Klaus Meyer's Blog
On Global Business and Economics in Volatile Times
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March 18, 2012
At breakfast in a local hotel, I watched children quarreling at the neighboring table - just the way siblings are, nothing special you may think? Well, I come from Shanghai, and in Shanghai seeing siblings plays is rare - unless you meet Chinese Americans, or the four kids of my Korean colleague. Most youngsters in Shanghai grow up as only-children, with all their parents attention, but no siblings to play with; while kids in Taiwan are, well, just like kids everywhere - having fun, playing, arguing, fighting...
This is just one of many differences that spring into my eyes watching people in Taipei. All along the main streets - and many back alleys - are small shops selling all kinds of things, small restaurants, cafe (like the one I am sitting in this moment). In Shanghai, the shops tend to be of two kinds: either very posh with global prestige brands, or very poor serving basic needs. Most shops here are somewhere "in between" - not too posh, but not so simple and dirty that one would distrust their quality. The same difference apply to people. In Shanghai, the difference are very visible between the well-off, who display their status with make-up, their clothes, and the brands they associate with, and the poor who wear worn clothes and visibly struggle with modern life. I am sure there are rich and poor people in Taipei too - it just isn't that obviously.
Another difference is motorcycles. They are everywhere in Taipei, and they add considerably to the noise levels. With extensive traffic jams and scare parking, they are the most convenient way to get around, especially for students. In Shanghai, they are less prevalent - and often electrical and hence relatively quiet (see November 2011).
Finally, one difference with practical implications for myself: a 'zhongbei natie' (Medium Latte) costs of about half the price in Taipei!
Of course, the two cities have a lot in common too. First of all, they both are immigrant cities that attracted a lot of people from other parts of the country and even the world over the past two or three generations. Thus, neither is Shanghai representative of mainland China, nor is Taipei representative of Taiwan. Also, both cities are very crowded places, with elevated roads taking cars relatively quickly across town (though even 'up there' are often traffic jams), while the metro systems are fairly efficient and rapidly expanding - serving commuters far better than the crumbling system of London, or the tiny systems in most of North America.
Every city has its own character. That's what makes traveling and watching people so exciting. Of course, it also has practical implications for international business - and the importance of local context for strategy and of anthropological research in marketing.
Do you think the Chinese Zodiac is just some ancient tradition that has long past into history, and probably was killed off by Mao's cultural revolution? Think again. You probably read some statistics that hospitals across Greater Chinese report increased attendance. What are statistics? Well, this actually has some pretty real implications. In Taiwan two of my three female co-authors have given birth recently; in China, our departmental secretary is off on maternity leave and my language teacher has resigned to take more rest during her pregnancy.
The last time there was such a boom of pregnancies was the year 2000, a 'golden dragon' year. These kids are now 12 years and preparing to fight for university places in a few years. Such cyclical birth patterns may be good news for manufacturers of baby clothes, but for who can't easy increase or decrease their capacity - hospitals and schools - they create a considerable planning challenge.
Why are journals biased against qualitative research?
Qualitative researchers often complain that management journal editors and reviewers are biased against them. Recently, several journals tried to redress the issue by publishing review papers to encourage qualitative work (Bluhm et al. 2011, Welch et al. 2011). One commonly cited cause is the lack of standards against which to assess qualitative work - an argument that frankly misunderstands the source of the power of qualitative work, namely to break with the norms of 'normal science'.
Let me suggest an entirely different argument. Journal editors are concerned with short-term citation impact of the papers they publish, and qualitative papers get less cited. To test this hypothesis, I did a self-experiment and analyzed citations to my own work, and indeed I found that my quant papers get three times as many cites as my qual papers (full analysis here). Why may this be so?
Whatever the causes for this pattern, I guess the main lesson is to do what you are best at, and to argue your point!
Is Shanghai more like London than like Moscow?
My co-author was in Shanghai for the first time in his life, and I took him for a walk through the city, discussing our work as we walked, and sipping coffee while digging into our papers. At the end of the day, he summed up his impressions as "Shanghai doesn't look like an emerging economy at all - it looks very Western. Shanghai is much more similar to London than to Moscow, Istanbul or Delhi". Really?
His reasoning was anthropological, even though he is trained as economist: If this was Delhi, there would be beggars everywhere, and people would be sleeping rough. If this was Moscow, there would be armed police evident at every public place, and big cars carrying loads of bodyguards. Even in Istanbul, there would be street traders buzzing everywhere. Shanghai is so clean, so orderly. Streets are so empty at night. Even during rush hour, the traffic jams seem quite tolerable. Hardly any rubbish on the streets, walkways, and shopping districts. Well maintained parks and green areas along the roads [in Pudong], you never see that in another emerging economy.
I can't compare to Moscow, Istanbul or Delhi where my colleague had recently been, and he may have seen the most tourist-friendly areas. But his observations are quite interesting: China is different from other emerging economies in that despite widespread inequality and poverty, it is a very 'orderly' society, which makes life much easier for everyone, especially foreigners. It also means that there are some forces that are just not so obvious as there are elsewhere - when he remarked about the absence of police, I could quickly point to a passing police car, a traffic warden, and a security guard lingering in the area. Order does not emerge from nowhere.
This raises interesting question as to what is an emerging economy? Should we define it by average level of income? By the rule of law or other indicators of 'institutional development? By the degree of inequality? Or by how safe it is to walk on the streets?
Cultural Identity: The Sports we Watch
On chilly rainy day, I stepped into a pub. I ordered a local Ale and a Shepherds' Pie, and watched the local football game on the large TV screen. The home team was trailing 0:4, which made people watching more interesting than the game. Yet, at the end both teams won a trip to the finals in London, so everyone was happy. All felt like I was back in god 'ol England.
But then the TV switched to another channel. It looked like a team wrestling sport with complex rules - men wearing big helmets and hugely inflated shoulder pad were wrestling each other to the ground, interspersed with the throwing of an egg-shaped ball. Well, they call that football too. Evidently I was not in England, but in an English-themed pub at the far South Western corner of Canada.
My thoughts turned back to a dinner conversation last week in Calgary with a gentlemen in his 70s who emigrated from Poland to Canada thirty years ago. Yes, he said, he made the right decision to come to Canada all those years ago. Canada more than any other country allows newcomers to fit in, at least in the second generation - his sons now both hold professorships at Canadian universities. But, most of his friends in fact were other immigrants from Europe. "In many ways we are the same with the Canadians", he said, but there are subtle differences. "This is most evident is the sports we watch."
Spectator sports as carrier of cultural identity, and of cultural affinity? Many other example come to mind. Today, the news reported Danes celebrating their European championship in handball - who in this part of the world even knows what that is? A few years ago I experienced a huge spontaneous street party in Helsinki: Finland had just beaten Russia in ice-hockey - Canadians would certainly understand, but who else? And then there is cricket, a buzzword that gets English, Indian and Australians simmering with excitement, while (almost) everyone else literally switches off. Spectator sports have become such an important part of life for people in modern societies, that they have indeed become an important part of popular culture.
This raises interesting suggestions for culture research: Can we proxy cultural affinities by the spectator sports that people watch? It is far more parsimonious than the over-engineered proxies we often use in management research, yet might be highly effective.
Starbucks: Measuring and Benchmarking Performance in an MNE
A short article in a Canadian newspaper got me thinking about the merits of multinationals reporting their performance in regional segments (i.e. separated for different regions of the world0. The article reported that Starbucks was changing its reporting practice from distinguishing 'domestic' (i.e. USA) and 'international' to reporting three segments 'North America', 'Asia Pacific' and 'Europe Middle East and Africa. Academics will be pleased with such more detailed data as it allows us to do some more rigorous analysis - a lot of research on international performance of big firms stands on thin data as companies don't publish what we would need for rigorous analysis. However, what are the implications for managing subsidiaries?
The article argued that this changed reporting practice would put pressure on Canadian Starbucks to increase its profit margins: Since they are now joined accounting-wise with the US, the Canadian would be under pressure to increase its profitability to the levels achieved in the USA. The more I thought about it, the less this statement made sense to me.
In the article, executives from Starbucks attribute their lower margins to higher costs of milk (raw material for 'Latte') and barristas (low/medium skilled human capital). In other words, marginal costs are higher. In addition, we should add, the customers willingness to pay (demand curve), which in turn depends on their preferences (and hence the brand reputation) and competition, the availability of alternative providers of coffee shops - and there are plenty of other chains in Canada, such as "Tim Hortons" which people here seem quite proud of. In other words, the profitability one can achieve in a market depends on the costs and market structure in that market - and you cannot really compare profitability (in terms of return over sales) across different markets.
If Starbucks was indeed maximizing its profitability in terms of return over sales, then it would probably shrink to operating in its most profitable market only - which obviously they are not doing. Rather, they are (presumably) trying to maximize total profits - which means operations abroad - such as Canada - are making a positive contribution as long as they generate more profits than the costs of capital.
If, hypothetically, Starbucks tried to increase its profitability in Canada, it would face several options. Firstly, it could raise prices, or close down some of its least profitable branches. With competitors all around, the main winners of such a strategy would be Tim Hortons, Blenz and other local coffee shops who would happily increase their market share. Secondly, it could take over a competitor to increase market share. This may be an option that consumers are unlikely to appreciate, and that may face obstacles from the competition authorities. Third, they could use their bargaining power to lower the costs of milk and or staff costs. Yet, this will limit their ability to attract quality inputs and people to work for them - apart from conflicts with labour laws. Either way, singular focus on profitability can seriously harm long-term market positions.
The bottom line is this: You need to be very careful when to use 'profitability' (as a ratio) or 'profits' (as an absolute value) as a performance criterion. As rules of thumb, for existing operations, when benchmarking against a direct competitor, profitability may be appropriate. When considering operations in an additional market, it is the absolute contribution to profits that matters.
DOWN: Blackberry, Nokia; UP: Apple, Samsung, HTC
The morning newspapers I have been reading while traveling in Canada, had one big business story throughout the week: the decline and uncertain future of Research in Motion (RIM), until recently the pride of Canadian technophiles. As a start-up company of the 1980s, RIM led innovation of mobile phone and its 'Blackberry' became the favorite toy of business folks in financial centres around the world. Yet, this week, the founders and co-CEOs resigned and handed over the leadership after months of losing the buzz of a leading technology brand, and market share, and consequently losing three quarters of its share value.
The story reminds me of the competition between Nokia and Eriksson in the 1990s. Nokia was first to realize that phones were becoming fashion items, while Ericsson focused on technology. Eventually, Ericsson formed a JV with Sony to create a joint brand ... but I have not seen a phone of either brand for quite a while.
Now the next generation of technology has pushed past Nokia and RIM. Apple's iPhone and iPad have become not only the most fashionable brand in the sector, but have created an entirely new way of using phones - as a platform for a wide range of applications few inventors even thought about a few years ago. They have been joined by Android phones based on a open software created by Google, with handsets provided by Samsung, HTC and others. The buzz among technophiles has moved on - the places where the best software engineers go to work are no longer Nokia or RIM, but Google, Apple, and (in Asia) HTC and Samsung.
The shift is evident in the ranking of the most valuable brands published by www.interbrand.com. From 2009 to 2011, Apple has been rising from 20th to 8th, Samsung from 19th to 17th, while HTC as the first ever brand from Greater China joined the list at rank 98. At the same time Nokia dropped from 5th to 14th. Blackberry has been rising from 73rd in 2008 to 54th in 2010, but dropped two places in 2011. Yet, technological hick-ups and slacking sales suggest they probably had fallen further by the end of the year.
The competition has shifted every few years. Initially, it was about building technology making phone smaller, then about fashion brands, and now it is about standards. It is no longer individual brands competing, but different systems and their software platforms. The more and better the applications running on a standards, the better the business for everyone operating on that standard. Apple has its own standard, and controls it firmly. Android is a shared standard backed by Google. Nokia joined forces with Microsoft to develop a Window's based standard. RIM still believes in its own blackberry software, even though the release of the latest version had to be postponed.
When competition turns into 'standard wars', usually only one or two survive. It just not practicable for all developers of 'apps' to develop four different versions. If RIM wants to persist with its Blackberry software, it will need a miracle by RIM's new leadership to play in the same league as Apple and Google. And in the lower league, there is not much money to be made.
Economists usually get their forecasts wrong, and journalists are even further off the mark. Many economists predict a serious recession in 2012, and journalists, especially the British press, expect an Armageddon. So, is that actually good news because it won't happen? I actually think so.
The world economy is volatile. It always is. Emerging economies have known that for a long time having frequently experienced financial crisis (e.g. Asia 1997), health scares (SARS, bird flu etc) and natural disasters (earthquakes, monsoon, tsunamis). Consequently, business have realize that flexibility and adaptability are essential to prosper under such circumstances, and they developed their capabilities accordingly.
In contrast Western Europe has seen three decades of relative stability, even the unification in 1990 did little to disrupt business; it rather offered easy opportunities to extend business. However, the financial and housing market crisis of 2007 - along with the Icelandic volcano and some minor health scares made clear to business leaders that Europe is not living on an island of stability. Hence, many businesses in the real economy (i.e. outside the financial sector) rediscovered the importance of flexibility and adaptability, and developed their capabilities accordingly. As 2011 drew to a close. consumers defy scaremongering in the media and keep consumer spending high, while manufacturing enterprises across Northern Europe (not just Germany!) report full order books (references below). Businesses - and to some extent consumers - have learned to live with higher uncertainty.
Meanwhile, we have over the past decade learned about the power of self-reinforcing bubbles in financial markets, and in some other markets like real estate. One excessively large forecasts chases another, people make investment decisions based on the forecasts, until they have collectively created a lot of overcapacity. Hence, the positive trend is accelerated until the bubble burst. Likewise, negative bubbles reinforce themselves - notably the activities of short-sellers. But the financial markets can't go against the real economy for ever. So, the short-selling bubble will burst eventually.
Hence, the global economy in 2012 faces a lot of uncertainty. However, businesses in many countries are much better prepared to handle such uncertainty than the popular press would make you believe! Welcome to 2012, a year of fresh opportunities!
Note: C-numbers relate to chapters in: M.W. Peng & K.E. Meyer, 2011 International Business, London: Cengage.
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