Bookshelves now bulge with books proclaiming the death of distance, the flattening of the world, and the disappearance of differences across countries. Such proclamations of apocalypse now or in the near term have proven to be effective attention-getting devices for their purveyors. But they are wrong empirically and, from a practical perspective, represent serious threats to the profitability of the companies that take them seriously. Empirically, visions of the apocalypse generally assume or predict internationalisation levels close to 100%. But such predictions of complete cross-border integration are way off the mark. Ask yourself, for example, how large foreign direct investment flows are in relation to total gross fixed capital formation worldwide. For all the rhetoric about investment knowing no boundaries, that ratio has recently hovered around 10%, and although merger waves can push it higher than that — as they are likely to do this year — it has never quite reached 20%. And that isn’t just a carefully selected example. The levels of internationalisation of such diverse activities as telephone calls, management research, and charitable giving all fall below 10%. That’s one yellow card for the idea that borders don’t matter any more. The second — and decisive — yellow card against the idea of borderless world is that if managers start to believe in it, their companies are likely to compete internationally the same way that they do at home. This reinforces biases associated with the fact that firms that are successful at home are disproportionately likely to venture abroad in the first place — and to be overly enamoured of their domestic business models when they do so. The likely result: business models that fail overseas even though they work well at home. Perhaps the most vivid example of this second point, and certainly the largest, is provided by Wal-Mart, a company that I have studied for more than 20 years. Wal-Mart is a lean-mean sales machine in its home base of the United States, where it accounts for close to 10% of total retail sales and generates 80% of its sales revenue. International sales, while small relative to domestic, far outstrip other retailers’. Specifically, at the end of 2005, Wal-Mart International operated over 2,660 stores, employed more than 450,000 associates, and achieved consolidated sales that year of over $60 billion. But while international store operations have grown faster than domestic, their profitability has been a major concern. Why? There are many reasons for Wal-Mart’s poor profitability overseas, but what stands out the most is a mindset that saw the differences between countries as qualitatively no different than the distance between states within the US. As CEO Lee Scott put it several years ago in response to questions about Wal-Mart’s international prospects, “People said we would struggle when we left Arkansas and got to places like Alabama, 600 miles from Arkansas. We even hired a person to work on the cultural differences between Arkansas and Alabama. Then we were told that in New Jersey or New York, our style wouldn’t be successful.” The subtext here is a common one: our business model has performed well at home, so it should also perform well overseas. The predictable correlate, of course, is a focus on similarities across countries at the expense of paying attention to the differences between them. In the specific case of Wal-Mart, I identified 50 domestic policies and practices of the company and assessed 35 of them as being carried over more or less completely to its international operations, and only three as clearly not being carried over. The result? As emphasised in the wake of Wal-Mart’s recent exit from Germany, policies developed in the US such as employing greeters and having employees perform the company cheer were imposed on markets to which they were clearly ill-suited. Some validation that differences underlie Wal-Mart’s profit problems outside the US is provided by estimates that I prepared — based on interviews with Wal-Mart’s managers and consultants as well as the company’s financial reports — of its profitability in the eight major international markets in which it participated directly in 2004. It was quite profitable in Canada, Mexico and the UK, but unprofitable in Argentina, Brazil, China, Germany and South Korea. What distinguishes the two groups of countries? First, each of the five unprofitable countries is more distant from Wal-Mart’s headquarters (corporate, US and International) in Bentonville, Arkansas, than each of three profitable ones. Second, none of the five unprofitable countries but two of the profitable ones — Canada and the UK — share a common language with the US; relatedly, they are also the only ones linked to the US by colonial ties or a common coloniser. And third, two of the profitable countries (Canada and Mexico), but none of the unprofitable ones, share a common land border with the US; relatedly, they, unlike are the others, are its partners in a free trade agreement (NAFTA).
Or to summarise, given that Wal-Mart’s strategy historically underweighted differences, it makes money in the countries that are most similar to the US, but loses money in the countries that are very different. In fairness to Wal-Mart, I should add that it seems to have gotten better over time at adjusting to distance. For example, in stocking non-US stores, it now pays more attention to local retailers’ offerings as a baseline and less to its own merchandising mix in the US (an early overemphasis on which led to missteps such as stocking US-style footballs in soccer-mad Brazil). So it would be a mistake to rule out Wal-Mart as a successful contender in the Indian market. But if it is to succeed here, it will do so only if it emphasises significant changes to how it operates in the US. For a counter-example of a company that has done well by recognising differences across countries, consider the case of Yum! Brands, the parent of the Pizza Hut, Taco Bell, and KFC fast-food chains, which was spun off from Pepsi in 1997. At the time, it had less than one-tenth as much money as arch-rival McDonald’s International to invest outside the US — in operations that sprawled across 27 countries and were quite patchy in terms of processes and performance. But since then, it has struck gold with its operations in China, which accounted for 1,800 units in 2005 versus 263 units in 1998, and generated more operating income in 2005 — with a return on invested capital of 30% — than all of international did in 1998. Yum! now talks about building dominant China brands — particularly KFC, which dominates its operations in China as well as McDonalds there — as its key corporate strategy. The chief reason for this stunning success in an intensely contested market is while Yum! was generally stressing rationalisation and standardisation, it made an exception for the Chinese market. Specifically, it repositioned KFC there to offer extended menus, full table service and better facilities, reckoning that while China had developed very rapidly, there was a dearth of affordable casual dining options, particularly ones with assured quality. Yum! China still faces no serious challenger in this booming category. The point is not that exceptionalism always makes sense, any more than does standardisation. Rather, it is that uncovering strategies like Yum! China’s requires serious attention to the differences between countries rather than an easy faith that such differences have vanished or will soon do so — or that distance is dead or the world is flattening. (The author is professor, Harvard Business School, Boston, and IESE Business School, Barcelona)
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