Yves Doz is Professor of Strategic Management and the Timken Chaired Professor of Global Technology and Innovation at INSEAD, and Visiting Professor at the Helsinki School of Economics. He was Dean of Executive Education (1998-2002) and Associate Dean for Research and Development (1990-1995) at INSEAD. He has also taught at the Harvard Business School, Stanford’s Graduate School of Business, Seoul National University, and Aoyama Gakuin University in Tokyo.
Ivey Business Journal: What is the right strategy for a company to succeed in the current environment of globalization?
Yves Doz: It’s got to make itself more resilient and more agile. Resiliency means relying more on outsourcing and off-shoring, making its new ventures less capital intensive, and building reserves of cash. That’s where the resiliency is. Agility means being more opportunistic, and by being able to read the resources you are able to squeeze out, basically redeploying resources and trying to be more agile in pursuing certain markets. Two examples come to mind — both of them are French — just because I’ve studied them. One is Schneider Electric, which has been able to pursue what I’ve just described. When I met the CEO, he was about to retire. I asked him what the most significant accomplishment in his career was. He said it was getting the Chinese to adopt European standards for electrical systems and electrical distribution. Another company which has been equally successful in many ways is L’Oreal, which has also been able to manage more actively the resources they currently have and to redeploy them in Asia as well. So I think it’s this agility which is going to make the difference between the companies which successfully adjust and the companies which don’t. And it’s also the ability to reduce the amount of cash they need to do something, reducing not the operating costs but the strategic costs.
IBJ: What do you mean by strategic costs?
YD: I mean the cost of major investments, the cost of building markets, not the day-to-day efficiency of the plants. It goes back to the late C.K. Prahalad. He used to speak of strategy as being stretch and leverage. That advice is more apt today than it ever was, that the successful companies are able to stretch their resources by being able to use less capital and are leveraging whatever they can save to be able to make strategic moves, rather than being paralyzed by a lack of resources.
IBJ: How has the current environment change the rules for multinationals?
YD: There is more specialization across layers of value added, so you find that companies are less integrated than they used to be, and that actually also means that the various layers can be run quite differently. It makes it easier for newcomers to penetrate certain layers. So, if you look at Chinese companies, that’s very much what they’ve done in lots of industries, whether it’s composite materials, chemicals, or semiconductors or electronics and so on. In some ways, the traditional multinational companies are responding in a way which makes sense. There is an individual motive and a collective outcome issue there. The individual motive is kind of saying that, “If I can specialize in layers where I add the most value and outsource and subcontract the rest, then essentially I’m going to be in an advantageous position.” The collective consequence of established companies taking that position is just that it becomes easier for new competitors to come in. So there’s an interesting dynamic there because what happens when the new competitors start to build their own brands, they start to compete with the brand companies or the OEM companies, like you see the Chinese very much doing today. So I think that’s one move. And in a funny way it’s a move that is very effective if one company does it, and probably very detrimental if everyone does it.
I think the other move is that there are more and more companies that are de-locating their core activities, as in moving them offshore, and not for cost saving reasons, but to find skills and capabilities, and to enjoy the symbolic value of becoming a truly multinational company. So it’s interesting…All of Cisco’s service operations, which is like 7,000 or 10,000 people and several billion dollars, is now run out of Bangalore, India and they call it Headquarter East. I just heard that Siemens has been moving major pieces of its headquarters to Shanghai, I believe. So what you find is that companies are not only externalizing some activities, but that they are also moving core activities, not just manufacturing or even engineering labs, to new parts of the world.
And I think the third thing I would mention is that these companies resemble more and more project organizations. I think that the idea that there is a permanent structure of national subsidiaries, regional headquarters and so on is not necessarily passé, but it is being challenged. I think the thought process is, “Do we really need all that kind of hierarchy or can we create a different way to run the company more as a series of specific projects?”
IBJ: Chinese companies are moving up the value chain and setting up sales and marketing organizations in United States. What are you observations on how Chinese companies are competing?
YD: I sense that they are to some extent replaying the scenario that Korean companies played 20 years ago and that Japanese companies played 30 years ago, which is that they’re creating new market segments. For example, Haier started in the West mostly by selling wine coolers and wine. Then they created new product categories and broadened the product range. Generally, they relied on major distributors, the same thing as the Japanese in the 1970s and 1980s. I think the Chinese are trying to achieve quality and they are by and large succeeding in achieving quality. I think the brands, except for Lenovo or ThinkPad and Haier, still have a long way to go, which is also why they are buying brand companies. I think the deal was just formalized last year…it’s an interesting one…a Chinese car company bought Volvo. What they are buying in Volvo is perhaps a bit of design and engineering skills and so on, but they are mostly buying a very respectable brand, which is a worldwide brand. Volvo is one of the few companies that is a worldwide company or worldwide brand.
With Lenovo, it’s interesting that it kept the ThinkPad brand but decided take the IBM logo off the computers it was making. So I think they are moving very intensely now in brand building or brand buying which is all that is required to succeed. The Japanese used to do this, which is to say not go for small segments. They said, “Let’s basically go for half of the market, and let’s try to find what are simple customer characteristics, or customer preference characteristics, which will minimize the requirements for market understanding and differentiations, so that we can just go right into markets, with products that are not going to be very exciting products, but that are not going to require a lot of adaptation, nor a lot of understanding.”
IBJ: Any other examples come to mind?
YD: Again, Lenovo and ThinkPad is a good example of brand buying and then brand building. I think Haier is a good example also. To me these are the most interesting, the companies that have gone the furthest. What’s interesting is that there’s a whole bunch of companies behind them which are also following in the same track. And the Koreans are now very worried. I do a fair amount of work in Korea and they are very worried because they are saying that, “We are now being squeezed because we never had the brand image of a Sony nor did we ever have the industrial efficiency of some of the Chinese companies.” They think that they are basically being squeezed between the Chinese and the Japanese. There’s a lot of worrying at Samsung. Every major Korean company that has been in touch with me the past couple of years is very worried.
IBJ: What’s the main reason for Korea’s industrial success?
YD: Hard work! I’m half kidding, but they work very hard and they are very dedicated and they do their homework very well. It’s a country where, perhaps because of the Korean war and the fact that most of these companies are family controlled or family influenced, the corporate leaders are old and still remember the time of rebuilding the country. They have this kind of extreme work discipline and extreme concern for work organization. Interestingly enough, they also have strong unions, so they have to negotiate and implement things with unions, and that actually creates some reasonably novel work practices. So the internal organizations of these companies have been very successful in terms of mass production, for some years, although no longer so much today. They enjoy a relatively strong cost advantage, just because the labour costs are still relatively low.
IBJ: I think their product design is also very good.
YD: That’s true, but so far they have been largely in an imitative mode. So they basically picked up Sony or Sharp on one side and Mercedes and BMW and Honda on another side and they said how can we do better than these? But they were still very inspired by existing products and existing brands. I think the challenge for them is to move beyond dealing only with these imitative strategies. A good example is a company called SK, which is a diversified group that has a branch called SK Telecom. They are trying to move into system solutions, but they are trying to move into it in a different way, to think about applications. They did a lot of pioneering work on broadband deployment. The fact that there was a national plan in Korea to deploy broadband very quickly has opened all kinds of avenues for more interesting electronic products and electronic systems. If you look at Samsung…I was doing some work with the Samsung advanced site, information technology lab or industrial technology lab, and they are very concerned about how to develop system integration and system management and big project management… moving away from product design to system design and solution design. Other companies are following in the same path. The most interesting point is that Cisco, which is trying to do very complex design of information technology, is working in Saudi Arabia and Abu Dhabi. Who do they face as competitors but the Koreans. And the Koreans were able to beat the French on nuclear engineering in Abu Dhabi.
IBJ: That’s quite an accomplishment for the Koreans.
YD: It is. The French would tell you that they have lower construction costs, which is true, but what I’m trying to say is that Abu Dhabi, which is a very picky place, basically goes for the best. The fact that they would pick a Korean consortium to build the next generation of nuclear reactors rather than a French consortium tells you a lot about the level of achievement of the Koreans. The Koreans are also doing high speed trains, again beating the French. So it’s an amazing success, a turning point around this system engineering capability, and as I was saying earlier, they need absolutely to be able to do this because on the purely industrial product basis — they are doing okay in cars and they are doing fine in lots of other businesses — but their future is not so rosy as their past because of this squeezing effect between the Chinese competition on one side and the fact that they are not quite really able to dislodge the Japanese brands on the other.
IBJ: American influence in business is declining. Can it be reversed?
YD: I don’t really know. Take Apple. It’s true that the design is done in California and some of the engineering and so on, but I think that there is a deep-rooted problem there which is — and the same is true for Europe — can rich and relatively large countries survive on the basis of advanced engineering and advanced technology? And frankly I don’t know the answer. If you asked me about Finland – where I have done some work — I’m not sure they can pull it off, but if they say we want to be a niche leader in aging and wellness and the integration of technology with social welfare services, and because we are a very rapidly aging population dispersed over relatively wide and [hostile] territory and we are nicely positioned to be a living lab for old age people, well I would say that you can play that game if you are a five-million-people country like Finland. It’s not clear to me what the U.S. or for that matter France or Germany can do about this, because you are dealing with very big populations and the average level of education. What worries me the most is that the average level of education in the U.S. is not going up the way it used to. So, there may be a growing gap between a small university elite and a large number of people who don’t really have the skills to move into these higher paying, more creative jobs. I think the West has a major problem in terms of future employability of people.
IBJ: We’re all hoping that many more jobs will be available and reduce unemployment. What sort of economy – assuming that there must be some re-structuring — can provide those jobs?
YD: You’ve got two core issues. One is most dramatic in France, perhaps more than in the United States. In France, unemployment among the young is very high and people start to work relatively late or they work through these short contracts, little jobs, and so on. Then there is also this tendency, which we need for retirement benefit purposes, this tendency to push the edge or extend the age of retirement. The French are now discussing from age 62, they’d like it to be 65 within a few years, so in a way there is a benefit to the old and there is a cost to the young. I don’t know how to manage that, and that might become a big societal issue. It’s already becoming so because when you get into these new towns where the unemployment among the young people is high, you create all kinds of social violence and disruption very quickly. And I don’t know how to overcome that. There is going to be a growing gap. The whole world is going to look like Silicon Valley, there will be a growing gap between the rich and relatively few and then a fairly large number of people. You can only have so many gardeners and hairdressers and whatever. It’s a real deep civilization problem.
IBJ: It’s very visible in the U.S. today where so many people are working in minimum-wage jobs and the quality of education is declining.
YD: It’s the same in France and in Europe. It’s becoming unaffordable. France is the country in the world where people get into the workforce the latest and get into retirement the earliest. On the other hand, if you look at productivity, France is at top of the world or just about. So it’s an interesting phenomenon, where a few very highly productive people can still manage to make cars and resist the Japanese and the Chinese, as we were discussing earlier. But that will not sustain the country because the industrial base is becoming too narrow. The point you were making about education is well-taken, which is that the quality of education is coming down, so that you will find people will become permanently unemployable.
IBJ: You’ve done an awful lot of work on innovation. What do you see as the main themes in the discipline?
YD: The companies that do the best with innovation are companies that are able to create very specific alliances and have a very thoughtful way of thinking about these alliances. To take one example, it’s interesting that IBM has been able to compete against Intel in semiconductors by building a very thoughtful alliance with various partners. They have managed these collaborations in a very thoughtful way. If you ask me what the differentiator is, I think more and more it’s the skill and ability to manage complex alliances. The companies that are going to innovate most successfully are companies that are able to develop core technologies and build those core technologies together, and are also able to form more downstream more strategic partnerships, and are able to aim at specific applications and to do all of this collaboratively. Companies that find the right balance between being “too open” and having this kind of old traditional model of innovation, carried out very secretly and privately in our labs, are doing well.
IBJ: Do clusters facilitate innovation?
YD: I like the word hub more than clusters because in a sense, if you start to think about the global network of clusters, each of the clusters becomes a hub. Think of Singapore, for example, which has been able to build a hub around life sciences, from the bottom up, starting with clinical research trials, moving into process technology for blood companies and now moving into innovation. I think that has worked, so I think the regional clusters in national city-states still play a key role. If anything, it will be stronger because what you find now is that the mindset of entrepreneurial leaders is much more global than it used to be, so people have seen some of these beginner entrepreneurs really go and ask themselves where they can cherry-pick the best possible and best available technology. These are going to be more and more important, especially how those clusters are formed. People will regroup with the more successful clusters and may divest or leave behind the less successful ones. There are also strong public policy implications because it means that, again at the level of Finland or at the level of the [Boston] area, back to what we were discussing earlier, a transition to knowledge jobs and high level of employment. This can be achieved at the regional level but you cannot have a country which is made up of a few pockets of very high-tech kind of stuff while the rest of the country is essentially miserable. Or where the unemployed live on subsidies from the most successful areas.
IBJ: What is in the national DNA that makes a small country, like Finland, so enterprising?
YD: I have a pet theory there which hasn’t been seriously researched, but I find that small countries that have faced larger enemies historically develop more of an entrepreneurship sense, more of a sense of we need to make it on our own. That would apply to Finland. It obviously applied to Israel, it might apply to some extent to Ireland against the Brits, it certainly does apply to Singapore. Singapore moved away from the Malay Federation after a few years of cohabitation with Malaysia. And I think there is this tendency to want to be self-sufficient. There is also a piece of it which is frankly, to some extent, being lucky or being thoughtful at the right time. If you look at the history of Nokia and mobile phones, it’s not a history of grand strategizing and grand planning and saying we’ll lead the world. It’s a series of steps that were taken one at a time in very sensible ways, but in relatively unplanned ways. So it was being more opportunistic than strategic. If I look at the few successful Israeli companies that have become global leaders, like Teva in generic pharmaceuticals, they did not start with the view of being a global leader. So I think there’s a certain form of entrepreneurial opportunism, of finding of opportunities and just jumping in.
IBJ: There must also be something that enables the opportunity …
YD: It’s also having been poor. A country that is making its way out of poverty, or has already made it, does not want to be poor again.
IBJ: Thank you very much for your time.
YD: You are welcome.