Location Matters, Leaders not that Much

In their 1982 book In Search for Excellence Tomas J. Peters and Robert H. Waterman showed us what differentiates successful companies from the rest. Their analysis was compelling because it could be used by companies and executives to foster eight skills that make companies grow faster and more profitable. These eight characteristics of winning firms include quick decision making, closeness to customers, entrepreneurship, employee satisfaction, and a lean and simple organization.

Business schools give a lot of attention to these leadership skills that guarantee impact: impact on performance, impact on team effectiveness, impact on the firm’s attractiveness for talent. An assumption that underpins our approach is that all these are under the control of the firm. That is why we devote so many sessions to teach entrepreneurship, to show executives how to be more agile and to be customer centric.

However very often these drivers of success depend enormously on the external environment and the institutional context. For example, fast execution must take into account that companies interact with regulators, non-governmental organizations, the media, customers and suppliers. And these relationships are shaped by national culture and the political system.

Let me provide some examples. I would be tempted to recommend IKEA to set up a store in Brazil, because there is none. The country has a large, middle- and low-class urban population, the demand for furniture has been increasing as disposable income increases, and the existing retailers are scattered and inefficient. However, Brazil lacks a key ingredient to make IKEA successful: roads. Their business model is based on customers going by themselves to the distribution center. In the absence of a good road infrastructure, the business will fail. That is why there is no IKEA in Brazil (and only one in India, by the way).

Innovation may be partly driven by the individual vision and skills, but it is more often shaped by institutional conditions. WeWork became one of the most valuable start-ups in the world as its founder, Israel-born Adam Neumann, was trying to satisfy the needs of other small start-ups for space. Israel, once referred to as “the land of milk and honey” is nowadays known as the “start-up nation”. But such a successful ecosystem comes from the combination of a strong and well-developed venture capital market, a highly-skilled workforce, and a flexible economy. These characteristics explain why the start-up nation is Israel, and not Argentina or Philippines. This is also why Skype was born in Estonia and not in Morocco.

Finally, agility and organizational simplicity explain the stellar performance of Alphabet, Alibaba, Uber and Tesla. Once again, in order for these companies to succeed, they had to rely on their large domestic markets, the regulator’s stance towards tolerating monopolies, and the companies’ ability to attract the best talent, either home-grown (China) or foreign (USA). By the way, one of the reasons why most digital platforms are concentrated in either of these two countries, and not in Europe for instance, is that in Europe there is a myriad of regulations that digital companies have to comply with, and the type of state support that other technology companies have been receiving from the public sector for decades is missing.

We usually give too much importance to individual characteristics, leadership skills and strategic choices in order to explain why companies fail and succeed. But 80% of a company’s result (as my research has shown) are determined by location. If you are lucky enough to be born at the right time in the right place, chances are you will be a successful entrepreneur. But we will hardly find the new Apple in Lebanon. And despite there being many Elon-Musk-type individuals in Tanzania, none of them will ever be able to create a multi-billion dollar company there.

Arturo Bris is professor of finance at IMD (The Institute of Management Development) and the director of the world-renowned IMD World Competitiveness Center. His new book, The Right Place: How National Competitiveness Makes or Breaks Companies is published by Routledge, £29.99

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