Have you ever been forced to either change your business model or close your business entirely?
This was the decision faced by Amway’s management in the mid 2000′s when the Chinese government passed legislation preventing direct-sale businesses from operating in the country. In this month’s HBR article, Amway’s President on Reinventing the Business to Succeed in China, Doug DeVos shares the thought process and lessons learned along the way. These include:
Lesson #1: Understand the People, Culture, Economics and Politics
In one section of the article, DeVos describes,
A Chinese proverb, loosely translated, says, “If you are patient in one moment of anger, you will escape a hundred days of sorrow.” Eva was right. We could be patient. We could be cooperative. We could seek solutions to strengthen our industry and protect consumers. And we could partner with the Chinese government and our competitors to create reforms that would set the stage for our industry to grow and flourish in China.
Maintaining patience in times of turmoil can be a painstaking exercise. To an extent, it seemed that Amway’s hands were tied—either try something or lose everything in the region. That said, it is evident that the something they tried actually worked. By demonstrating their commitment to the Chinese government, and respecting their culture, Amway was able to continue growing its operations in the region.
Lesson #2: Remain True to Core Purpose
As DeVos tells the story of handling the strategic challenges of redesigning Amway’s business model, he says, “We had to remember that Amway isn’t simply about the products or the sales channel; it’s about opportunity.”
Many of today’s businesses struggle with the concept of core competence. It seems that consultants often use this term as an excuse to expand or narrow product sets or service offerings. By definition, a core competence includes a combination of knowledge and skills within an organization; though I would suggest that purpose plays an equal role. To remain in China, Amway needed new knowledge and skills, but maintained its core competence by remaining true to its original purpose: opportunity.
Lesson #3: Trust in Relationships
The third lesson DeVos outlines is a difficult one: trusting in relationships. DeVos explains that there simply wasn’t enough time to rebuild the business while also explaining what was being done along the way. This meant saying “Trust us on this” to many of Amway’s own distributors.
In the end I think Amway got lucky as this approach could have just as easily gone the opposite of what was intended. Amway’s distributors are entrepreneurs who want to run their own business. By working with Amway, though, their individual businesses inherently rely on the direction Amway takes—a rising tide raises all boats. Asking for one-sided trust is a tall order, and no one wants to feel like they’re caught in a situation of the blind following the blind.
Lesson #4: Take the Long-Term View
Closely aligned with Lesson #1, DeVos wraps up the article by restating that Amway’s business has been around for generations and that Amway’s success in China is largely a result of its ability to take a long-term view.
I agree that short-sighted business decisions often result in terrible outcomes, but I also think that the “long-term view” shouldn’t be confused with self-fulfilling prophecy. Hindsight is always 20-20, but foresight can seem more like 20-2000. In Amway’s case with China, I think most anyone could have recognized that a redirection in business model needed to take place. The key unanswered questions were: (1) What would that new model need to look like? and (2) How would Amway get there?
As with many business strategies, Amway’s success was a blend of savvy and serendipity. Their approach to working with the Chinese government demonstrates real maturity, though it seems that they took a significant risk with their distributors by not managing communications more effectively through the process.
I can imagine someone saying, “If we get kicked out of China the distributors won’t have any business anyway, so there’s no need to spend a lot of time or effort on communications until we know if something is going to work.” This approach could work in the short-term, but this doesn’t fit the long-term lesson learned. DeVos explains:
[China's] leaders were talking about joining the World Trade Organization. People in our industry believed that the government would relax the prohibitions on direct selling as part of that process. And, in fact, in late 2005 legislation was passed that would allow Amway to return to a direct sales business model. We received our new license to do business in China in 2006.
As it turned out, Amway was able to return to its direct sales business model in 2006. If Amway had severely damaged its distributor relationships as a result of short-sighted decision-making, it could have jeopardized its ability to continue growing a $4B portion of its business.