For companies looking to go global, distance still matters

Profitable countries tend to resemble the US on cultural, administrative, geographic, and economic counts; unprofitable countries do not

There are no foreign lands. It is the traveller only who is foreign — Robert Louis Stevenson, The Silverado Squatters, 1883

H Lee Scott Jr, the current president and chief executive officer of Wal-Mart Stores Inc, has led the global expansion of Wal-Mart rather passionately.

He is reported to have said when asked about the company’s international prospects a few years back, “People said we would struggle when we left Arkansas and got to places like Alabama, 600 miles away. 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 company went ahead and replicated its basic business model in the United States for its international expansion as well. And did this work?

As Pankaj Ghemawat writes in Redefining Global Strategy — Crossing Borders in a World Where Differences Still Matter, that the company failed to account for distance.

“Wal-Mart’s international sales, while much smaller, have grown much faster and far outstrip those of any other international retailer. But the profitability of its international sales have been substantially less than of its US sales.”

Ghemawat, currently the Anselmo Rubiralta professor of global strategy at IESE Business School in Barcelona, was earlier with the Harvard Business School, as the Josefina Chua Tiampo professor of business administration.

According to him, there are largely four kinds of differences between countries: Cultural, administrative/political, geographic and economic.

“Wal-Mart transferred its basic model from the US to overseas and did better in countries similar to the US than in very different ones. Even more interestingly, the profitable countries tend to resemble the US along cultural, administrative, geographic, and economic dimensions whereas the unprofitable countries do not.”

But, most companies fail to account for these differences while planning international expansion.

“Take, for instance, the traditional Chinese tolerance of copyright infringement. Many people ascribe this social norm to China’s recent communist past. But as William Alford argues in To Steal a Book Is an Elegant Offense, it probably reflects a Confucian principle that encourages replication of the results of past intellectual endeavours.

Indeed, copyright infringement was broken for western publishers well before China’s current growth. Back in the 1920s, for example, Merriam-Webster, about to introduce a bilingual dictionary in China, found that a local publisher had already begun to distribute its own, unauthorised version.”

Companies also fail to account for administrative distances between countries.

“News Corporation seemed administratively tone-deaf — especially in a business in which foreign ownership is always politically loaded, given TV’s power to influence people. Shortly after acquiring Star, Rupert Murdoch pronounced satellite TV “an unambiguous threat to totalitarian regimes everywhere,” because it permitted people to circumvent official news sources! The Chinese government reacted by banning domestic reception of foreign satellite TV services. Much of Murdoch’s China strategy has since involved digging out of this hole,” writes Ghemawat.

Then there are geographic differences. “Thus, air-conditioners aren’t needed where (or when) it isn’t hot, and clothes dryers have proven less successful in the Mediterranean sun.”

The income level of a country also has a role to play. “A refrigerator can account for the bulk of annual per capita income in India, compared with a few percentage points in the US. As a result, refrigerator penetration is still very limited in India, despite the heat, and the varieties sold are much smaller, simpler, and cheaper than those in the US. Other economic factors that matter greatly are variation in the availability and prices of substitutes or complements such as space and electricity. US buyers generally have the most living space and, therefore, tend to buy larger varieties and tolerate higher noise levels. Electricity costs are often higher outside the US, focusing more attention on energy efficiency. Unreliable electricity supply also creates niches, such as the Chinese interest in electronic controls that reset automatically after power failures.”

Companies wanting to enter new countries for doing business need to keep these factors in mind, or they will have a tough time dealing with surprises.

k_vivek@dnaindia.net