Can globalization happen without localization?

Multinational Corporations (MNCs) are eagerly seeking new markets they can conquer and exploit in the hope that they can satisfy the ever-growing hunger of their investors. Unlike in the “Age of Discovery”, when developed countries merely took what they wanted from their new colonies, modern MNCs can neither force their agenda, nor “grab-and-go” the valuable resources from their new lands. Brutalism has been replaced by sophistication that imposes new challenges to these modern players. MNCs need to overarch 1) Administrative Distance - political hostility, institutional differences; 2) Cultural Distance - language barriers, different buyer behaviors and norms); and 3) Economic Distance - costs and quality of resources. We attempt to explore why some corporations fail with their global expansion while others succeed.

Source: FinancialTimes.com

The failure of giants

The engines of western behemoths are making less and less noise in India. Ford is considering quitting the lucrative market after decades of struggling trying to gain foothold in India. While this question is still on the agenda of Ford executives, General Motors and Harley-Davidson, a U.S.-based carmaker and motorcycle manufacturer respectively, have already left the country. One of the most prominent root causes of these struggles is not taking into account Cultural and Economic Distance that is the lack of adaptability of global strategies to meet local needs. The highly competitive Indian market demands low-priced, subcompact, efficient cars and rejects the expensive western vehicles with big engines.

The automotive industry is not the only one that can provide examples for failures. Target launched its aggressive entry strategy towards Canada in 2013. The U.S. retailer rapidly expanded into the new market and acquired over 200 stores for 4Bn USD. However, its unfavorable store locations and its high prices due to costly resources did not fit Canadian demand, which was aggravated by declining reputation and brand perception. Walmart, another U.S. retailer, faced a similar downfall in Japan. The company failed to take into account the routines and needs of Japanese consumers: instead of offering fresh, high-quality specialties the company decided to force its “American-way” and sell packaged, low-quality goods in big quantities. Such a lack of social understanding and communication of unique selling proposition led to the retreat of the multi-billion company in 2020. Another mistake these companies made is not testing the water. MNCs need to gain knowledge by experimenting the new market and upscale gradually. Both Target and Walmart poured billions of dollars into their new business venture without first accumulating knowledge about the target region.

Globalization is not hopeless

Luckily for global strategists, there are also examples from the successful end of the spectrum. While the above giants all failed on their respective markets, others have managed victorious conquer. McDonald’s follows an adaptation strategy to shorten distances between its home market (U.S.) and its new markets. Its network of franchises allows the fast-food chain to exploit franchisees’ market knowledge, while Headquarters (HQ) provides standardized guidelines to optimize operations. Besides appealing to local customer behavior (e.g. taste and meat preference, environmental friendliness) to reduce Cultural Distance, the company cautious with political confrontations and proudly promotes its contribution to local employment in order to tackle its Administrative Distance. Netflix is also a champion of adopting local needs. The video-on-demand company expanded its operation in more than 140 countries between 2015-17. Its success was built on two pillars. First, the company chose to scale up its overseas operations gradually with no inconsiderate investments. It managed to pursue a phased roll-out strategy by testing, learning then customizing its recommendation engine and movie library. Instead of overloading new markets with products popular in the home market, it was crucial to offer a product portfolio tailored towards the special needs of the target market. Second, it responded to idiosyncratic regulatory conditions. Understanding the new administrative setting enabled Netflix to fend off players in political, regulatory domains and remove one of its biggest barriers to expand.

Glocalization is the way to go

We reviewed a dozen of case studies on MNCs’ market entry attempts and found a specific distribution. Interestingly, most of them are scattered around the same phenomena: glocalization. Glocalization entails the view of considering local conditions when expanding companies to operate internationally. We strongly believe that the most significant difference between the aforementioned examples is the companies’ ability to build and use relevant capabilities to shorten the distance between their home and target countries.

While Ford, General Motors and Harley-Davidson all forced their “U.S.-way-of-doing-business” on their new markets and failed to alter their offerings to satisfy idiosyncratic customer needs, McDonald’s proactively sought how to meet local needs. The fast food restaurant's HQ deployed relevant and appropriable skills to help franchisees in setting up their operations under their unique economic circumstances. In exchange, local complementary capabilities and market knowledge had been transferred back to the HQ, which were redeployed during the following market entries. The model helps exploiting existing capabilities, and renewing them to support global expansion. This adaptability is seen in other sectors as well. Many technology companies are champions in filling administrative gaps. They oftentimes alter their business practices to meet local regulations, or develop mutually beneficial policies with regulators to maximize value for both the company and the society.

This blog entry implies that MNCs cannot brutally force their global strategy on new markets. Winning the customers (and other political and economic actors) of a new market takes more than pushing what worked at home. Managers must take into account the idiosyncratic, local factors in order to conquer new lands and satisfy the ever-growing hunger of their investors.