Today’s Top Stories
- London Attacker, Born in U.K., Had Criminal Convictions, Was Probed for Extremism (WSJ.com: World News)
- Pro-settlement hardliner Friedman confirmed as US envoy to Israel (BBC News - Home)
- Investing In Soccer (Forbes - Business)
- Eurovision: Russia rejects offer for Julia Samoilova to perform 'via satellite' (BBC News - Home)
- Mexico may 'step away from NAFTA' if deal isn't good (Business and financial news - CNNMoney.com)
- London Attacks Highlight Balancing Act for Big Cities (WSJ.com: World News)
- New GOP bill costs more, but doesn't cover more (Business and financial news - CNNMoney.com)
- MarketWatch First Take: Micron profits from memory price spike, expects party to continue (MarketWatch.com - Top Stories)
- Rolling Back EPA's Clean Car Standards Is Bad For America. Here's Why. (Forbes - Business)
- Republicans delay health vote as rebels defy Trump (Europe homepage)
- Republicans delay health vote as rebels defy Trump (UK Homepage)
Other Blog Headlines
- 5 Filters of the Mass Media Machine (The Big Picture)
- The Natural Rate of Interest: Estimates for the Euro Area (Economist's View)
- A few Comments on February New Home Sales (Calculated Risk)
Category Archives: Corporate Strategy
A recent article in the Economist highlighted the struggles of developed-country multinationals in emerging markets (see Emerge, Splurge, Purge). Multinationals struggling in emerging markets is nothing new. The surprising part to me is that we still haven’t learned our lesson from years of mistakes. Every wave of emerging market investment seems to be justified by some variant of the “this time will be different” meme—i.e., the opportunities are limitless and the risks are diminished. We’ve witnessed this type of behavior in the investment run up before the 1997-98 Asian financial crisis; the irrational exuberance leading up to the 2007-08 global financial crisis; and now, in the period of central bank easy money and yield chasing in the wake of the global financial crisis. But now, every time the Fed utters the word “taper”, markets in the emerging world wobble and multinationals suddenly discover that profitability in emerging markets has failed to live up to expectations. According to the Economist:
The decline has been broad-based. Current laggards include some of the world’s largest, and best known, companies. For example, Proctor & Gamble’s global margins are half of its U.S. margins, and its performance in emerging markets is especially weak. Not only that, but Western multinationals have struggled in the previously high-flying BRIC economies—China, India, and Brazil, in particular. The root of the problem:
One comment here: Growth is not the same thing as profitability. And managers often conflate the two. But beyond the obvious pursuit of growth, expressions of managerial hubris, and increased market volatility, multinational managers often make poor decisions about the underlying risks they will take on in emerging markets. Globalizing companies tend to systematically overestimate the benefits of entering emerging markets while underestimating the costs. This is because developed country multinationals bear heightened political, economic, regulatory, and cultural risk in emerging economies. And those risks are not adequately priced. As I’ve written before (see So You Want to Do Business In a Developing Country? or U.S. Banks Pin Hopes on Emerging Markets):
The takeaway here is that ventures into emerging markets should be considered with appropriate risk pricing tools. Judging by the recurring bouts of poor multinational performance in emerging markets, we haven’t quite reached that goal. But maybe, just maybe, next time will be different.
More on this topic (What's this?)
SunEdison goes on a wind energy acquisition overdrive as it looks to set up an emerging market yi... (Green World Investor, 7/13/15)
FTTx goldmine in emerging markets hindered by regulators, incumbents (Telecom Ramblings, 6/10/15)
Emerging Market Bonds (The DIV-Net, 5/27/15)
Google recently announced the sale of Motorola Mobility to Lenovo for $2.91 billion. It acquired Motorola only two years ago for $12.5 billion (see After Big Bet, Google Is to Sell Motorola Unit). Many have interpreted this move as an admission of failure in the hardware space. According to the New York Times:
Some analysts even went so far as to describe the decision to buy Motorola as “the extravagance of being a company with over $350 billion in market cap” and the sale as “slipping the millstone off your [Google’s] neck.”
Maybe that’s partially right. But it’s not the whole story. And the New York Times provided an excellent analysis demonstrating how Google didn’t quite lose as much money as the headline numbers might suggest (see Did Google Really Lose?).
But even if we concede that the sale was not as bad as headlines suggest, there’s still much more strategy involved in the sale.
First, you have to understand the deal in the context of the competitive marketplace for Android devices - that is, with Samsung in mind. Don’t forget, Samsung is, by far, the largest manufacturer of Android devices. It dominates the market, with upwards of 65% market share. It is the 800-pound gorilla of Android hardware, and it can therefore exert a lot of power over Google.
It is in Google’s best interest to have as many makers of Android devices as possible. This reduces the power of any one manufacturer individually, and increases Google’s power vis-à-vis those manufacturers. In fact, one of the reasons (among others) that Google acquired Motorola was to have a captive manufacturer of Android devices, reducing Google’s dependence on Samsung, and any threat to Google posed by Samsung. For example, if, in the extreme, Samsung decided to stop manufacturing Android devices, Google still had a viable manufacturing partner in Motorola.
With that as background, we come to the interesting part of this sale.
Google is selling Motorola Mobility to Lenovo, bolstering a manufacturer of Android devices, especially in the U.S. market (where Motorola is strong and Lenovo weak). In addition, Google has retained all of the relevant intellectual property (patents) owned by Motorola Mobility, not only assuring some licensing income, but also preserving the right to reenter the hardware market at a later date should the need arise. That is, should something happen with one of the current Android manufacturers (e.g., Samsung, HTC, LG, Lenovo), Google has the know-how to reenter the handset game.
So overall, you can’t take this sale simply at face value. It may, at first glance, seem like a huge loss for Google. But there is more to it than a wholesale admission of failure. If you dig a little deeper, it looks like a pretty sound strategic maneuver. Now if only I could say the same for the Nest acquisition…
The world recently lost a truly beautiful economic mind. I, along with many others, have been reflecting on Ronald Coase’s passing over the past several weeks, and I was truly saddened to read the news. His 1937 classic “Nature of the Firm” had a profound impact on my intellectual development and growth.
Coase is perhaps best known for “Coase’s Theorem,” which addresses economic efficiencies in the face of externalities. Coase argued that in a world without transaction costs, markets can efficiently allocate costs associated with externalities. Indeed, the system of “Cap and Trade” can be viewed as an attempt at Coasian bargaining by creating a market for externalities.
Though Coase’s Theorem has been influential in the realm of both economics and public policy, his contributions extend well beyond those domains. His work has been central to Business Strategy, and in particular, Corporate Strategy. What many often forget is that Coase was the intellectual founder of the field of Transaction Cost Economics. And as I explained in a blog post lauding Oliver Williamson as the Nobel recipient in Economics (see Oliver Williamson, Nobel Honoree):
Transaction Cost Economics is a central theory in the field of Strategy. It addresses questions about why firms exist in the first place (i.e., to minimize transaction costs), how firms define their boundaries, and how they ought to govern operations.
In Transaction Cost Economics, the starting point is the individual transaction (the synapse between the buyer and the seller). The question then becomes: Why are some transactions performed within firms rather than in the market, as the neoclassical view prescribes. The answer, not surprisingly, is because markets break down.
Coase recognized that there were costs to using the market mechanism (transactions costs) that resulted in market failure.
For these reasons [because of transactions costs] it is often more advantageous to structure transactions within firms. And this is why firms are not just ubiquitous in our society, but also worthy of study in their own right. This contrasts with the typical view of firms in neoclassical economic theory as, at worst, a market aberration that ought not exist, and at best, a black box production function.
Today, transaction costs economics is often used to explain corporate scope, and is widely applied to the study of growth and diversification – whether via organic growth, alliance, or acquisition.
All things considered, as a Strategy scholar, I feel truly fortunate to be able to stand on the shoulders of intellectual giants such as Coase.