Wednesday, April 10, 2013

The Failure of Success When Internationalizing

Wal-Mart in Korea … Best Buy in China … Tesco in the U.S. …  The list of companies that have tried to expand internationally and have failed is long indeed, as my students learn in my classes in International Business.  Of course, there are companies that have also been successful as they internationalized, such as IBM, BMW, Toyota, Mastercard, and UPS, to name just a few.

My students are initially very surprised that companies that have been so successful in their home markets could stumble when expanding overseas.  When I ask them why these companies have failed, the two most common reasons they give are that they did not do sufficient market research, and that they failed to adapt to the needs of consumers in the market.

But I push them to dig deeper, to look at some of the root causes.  I challenge them on why they would assume that these companies did not do any market research.  And was the failure to adapt simply a blindness to differences, or a willing choice they made?  After all, these companies have relatively deep pockets, and would want to be sure that their investments would pay off.  Wouldn’t they want to do their homework and due diligence before plunging into a new market?

In interviews with executives, various discussions with students (many of whom work for global companies, some at fairly senior levels), and from research on the topic, I believe that the reasons for failure come down to four underlying causes.

Number one is a “readiness” factor.  Cavusgil et al. (2012) have explained this very clearly when they write that management needs to “… determine the degree to which they have the motivation, resources, and skills necessary to successfully engage in international business.”  For many companies, considering the possibility of expanding into an international market and increasing revenues is reason enough for them.  Unfortunately, these companies get ahead of themselves and forge ahead without laying the proper groundwork.  Part of this groundwork includes the four questions that Cavusgil et al. suggest firms should ask themselves:
1.     What do we hope to gain from international business?
2.     Is international expansion consistent with other firm goals, now or in the future?
3.     What demands will internalization place on firm resources?
4.     What is the basis of the firm’s competitive advantage?

For example, Target is a successful company that has only recently started to expand internationally.  It did this by acquiring the Canadian retail chain Zellers.  Target seems to be very cautious in its approach.  Even though many Canadians are familiar with Target and its logo, Target will continue to use the Zellers name as it learns how to operate their business model in a different country.  Contrast this with Best Buy, which opened its largest-ever store in China and then quickly added eight more stores.  Then, in 2011, it pulled the plug on all nine stores, realizing that its business model did not work in the Chinese market. 

Cavusgil’s questions will not only help companies to determine if internalization is right for them at this time, but also help them to develop a game plan, with specific actions and timelines, to improve their readiness.  For example, a company might want to hire an executive who has had extensive experience in the industry and in that country, and who is familiar with that country’s regulatory requirements.  It helps if that executive has some established relationships with government officials, since such relationship-building is very important in certain markets. 

Number two is a failure to consider criteria other than ROI in the decision on whether, where, when and how to internalization.  A company’s financial analysts may crunch the numbers and come up with very favorable returns.  Companies can get giddy with dreams of tremendous returns that they sometimes fail to probe and question the assumptions on which these numbers are based. 

For example, have country, political, and cultural risks been considered seriously?  If intellectual property rights are not strongly adhered to in the country, what is the risk for the company and what risk mitigation strategies should be put in place?  What is the competitive environment like in the country?  Are there strong local competitors as well as global competitors already in the marketplace?  Companies face many short-term pressures, and the allure of expanding into new markets can be compelling.  But ROI and other financial indicators alone should not be the sole criteria for entering a market.  In the M&A research, for example, data clearly show that the majority of mergers and acquisitions fail to meet targeted returns on investment.

Number three is not effectively addressing the right balance between standardization and localization.   In the global companies I have worked for, this tension plays out in many different ways.  In one consumer products company, for example, some general managers in different subsidiary operations insisted on having the final say in such decisions as the color on the packages, the suppliers to use for their printing needs, and even the logo of the company for their countries. 

When Allan Mullaly became CEO of Ford, he was surprised to learn that Ford cars had 27 different car platforms.  Was every one of them necessary?  Ford now has reduced the number of platforms to 14, with nine of them accounting for 87% of Ford’s global sales (Detroit Free Press, February 20, 2013).  The more that a company customizes and localizes its value chain and its product offerings, the higher the costs – although others would argue that the profits will also increase because the products will appeal better to local consumers.  Nonetheless, there are trade-offs here that need to be considered, and companies need to be clear on their strategic priorities. 

Companies need to set clear boundaries on those aspects of their value chain, products and brand image that are “core” to their strategy.  They need to make sure that these boundaries are clearly communicated internally, and that these aspects are standardized globally with some centralized control.  For Ford, these would include their global platforms.  For Nike, it would include their brand image.

And number four is a company mindset that past success should predict future success, especially past success with the company’s business model.  In his terrific book, “What Got You Here Won’t Get You There,” Marshall Goldsmith describes many of his executive clients who refuse to change their behavior since their style, dysfunctional as it may be at present, is what made them successful to begin with.  I believe a parallel may be found with companies that have become so successful that they believe that replicating their business model will work everywhere.  There are companies of course that have succeeded with such replication, and arguably there are certain industries (e.g., consumer electronics) where replication is a safe approach to globalizing.  But for many companies and industries, it always pays to question the validity of a replication strategy.

Based on the above, here are four additional questions that companies should answer before internationalizing:
1.  Is your company “ready” to go global?
2.    Does your definition of success include factors other than just ROI?
3.     Have you defined what aspects of your value chain, products and brand are core and what can be      adapted?
4.     Is your company sure that a replication strategy will work?

Cavusgil, S. et al.  International Business.  (2012).  Upper Saddle River, New Jersey: Prentice Hall.

Goldsmith, M.  What Got You Here Won’t Get You There.  (2007).  New York:  Hyperion.