Why nations fail ? ... and why companies fail ?

Why nations fail ?

In this very inspiring book, called why nations fail ?, Daron Acemoglu and James Robinson demonstrate with a number of in depth examples that disappeared civilizations have failed because they have not been able to incentivise their citizens in creating value. 



Extractive civilizations are the ones where the elites try to extract the larger value from the citizens without giving any thing back. Value is extracted not only through taxes but also in redirecting towards the elites all the possible value, controlling monopolies, not respecting property and in some cases not even respecting the human rights of their citizens. 

In such a context, why should citizens be motivated in putting huge efforts in generating value when this value will be captured by the elite ? 

Among the number of examples brought by the authors to illustrate this theory, one is  fascinating : the Venice republic. This small town has been able within a very short time to expand its influence to whole Mediterranean area and in an even shorter time, they have collapsed completely !

Why ?

The reason why Venice republic has been so successful is that they have invented an inclusive governance in which the citizens were paid back from the efforts they put for generating value. As an example, Venice republic invented the joined venture: a shared model between navigators and merchants was in place to incitivise navigators to explore and trade with remote countries. Back to Venice those successful explorers were getting a reasonable part of the cake and were gaining influence within the city as the governance model was open to new comers. 
This illustrates the creative destruction coined by Joseph Schumpeter. 
Of course, creative destruction comes at the expense of established players and this is the very reason why elites are getting increasingly reluctant to support such an approach. They have climbed the ladder and they don't want to be challenged or even worse to be replaced by new comers.
This is exactly why, after years of success Venice republic failed : governance changes stopped the inclusion of new comers establishing a status quo among the established players. This froze innovation and growth and lead extremely rapidly to the decline.

What about companies ?

A strong parallel can be made with companies which are somehow similar to states : they set up  a governance  model which can be more extractive or more inclusive. Normally when they are small, they favour initiative and growth and tend to be more inclusive. Later, being established, they become extractive, extracting the more value possible from their employees and keeping the status quo as much as possible making them becoming in the end irrelevant. 

This theory about inclusive vs extractive approaches also explains the success of transformational leadership which aims at developing employees instead of only extracting value from them.

Culture and international companies

International companies are said to have a very strong culture. In fact, this is mandatory not only to motivate employees but also for offsetting cultural differences coming from different countries.



Even in Europe where cultural differences are supposed to be smaller, bridging cultural differences is important. As an illustration although it may appear as a cliché, different cultures such as Italian and German do not have the same approach regarding work. For example, efficiency is favored in Germany, spending less time at work whereas commitment is measured in Italy through long hours. Another example is the way work is organized: in Germany structured plans are preferred whereas they are viewed as a lack of creativity in Italy. Management is also perceived differently: considered more like a coordination role in Germany opposed to a leading role in Italy. If no one tries to bridge these differences, a mixed team will soon be impacted by these divergent views.


Cultural differences are influencing the way a company is organized and run. These differences are impacting companies on all levels: on the entire company, on managers, on teams as well as on projects.

Company wise, the company’s culture must be very strong to be able to offset cultural differences coming from various countries. If not there is no common ground for basic things like work hours, signs of commitment, …

Even if a strong corporate culture is in place, on a managerial level, managers have to understand and respect those cultural differences otherwise, they will be less efficient or fail. There is a limit to what you can force people to do. Respect is not straightforward in heterogeneous environments: a common behavior is to reject what is different.

From a team management perspective, diversity is a constraint but can also be a clear advantage if managed smartly. The art of management is using resources in the best possible way; in an heterogeneous environment this is made even more difficult as differences among people are wider. Therefore, identifying the best fit between people and tasks is more difficult but can be truly rewarding if a manager pays sufficient attention to differences.

Cultural differences also influence politics and consequently projects and project governance: depending on the culture, visibility is not always given to the same projects. In some organizations, business cases will be the main driver trying to maximize the value/cost ratio. For others strategy and long term plan may play a stronger role, for others a country can also be in the driving seat, …

Managing diversity does not mean that there is no common ground: vision and strategy are key to motivate teams: even from different backgrounds, understanding together what we are aiming at has been a powerful lever for success. Of course diversity is making this exercise more difficult as the vision and its implementation have to be translated and adapted to each culture.

Capital markets IT

An incredible growth

In the last 20 years, the very strong growth on capital market has triggered huge investments. For some companies strategy was pretty straightforward: any product, anywhere! Focus was definitely on growth and not on costs. The priority was to grab new market shares and revenues not to save cost or improve efficiency.

The direct consequence of this strategy has been a huge size increase as shown in the
following graph:

Goldman Sachs employees (Source Goldman Sachs)

Management capacity had to grow accordingly

This growth has not been possible without increasing management capacity. Going on with the Goldman Sachs example, if we consider that a team is composed of an average of 6 teammates, the growth in the graph above correspond to an increase of more than half a hierarchical level!

As experienced managers were not so common within Capital Markets IT, a lot of experienced managers, able to structure teams to sustain this growth have been coming from other industries or even other areas than IT.

Since the crisis, innovation and revenues race is over

The financial crisis is bringing a new situation: growth race is over, cost is the main focus. This is forcing the financial industry to move back cutting costs and jobs. This is where the main challenge is: how to scale down regaining efficiency? Will the managers that have been managing the scale up be able to manage the scale down?

This deep transformation is very difficult to trigger and is coming from top management which, seeing smaller or new competitors entering in the market, may realize that a deep transformation is mandatory. This transformation means cutting hierarchical levels building smaller teams, more agile and more efficient. 

Processes need also to be revised to be adapted to the new size, internal invoicing for example does not need the same effort for a smaller setup!

 The most challenging part is not to cut cost at the same efficiency but is to improve efficiency while cutting costs. This means for IT identifying and retaining the best profiles that are making a true difference and setting up with those profiles small and agile teams. One can understand how different this approach is from the past, where quantity was more in focus than quality.