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We're talking with Donald Sull about his new book Made In China: What Western Managers Can Learn From Trailblazing Chinese Entrepreneurs. Before we get into a discussion of the book, let's have a quick overview of your background.
DS: I did my bachelor's degree, my master's, and my doctorate at Harvard. Before returning to academia, I worked as a consultant with McKinsey and with an international private equity investment firm called Clayton, Dubilier & Rice. Since then I've been on staff with the London Business School and Harvard. I kind of bounce back and forth between the two places.
So what got you so interested in studying these Chinese companies?
DS: I had just finished researching and writing a book on Brazil, looking at how companies succeed in unpredictable markets—which Brazil is. I had a lot of fun with that and learned a lot. So I was looking for another emerging market to somehow test the robustness of the findings from Brazil and also to broaden the scope of the study. So that's what led me to China. It wasn't a replication of the Brazil study, but it was looking at the same question of how companies succeed in unpredictable markets in a different domain.
And did you find the results to be similar between Brazil and China?
DS: Yes, pretty much. Actually, it's probably helpful to step back and give you some context about the overall research project. What I've been doing for the past six years is studying this question of looking for the principles of effective management in unpredictable markets. The way I designed this study was to look at two industries characterized by high levels of unpredictability—specifically, enterprise software and the global aerospace industry—then two countries, Brazil and China.
It was a paired research design, where there were pairs of companies quite similar to one another, say, 10 years ago or at the beginning of the study period, but where one was demonstrably more successful in the unpredictable market. The idea was to then dig deeply into the companies and try to understand what accounted for the differences. The hope was to build cumulatively across these four domains (two industries, two countries) and across what ended up being two dozen or so pairs of companies to identify robust principles for managing in unpredictable markets.
The rationale for that research design was that a lot of the research that's been done on managing in unpredictable markets has really been about managing in information technology markets in the U.S. in the span of about 20 years. I think some of the findings of that stream of research are quite robust, but some of them are quite idiosyncratic, such as focusing on network effects and rhythmic pacing that's linked to evolution of semi-conductor generations. So I was looking to see if there were principles that were robust enough to cut across the different domains. And the punch line was that there were principles and techniques that were remarkably similar across the domains.
But on the one hand, if we compare western economies to the Chinese economy, we might say that the western economies have been entrepreneurial for a much longer time than the Chinese. So the Chinese would have been studying the American companies or European companies. I mean, coming out of the cultural revolution, it's like they were starting from scratch.
DS: Exactly. That was the greatest thing that could have happened. That's one of the things that's surprising about that book, about that stream of research, is that because they were starting from scratch, they tackled some of the challenges of their market quite naively. They were not burdened with the legacy of western business school training and western experience and, therefore, came up with their own solutions.
Right. They had a collective beginner's mind regarding entrepreneurialism.
DS: Yes. On the one hand, I think that they converged on principles that would not be surprising to anyone who spent time with Silicon Valley venture capitalists. But in other cases they came up with their own way of doing things that was very different.
You just said that maybe someone who has been living in Silicon Valley won't be surprised by these results. So who is your book for? Who is your audience?
DS: First of all, I'm not sure there's nothing in there that will surprise Silicon Valley folks, having passed it by a fair number of venture capitalists and entrepreneurs who found interesting information in there. That being said, I think the book is basically for managers who are interested in understanding how to manage in unpredictable markets in general. Although the examples are Chinese, my argument is that many of the principles can be applied in other markets. And, of course, the book is for people who are specifically interested in the Chinese cases.
I want to ask two questions here. One is can you talk a little about one of these principles? I think you have eight in the book. You pair up eight companies that won and eight companies that lost, in effect, in each of the chapters. But before I get to that, I just want to circle back to that Silicon Valley thing—or maybe this answers the same question—when you showed this book to the Silicon Valley people, what were they most interested in, or what surprised them the most?
DS: For people who have cut their teeth in entrepreneurship in the U.S., I think one interesting thing was the need to understand the role of the macroeconomic and government variables in creating opportunities and threats in entrepreneurial ventures. For companies involved in medical devices, for instance, that would be common in U.S. startups, but otherwise folks don't think so much about the role of regulation or local government support for industries and so forth in driving opportunities and threats. I think that was part of it.
It's tough to disentangle, because there are two things going on in that book simultaneously. One is the set of principles, and the other is the Chinese setting.
In terms of the principles, I think the primary thing that very sophisticated venture capitalists would find interesting concerns the timing. One of the arguments I make in the book is that opportunities for significant value creation, or conversely threats to existing value creation, are not uniformly distributed in time. In unpredictable markets there are lots of little opportunities, periodic middle opportunities, and rare golden opportunities where the confluence of external factors, regulation, capital market access, competition, technology, and so forth coincide in such a way to create an occasion where a large amount of value can be created in a short period of time.
Is that exemplified by that story about the Haier Group—if I have my stories right here—where the CEO, Ruimin Zhang, saw an opportunity to buy a big hunk of land to set up an industrial park as he was trying to expand the business. Chairman Deng was traveling to the area—I think this was in '92—and Zhang realized that the visit from Chairman Deng was going to free up a lot of capital, so he secured a loan immediately. Zhang also understood from China's history that this period of available capital might not last long.
DS: Yes. That is an example. Actually, I think in the book what I used was Sina, (www.sina.com) the network technologies company. Basically, this was one of the really robust findings. So in all of these cases across the different industries in both China and Brazil, these golden opportunities were relatively rare, even in very unpredictable markets. Conversely, for existing businesses, confluences of negative factors that could put the business out of its misery pretty quickly were also unevenly distributed in time.
The implication is that even in extremely unpredictable markets, like the internet in China, or aerospace in Brazil, or appliances in China, there are relatively long periods of calm between storms, good or bad storms. It was quite interesting that the attention tends to focus on what companies do when these golden opportunities present themselves or when the sudden death threats loom on the horizon, when in fact it was the activities during these periods of active waiting that were quite decisive.
So even in the lull between the storms of whatever nature, you had to, in effect, imagine that it was still chaotic.
DS: Yes. That for sure, but more than that, you knew there would be golden opportunities, right? You didn't know their specific timing, or form, or magnitude, but you knew they would come, just as you knew it was quite likely there would be these sudden death threats, although you didn't know their form, magnitude or timing either. So then the question becomes what actions can you take during these lulls between the storms, these periods of active waiting that position you for opportunities and threats that you can neither forecast nor control. And there was a set of activities around having a fuzzy vision and clear priorities, for instance.
Let's get back to the eight principles in the book. Do you have a favorite, or is there one that you think is primary in relation to the others?
DS: Is there a first among equals? I think active waiting is the most important, but the truth of the matter is, this book is really part of an ongoing research program where things are becoming clearer with each iteration. My current frontrunner is this notion of active waiting, that what's decisive is what you do during these lulls between the storms.
So what about companies—do you have a favorite among the ones that you studied?
DS: They were all very interesting. Favorite is a hard category—like the Academy Awards, but I can break it up a little bit more so it's easier to answer. In terms of entrepreneurs I'm most rooting for, it would have to be the Wahaha guy, Zong, who is just a terrific character, and had this amazing history of having been banished to a salt mine.
What's his company?
DS: Wahaha. (en.wahaha.com.cn) It's the leading beverage producer in China. He'd be the one I'm rooting most for. For the company that I think is the most interesting unknown story, I'd say Galanz, (www.galanz.com) which is the largest microwave oven maker in the world. Most of these stories are relatively unknown in the West, but this story isn't even well known in China. Galanz has quite an interesting strategy where they've taken equipment from branded appliance makers around the world, transferred the production equipment physically to China, and manufactured for those companies for sale under their own brands in China. It's quite an interesting, counter-intuitive strategy that is working very well to date. Nobody knows about it. But I think it's a different model than, say, Haier (www.haier.com) or Lenovo (www.lenovo.com) or Samsung (www.samsung.com), for that matter. We're pretty familiar with the model of these Asian companies that start with low cost production and then try to build a global brand.
Lenovo, actually, that's the one name that we all would have heard regularly in regard to IBM and buying their computer making capacity, right?
How are they doing at the moment?
DS: Fine. We'll see how it goes. Here's my read on the Lenovo thing. The Chinese government has a ministry that deals with very large companies, and that ministry is dead keen on having X number of Chinese companies be in the global Fortune 500 within 10 years or something. So they're putting a lot of pressure on companies like Lenovo to take actions that will allow them to dramatically increase their global revenues. That might work out okay.
But there again, that goes against that entrepreneurial side where people are sorting things out on their own, free of government intervention, and now you're suggesting that maybe government intervention will push them in directions they might not normally have gone?
DS: Well, it may actually push them to do things they might want to do, but it also pushes them to do things when they should be actively waiting. That's my big concern. The thing about IBM, for instance, is that there are some interesting assets there, and it could be that by shifting production equipment and manufacturing over to China that business could be okay. But I'm not sure this was the right time to buy it. I think it they had waited a little longer, they might have gotten a better deal. So this push to hit the global Fortune 500 or 100, or whatever it is, I think it's forcing companies to do the right thing at the wrong time. So it makes me a little nervous.
But then from the point of view of western managers, aren't they also sitting here thinking, "Oh, my God, we're just going to be totally overwhelmed by sort of the capacity that China represents"?
DS: Yes. But every 10 years, U.S. managers come up with a boogieman that strikes terror into the hearts of all responsible managers. So now it's China; in the '90s it was the dot.com; in the '80s it was Japan, Inc; in the '70s it was OPEC; in the '60s it was the Soviet Union; in the '50s it was U.S. Steel. Let's look at that list. The dot.coms, yes, they have been important, but nothing like folks were afraid of. Japan has been a flatliner for a decade. OPEC is back, okay, fair enough. The Soviet Union has dissolved, and U.S. Steel is effectively bankrupt.
I think people get into this sort of panic mode and stop thinking sensibly when these boogiemen are invoked; and China is the current boogieman. It is the case, sure, that there are roughly 600 million people currently living on farms, and that over the next 20 or 30 years many of them are going to be on the move.
Right. We're going to see in China what happened in the U.S., sort of post World War II, right?
DS: Yes, we're going to see that. It's going to put downward pressure on manufacturing costs. But I don't know what that means for businesses. I don't think any of us knows what it means for businesses yet. But I'm not at all convinced that it's some massive disaster.
Right. I mean, that thing about China, it isn't necessarily a negative. It's also this huge, walloping, unbelievable opportunity, right?
DS: Absolutely. That's right. It cuts both ways.
So I think a book like yours, where you start to reveal some of the management principles in effect there, can only help people to then work with these Chinese companies, right?
DS: Yes. From the perspective of western managers who are interested in China, I think there are several helpful points in the book. First is what I call recon pull versus headquarters push. That's the notion that in any rapidly changing environment—and China is an example of that—there are multiple variables that are influencing the opportunity set and the threats facing a business. And they're changing rapidly, so you have to delegate more decision making to the folks who are on the ground—more so than you might in a more stable environment.
So I think that's something that people have to think about. If you're a large multinational, and there's a certain speed with which you make decisions in most of the countries where you compete, and there's a certain level of decisions that you allow folks in the country to make versus those that you make at headquarters, that balance may shift based on the speed of change or the level of unpredictability in a market.
I think the second thing that's important for the managers who are thinking about China would be the examples of partnerships that worked or didn't work. In fact, there's one chapter that talks about managing these relationships. Some of the best opportunities are to find great partners in China. So Wahaha has been a gold mine for Danone (www.danone.com), who owns a 51 percent stake in several joint ventures to market, bottle, and distribute purified water in China. That's been terrific for Danone. Other companies have kind of crashed and burned conspicuously by not doing that. So I think that a second thing that's important for managers who are looking to do well in China is to think about the kinds of relationships that are going to work and those that won't.