Intro to International Business

92

The globalization of Inarl<ets

Theodore Levitt

Many companies have become disillu - sioned with sales in the international mar- k etplace as old markets become saturated and new ones must be found . How can they customize products for the demands of n ew markets? Which items will con - sumers want? With wily international com- petitors breathing down their neck s; many organizations think t hat the game just isn't worth the effort.

In this powerful essay, the author asser ts th at well-managed companies have moved from emphasis on customizi ng item s to offering globally standardized products that are advanced, functional, rehable - and low priced. Multinational companies that concentrated on idiosyncratic con - s umer preferen ces have become befuddled and unable to take in the fores t because of the trees. Only global companies will achieve Jon g-term success by concentrat - ing on what everyon e wants rather than worrying about the details of wh at every- one thinks they might li ke.

Mr. Levitt is Edward W. Carter Professor of Business Administration and head of the marketing area at the Harvard Business School. This is Mr. Levitt's twenty-third article for H BR; his classic "Ma rketing Myopia ," first published in 1960, was reprinted m September-October 1975, and hi s last article was " Mark eting Intangible Products and Product Intangibles" (May-/une 1981).

Illus tration by Karen Watson .

Co111panies111ustlearn to operate as if the world were one large 111arket -

ignoring superficial regional and national differences

A powerful force drives the world toward a converging commonality, and that force is technology. It has proletarian ized communication, transport, and travel. It h as made isolated places and impoverished peoples eager for m odernity's allure- m ents. Almost everyone everywhere wa nts all the things they have heard about, seen, or experienced via the new technologies.

The result is a new comm ercial reality- the emergence of global markets for standardized con- sumer products on a previously unimagined scale of magnitude. Corporations geared to this new reality benefit from enormous economies of sca le in produc- tion, distribution, m arketing, and management. By translating these benefits into reduced world prices, they can decima te competitors tha t still li ve in the disabling grip of old assumptions abou t how the world works.

Gone are accu stom ed differences in national or regional preference. Gone are the days when a company could sell last year's m odels-or lesser version s of advanced products - in the less- developed world . And gone are the days when prices, margins, and profits abroad were generally h igher than at h om e.

The globaliza tion of m arkets is a t hand. With that, the multinational com mercial world nears its end, and so does the multinational corpora tion.

T he multinational and the global corpo- ra tion are not the sam e thing. T he multination al cor- poration operates in a num ber of countri es, and adjusts its products and practices in each - at high relative costs. The global corporation operates with resolute constancy- at low rela tive cost - as if the entire world

I In• landmark artic le, Robert D Buzzell pointed o ut the rap1d1ty w11h whic h barn ers to s tandardtzauo n were falling . In all cases t hey succumbed

to more and cheaper •dv•nccd w•ys of do mg th mgs . Sec

"Can Yo u Standardize Mulun au o nal Markeung~"

I !BR November· December 1968, p. 102.

(or major regions of it) were a single entity; it sells the same things in the same way everywhere.

Which strategy is better is not a mat- ter of opinion but of necessity. Worldwide communi- cations carry everywhere the constant drumbeat of modem possibilities to lighten and enhance work, raise living standards, divert, and entertain. The same countries that ask the world to recognize and respect the individuality of their cultures insist on the whole- sale transfer to them of modem goods, services, and technologies. Modernity is not just a wish but also a widespread practice among those who cling, with unyielding passion or religious fervor, to ancient atti- tudes and heritages .

Who can forget the televised scenes dur- ing the 1979 Iranian uprisings of young men in fashion- able French-cut trousers and silky body shirts thirsting with raised modem weapons for blood in the name of Islamic fundamentalism?

In Brazil, thousands swarm daily from pre-industrial Bahian darkness into exploding coastal cities, there quickly to install television sets in crowded corrugated huts and, next to battered Volkswagens, make sacrificial offerings of fruit and fresh-killed chickens to Macumban spirits by candlelight.

During Biafra's fratricidal war against the Ibos, daily televised reports showed soldiers carry- ing bloodstained swords and listening to transistor radios while drinking Coca-Cola.

In the isolated Siberian city of Krasno- yarsk, with no paved streets and censored news, occa- sional Western travelers are stealthily propositioned for cigarettes, digital watches, and even the clothes off their backs.

The organized smuggling of electronic equipment, used automobiles, western clothing, cos- metics, and pirated movies into primitive places exceeds even the thriving underground trade in mod- em weapons and their military mercenaries.

A thousand suggestive ways attest to the ubiquity of the desire for the most advanced things that the world makes and sells-goods of the best qual- ity and reliability at the lowest price. The world's needs and desires have been irrevocably homogenized. This makes the multinational corporation obsolete and the global corporation absolute.

Living in the Republic of Technology

Daniel J. Boorstin, author of the monu- mental trilogy The Americans, characterized our age

Global marketers 9.3

as driven by "the Republic of Technology [whose[ supreme law .. .is convergence, the tendency for every- thing to become more like everything else."

In business, this trend has pushed mar- kets toward global commonality. Corporations sell standardized products in the same way everywhere - autos, steel, chemicals, petroleum, cement, agricul- tural commodities and eq uipment, industrial and commercial construction, banking and insurance services, computers, semiconductors, transport, electronic instruments, pharmaceuticals, and telecommunications, to mention some of the obvious.

Nor is the sweeping gale of globaliza- tion confined to these raw material or high-tech prod- ucts, where the universal language of customers and users facilitates standardization. The transforming winds whipped up by the proletarianization of com- munication and travel enter every crevice of life.

Commercially, nothing confirms this as much as the success of McDonald's from the Champs Elysees to the Ginza, of Coca-Cola in Bahrain and Pepsi-Cola in Moscow, and of rock music, Greek salad, Hollywood movies, Revlon cosmetics, Sony tclev1- sions, and Levi jeans everywhere. "High-touch" products are as ubiquitous as high-tech.

Starting from opposing sides, the high- tech and the high-touch ends of the commercial spec- trum gradually consume the undistributed middle in their cosmopolitan orbit. No one is exempt and noth- ing can stop the process. Everywhere everything gets more and more like everything else as the world 's pref- erence structure is relentlessly homogenized.

Consider the cases of Coca-Cola and Pepsi-Cola, which are globally standardized products sold everywhere and welcomed by everyone. Both successfully cross multitudes of national, regional, and ethnic taste buds trained to a variety of deeply ingrained local preferences of taste, flavor, consistency, effervescence, and aftertaste. Everywhere both sell well. Cigarettes, too, especially American-made, make year-to-year global inroads on territories previously held in the firm grip of other, mostly local, blends.

These are not exceptional examples. (Indeed their global reach would be even greater were it not for artificial trade barriers.) They exemplify a gen- eral drift toward the homogenization of the world and how companies distribute, finance, and price products. Nothing is exempt. The products and methods of the industrialized world play a single tune for all the world, and all the world eagerly dances to it.

Ancient differences in national tastes or modes of doing business disappear. The commonality of preference leads inescapably to the standard1zat1on of products, manufacturing, and the institutions of trade and commerce. Small nation-based markets transmogrify and expand. Success in world competi- tion turns on efficiency in production, distribution,

94

marketing, and management, and inevitably becomes focused on price.

The most effective world competitors incorporate superior quality and reliability into their cost structures. They sell in all national markets the same kind of products sold at home or in their largest export market. They compete on the basis of appropri- ate value - the best combinations of price, quality, reli- ability, and delivery for products that are globally identical with respect to design, function, and even fashion.

That, and little else, explains the surg- ing success of Japanese companies dealing worldwide in a vast variety of products - both tangible products like steel, cars, motorcyles, hi-fi equipment, farm machinery, robots, microprocessors, carbon fibers, and now even textiles, and intangibles like banking, ship- ping, general contracting, and soon computer software. Nor are high-quality and low-cost operations incom- patible, as a host of consulting organizations and data engineers argue with vigorous vacuity. The reported data are incomplete, wrongly analyzed, and contradic- tory. The truth is that low-cost operations arc the hall- mark of corporate cultures that require and produce quality in all that they do. High quality and low costs are not opposing postures. They are compatible; twin identities of superior practice.2

To say that Japan's companies are not global because they export cars with left-side drives to the United States and the European continent, while those in Japan have right-side drives, or because they sell office machines through distributors in the United States but directly at home, or speak Portuguese in Brazil is to mistake a difference for a distinction . The same is true of Safeway and Southland retail chains operating effectively in the Middle East, and to not only native but also imported populations from Korea, the Philippines, Pakistan, India, Thailand, Britain, and the United States. National rules of the road differ, and so do distribution channels and languages. Japan's dis- tinction is its unrelenting push for economy and value enhancement . That translates into a drive for standard- ization at high quality levels.

Vindication of the Model T

If a company forces costs and prices down and pushes quality and reliability up -while maintaining reasonable concern for suitability- customers will prefer its world-standardized products. The theory holds, at this stage in the evolution of glo- balization, no matter what conventional market research and even common sense may suggest about different national and regional tastes, preferences, needs, and institutions . The Japanese have repeatedly

Ha rva rd Business Review May-June 1983

vindicated this theory, as did Henry Ford with the Model T. Most important, so have their imitators, including companies from South Korea (television sets and heavy construction), Malaysia (personal calcula- tors and microcomputers), Brazil (auto parts and tools ), Colombia (apparel), Singapore (optical equipment), and yes, even from the United States (office copiers, com- puters, bicycles, castings), Western Europe (automatic washing machines), Rumania (housewares), Hungary (apparel), Yugoslavia (furniture), and Israel (pagination equipment).

Of course, large companies operating in a single nation or even a single city don't standardize everything they make, sell, or do. They have product lines instead of a single product version, and multiple distribution channels. There are neighborhood, local, regional, ethnic, and institutional differences, even within metropolitan areas. But although companies customize products for particular market segments, they know that success in a world with homogenized demand requires a search for sales opportunities in similar segments across the globe in order to achieve the economies of scale necessary to compete.

Such a search works because a market segment in one country is seldom unique; it has close cousins everywhere precisely because technology has homogenized the globe. Even small local segments have their global equivalents everywhere and become subject to global competition, especially on price.

The global competitor will seek con- stantly to standardize his offering everywhere. He will digress from this standardization only after exhausting all possibilities to retain it, and he will push for rein- statement of standardization whenever digression and divergence have occurred. He will never assume that the customer is a king who knows his own wishes.

Trouble increasingly stalks companies that lack clarified global focus and remain inattentive to the economics of simplicity and standardization. The most endangered companies in the rapidly evolv- ing world tend to be those that dominate rather small domestic markets with high value-added products for which there are smaller markets elsewhere. With transportation costs proportionately low, distant com- petitors will enter the now-sheltered markets of those companies with goods produced more cheaply under scale-efficient conditions. Global competition spells the end of domestic territoriality, no matter how diminutive die territory may be.

2 There is powerful new evidence for th •s, even though the o pposite has been urged by anal ysts of PIM S data for nearly a decade. See

" Product Quality Cost Produc uon and Business Performance - A Test of

Some Key Hypotheses " by Lynn W Ph1 lhps, Dae Chang, a nd Robert D Buzzell, Marva rd Busmess Sch ool Workmg Paper No 83-13

G lobal m arketers 95

96

One ergument thet oppoel9 globlllzlllon uya thet ..... faclory autom8llon wll erllble plenta of IMl- llve m lo change proc1uc:1a ...i product...,,_ qulddy. without llopping the rnenulecturlng proclll. TheM fllclorlM of the future could thul produce brolld llnH of CUllomlud produc:la without ucrlftclng the ICale eooi IOlniel thet come from long production 1U111 ol ltlndmdlzed items. Computer-aided dellgrl MCI rnenuf.aurlng (CAO/CAM), combined with robotlcl, wll cnate a new equipment MCI procea tedio"IOlogy (EPT) that wHI make ""811 planta located clole lo their IMIUll a1 efllclent •large ones located dlatantly. Economlel of ICale wil not dominate, but rather econo- mie. of ecope-the ability of either large or small planta lo produce grMl varietlel of relallYety CUllomized produc:la at l9mallcably low coata. If that happena, CUl- lomerl wil have no need to abandon epec:lal pi .........

, .. not deny the power of tllaee poulbllltlel. But pos- llllllllel do not make piobablliliel. There ii no concelv· lllle way In which llexllle faclory aulOrnation can act-. the ICale eooiiomiel of. modernized plant dedk:8l9d to mm production of standardized llMI. The new dlgltlad equipment and procea technologiel .. available ID all. Manufacturers with minimal CUI· lomlDllon MCI narrow product-line brMdltl wil llaV9 coata ,_below ttlOle with more customization and wlderllnM.

When the global producer offers his lower costs internationally, his patronage expands exponentially. He not only reaches into distant mar- kets, but also attracts customers who previously held to local preferences and now capitulate to the attrac- tions of lesser prices. The strategy of standardization not only responds to worldwide homogenized markets but also expands those markets with aggressive low pricing. The new technological juggernaut taps an ancient motivation-to make one's money go as far as possible. This is universal-not simply a motivation but actually a need.

The hedgehog knows

The difference between the hedgehog and the fox, wrote Sir Isaiah Berlin in distinguishing between Dostoevski and Tolstoy, is that the fox knows a lot about a great many things, but the hedgehog knows everything about one great thing. The multina- tional corporation knows a lot about a great many

Harvard Business Review May-June 1983

countries and congenially adapts to supposed differ- ences. It willingly accepts vestigial national differ- ences, not questioning the possibility of their transformation, not recognizing how the world is ready and eager for the benefit of modernity, especially when the price is right. The multinational corporation's accommodating mode to visible national differences is medieval.

By contrast, the global corporation knows everything about one great thing. It knows about the absolute need to be competitive on a world- wide basis as well as nationally and seeks constantly to drive down prices by standardizing what it sells and how it operates. It treats the world as composed of few standardized markets rather than many customized markets . It actively seeks and vigorously works toward global convergence. Its mission is modernity and its mode, price competition, even when it sells top-of-the- line, high-end products. It knows about the one great thing all nations and people have in common: scarcity.

Nobody takes scarcity lying down; everyone wants more. This in part explains division of labor and specialization of production. They enable people and nations to optimize their conditions through trade. The median is usually money.

Experience teaches that money has three special qualities: scarcity, difficulty of acquisi- tion, and transience. People understandably treat it with respect. Everyone in the increasingly homoge- nized world market wants products and features that everybody else wants. If the price is low enough, they will take highly standardized world products, even if these aren't exactly what mother said was suitable, what immemorial custom decreed was right, or what market-research fabulists asserted was preferred.

The implacable truth of all modem production-whether of tangible or intangible goods - is that large-scale production of standardized items is generally cheaper within a wide range of volume than small-scale production. Some argue that CAD/ CAM will allow companies to manufacture customized products on a small scale - but cheaply. But the argu- ment misses the point. (For a more detailed discussion, see the insert, "Economies of scope." ) If a company treats the world as one or two distinctive product mar- kets, it can serve the world more economically than if it treats it as three, four, or five product markets.

Why remaining differences?

Different cultural preferences, national tastes and standards, and business institutions are vestiges of the past. Some inheritances die gradually; others prosper and expand into mainstream global

Global marketers 97

preferences. So-called ethnic markets are a good exam· ple. Chinese food, pita bread, country and western music, pizza, and jazz are everywhere. They arc market A failure in global segments that exist in worldwide proportions. They imagination don't deny or contradict global homogenization but confirm it.

Many of today's differences among nations as to products and their features actually reflect the respectful accommodation of multinational corporations to what they believe are fixed local prefer· ences. They believe preferences are fixed, not because they are but because of rigid habits of thinking about what actually is. Most executives in multinational corporations are thoughtlessly accommodating. They falsely presume that marketing means giving the cus· tamer what he says he wants rather than trying to understand exactly what he'd like. So they persist with high-cost, customized multinational products and practices instead of pressing hard and pressing properly for global standardization.

I do not advocate the systematic disre· gard of local or national differences. But a company's sensitivity to such differences does not require that it ignore the possibilities of doing things differently or better.

There are, for example, enormous differ· cnces among Middle Eastern countries. Some are socialist, some monarchies, some republics. Some take their legal heritage from the Napoleonic Code, some from the Ottoman Empire, and some from the British common law; except for Israel, all are influenced by Islam . Doing business means personalizing the busi· ness relationship in an obsessively intimate fashion. During the month of Ramadan, business discussions can start only after 10 o'clock at night, when people are tired and full of food after a day of fasting. A company must almost certainly have a local partner; a local law- yer is required (as, say, in New York), and irrevocable letters of credit are essential. Yet, as Coca-Cola's Senior Vice President Sam Ayoub noted, "Arabs are much more capable of making distinctions between cultural and religious purposes on the one hand and economic realities on the other than is generally assumed. Islam is compatible with science and modern times."

Barriers to globalization are not con· fined to the Middle East. The free transfer of technol· ogy and data across the boundaries of the European Common Market countries are hampered by legal and financial impediments. And there is resistence to radio and television interference ("pollution") among neigh· boring European countries.

But the past is a good guide to the future. With persistence and appropriate means, barri· ers against superior technologies and economics have always fallen. There is no recorded exception where reasonable effort has been made to overcome them. It is very much a matter of time and effort.

Many companies have tried to standard· ize world practice by exporting domestic products and processes without accommodation or change-and have failed miserably. Their deficiencies have been seized on as evidence of bovine stupidity in the face of abject impossibility. Advocates of global standardiza· tion see them as examples of failures in execution.

In fact, poor execution is often an important cause. More important, however, is failure of nerve-failure of imagination.

Consider the case for the introduction of fully automatic home laundry equipment in West· cm Europe at a time when few homes had even semi· automatic machines. Hoover, Ltd., whose parent company was headquartered in North Canton, Ohio had a prominent presence in Britain as a producer of vacuum cleaners and washing machines. Due to insuf- ficient demand in the home market and low exports to the European continent, the large washing machine plant in England operated far below capacity. The com· pany needed to sell more of its semiautomatic or auto· ma tic machines.

Because it had a "proper" marketing orientation,' Hoover conducted consumer preference studies in Britain and each major continental country. The results showed feature preferences clearly enough among several countries (see the Exhibit).

The incremental unit variable costs (in pounds sterling) of customizing to meet just a few of the national preferences were:

£ s. d .

Stainless steel vs. enamel drum 0 0

Porthole window 10 0

Spin speed of 800 rpm vs. 700 rpm 15 0

Water heater 2 15 0

6 vs. 5 kilos capacity 10 0

£6 10 s Od $18.20 at the exchange rate of that time.

Considerable plant investment was needed to meet other preferences.

The lowest retail prices (in pounds ster· ling) of leading locally produ ced brands in the various countries were approximately:

98

U.K. £110

France 114

West Germany 113

Sweden 134

Italy 57

Product customization in each country would have put Hoover in a poor competitive position on the basis of price, mostly due to the higher manu- facturing costs incurred by short production runs for separate features. Because Common Market tariff reduction programs were then incomplete, Hoover also paid tariff duties in each continental country.

How to make a creative analysis

In the Hoover case, an imaginative analysis of automatic washing machine sales in each country would have revealed that:

1 It~dian automatics, small in capacity and size, low-powered, without built-in heaters, with porcelain enamel tubs, were priced aggressively low and were gaining large market shares in all countries, including West Germany.

2 The best-selling automatics in West Germany were heavily advertised (three times more than the next most promoted brand), were ideally suited to national tastes, and were also by far the high- est priced machines available in that country.

3 Italy, with the lowest penetration of washing machines of any kind (manual, semi- automatic, or automatic) was rapidly going directly to automatics, skipping the pattern of first buying hand- wringer, manually assisted machines and then semiautomatics.

4 Detergent manufacturers were just beginning to promote the technique of cold-water and tepid-water laundering then used in the United States.

The growing success of small, low- powered, low-speed, low-capacity, low-priced Italian machines, even against the preferred but highly priced and highly promoted brand in West Germany, was sig- nificant. It contained a powerful message that was lost on managers confidently wedded to a distorted version of the marketing concept according to which you give the customer what he says he wants. In fact the cus- tomers said they wanted certain features, but their

Harvard Business Review May-June 1983

behavior demonstrated they'd take other features pro- vided the price and the promotion were right.

In this case it was obvious that, under prevailing conditions, people preferred a low-priced automatic over any kind of manual or semiautomatic machine and certainly over higher priced automatics, even though the low-priced automatics failed to fulfill all their expressed preferences. The supposedly metic- ulous and demanding German consumers violated all expectations by buying the simple, low-priced Italian machines.

It was equally clear that people were profoundly influenced by promotions of automatic washers; in West Germany, the most heavily promoted ideal machine also had the largest market share despite its high price. 1Wo things clearly influenced customers to buy: low price regardless of feature preferences and heavy promotion regardless of price. Both factors helped homemakers get what they most wanted-the superior benefits bestowed by fully automatic machines.

Hoover should have aggressively sold a simple, standardized high-quality machine at a low price (afforded by the 17% variable cost reduction that the elimination of £6-10-0 worth of extra features made possible). The suggested retail prices could have been somewhat less than £100. The extra funds "saved" by avoiding unnecessary plant modifications would have supported an extended service network and aggressive media promotions.

Hoover's media message should have been: this is the machine that you, the homemaker, deserve to have to reduce the repetitive heavy daily household burdens, so that you may have more con- structive time to spend with your children and your husband . The promotion should also have targeted the husband to give him, preferably in the presence of his wife, a sense of obligation to provide an automatic washer for her even before he bought an automobile for himself. An aggressively low price, combined with heavy promotion of this kind, would have overcome previously expressed preferences for particular features.

The Hoover case illustrates how the perverse practice of the marketing concept and the absence of any kind of marketing imagination le t multinational attitudes survive when customers actu- ally want the benefits of global standardization. The whole project got off on the wrong foot. It asked people what features they wanted in a washing machine rather than what they wanted out of life. Selling a line of products individually tailored to each nation is thoughtless. Managers who took pride in practicing the marketing concept to the fullest did not, in fact, prac- tice it at all. Hoover asked the wrong questions, then applied neither thought nor imagination to the answers. Such companies are like the ethnocentricists

Global marketers 99

-' ·~. " •"'°"°'"•• o·•;°t:rl'll'J-W::~"t~'':.,t;-.111 -F:' i 'f ·' '" - · •-T•' I 'Exhibit Consumerpreferel),cesas ·to~uto ,',) . ..--~ ; _ -~:· · ! . • '

washing machine.features iii ~he 1~ l- '·· : · "•.• u·L >b?.

........ ........... ..., ......._, ..... ...... ............. M" Low 34 M" 34 llldMnOW llldMnOW llldwlde llldMnOW llldwlde

a._._... Enemel EftllMI StMllll9 e..... ..... ..... ..... ....... 10p Fronl Front Front Front .............. ~ v. v. v. v. ...., 5klloe 4klloe lkb lklloe llcb ........ 700rpm 400rpm ll50rpm IOOrpm IOOrpm .. , ..... Not v. V.tt - Not ...... ............ ,.,.,.,, 1Umble 1Umble ,.,.,.,, 1Umble ........... lnaonlplcuoua :Cl ......,.... Eleglrll ..... ....... ....... ...... . ....... -:=:-.t:ra C 111 Cll!111n9 ........................... Md ........... lllfilllln .....

-... ............. ttWllla.:~--....... ......... ............

pnMclld

in the Middle Ages who saw with everyday clarity the sun revolving around the earth and offered it as Truth. With no additional data but a more searching mind, Copernicus, like the hedgehog, interpre ted a m ore compelling and accurate reality. Data do not yield information except with the intervention of the mind . Information does not yield meaning except with the intervention of imagination.

Accepting the inevitable

The global corporation accepts for bet- ter or for worse that technology drives consumers relentlessly toward the same common goa ls - alleviation of life's burdens and the expansion of dis· cretionary tim e and spending power. Its role is profoundly different from what it has been for the ordi- nary corporation during its brief, turbulent, and remarkably protean history. It orchestrates the twin vectors of technology and globalization for the world's benefit . N either fate, nor nature, nor God but rather the necessity of commerce created this role.

In the United States two industries became global long before they were consciously aware of it. After over a generation of persistent and acrimonious labor shutdowns, the United Steel- workers of America have not called an industrywide strike since 1959; the United Auto Workers have

not shut down General Motors since 1970. Both unions realize that they have become global - shutting down all or most of U.S. manufacturing would not sh ut out U.S. custom ers. Overseas suppliers are there to supply the market .

Cracking the code of Western markets

Since the theory of the marketing concept emerged a quarter of a cen tury ago, the more managerially advanced corporations have been eager to offer what customers clearly wanted rather than what was merely convenient. T h ey have created marketing departments supported by professional market researchers of awesome and often costly proportions. And they have proliferated extraordinary numbers of operations and product lines-highly tailored products and delivery systems for many different markets, mar· ket segments, and nations.

Significantly, Japanese companies oper· ate almost entirely without marketing departments or market research of the kind so preval ent in the West . Yet, in the colorful words of General Electric's chair· man John E Welch, Jr., the Japanese, coming from a small cluster of resource-poor islands, with an entirely alien culture and an almost impenetrably complex lan- guage, have cracked the code of Western markets . They have done it not by looking with mechanistic thor- o ughness at the way markets are different but rather

100

by searching for meaning with a deeper wisdom. They have discovered the one great thing all markets have in common -an overwhelming desire for depend- able, world-standard modernity in all things, at aggressively low prices. In response, they deliver irresist- ible value everywhere, attracting people with products that market-research technocrats described with superficial certainty as being unsuitable and uncompetitive.

The wider a company's global reach, the greater the number of regional and national prefer- ences it will encounter for certain product features, distribution systems, or promotional media. There will always need to be some accommodation to differences. But the widely prevailing and often unthinking belief in the immutability of these differences is generally mistaken. Evidence of business failure because of lack of accommodation is often evidence of other shortcomings.

Take the case of Revlon in Japan. The company unnecessarily alienated retailers and con- fused customers by selling world-standardized cosmet- ics only in elite outlets; then it tried to recover with low-priced world-standardized products in broader dis- tribution, followed by a change in the company presi- dent and cutbacks in distribution as costs rose faster than sales. The problem was not that Revlon didn't understand the Japanese market; it didn't do the job right, wavered in its programs, and was impatient to boot.

By contrast, the Outboard Marine Corporation, with imagination, push, and persistence, collapsed long-established three-tiered distribution channels in Europe into a more focused and controlla- ble two-step system - and did so despite the vociferous warnings of local trade groups. It also reduced the num- ber and types of retail outlets. The result was greater im- provement in credit and product-installation service to customers, major cost reductions, and sales advances.

In its highly successful introduction of Contac 600 (the timed-release decongestant) into Japan, SrnithKline Corporation used 35 wholesalers instead of the 1,000-plus that established practice required. Daily contacts with the wholesalers and key retailers, also in violation of established practice, sup- plemented the plan, and it worked.

Denied access to established distribu- tion institutions in the United States, Komatsu, the Japanese manufacturer of lightweight farm machinery, entered the market through over-the-road construction equipment dealers in rural areas of the Sunbelt, where farms are smaller, the soil sandier and easier to work. Here inexperienced distributors were able to attract customers on the basis of Komatsu's product and price appropriateness.

In cases of successful challenge to pre- vailing institutions and practices, a combination of

Harvard Business Review May -J une 1983

product reliability and quality, strong and sustained support systems, aggressively low prices, and sales- compensation packages, as well as audacity and impla- cability, circumvented, shattered, and transformed very different distribution systems. lnstead of resentment, there was admiration.

Still, some differences between nations are unyielding, even in a world of microprocessors. In the United States almost all manufacturers of micro- processors check them for reliability through a so- called parallel system of testing. Japan prefers the totally different sequential testing system. So Teradyne Corporation, the world's largest producer of micropro- cessor test equipment, makes one line for the United States and one for Japan . That's easy.

What's not so easy for Teradyne is to know how best to organize and manage, in this instance, its marketing effort. Companies can organize by product, region, function, or by using some combi- nation of these. A company can have separate market- ing organizations for Japan and for the United States, or it can have separate product groups, one working largely in Japan and the other in the United States. A single manufacturing facility or marketing operation might service both markets, or a company might use separate marketing operations for each.

Questions arise if the company orga- nizes by product. In the case of Teradyne, should the group handling the parallel system, whose major mar- ket is the United States, sell in Japan and compete with the group focused on the Japanese market? If the com- pany organizes regionally, how do regional groups divide their efforts between promoting the parallel vs. the sequential system? If the company organizes in terms of function, how does it get commitment in marketing, for example, for one line instead of the other?

There is no one reliably right answer- no one formula by which to get it. There isn 't even a satisfactory contingent answer.1 What works well for one company or one place may fail for another in pre- cisely the same place, depending on the capabilities, histories, reputations, resources, and even the cultures of both.

The earth is flat

The differences that persist throughout the world despite its globalization affim1 an ancient dictum of economics-that things are driven by what happens at the margin, not at the core. Thus, in ordi- nary competitive analysis, what's important is not the average price but the marginal price; what happens not

in the usual case but a t the interface of newly erupting conditions. What counts in commercial affairs is what happens at the cutting edge. What is most striking today is the underlying similarities of what is happen- ing now to national preferences at the m argin. These similarities at the cutting edge cumulatively form an overwhelming, predominant commonality everywhere.

To refe r to the persistence of economi c nati onali sm (protective and subsidized trade practices, special tax aids, or restrictions for home m arket pro- ducers) as a barrier to the globalization of markets is to make a valid point. Economic nationalism does have a powerful persistence. But, as with the present almost totally sm ooth internationalization of investment capital, the past alone does not shape or predict the future. (For reflections on the internationalization of capital, sec the insert, " The shortening of Japan ese horizons.'')

Reality is not a fixed paradigm, domi- nated by imm emorial customs and derived attitudes, heedl ess of powerful and abundant new forces. The world is becoming increasingly informed about the liberating and enha ncing possibilities of modernity. The pe rsistence of the inherited varieties of national preferences rests uneasily on increasing evidence of, and restlessness regardin& their ineffi ciency, costli- ness, and confinem ent. T he historic past, and the national diffe rences respecting commerce and industry it spawned and fos tered everywhere, is now subject to relati vely easy t ransformation.

Cosmopolitanism is no longer the monopoly of the intellectual and leisure classes; it is becoming the established property and defining char- acteristic of all sectors everywhere in the world. G rad- ually and irres istibl y it breaks down the walls of economic insularity, nationalism , and chauvin ism . What we see today as escalating commercial national- ism is s imply th e last violent death rattl e of an obso- lete in stitution.

Companies that adapt to and capitalize on economic convergence can still m ake distinctions and adjustme nts in different markets. Persiste nt differ- ences in the world arc con sisten t with fundam ental underl ying commonalities; they often complement ra ther than oppose each other-in business as they do in ph ysics. There is, in physics, simultaneously m atter and anti-matter working in symbiotic harmony.

T he earth is round, but fo r most pur- poses it 's sensible to treat it as flat. Space is cu rved, but not much fo r everyday life here on earth.

Divergence from establish ed practice happens all the time. But the multinational mind,

.1 For a discussi on of mult1nat1onal reo rgan 1z.1t1on1 \CC Chrmuph er A Bartlett,

" MNCs · Get Off the Reorgami:a u on Merry·Go-Round," H BR Marc h -Apnl 1983, p 1.18

Global m arketers IOI

One or the mo11 powerful,_. IMlt cellbl'llld torwa driving comrMICe towlJd glol* lt8ndlrdlzatlon II the monNry ayllem, lllong wlltl the lntlrnatlonel lrMll· menl proceM.

Today money la limply electronic lmpuleee. With the IPMd or light 11 rnovee etrort1ea1y between cllltm'lt centen (Md even .....,plecM). A ct.lg9 of ten bMll po1n111n the pr1ce or• bond ca...1111 tnmnt Md mu11ve lhlft or money trom London 1o Tokyo. The.,.. tern ha profound 1rnpec1 on the way compMiM oper- • throughout the world.

Tllce.llpen, where high debt·IHquity belence lhMta .. "guuanlMCI" by verlous IOClelll preeumptiona about the virtue or "a long vi.w," or by gcMf'lllMlll pol- icy in ot. ways. Even here, upward llllfll In 1n1er..a ...... "'ot..,.,.. or the world a11rac1 cap11a1 out or .. country In powerful pniporliol•. In,_,. yeara more Md more JlpeneM glabel corporaliol• have gone lo the world .. equity marUls tor funde. Debi le IDO ....... neratM In hlgh-yieldll ig counlrlel to ..., capital at homelofMdthe.llpeneMneed.Aa ~ ........... . equity becomH a more anractM opllon tor the ..... .

The long-term lrnpllCI on JlpeneM enlerprlle wll be tran1tormlng. Aa the equity propoltlon or JapeMM COi'· porate capltdzatlon ....... compenlM wll r9IPOl1d to the 111or1er-1erm 1'"'91tment horizon• or the equ11y m.-- kell. Thua lhe rnuch-vaunled JapeMH corporate practice to taldrig the long .. wlll grmually dialppMr.

warped into circumspection and timidity by years of stumbles and transnational troubles, now ra rely chal- lenges existing overseas practi ces. More often it con· siders any departure from inherited dom estic routines as mindless, disrespectful, or impossible. It is the mind of a bygone day.

The su ccessful global corporation does not abjure customization or differentia tion for the requirements of m arkets that differ in product prefer· ences, spending patterns, shopping preferences, and institutional or legal arran gements. But the global cor- poration accepts and adjusts to th ese diffe re nces only reluctantly, only after relentlessly testing their immu- tability, after trying in various ways to circumvent and reshape them as we saw in the cases of O utboard Marine in Europe, SmithKline in Japan , and Komatsu in the United Sta tes.

T here is only one significant respect in which a company's activities around the world are important, and this is in what it produces and how it sells. Everything else deri ves from, and is subsidiary to, these activities.

The purpose of busin ess is to get and keep a customer. Or, to use Peter D ruckcr's m ore refin ed construction, to create a nd keep a custom er. A

102

company must be wedded to the ideal of innovation- offering better or more preferred products in such com- binations of ways, means, places, and at such prices that prospects prefer doing business with the company rather than with others.

Preferences are constantly shaped and reshaped. Within our global commonality enormous variety constantly asserts itself and thrives, as can be seen within the world's single largest domestic mar- ket, the United States. But in the process of world homogenization, modem markets expand to reach cost-reducing global proportions. With better and cheaper communication and transport, even small local market segments hitherto protected from distant competitors now feel the pressure of their presence. Nobody is safe from global reach and the irresistible economies of scale.

TWo vectors shape the world- technology and globalization. The first helps deter- mine human preferences; the second, economic realities. Regardless of how much preferences evolve and diverge, they also gradually converge and form markets where economies of scale lead to reduction of costs and prices.

The modem global corporation con- trasts powerfully with the aging multinational cor- poration. Instead of adapting to superficial and even entrenched differences within and between nations, it will seek sensibly to force suitably standardized prod- ucts and practices on the entire globe. They are exactly what the world will take, if they come also with low prices, high quality, and blessed reliability. The global company will operate, in this regard, precisely as Henry Kissinger wrote in Years of Upheaval about the continuing Japanese economic success- "voracious in its collection of information, impervious to pressure, and implacable in execution."

Given what is everywhere the purpose of commerce, the global company will shape the vec- tors of technology and globalization into its great strategic fecundity. It will systematically push these vectors toward their own convergence, offering every- one simultaneously high-quality, more or less stan- dardized products at optimally low prices, thereby achieving for itself vastly expanded markets and prof- its. Companies that do not adapt to the new global realities will become victims of those that do. l;7

Harvard Business Review May-June 1983

Turtles all the way down There is an Indian story-at least I heard it as an Indian s1ory- about an Englishman who, having been told that the world rested on a platform which rested on the back of an elephant which rested in turn on the back of a tur- tle, asked (perhaps he was an ethnographer; it is the way they behave), what did the turtle rest on? Another turtle. And that turtle? " Ah, Sahib, after that it is turtles all the way down:· ...

The danger that cultural analysis, in search of all-too- deep-lying turtles, will lose touch with the hard surfaces of life-with the political, economic, strattficatory reali- ties with in which men are everywhere contained-and with the biological and physical necessities on which those surfaces rest, is an ever-present one. The only defense against it, and against, thus, turning cultural analysis into a kind of soc1olog1cal aestheticism, is to train such analysis on such realities and such necessi- ties in the first place.

From Clittord Geertz, The Interpretation of Cultures (New York: Basic Books 1973), With permission of the publisher

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