Management Case

Below, we discuss a rather humorous example of how a local custom can affect operations at a manufacturing plant in Singapore.

Larry Henderson, plant manager, and John Lichthental, manager of human resources, were faced with a rather unique problem. They were assigned by Celanese Chemical Corp. to build a plant in Singapore, and the plant was completed in July. However, according to local custom, a plant should be christened only on “lucky” days. Unfortunately, the next lucky day was not until September 3.

The managers had to convince executives at Celanese's Dallas headquarters to delay the plant opening. As one might expect, it wasn't easy. But after many heated telephone conversations and flaming emails, the president agreed to open the new plant on a lucky day—September 3.38

In the nearby Insights from Executives box, Terrie Campbell, a senior executive at Ricoh Americas, offers further thoughts on the opportunities and risks for multinational firms.

Global Dispersion of Value Chains: Outsourcing and Offshoring

A major recent trend has been the dispersion of the value chains of multinational corporations across different countries; that is, the various activities that constitute the value chain of a firm are now spread across several countries and continents. Such dispersion of value occurs mainly through increasing offshoring and outsourcing.

A report issued by the World Trade Organization described the production of a particular U.S. car as follows: “30 percent of the car's value goes to Korea for assembly, 17.5 percent to Japan for components and advanced technology, 7.5 percent to Germany for design, 4 percent to Taiwan and Singapore for minor parts, 2.5 percent to U.K. for advertising and marketing services, and 1.5 percent to Ireland and Barbados for data processing. This means that only 37 percent of the production value is generated in the U.S.”39 In today's economy, we are increasingly witnessing two interrelated trends: outsourcing and offshoring.

Outsourcing occurs when a firm decides to utilize other firms to perform value-creating activities that were previously performed in-house.40 It may be a new activity that the firm is perfectly capable of doing but chooses to have someone else perform for cost or quality reasons. Outsourcing can be to either a domestic or foreign firm.

Offshoring takes place when a firm decides to shift an activity that it was performing in a domestic location to a foreign location.41 For example, both Microsoft and Intel now have R&D facilities in India, employing a large number of Indian scientists and engineers. Often, offshoring and outsourcing go together; that is, a firm may outsource an activity to a foreign supplier, thereby causing the work to be offshored as well.42

The recent explosion in the volume of outsourcing and offshoring is due to a variety of factors. Up until the 1960s, for most companies, the entire value chain was in one location. Further, the production took place close to where the customers were in order to keep transportation costs under control. In the case of service industries, it was generally believed that offshoring was not possible because the producer and consumer had to be present at the same place at the same time. After all, a haircut could not be performed if the barber and the client were separated!

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7.1INSIGHTS FROM EXECUTIVES

TERRIE CAMPBELL, VICE PRESIDENT OF STRATEGIC MARKETING AT RICOH AMERICAS CORPORATION

BIOSKETCH

Terrie Campbell serves as vice president of strategic marketing for Ricoh Americas Corporation. In this role, she is responsible for the strategy, direction, and execution of Ricoh's Managed Document Services approach, as well as key vertical marketing strategies and programs, for both direct and dealer channels. Campbell is also the global lead for the development of tools and processes to ensure consistent execution of Ricoh Managed Document Services around the world. Prior to this appointment, Campbell served as vice president of Managed Document Services for Ricoh USA.

1.	Ricoh has significant international operations. What do you see as some of the primary opportunities and threats in global expansion? Opportunities are primarily found in the area of being able to leverage our global footprint and support customers that want a level of consistency from region to region. We also find that by having such a significant number of locations and customers, we are very well positioned to understand the best practices, benchmarks, and trends that help us continue to innovate and find new ways to solve our customer problems. With such a large network of resources, there are very few issues or challenges in our space that we have not addressed somewhere in our organization before. The challenges include regional culture differences and time-zone management when trying to collaborate via conference calls or video. There are also limitations on what our systems are allowed to pass from region to region due to legislation and regional regulations. There is also the dynamic that as an organization, a significant portion of our growth came through acquisitions, which may create headwind from assimilation issues. For our model to work, we have also embraced a distributor model in some of our noncore markets. This brings us a high degree of flexibility to meet our customer needs, but it also adds a new level of oversight to ensure consistency in the delivery of services and support. The biggest challenge is around the ability of systems to speak to one another when translation and currency conversions are needed. The reality is that it requires a lot of heavy lifting to get a global view of business when you take these issues into consideration.
2.	What are some of the challenges associated with adapting your marketing strategies to local tastes and cultures? Different words have different meanings from region to region. It is critical to define the vision first for the organization and then allow the resources that best understand the regional connotation to edit for final copy. The risk, when this happens, is that the message may lose some of the nuance that brings “punch” to the story. Getting everyone to understand the intent of the message must be the first order of business. You will often find that an entirely different approach is needed in a region, but given flexibility, it will achieve even stronger alignment and customer engagement. Another challenge that is fairly typical is that the “not invented here” mentality may set in when one region proposes an idea across the globe. There is no question that the passion for an idea is typically going to lie with the originator; as a result, it may be difficult for that person to understand or accept resistance from another region when that region does not feel the same passion for the idea or concept. It may turn into a long, emotional battle of wills if the other region believes it has a superior idea, concept, or current way of operating. This is often a surprise to a person new to global marketing or communications. The key to success is to ensure that the key stakeholders have a voice in the process early and can see their “fingerprints” on the finished idea. The time invested in the up-front collaboration and engagement is well worth your effort to ensure adoption and success.
3.	How does Ricoh facilitate the transmission of knowledge and learning from one market to another? Facilitation of learning across markets begins with a strong best-practice collection and development process. Additionally, tools to enable the organization to share wins and learning that may be part of an innovation process ensure that new ideas and successes are formalized and shared. Once an idea is defined as a repeatable solution or process, then leveraging field deployment teams and training tools will instill knowledge, manage testing, and report certifications. These tools will include online, self-paced courses, classroom courses, and facilitator-led, manager-led, or virtual-classroom options. There is also the need to proliferate casual or “tribal” knowledge, which can be facilitated through social platforms or knowledge libraries that provide access to the appropriate employees.
4.	What are some of the human resource management challenges and opportunities with regard to Ricoh's different international operations? As a global company, it would be ideal to have all employees in common job descriptions, with common pay grades, incentives, and so on. The idea is great, but the fact is that with local competition for talent and local pay practices, regional variation is required in these areas. Additionally, the job title in one region may not make sense at all in another. We do seek to have relevant technical certifications and cross--leverage training to ensure consistency where possible in knowledge, but how the roles are managed from a human resource perspective requires local direction. We also find that unemployment is different across the operations so turnover dynamics are not the same, and that has an impact on the cost of doing business in an area. We are fortunate to have strong alignment of the human resource leadership across the regions so best practices are shared to take advantage of them where possible.

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For manufacturing industries, the rapid decline in transportation and coordination costs has enabled firms to disperse their value chains over different locations. For example, Nike's R&D takes place in the U.S., raw materials are procured from a multitude of countries, actual manufacturing takes place in China, Indonesia, or Vietnam, advertising is produced in the U.S., and sales and service take place in practically all the countries. Each value-creating activity is performed in the location where the cost is the lowest or the quality is the best. Without finding optimal locations for each activity, Nike could not have attained its position as the world's largest shoe company.

The experience of the manufacturing sector was also repeated in the service sector by the mid-1990s. A trend that began with the outsourcing of low-level programming and data entry work to countries such as India and Ireland suddenly grew manyfold, encompassing a variety of white-collar and professional activities ranging from call centers to R&D.

Bangalore, India, in recent years, has emerged as a location where more and more U.S. tax returns are prepared. In India, U.S.-trained and licensed radiologists interpret chest X-rays and CT scans from U.S. hospitals for half the cost. The advantages from offshoring go beyond mere cost savings today. In many specialized occupations in science and engineering, there is a shortage of qualified professionals in developed countries, whereas countries like India, China, and Singapore have what seems like an inexhaustible supply.43

While offshoring offers the potential to cut costs in corporations across a wide range of industries, many firms are finding the benefits of offshoring to be more elusive and the costs greater than they anticipated.44 A study by AMR Research found that 56 percent of companies moving production offshore experienced an increase in total costs, contrary to their expectations of cost savings. In a more focused study, 70 percent of managers said sourcing in China is more costly than they initially estimated.

The cause of this contrary outcome is actually not all that surprising. Common savings from offshoring, such as lower wages, benefits, energy costs, regulatory costs, and taxes, are all easily visible and immediate. In contrast, there are a host of hidden costs that arise over time and often overwhelm the cost savings of offshoring. These hidden costs include:

· Total wage costs. Labor cost per hour may be significantly lower in developing markets, but this may not translate into lower overall costs. If workers in these markets are less productive or less skilled, firms end up with a higher number of hours needed to produce the same quantity of product. This necessitates hiring more workers and having employees work longer hours.

· Indirect costs. In addition to higher labor costs, there are also a number of indirect costs that pop up. If there are problems with the skill level of workers, the firm will find the need for more training and supervision of workers, more raw material and greater scrap due to the lower skill level, and greater rework to fix quality problems. The firm may also experience greater need for security staff in its facilities.

· Increased inventory. Due to the longer delivery times, firms often need to tie up more capital in work in progress and inventory.

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· Reduced market responsiveness. The long supply lines from low-cost countries may leave firms less responsive to shifts in customer demands. This may damage their brand image and also increase product obsolescence costs, as they may have to scrap or sell at a steep discount products that fail to meet quickly changing technology standards or customer tastes.

· Coordination costs. Coordinating product development and manufacturing can be difficult with operations undertaking different tasks in different countries. This may hamper innovation. It may also trigger unexpected costs, such as paying overtime in some markets so that staff across multiple time zones can meet to coordinate their activities.

· Intellectual property rights. Firms operating in countries with weak IP protection can wind up losing their trade secrets or taking costly measures to protect these secrets.

· Wage inflation. In moving overseas, firms often assume some level of wage stability, but wages in developing markets can be volatile and spike dramatically. For example, minimum wages set by provinces in China increased at an average of 18 percent per year in the 2010–2014 period.45 As Roger Meiners, chairman of the Department of Economics at the University of Texas at Arlington, stated, “The U.S. is more competitive on a wage basis because average wages have come down, especially for entry-level workers, and wages in China have been increasing.”

 

7.4STRATEGY SPOTLIGHT

RESHORING OPERATIONS: OTIS STRUGGLES TO LIFT ITS U.S. MANUFACTURING OFF THE GROUND

United Technologies Corporation has found that reshoring manufacturing to the United States is a very challenging experience. In late 2012, the firm announced with great fanfare that it would relocate an Otis elevator plant from Mexico to South Carolina. The relocation was seen both as a boon to the community, since it would generate nearly 400 good-paying jobs, and as another signal of the renaissance of American manufacturing. For Otis, the move promised to save the firm money, streamline operations, and speed up order fulfillment by bringing manufacturing closer to customers and locating manufacturing right next to the engineering staff. The firm anticipated seeing a 17 percent reduction in freight and logistics costs and a 20 percent efficiency gain by co-locating all staff involved in elevator design and manufacturing.

However, it has proved to be a challenging transition. Due to production delays as Otis ramped up U.S. production, a large backlog in orders arose. Some customers canceled their orders after waiting months for delivery. Otis was forced to keep its Nogales, Mexico, plant open six months longer than it had anticipated due to delays in ramping up the manufacturing unit in South Carolina. All totaled, the problems led to a $60 million hit to Otis's bottom line in 2013 and continued to weigh on earnings through the first half of 2014.

The key challenge Otis faced was constructing the skilled labor pool it needed. Although the firm transferred some workers from operations in Arizona and Indiana, it had difficulty finding skilled manufacturing workers in South Carolina. Florence, South Carolina, the town Otis moved to, had a long history of being a manufacturing town but saw its manufacturing base decline rapidly in the 1980s and 1990s. It is a geographically attractive location, with available manufacturing sites and easy access to rail and port locations. As a result, Otis was able to move into an empty facility that used to house a Maytag plant. However, Otis found that the current manufacturing systems required higher technology-based skills than those in the past and that the skill set of the region's workers was not up to the demands of the job.

In the words of Robert McDonough, COO of the business unit that includes Otis, “I think we failed on both the planning and the execution side.” To address these issues, Otis brought in new leadership for its North American operations. At the plant level, Otis brought in additional workers and invested in greater training than it had anticipated. Otis is still committed to the Florence plant and has brought the backlog down, but its experience does highlight some of the challenges firms face as they bring manufacturing operations back to the U.S.

Sources: Mann, T. 2014. Otis finds reshoring manufacturing is not easy.  wsj.com,  May 2: np; and Anonymous. 2014. Supply chain news: When it comes to reshoring, detailed planning and expectation setting is key, Otis elevators learns the hard way.  scdigest.com,  May 5: np.

Firms need to take into account all of these costs in determining whether or not to move their operations offshore. Strategy Spotlight 7.4 discusses the experience Otis, the elevator manufacturer, had when it decided to “reshore” its manufacturing.

Achieving Competitive Advantage in Global Markets

We now discuss the two opposing forces that firms face when they expand into global markets: cost reduction and adaptation to local markets. Then we address the four basic types of international strategies that they may pursue: international, global, multidomestic, and transnational. The selection of one of these four types of strategies is largely dependent on a firm's relative pressure to address each of the two forces.

Two Opposing Pressures: Reducing Costs and Adapting to Local Markets

Many years ago, the famed marketing strategist Theodore Levitt advocated strategies that favored global products and brands. He suggested that firms should standardize all of their products and services for all of their worldwide markets. Such an approach would help a firm lower its overall costs by spreading its investments over as large a market as possible. Levitt's approach rested on three key assumptions:

1.	Customer needs and interests are becoming increasingly homogeneous worldwide.
2.	People around the world are willing to sacrifice preferences in product features, functions, design, and the like for lower prices at high quality.
3.	Substantial economies of scale in production and marketing can be achieved through supplying global markets.46

However, there is ample evidence to refute these assumptions.47 Regarding the first assumption—the increasing worldwide homogeneity of customer needs and interests—consider the number of product markets, ranging from watches and handbags to soft drinks and fast foods. Companies have identified global customer segments and developed global products and brands targeted to those segments. Also, many other companies adapt lines to idiosyncratic country preferences and develop local brands targeted to local market segments. For example, Nestle´'s line of pizzas marketed in the United Kingdom includes cheese with ham and pineapple topping on a French bread crust. Similarly, Coca-Cola in Japan markets Georgia (a tonic drink) as well as Classic Coke and Hi-C.

Consider the second assumption—the sacrifice of product attributes for lower prices. While there is invariably a price-sensitive segment in many product markets, there is no indication that this is increasing. In contrast, in many product and service markets—ranging from watches, personal computers, and household appliances to banking and insurance—there is a growing interest in multiple product features, product quality, and service.

Finally, the third assumption is that significant economies of scale in production and marketing could be achieved for global products and services. Although standardization may lower manufacturing costs, such a perspective does not consider three critical and interrelated points. First, as we discussed in Chapter 5, technological developments in flexible factory automation enable economies of scale to be attained at lower levels of output and do not require production of a single standardized product. Second, the cost of production is only one component, and often not the critical one, in determining the total cost of a product. Third, a firm's strategy should not be product-driven. It should also consider other activities in the firm's value chain, such as marketing, sales, and distribution.

Based on the above, we would have a hard time arguing that it is wise to develop the same product or service for all markets throughout the world. While there are some exceptions, such as Boeing airplanes and some of Coca-Cola's soft-drink products, managers must also strive to tailor their products to the culture of the country in which they are attempting to do business. Few would argue that “one size fits all” generally applies.

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The opposing pressures that managers face place conflicting demands on firms as they strive to be competitive.48 On the one hand, competitive pressures require that firms do what they can to lower unit costs so that consumers will not perceive their product and service offerings as too expensive. This may lead them to consider locating manufacturing facilities where labor costs are low and developing products that are highly standardized across multiple countries.

In addition to responding to pressures to lower costs, managers must strive to be responsive to local pressures in order to tailor their products to the demand of the local market in which they do business. This requires differentiating their offerings and strategies from country to country to reflect consumer tastes and preferences and making changes to reflect differences in distribution channels, human resource practices, and governmental regulations. However, since the strategies and tactics to differentiate products and services to local markets can involve additional expenses, a firm's costs will tend to rise.

The two opposing pressures result in four different basic strategies that companies can use to compete in the global marketplace: international, global, multidomestic, and transnational. The strategy that a firm selects depends on the degree of pressure that it is facing for cost reductions and the importance of adapting to local markets. Exhibit 7.4 shows the conditions under which each of these strategies would be most appropriate.

EXHIBIT 7.4

Opposing Pressures and Four Strategies

It is important to note that we consider these four strategies to be “basic” or “pure”; that is, in practice, all firms will tend to have some elements of each strategy.

LO7.5

The advantages and disadvantages associated with each of the four basic strategies: international, global, multidomestic, and transnational.

International Strategy

There are a small number of industries in which pressures for both local adaptation and lowering costs are rather low. An extreme example of such an industry is the “orphan” drug industry. These are medicines for diseases that are severe but affect only a small number of people. Diseases such as Gaucher disease and Fabry disease fit into this category. Companies such as Genzyme and Oxford GlycoSciences are active in this segment of the drug industry. There is virtually no need to adapt their products to the local markets. And the pressures to reduce costs are low; even though only a few thousand patients are affected, the revenues and margins are significant, because patients are charged up to $100,000 per year.

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An international strategy is based on diffusion and adaptation of the parent company's knowledge and expertise to foreign markets. Country units are allowed to make some minor adaptations to products and ideas coming from the head office, but they have far less independence and autonomy compared to multidomestic companies. The primary goal of the strategy is worldwide exploitation of the parent firm's knowledge and capabilities. All sources of core competencies are centralized.

The majority of large U.S. multinationals pursued the international strategy in the decades following World War II. These companies centralized R&D and product development but established manufacturing facilities as well as marketing organizations abroad. Companies such as McDonald's and Kellogg are examples of firms following such a strategy. Although these companies do make some local adaptations, they are of a very limited nature. With increasing pressures to reduce costs due to global competition, especially from low-cost countries, opportunities to successfully employ an international strategy are becoming more limited. This strategy is most suitable in situations where a firm has distinctive competencies that local companies in foreign markets lack.

Risks and Challenges   Below are some of the risks and challenges associated with an international strategy.

· Different activities in the value chain typically have different optimal locations. That is, R&D may be optimally located in a country with an abundant supply of scientists and engineers, whereas assembly may be better conducted in a low-cost location. Nike, for example, designs its shoes in the United States, but all the manufacturing is done in countries like China or Thailand. The international strategy, with its tendency to concentrate most of its activities in one location, fails to take advantage of the benefits of an optimally distributed value chain.

· The lack of local responsiveness may result in the alienation of local customers. Worse still, the firm's inability to be receptive to new ideas and innovation from its foreign subsidiaries may lead to missed opportunities.

Exhibit 7.5 summarizes the strengths and limitations of international strategies in the global marketplace.

EXHIBIT 7.5	Strengths and Limitations of International Strategies in the Global Marketplace
Strengths	Limitations
· Leverage and diffusion of a parent firm's knowledge and core competencies.	· Limited ability to adapt to local markets.
· Lower costs because of less need to tailor products and services.	· Inability to take advantage of new ideas and innovations occurring in local markets.

Global Strategy

As indicated in Exhibit 7.4, a firm whose emphasis is on lowering costs tends to follow a global strategy. Competitive strategy is centralized and controlled to a large extent by the corporate office. Since the primary emphasis is on controlling costs, the corporate office strives to achieve a strong level of coordination and integration across the various businesses.49 Firms following a global strategy strive to offer standardized products and services as well as to locate manufacturing, R&D, and marketing activities in only a few locations.50

A global strategy emphasizes economies of scale due to the standardization of products and services and the centralization of operations in a few locations. As such, one advantage may be that innovations that come about through efforts of either a business unit or the corporate office can be transferred more easily to other locations. Although costs may be lower, the firm following a global strategy may, in general, have to forgo opportunities for revenue growth since it does not invest extensive resources in adapting product offerings from one market to another.

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A global strategy is most appropriate when there are strong pressures for reducing costs and comparatively weak pressures for adaptation to local markets. Economies of scale become an important consideration.51 Advantages to increased volume may come from larger production plants or runs as well as from more efficient logistics and distribution networks. Worldwide volume is also especially important in supporting high levels of investment in research and development. As we would expect, many industries requiring high levels of R&D, such as pharmaceuticals, semiconductors, and jet aircraft, follow global strategies.

Another advantage of a global strategy is that it can enable a firm to create a standard level of quality throughout the world. Let's look at what Tom Siebel, former chairman of Siebel Systems (now part of Oracle), the $2 billion developer of e-business application software, said about global standardization:

Our customers—global companies like IBM, Zurich Financial Services, and Citicorp—expect the same high level of service and quality, and the same licensing policies, no matter where we do business with them around the world. Our human resources and legal departments help us create policies that respect local cultures and requirements worldwide, while at the same time maintaining the highest standards. We have one brand, one image, one set of corporate colors, and one set of messages, across every place on the planet. An organization needs central quality control to avoid surprises.52

Risks and Challenges   There are, of course, some risks associated with a global strategy:53

· A firm can enjoy scale economies only by concentrating scale-sensitive resources and activities in one or few locations. Such concentration, however, becomes a “double-edged sword.” For example, if a firm has only one manufacturing facility, it must export its output (e.g., components, subsystems, or finished products) to other markets, some of which may be a great distance from the operation. Thus, decisions about locating facilities must weigh the potential benefits from concentrating operations in a single location against the higher transportation and tariff costs that result from such concentration.

· The geographic concentration of any activity may also tend to isolate that activity from the targeted markets. Such isolation may be risky since it may hamper the facility's ability to quickly respond to changes in market conditions and needs.

· Concentrating an activity in a single location also makes the rest of the firm dependent on that location. Such dependency implies that, unless the location has world-class competencies, the firm's competitive position can be eroded if problems arise. A European Ford executive, reflecting on the firm's concentration of activities during a global integration program in the mid-1990s, lamented, “Now if you misjudge the market, you are wrong in 15 countries rather than only one.”

Exhibit 7.6 summarizes the strengths and limitations of global strategies.

EXHIBIT 7.6	Strengths and Limitations of Global Strategies
Strengths	Limitations
· Strong integration occurs across various businesses.	· Limited ability exists to adapt to local markets.
· Standardization leads to higher economies of scale, which lower costs.	· Concentration of activities may increase dependence on a single facility.
· Creation of uniform standards of quality throughout the world is facilitated.	· Single locations may lead to higher tariffs and transportation costs.

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Multidomestic Strategy

According to Exhibit 7.4, a firm whose emphasis is on differentiating its product and service offerings to adapt to local markets follows a multidomestic strategy.54 Decisions evolving from a multidomestic strategy tend to be decentralized to permit the firm to tailor its products and respond rapidly to changes in demand. This enables a firm to expand its market and to charge different prices in different markets. For firms following this strategy, differences in language, culture, income levels, customer preferences, and distribution systems are only a few of the many factors that must be considered. Even in the case of relatively standardized products, at least some level of local adaptation is often necessary.

Consider, for example, the Oreo cookie.55 Kraft has tailored the iconic cookie to better meet the tastes and preferences in different markets. For example, Kraft has created green tea Oreos in China, chocolate and peanut butter Oreos for Indonesia, and banana and dulce de leche Oreos for Argentina. Kraft has also lowered the sweetness of the cookie for China and reduced the bitterness of the cookie for India. The shape is also on the table for change. Kraft has even created wafer-stick-style Oreos.

Kraft has tailored other products to meet local market needs. For example, with its Tang drink product, it developed local flavors, such as a lime and cinnamon flavor for Mexico and mango Tang for the Philippines. It also looked to the nutritional needs in different countries. True to the heritage of the brand, Kraft has kept the theme that Tang is a good source of vitamin C. But in Brazil, where children often have iron deficiencies, it added iron as well as other vitamins and minerals. The local-focus strategy has worked well, with Tang's sales almost doubling in five years.

To meet the needs of local markets, companies need to go beyond just product designs. One of the simple ways firms have worked to meet market needs is by finding appropriate names for their products. For example, in China, the names of products imbue them with strong meanings and can be significant drivers of their success. As a result, firms have been careful with how they translate their brands. For example, Reebok became Rui bu, which means “quick steps.” Lay's snack foods became Le shi, which means “happy things.” And Coca-Cola's Chinese name, Ke Kou Ke Le, translates to “tasty fun.”

Strategy Spotlight 7.5 discusses how Honda experienced challenges in moving fully to multidomestic operations and how it responded.

Risks and Challenges   As you might expect, there are some risks associated with a multidomestic strategy. Among these are the following:

· Typically, local adaptation of products and services will increase a company's cost structure. In many industries, competition is so intense that most firms can ill afford any competitive disadvantages on the dimension of cost. A key challenge of managers is to determine the trade-off between local adaptation and its cost structure. For example, cost considerations led Procter & Gamble to standardize its diaper design across all European markets. This was done despite research data indicating that Italian mothers, unlike those in other countries, preferred diapers that covered the baby's navel. Later, however, P&G recognized that this feature was critical to these mothers, so the company decided to incorporate this feature for the Italian market despite its adverse cost implications.

At times, local adaptations, even when well intentioned, may backfire. When the American restaurant chain TGI Fridays entered the South Korean market, it purposely incorporated many local dishes, such as kimchi (hot, spicy cabbage), in its menu. This responsiveness, however, was not well received. Company analysis of the weak market acceptance indicated that Korean customers anticipated a visit to TGI Fridays as a visit to America. Thus, finding Korean dishes was inconsistent with their expectations.