, post-production team in Croatia and editor in Serbia.”  - Mark McRae.

Story #4 Acer

Acer, the Taiwan-based personal computer maker, has used capability sourcing to make itself into the world’s second-largest PC manufacturer. Since the spin-off of its contract manufacturing operations in 2000, the company has made a big step ahead its competitors. The Acer executives knew it was good at branding and marketing and chose to outsource everything company had a harder time with, like manufacturing. The move led Acer to faster-growing sales and gains in market share. The company now maintains a strikingly lean and flexible operation. Its 6,800 employees represent a workforce less than a tenth the size of its largest competitor.

 Story #5 JM Family Enterprises

JM Family Enterprises is a diversified automotive corporation whose principal businesses focus on vehicle distribution and processing; financial services and technology products. The company outsourced all mainframe hardware, software and operations because once mainframe usage leveled off at $8.2 billion. The outsourcing vendor immediately optimized operations so that critical month-end financial reports landed on the desks of JM Family executives on time. What hadn't happened before.

"It was the same hardware. The same data. But they were able to gain efficiencies because they knew how to run a mainframe better than we were ever able to."    -  Ken Yerves, Senior VP

The best outsourcing companies in the world.

10. Capgemini A French IT company, Capgemini is present in over 36 countries with a staff well over 100,000. Major partnerships include Intel and Microsoft. Capgemini’s business goals include expertise, ensuring sustainable and long-term growth and providing a return on investment to its shareholders.

9. ISS ISS is ranked one of the top companies in the world when it comes to facility services and management. Whether it’s cleaning, catering, office support, property service, security or total facility management, Denmark-based ISS is equipped to meet any and all of your facility needs. “The ISS Way” focuses on further aligning the business model and strengthening knowledge-sharing abilities.

8. Infosys Technologies Infosys has the most humble beginnings of any company on our list as seven partners with $250 to their name started the IT service provider in 1981 in Bengaluru, India. Today, the company rakes in more than $5.4 billion annually and designs and delivers technology-enabled business solutions. The company has a long history of praise from Bill Clinton to Business Today.

7. CSC—Computer Sciences Corporation Another IT infrastructure outsourcing provider, Computer Sciences Corporation is a company that specializes in system integration. When Xerox acquired the aforementioned ACS in 2009, it left CSC as the only independent outsourcing firm headquartered in the United States.

6. Colliers International A Washington-based outsourcing partner that serves the real estate sector, Colliers International is a global company that helps its clients in consulting, landlord representation and asset management, among other areas. With 480 offices in 61 countries, Colliers International runs on a “partnership model” that combines the same entrepreneurial aspects of a local company with the strength, reach, accountability and versatility of a global firm.

5. Sodexo Based in Issy-les-Moulineaux, France, Sodexo is global food services outsourcing company that specializes in facility and vendor management. Revenues at Sodexo in 2009 reached $14.7 billion Euros in 2009 alone. Sodexo serves more than 10 million customers per day, manages 700 facility sites and dishes out 9.3 million meals each day.

4. ACS—Affiliated Computer Services Many of the services at Texas-based ACS come by way of HR outsourcing, but the company is more than equipped to achieve anything from finance BPO to IT outsourcing. The company generated a modest $6 billion annually and recently it installed a 100-percent contactless ticketing solution in the Houston transportation system. Another ACS project, a fully-automated hospital, helped a customer see savings upwards of $2 million.

3. Wipro Technologies  Bangalore, India

An India-based IT specialist, WiPro Technologies specializes in “Total Outsourcing” which has targets geared towards achieving specific IT objectives. Wipro can provide IT infrastructure solutions that seamlessly align with the organizational processes and practices of any business. They are one of the world’s top technology vendors and are widely considered the outsourcing partner of choice for IT-specific infrastructures.

2. IBM The technology giant is based in Armonk, New York, but maintains a reputation as a global entity that specializes in technology outsourcing service. IBM started touting “Next-Generation BPO” in 2010 and the company gives customers every available resource to make an informed decision on whether to outsource its technology needs. (Trust us, this is a smart play) Key figures from IBM include supply chain savings anywhere from $3 to 5 billion each year and over $500 million in productivity improvement.

1. Accenture “High Performance. Delivered.”

Accenture moved its headquarters to Dublin, Ireland in 2009, but that didn’t stop us from naming the outsourcing specialist the top outsourcing company in the world. Accenture’s net revenue sailed to $21.55 billion in 2010. Major clients include three-fourths of the Fortune Global 500 and Accenture’s outsourcing services range from application and infrastructure to BPO and bundled outsourcing. It has offices in more than 200 cities in 53 countries. It also headlines the WGC Accenture Match Play Championship in Tucson, Ariz., one of the most bad ass golf tournaments in the world. Well played, Accenture.