Failing Forward: How Failures Can Guide Firm Future Success
- Prof George Batsakis
- Oct 8, 2024
- 5 min read
Executive Summary: For most stakeholders, including business media, clients, suppliers, and governments, foreign divestment (i.e., when companies pull out of international markets) seems like the ultimate failure that leads to bad publicity, stock price declines, and even CEO dismissals. Yet, taking a closer look, one may argue that failure can be a powerful learning tool for the future. The recent research[i], which I co-authored with Alex Mohr, Palitha Konara, and Christos Koritos, explains how internationalizing retail companies can learn from divestment experiences to improve their future international strategic decisions and, of course, performance. Companies can transform these setbacks into valuable lessons by reflecting on past mistakes and spreading these learning opportunities over different regions and time periods. Are you interested in learning more about it? You can read my reflections below!
The Value of Failing in Different Places
When multinational companies exit a foreign market, it might look like a retreat. However, pulling out of multiple markets across different regions is actually one of the best – yet quite expensive – ways for companies to learn. This "spatial dispersion" of divestment, i.e., exiting from diverse geographic areas, offers companies a unique opportunity to study their failures in different contexts. Indeed, each country has its own challenges, such as local regulations, customer preferences, or competitive landscapes, and the more diverse these challenges, the more a company can learn.
For example, suppose a company closes down its stores in Latin America due to supply chain inefficiencies but also exits from a highly regulated market in the European Union. In that case, it is exposed to two very different types of failure. By drawing on both events, the company can better and more broadly understand what went wrong and why. Such a global learning effect can help companies make improved decisions in the future. For example, companies can better decide how to allocate or reconfigure resources, target countries, and plan their entry into new international markets. After all, despite their numerous exits from foreign markets throughout the years, the global retail market size keeps on growing, which shows that market size is not the problem of these failures (see Figure 1).
For example, Tesco, the British retail giant, had to divest its operations in both Japan and the United States over the past two decades. In Japan, they struggled to adapt to local consumer preferences and faced tough competition. Japan is a tough nut to crack for most Western companies interested in tapping into such an attractive economy, primarily for market-seeking reasons. In the U.S., Tesco’s problems originated from misunderstanding and rather underplaying the competitive landscape, as well as underestimating supply chain challenges. Through these diverse experiences, Tesco better understood what it takes to succeed in new markets. For instance, they realised that adjusting their product offerings to local tastes and investing more in market research before launching, even in markets that seem to be more culturally adjacent to their home country, is an absolute necessity.
Time Matters: Why Companies Need to Reflect Before the Next Move
Timing is crucial when it comes to learning from failure. Our research shows that companies benefit from having "time slack" between divestment episodes, i.e., allow for longer intervals between ceasing operations in foreign markets. When companies allow more time between one exit and another, they have the space and time to reflect on what went wrong, why it happened, and how to avoid similar mistakes.
Starbucks, for instance, after exiting from the Australian market in 2008, where it had opened too many stores too quickly, decided to reflect on their unsuccessful strategy before re-entering with a more systematic approach this time. This time gap allowed Starbucks to reassess how to approach its future international expansion strategy, paying much more attention to better comprehending local culture and customer idiosyncrasies. This is what Starbucks did in China, where the expansion strategy paid off in the long run, now operating with nearly 7,000 coffee shops (see Figure 2).
Taking a calculated and gradual approach when exiting from foreign markets enables companies to analyse their failures more efficiently through post-mortem reviews, arrange training sessions to enhance decision-making, and fortify internal processes to prevent future mistakes. Engaging in the next market without this reflective period would likely result in repeating the same errors. By spacing out the divestments, companies allow themselves the necessary time to think critically and adapt their strategies, thereby enhancing their preparedness for success in their next expansion.
The Importance of Failing in Organizations: The Case of Roche
Another powerful example of learning from failure can be drawn from Roche’s approach to handling project setbacks. Although unrelated to foreign divestment, the practices implemented by Roche in their systematic reviews of unsuccessful projects offer important lessons for companies navigating international exits. In 2015, Roche initiated a program in which teams examined their recent project failures and uncovered important insights about organisational processes, customer relationships, and personal leadership development. One team recognised that a major sale had failed because they were overly focused on their own agenda, causing them to overlook important cues from the client.[ii] Similarly, companies exiting foreign markets, such as Tesco's withdrawal from Japan and the U.S., could utilize this reflective model to determine if they misjudged local market demands or failed to adapt to unique operational challenges. Roche's experience underscores how establishing a formal process for reviewing failures, particularly across different markets, can not only enhance internal strategies but also improve a firm's capacity to manage global relationships. These insights can contribute to long-term learning for companies that have divested in diverse ways across different locations and time periods, ultimately leading to better decision-making in foreign markets.
Practical Lessons for Businesses: How Failure Leads to Smarter Decisions
Some companies may find foreign divestment unavoidable, but it doesn't have to be catastrophic. Here are some practical tips on how companies can transform setbacks into future achievements:
Gain Insights from Various Locations: The more diverse your failures are across different regions, the more valuable the lessons you can learn. Each area presents unique obstacles, and by examining a range of these, companies can develop a broader understanding of the global market.
Allow Sufficient Time Between Failures: Avoid rapidly moving from one market to another. Companies require time to contemplate, assess, and train their teams. This time gap is crucial for converting failure into valuable learning experiences.
Establish Formal Learning Processes: Companies can create organized methods for reviewing divestments, such as formal assessments after divestment or internal platforms for sharing knowledge where insights from past failures are recorded and used to guide future decisions.
Key Points: Failure as a Learning Curve
Foreign divestment provides crucial learning opportunities: Companies that view failure as a learning tool generally perform better in the long term.
Diversify Your Failures: Exiting markets in different regions helps companies obtain a more comprehensive understanding of international challenges, leading to more informed future strategies.
Time Facilitates Learning: The longer the interval between divestments, the more time companies have to reflect, learn, and enhance their approach to future market entries.
In conclusion, companies should not perceive foreign divestment as a failure. On the contrary, when this happens, they should see it as a valuable opportunity to learn and improve. By embracing the lessons from failures across diverse regions and with sufficient time in between, companies can emerge stronger and wiser.
[i] Batsakis, G., Mohr, A., Konara, P., & Koritos, C. (2023). The Effect of Foreign Divestment on Subsequent Firm Performance: The Moderating Role of Spatial and Temporal Dispersion of Prior Divestment Experience. British Journal of Management.
[ii] Birkinshaw, J., & Haas, M. (2016). Increase your return on failure. Harvard Business Review, 94(5), 88-93.
