Going Global

What It Took for an American Icon to Become #1 in China -- Another Lesson in Global Marketing

Regular readers of this blog know that from time to time we've examined whether global companies have the power to impose standardization upon foreign markets (ala Ted Levitt's original conception of globalized business), or whether the most successful global competitors are those that can adapt their products and business models to work in the face of divergent cultural tastes and norms.  Looking at global behemoths such as Disney and Wal-Mart, leading edge product platforms such as My Space and industry trends such as micro brews and the beer industry, the conclusion seems to be that the modern world of information driven consumerism has changed the game since Professor Levitt's seminal article in the Harvard Business Review.  As with everything else in the internet age, customer specific customization seems to present the winning formula.

The latest example of this that I've seen is the experience of Kraft Foods selling it's iconic Oreo cookie in China.  The Oreo has long been my personal favorite store bought cookie -- so much so that when my kids were little, Oreos were called "Daddy Cookies" in our house.  Particularly dunked in milk, they are almost the perfect snack food.  If there were any product I can imagine that should sell itself anywhere in the world just by getting people to try it, this would be it.

Alas, in the world of global consumer tastes and preferences, such is not the case.  Kraft, the world's second largest food seller began marketing the Oreo in China in 1996 (84 years after it was first introduced in the U.S.).  Like many "can't miss" products, it in fact struggled.  It was too sweet for the Chinese palate.   The packaging offered too many at too high a price to be seen as a good buy.

Kraft's efforts under CEO Irene Rosenfeld to become more entrepreneurial in its market approach is highlighted in an article in last Thursday's Wall Street Journal entitled "Kraft Reformulates Oreo, Scores in China."   As profiled in the article, a team led by Shawn Warren who took over Kraft's push in China in 2005 completely reworked the product to the point that a Chinese Oreo would be virtually unrecognizable in the U.S.  It is a reduced sugar concoction rolled around a combination of vanilla and chocolate creme and dipped in a chocolate coating.  The thing that it shares in common with its American namesake is that it is now the country's number 1 selling snack cookie. 

As I think about this story, it seems to me there are two distinct approaches for a company looking at entering international markets -- are you trying to find foreign markets for your existing U.S. products, or are you trying to expand and diversify your company into global markets.  If it is the former that you seek, then you need to be careful to vet the wants and needs of consumers in particular markets to be sure that they align with the value proposition used to sell your current products.  If you are seeking to accomplish the latter, however, aspiring to be a truly global company instead of an American company with products that are sold overseas, then you need to be flexible and innovative in designing products that are right for the markets you are seeking to enter.   Understanding this critical difference may require some initial soul searching that in my experience most companies don't do an adequate job of before taking the plunge into international markets.

Three Simple Rules for Success in Going Global

I have some catching up to do -- blogwise.  The first order of business is to get back to a post on China Law Blog from last month entitled "The China Ready Company -- The Basics".  In the post Dan Harris does his usual astute job distilling the critical points from an article on China for American business people -- in this case a piece from Upsize Magazine by Kent Kedl, founder of Technomic Asia. 

In the underlying article, Kedl advises almost any company to get into China, even if it's "kicking and screaming".  He dispenses some essential advice, however, to make sure that a company does it correctly.  First, he insists that the market analysis that leads a company into China must go beyond the number of people who live there.  As quoted in China Law Blog, Kedl bemoans the company that "went in thinking 1.3 billion people is a market. It's not. It's a population." 

Both Harris and Kedl make the important point that, while large companies might have the wherewithal to lose millions experimenting with the best way to implement an international strategy, small and medium size companies "have one shot".  As Dan Harris puts it, if done incorrectly, small companies can "lose their entire business, not just their new foreign operation. . . [They] have far less room for error."

The second critical piece of advice in the post is that there are more than one way to go international. There is a wide range of vehicles for entering international markets including sales through export facilitators or existing U.S. distributors with international channels, independent sales agents, sales reps and other employees on the ground, partnerships or joint ventures with local distributors abroad, and wholly owned foreign manufacturing and distribution operations.  Foreign operations may also open up different alternatives for technology deployment that don't exist in a company's domestic market.  As Kedl points out, "a company might have an old technology sitting on a shelf that is obsolete here but not necessarily there." 

All of this leads to Kedl's third piece of advice -- "Don't latch onto one particular tool and call it a strategy."   At the risk of being repetitive, it's worth repeating Kedl's descriptive analogy as to why this is so critical.  Regarding a client who had latched onto the idea that he wanted to do a joint venture in China without first doing the analysis as to how his particular business might best enter the market,Kedl concludes "that's like my saying, 'Where are you going on vacation?' and you say, 'I'm driving a Buick."   Sounds pretty dumb when you put it that way.

So the reason I wanted to do a post keying off of the China Law Blog post (aside from the fact that parroting Dan's material can't help but to make one sound more insightful than they otherwise would be), is that while Kedl focuses on the right way to enter the Chinese market, there is in his advice the nugget of a more broadly applicable set of rules for any company thinking of going global.  I would summarize those three simple rules as follows: 

1. Do the market analysis and due diligence up front in order to select the international market which is most likely to be a success for your company's product or service;
2. Once you've decided what market you should enter, go about it in a way which is most likely to achieve your sales diversification and growth objectives in the most profitable way possible; and
3. Let your international market entry and development tactics be driven by your overall corporate strategy for sales growth and profitability -- not the other way around as seems to happen so often.

After all, if in the end your foray into international markets does not make your overall business more successful, then it is unlikely that your international ventures will be deemed a success.  Whether your first inclination is China or India or Mexico or the EU, abide by these three simple rules and you will greatly increase your odds of finding success abroad.

Our Space, Their Space and MySpace -- A Paradigm for the Challenges of Going Global

Moving from one's home market into the realm of selling abroad presents a number of unique challenges, even for a company with the backing of a well capitalized conglomerate like News Corp and a dominant position in its domestic market.  From understanding the cultural differences that impact product design and placement, adapting to a more limited availability of complementary infrastructure, facing an array of additional stronger competitors, and overcoming challenges to the company's very business model that can directly impact profitability and investment time horizons, an international business can look very different from the one you have at home.   

Which brings me to the article in last week's Technology Journal section of the WSJ entitled "My Space Aims for Trickier Markets" as it highlights every one of these challenges.  On the one hand, few companies would seem to be better positioned for an easy move abroad than a totally internet based business since there is no bricks and mortar to relocate.  But the obstacles here certainly begin with the need to customize the product to align with differing needs and preferences in foreign markets -- after all, it's not our space, but My Space.

The need for customization includes of course the language of the new target users, but that's only the tip of the iceberg.  Accommodating lesser and greater degrees of complementary infrastructure, in countries with slower internet speeds such as India, the site had to be changed to disable some of the automatic downloading of streaming video.  Conversely, in countries with much faster internet speeds such as South Korea, the content had to be changed to meet the much higher expectations of users.  In countries such as Turkey where social networking is still a developing cultural phenomenon, the site needed seamless tutorials to get people started.  Culturally conditioned to hold the interests of the group over those of the individual, users in Japan were hesitant to list their personal preferences that are so much a part of the U.S. MySpace page profile, but they were more than happy to select from an upgraded array of fan clubs.  Contemplating a move into Israel, the company is developing an internet software platform that will easily accommodate text running right to left for the expected group of users networking in Hebrew.

Does everyone hear the sound of costs going up?  To further challenge the business model, there are obstacles on the sales side of the income statement as well.   While internet use is becoming widespread in many of the new markets MySpace is entering, the idea of internet advertising hasn't caught on to the degree necessary to replicate the revenue streams My Space depends on in the U.S.  This seems to be particularly true in countries that are still moving along the path toward consumer driven capitalism such as Russia.

Overcoming higher costs and the need to develop different revenue streams is easier, of course, if you can go into a new market and own the territory, but the reality is that when a company enters new international markets there is frequently more competition, not less.  In this case, it's not MySpace but their space.  As much as MySpace is the market leader among social networking sites in the U.S., Facebook has already surpassed it in many foreign markets according to the Wall Street Journal piece.  It also faces a roster of additional competitors with names like Orkut, Fotolog, Bebo and hi5. 

So what do all these challenges do to the company's strategic vision for its new market ventures.  According to the Wall Street Journal, executives at MySpace "say launching in these countries won't generate much revenue anytime soon."    Placing what are described as "strategic bets", Travis Katz, managing director of MySpace's international business is quoted as saying "we are looking at places where there is not a ton of money to be made in the next 5 or 10 years."   That may or may not get the CFO of a multinational conglomerate pumped up about the impact of going global on the operating plan, but it can be a particularly tough nut to swallow for a small to medium size company that doesn't have 5 or 10 years to wait before getting a payback on its international business.

Is there a path forward to meeting all these obstacles?  Each market can present unique challenges to a company on both the cost side and the revenue side of the income statement.  Launching into new foreign markets warrants the same type of carefully thought out plan as you should develop for launching and selling a new business idea or product platform.   A detailed and realistic assessment of the size of the opportunity, the costs of capturing that opportunity, your means and costs of financing the venture, and the time horizon from launch to profitability will allow you to optimize your chances of a successful expansion abroad.

Do You Have a Long Tail Business?

I think the concept of the "long tail" is one of the most powerful business model descriptors to come along in some time.  It's why Chris Anderson's book "The Long Tail: Why the Future of Business is Selling Less of More" is on my list of "Must Read" books.  I've discussed the concept in previous posts on this blog, but it surprises me sometimes how little known this idea is in many business circles.  For example, I teach a regular course in strategic and tactical planning for export market development to business people in companies who are looking to expand their international market presence.  In most of those classes it seems as if one or two people at most know what the long tail is about.

In general terms, the long tail is that portion under a normal distribution curve which stretches endlessly out to the extremes past a couple of standard deviations from the mean.  As a business concept, the model of the long tail was first used by Anderson in an article in Wired magazine to help explain the success of companies such as NetFlix and Amazon.  In a nutshell, the idea is that companies with large decentralized distribution centers that drive up inventory costs (think Blockbuster or Barnes & Noble) necessarily have to focus only on products (book or movie titles) that are going to sell enough copies in a given period to justify the costs of stocking the merchandise.   While the few titles that sell thousands represent a huge market, because of the near endless length of the long tail, the thousands of titles that sell one or two copies presents a market opportunity that is as large or larger.  The key is that in order to exploit this opportunity, the company's cost structure must be such that they have highly centralized decision making coupled with a very low cost of distributing small quantities. 

The concept has been used in international marketing to this point to describe why micro-credit works as a business model.  This has been applied predominantly in the extension of very small loan amounts to a widely dispersed rural population in India -- indeed, as a result of this effort, Muhammad Yunus and his Grameen Bank were awarded the Nobel Peace prize last year.

My own interest in long tail theory in exploring international market opportunities goes beyond this however.  Most companies, it seems, are understandably and automatically drawn to the obvious mega-market opportunities in China, India, Brazil and other large markets.  These are the markets under the mean area of the bell curve -- the part of the market where the Barnes & Nobles and Wal-Marts play.  If you are a small or medium size company, there are certainly opportunities here, but you're going to be competing with the same behemoths you face everyday at home. 

So my question is, does your model meet the low cost-high speed /centralized decision making- decentralized distribution framework necessary to exploit the markets in the long tail -- the many small country markets that aren't on the radar of most companies because they can't make money there?  If so, by understanding how to apply this concept to your export market entry strategy, you could own a very large market opportunity.   

Eirinn Go Brach -- Bridge to the EU

If you are a company whose products or services appeal to the wants and needs of businesses or consumers in a fully developed economy, then Europe has to be on your short list of new markets to explore.  Although the economy of any individual member country is far smaller, when aggregated, the nominal GDP of the EU is larger than that of the US.  And while the go-go growth of emerging markets such as China and India is alluring, as things stand today, the EU's combined economy is over 5 times larger than China's and over 16 times larger than India's. 

As discussed elsewhere in this blog, the EU can be a daunting market to get one's arms around because while it is in some respects a single market, it remains in many respects many separate markets divided by language and cultural preferences.  Among the critical common issues that need to be addressed by the hopeful exporter, however, are fine tuning your value proposition to ensure that it connects with European sensibilities and getting your cost structure, pricing and accounting synched up to effectively do business in Euros instead of dollars.  Until these two issues have been effectively addressed, it doesn't make sense to spend the money to translate literature and get potential sales agents or distributors up to speed in 10 different languages.

So where do you start?  I would suggest that the Republic of Ireland is a grand place to jump in.

Although Ireland retains its native Gaelige as an official language, English is also an official language and is universally spoken and used in both business and everyday life.  Accordingly developing market intelligence through conversations with potential customers, suppliers, distributors and others is easy and comfortable.  While this would also be true in the UK of course, Ireland, I think, presents a few advantages over England as a bridge to business in the EU.  First and most directly, while England is part of the EU for many purposes, it did not adopt the Euro as its currency whereas Ireland did.  More subtly but of equal importance, Ireland seems to be culturally more in tune with the continent in many ways.

Ireland also has a very sophisticated and welcoming business climate with a well developed technology sector and a motivated and educated work force.  Evidence of its well developed economy can be found in the fact that Ireland's per capita GDP is among the highest in the EU, second only to Luxembourg. As with many nations surrounded by sea coast, it also has a lengthy and in-grained history of importing and exporting -- you'll be dealing with people who know how to sell foreign goods. 

If you have a product that requires a certification (an EU equivalent of a UL rating, for example), as a general matter, if you obtain the certification in one EU country, it will be transferable to other jurisdictions within the EU.  Many of the challenges in obtaining this type of certification can be made more navigable by being able to deal with testing agencies and regulatory authorities who speak English as a first language.   So again, clearing these hurdles in Ireland can smooth the way for subsequent entry into other European markets.   

The fact is in many respects Ireland can provide a very effective bridge for any American company seeking to develop new export markets in Europe.

On the downside, you will probably have to go out for one evening of traditional Irish food such as black pudding, but rest assured that, in my experience at least, even the Irish prefer to entertain their out of town guests by taking them to some of the many excellent Italian or Chinese restaurants in Dublin -- and a lovely evening at the Clarence Hotel (owned in part by U2's Bono and Edge)in trendy Temple Bar could well be on the agenda.

The EU -- One Market or Many?

The EU resuscitated its drive to adopt an updated political structure this past weekend by agreeing to the terms of a proposed treaty that would control the common governance of its member countries.  By calling the document a "treaty" instead of a "constitution", the member governments hope to avoid the need to put the document up for a vote of their constituents which resulted in a messy rejection of the idea last time around.  Presumably governments can enter into treaties that govern their arrangements with their neighboring countries without a plebiscite, while a constitution, at least in a liberal democracy, requires the consent of the governed.

While this end run may allow the EU to act more effectively as a consolidated political entity once it is fully in place, the question remains for a company looking to Europe as a potential export market whether the EU operates as a single economy or as many diverse markets.  Depending on your particular product or service, it may be a little of both.

On the single market side, the EU certainly has

• a common currency
• an integrated transportation infrastructure
• a trans-national regulatory framework.

On the other side of the ledger, the EU has

• individual constituents that speak many different languages
• national regulatory requirements
• local cultural preferences.

The EU in which your company will do business may depend on the level of the market to which your goods or services appeal.  One helpful paradigm for understanding how this might play out is the Global/Glocal/Local framework proposed in a Harvard Business Review article in October 2006.  The idea here is that each country's market operates at several different levels, one being the "global"  level where consumers seek products and services that conform to global standards at global prices, a second being the "glocal" level at which consumers seek global products and services with some local features and at prices somewhat lower than the global price, and a third being the "local" level at which consumers seek products and services appealing to local tastes and preferences at prices determined by local competition.

The more your product plays in the global segment of the market, the more the EU will seem like a single market.  Conversely, the more local your product offering, the more the EU will be comprised of many smaller markets.  Understanding which of the EU's two market personalities you will encounter is critical to your company's success as it affects everything from choosing the locales in which you are likely to be successful, determining whether any product customization's necessary, the need to translate your literature, and the breadth and fluency of your sales force.  And I don't see these market dynamics being altered by a new governing document whether it's a treaty or a constitution.    

The Problem with Top 10 Lists

In the current issue of Entrepreneur magazine, Laurel Delaney of Globetrade.com submits a "Global Village" column which purports to answer the question "how do you find the country in which to do business?" after you have "determined that your product can be sold abroad."   Her answer is to provide the top 10 from the World Bank's rankings provided in its report entitled "Doing Business 2007: How to Reform."  Unfortunately if you're an exporter, it's the wrong answer to the right question.

First off, the list ranks countries according to how easy it is to do business IN the country.  This indeed would be a useful starting point if you were looking to locate operations on the ground.  The fact that a country may be a relatively easy place in which to operate a business does not necessarily make it a good or easy market in which to sell product on an export basis.

Second, the key question for a company looking to sell product abroad isn't "What country is a good market for selling products generally?', but rather, "What countries present the best opportunity to sell our particular goods or services?"

The list, for example, includes Australia and New Zealand.  Both are good countries to do business in generally since they have well developed commercial laws based on the same English common law system which under-girds how we do things in the U.S.  From an export point of view, however, both are relatively unpopulous markets a great shipping distance from home.  Also, being island nations occupying their own parts of the Pacific, they tend to have relatively self-sufficient economies and much of their international trade is tied in with Asian countries which trade much closer in their spheres of influence.   This isn't to say that one or the other couldn't be a good export market for any particular product or service, but in my experience I'd be surprised if either appeared on a top 10 list of optimum export markets for most companies.

Japan also appears on the list.  As I've written about elsewhere on this blog, Japan, being a relatively homogeneous and populous market of affluent consumers with similar technological tastes to those in the U.S., can be an excellent market for many U.S. companies.  From an export point of view, however, Japan presents two challenges that can make it an expensive and time consuming investment for your average exporting company -- (1) it  has some very strict safety, health and environmental code requirements that can necessitate expensive and lengthy testing and approval processes, and (2) developing a quality distribution relationship can take quite a bit of time and investment given the importance the Japanese place on group dynamics and integration. 

On the flip side of these issues, from an exporter's point of view, the mere proximity and size should place Mexico on almost any U.S. company's top 10 list of possible export markets worth examining --  which is why, of course, it's one of the U.S.'s major trading partners.  Yet it is glaringly absent from the World Bank list provided by Ms. Delaney's column.

As a small business owner myself, I am a regular reader of Entrepreneur magazine and do find some useful ideas in its pages.  But if you're looking to select potential export markets for your company, there are far better places to start than this issue's Global Village Top 10 list.

Do You Trust Your Competitors Enough to Follow Them Anywhere in the World?

It strikes me as curious when I ask a company how they decided to enter a particular foreign market how many times the answer is that they learned that a competitor was selling product there so they concluded that there must be a market for their product.  This is called a "reactive" market selection strategy.  It stands in opposition to a "proactive" market selection strategy where a company analyzes its business model, its value proposition, and its competitive advantages and determines the foreign markets in which it can optimize its chances of realizing profitable growth.

One of the problems with following a competitor into a market is that you don't know how they selected the market.  In my experience the most frequent means by which a company selects an export destination is by another reactive strategy -- i.e. responding to an unsolicited order or an approach at a trade show by someone who wants to be a distributor or sales agent.  The latter group are also the companies that I see needing help sometime later digging out of an unfavorable distribution agreement. 

I don't know too many circumstances in which a company is likely to call a competitor to ask what move they should make next or seeking a recommendation as to how they might better position their business.   Let's face it, on the whole, we wouldn't trust a competitor to run our business.   So why would a company chase a competitor into an export market, at least why without a great deal of proactive market research?

One of the many great things about expanding into new foreign markets is that each one provides a new opportunity to hone your value proposition and gain a competitive advantage.  By doing the homework on a proactive market entry strategy, you might well wind up getting out in front of your domestic competitors in a market that they didn't explore, which is a whole lot better than always playing catch up in any language.

What Business Is Your Company In?

John Hagel had a post on his Edge Perspectives blog a couple of weeks ago that got me thinking further about a point I make in one of the classes I teach in international market selection and development, i.e. the relationship between understanding what competency is critical to your company's success and executing a plan that will optimize your chances of successfully entering a new foreign market.  John's posts tend to be longer and pithier than your average blog -- he's one of the few bloggers whose posts I wind up printing out and reading over a few times, sometimes with a pen in hand.

This particular post entitled "Retailers and Customers" examines whether the recent financial challenges encountered by The Gap (the clothing retailer once known as the principal purveyor of Levi jeans) affirms one of John's main theories, that growth and profitability are frequently inhibited by a company's loss of focus on a single core business model.  Building off some thinking first explored by Ted Levitt in his seminal HBR article "Marketing Myopia", Hagel asserts that there are three essential and very different core businesses that a company might be in -- infrastructure management, product innovation and commercialization, or customer relationships (I would add cash flow management as an additional unique core business).  Historically, large corporate organizations have tended to bundle two or more of these businesses into one organization.  John argues that these companies need to begin unbundling these businesses, focusing on the core business that drives their profits, if they are to create a platform for sustainable growth going forward.

The first key to expanding into global markets is to identify countries in which your business has the greatest probability of success.  One of the main challenges is that execution of your business model can be impacted by differing cultural norms, as well as different political, financial, management and infrastructure environments than the company is used to encountering in its existing markets.  In developing a plan that can be well executed, it's an advantage to be able to focus on a couple of things that must be done flawlessly in order to succeed.  It is in this sense that understanding what business your company is in along the lines used in John Hagel's paradigm can be extremely useful. 

It is difficult to master all aspects of a foreign market in the time permitted in today's fast paced strategic business environment.  Knowing going in whether your business model's success is most dependent on creating customer relationships on the one hand or on managing the flow of goods and services across a complex infrastructure on the other can go a long way toward narrowing your focus to those critical aspects of a new foreign market about which you need a profound understanding.

You're Not Alone -- Or, There is More than One Person in China Who Knows Your Business

I was meeting with a prospective client recently who had a story that was both frightening and yet familiar.   The company had been working with the same agent in China for the past three years with virtually nothing to show for it.   Far worse, over the course of successive joint trips to China over that period, the president of the company had concluded first that the agent "wasn't worth very much", then that the agent was "affirmatively incompetent", and most recently that the agent "couldn't be trusted" and was looking to steal the company's IP.  I should have been shocked, but wasn't. to learn that another trip to China with this same agent was scheduled for next month.

"Why do you keep using this person if you're convinced that he's not only a worthless incompetent but dishonest?" I asked, knowing the answer that I've heard before.  "He's our contact -- how would we find someone else?"

The more distant and foreign a market is, of course, the more you need someone you can trust to help you navigate the unfamiliar waters.  It seems, however, that the more distant and foreign a market is, the more small businesses latch on to the first contact they make who speaks passable english and expresses a genuine interest in their business.  It's a paradox -- and a dangerous one at that.

I pointed out to my friend struggling in China that with 300 or 400 million people engaged in the new economy there was surely more than this one person who had the skill set to help his business.  He agreed but was still mystified at how to locate these people.  A lot of small business people are used to going it alone.   They're independent and resourceful and frequently they wing their way into international markets the same way they've winged their way into other business opportunities -- through grit and force of will.   Unfortunately in these strange and foreign lands, you still need the right partners and personal resourcefulness generally isn't enough.

So --

• Network through a World Trade Center Association or internationally focused chamber of commerce;
• Use the services of the U.S. Department of Commerce or the SBA and USEAC offices;
• Go on a trade mission sponsored by your state's office of economic development;
• Hire a good international business consultant with experience in your industry or the country in which you're seeking to do business.

There is no need to go it alone.  Find the right partner and just as in a business deal here, run, don't walk, from the bad ones.