Deadly Sins of International Business Blog

Ever since Thomas L. Friedman, Pulitzer Prize winning author, published “The World is Flat“, we have been listening to the mantra of the world becoming a completely level playing field for companies for many years now. Other authors such as Pankaj Ghemawat continue to remind us that we’re still quite far from a borderless world, and failures by both large, multinational companies and countless small- and medium sized enterprises are a great testimony to his position. Legal and administrative barriers continue to exist even in politically integrated areas such as the European Union, relevant economic differences between countries persist, and – probably most importantly – cultural differences are as a alive as they have ever been (as this blog tries to document). Looking at my collection of McDonald’s advertising from various countries, I was recently reminded again of two things: first, cultures are still having a strong influence over the marketing-mix; second, McDonald’s is doing a pretty good job at addressing these differences. Let’s have a look at this small selection of examples below. What we see on the first one is not surprising. We all know that religious beliefs make the marketing of beef burgers next to impossible in India; product adaptation becomes a necessity. McDonald’s has therefore added items such as the “Chicken Maharaja Mac” or the ”McAloo Tikki” to its Indian menu. So far so good. When it comes to promotion, the next example (second from the left) shows how McDonald’s is using a national celebrity athlete, basketball player Yao Bing, in its advertising in China. As is common in testimonial advertising McDonald’s tries to transfer the positive image associated with Yao Bing onto the McDonald’s brand. Being both collectivistic and highly status oriented, China very willingly accepts someone’s endorsement who is a source of national pride and has unparalleled athletic and commercial success. Doing this, McDonald’s is showing a lot of cultural intelligence. And now for a European example – Austria. As I have recently posted in a different context, Austria is a relatively risk-averse culture. As far as consumer behavior is concerned, this results in a preference for tested products, products that have third-party certifications, and traditional products that can be trusted. And which products could be trusted more than products of Austrian origin? McDonald’s has picked up on this and is very openly playing the country-of-origin trump card – 100 % beef from Austria, 100 % Austrian potatoes (second image from right), and using Austrian slang words that wouldn’t even been understood just a few miles across the border in Germany – “Pipifein” which means something like “Great” (first from the right). Well done, McDonald’s!

As the English edition of the Chinese newspaper Renminbao (People’s Daily) reports, fourth quarter sales at Yum! Brands, the parent company of Kentucky Fried Chicken (KFC) and Pizza Hut have significantly declined. What has happened in the Middle Kingdom that not only has a huge love for chicken dishes, but also for foreign brands, a market that has been promising nothing but growth for the fast food giant? It all started out with a media report on China’s national TV station CCTV in December 2012. The broadcast alleged that some poultry farms, among them suppliers to KFC, ignored regulations by using hormones and antibiotics, and triggered unfavorable media attention and social media activity. An investigation by authorities in Shanghai only resulted in some vague recommendations concerning a strengthening of KFC’s supply chain, but no fine was assessed and no further action was taken. Unfortunately, as is often the case in such circumstances, the good news got much less media coverage than the original bad news. And so the Chicken scare started to nest in the minds of the Chinese consumers. As the Economist reports in its February 9th issue, KFC’s January sales in China fell by a dramatic 41 %. What makes this even worse is the fact that Yum! doesn’t operate under the usual franchise system in China, but owns most of its stores. With currently approximately 5000 restaurants in 800 Chinese cities, this is a costly development to digest – probably worse than eating a big bucket of deep fried poultry. KFC’s example just shows how tricky it can be to operate in far-away markets. Cultural, geographical and legal distance make it very difficult to first perceive and interpret the early warning signals correctly and then to react quickly and appropriately. Often in such cases, foreign companies quickly pick up the stigma of being an imperialist monster that has no respect for the local environment and whose only interest is exploitation of the local market. Or, in this case in the words of the Economist, to be the “Yucky Kentucky”!

Yes, the British are leaving the United States – again. After a $1.6 billion investment, British supermarket giant Tesco announced that it may be selling it’s US “Fresh and Easy” chain. Clearly, corporate PR speak for “we are pulling out of the United States altogether”. What has happened to Tesco, which successfully operates more than 6,000 stores worldwide? On the surface, the promises of convenience and tasty, freshly prepared food sounded great, but what US customers experienced was less “Fresh and Easy” and more “Small and Strange”. In the eyes of American consumers, the stores had a limited product range (terrible for a country where the pet food aisles are often better stocked than entire supermarkets in Europe), a selection that was uniform irrespective of the neighborhood of the store (watercress salad in South Los Angeles…), unfamiliar British fare instead of the ubiquitous American brands (Marmite, seriously?), too much packaging (in a country where we want our sandwiches on sourdough, toasted on one side with non-fat mayonnaise and chopped tomato – not sliced – Dijon on the upper half, and Pepper Jack, not Swiss), and – worst of all – it made customers do their own check out!

So, it’s really the old story of standardization versus adaptation and finding the right balance between protecting the efficiencies of a proven business model and adapting it to the environment of the target market. Yes, there is a tremendous amount of change in the supermarket landscape in the US that invites new concepts and experimentation, but you certainly can’t just bomb drop an entirely new concept into a market that is as competitive as, for instance the Southern Californian. You need to get the word out, listen to consumers, and slowly educate them, instead of alienating. But then again, if the entire economics of a business model are built around a standardized approach, then the only choice a company has is simply not to enter a culturally distant market. Or leave, several years and $1.6 billion later. Even if you’re a huge company such as Tesco.

This week, the two houses of the Indian parliament have decided to finally and fully pave the road for foreign direct investment in the country’s retail sector. Long awaited, and heavily disputed, this measure opens the sector to foreign retailers who have been waiting at the doorsteps of one of the largest consumer markets in the world. Until recently, only partial ownership has been allowed which didn’t prevent some retailers from tipping their toes into this foreign land. As important as the passing of the legislation has been, it shouldn’t distract from the fact that there are many other barriers to overcome than just the formal barrier of the law. As, I’m certain, US retail giant WalMart, which entered the Indian market in 2007 under a joint venture with the Bharti Group, can confirm. Originally, foreign companies including Wal-Mart’s joint venture were only allowed to operate wholesale stores. Based on recent changes in the law retail stores came within reach, and Wal-Mart announced that it would expand over the next few months. Now, in India’s bureaucratic culture, expansion can be cumbersome. Often, because of the burgeoning bureaucracy and the overlapping of federal, state and local laws, fifty or sixty different permits may be required before the opening of a store is approved. The suspicion is that the expansion train was going too slow, so that some Wal-Mart employees started to grease the tracks. An Indian government agency called Directorate of Enforcement therefore has been investigating Wal-Mart on suspicions of such corruption. Even before that, Wal-Mart had already suspended a number of employees, potentially including its CFO in India based on investigations related to the US Foreign Corrupt Practices Act. The fact that Wal-Mart started similar probes in Mexico, Brazil, China and India shows that blaming entire countries or cultures for corruption may only tell one side of the story. It always takes one to take the bribe, and one to pay the bribe. Implicitly or explicitly, employees must have felt a certain pressure to speed up the process, to please their bosses, or to bring results so that they can get the raise and the promotion. This case also shows that entering mature or developed foreign markets is difficult enough, but when it comes to emerging markets or developing countries, the differences in local practices can often create severe difficulties even for the best companies and the most skilled employees. Strategies that fit Western, industrialized nations, don’t necessarily fit emerging markets, and therefore need to be adapted carefully.

Yes, we’ve all heard the story about the Chevrolet Nova (not true as I have reported on this blog earlier), the Mitsubishi Pajero, the Mitsubishi Colt and other car models. However, behind those obvious and funny stories of branding blunders, there’s also some cultural richness and subtlety to explore. Have you ever thought about the names US car manufacturers brand their cars with? Ford EXPEDITION, Jeep PATRIOT, Lincoln NAVIGATOR, Dodge CHARGER – the list is endless. All of these names are more than just inventions of overly creative marketeers. They stand for something, and they provide identity. They’ve been chosen to describe the essence of the model, but also because they address some deep emotional needs of customers in the target group. To most customers in the United States, EXPEDITION stands for something positive, and so does PATRIOT or CHARGER. These are culturally loaded names for car models that conjure some of the positive values that most Americans have grown up with – individuality, initiative, responsibility, competition, to name but a few. Now stop and think about German car models (and, for the sake of the argument, let’s leave Volkswagen out of the equation for a moment). Mercedes has the A-class, the B-class, the C-class and so on. And when they go really crazy, those jovial Germans come up with the G-class! And BMW? They have the 1-series, the 3-series, the 5-series… You get the idea. Now what do these tell us about German cultural values? Germans value ideas such as structure, order, hierarchy, logic, but also the perfection of engineering that is buried in the numbers and letters. The big mystery of course is why do Americans then still like German luxury cars? Maybe it’s the lure of the exotic, maybe it’s that model names aren’t the most important factors in the purchase decision, or maybe it’s just one of those inexplicable paradoxes of culture.

Not too long before US-based DIY giant Home Depot announced it’s almost complete withdrawal from China, similar news emerged about Europe’s largest home improvement retailer, Kingfisher PLC. Kingfisher, founded in 1969, which owns the B&Q and Castorama brands, operates close to 1,000 stores in eight countries including Britain, Ireland, France, Poland, Spain, Turkey, Russia and China. Kingfisher has been struggling in most countries, but it’s China troubles seem to be of a different magnitude. Ever since it first entered China in 1999, it has been uphill for Kingfisher in the Middle Kingdom. When losses hit more than $ 80 million, B&Q decided to cut the number of stores by 22 in 2009. Realizing that the “big box concept” is not very appealing to the Chinese market, it also downsized operations for its remaining 40 stores. As has become apparent in the recent Home Depot case, B&Q may be struggling with exactly the same difficulties – the fact that for cultural and economic reasons, the entire DIY concept is too foreign to most Chinese consumers. And for those who like the idea of tiling their own bathrooms and flooring their own living rooms, there is a plethora of local alternatives in a highly fragmented market. After all, brand is not as important in the DIY segment as it is in more visible FMCG categories. All in all, another case of the difficulties associated with the internationalization of retail businesses.

Late last week, US-based home improvement giant Home Depot announced that it would take a $ 160 million after-tax charge and close seven of its big-box home improvement stores. Home Depot entered China with high hopes in 2006 when it acquired 12 stores across China. Over the years it had reduced the number of stores to the seven it is now closing. Home Depot, which of course also sources heavily from China, does have plans to keep two speciality stores in the city of Tianjin and also to be active in online retail, but for now the dreams of making it big in a market of more than a billion consumers are over. While it is true that many retailers in China are currently struggling as slow economic growth is curbing consumer spending, the roots of Home Depot’s failure may be somewhere else.

The first reason may be that China is not so much a Do-it-Yourself (DIY) culture, but more of a HIDBO (Have-it-done-by-others) culture. Cheap labor is abundant, but even more importantly for a culture that values status and prestige, tiling your own bathroom or painting your own window frames is not necessarily a desired activity for the masses. You may ask why it then is that IKEA is hugely successful in China – a company that also makes you assemble your own furniture. The answer leads us to the second reason behind Home Depot’s failure. Chinese are looking for guidance in acquiring Western lifestyles. IKEA provides this guidance by showing their customers how to decorate their homes in a Western fashion. The fact that you have to assemble your own furniture is a little more appealing when you know what the final product is supposed to look like. Besides, there’s always someone to assemble your IKEA furniture for you. Home Depot, however, leaves consumers largely alone and guessing about the final look and feel. Also, most Chinese live in small apartments and don’t have the room to keep tools or work on DIY projects. And ultimately, Home Depot is selling commodities – nails, screws and paints aren’t necessarily the same cultural icons like IKEA, McDonalds or KFC that so many Chinese middle class families are looking for. There may also be a third reason. Generally, as has also been featured in this blog, retail somehow doesn’t travel easily across international borders. But that’s for another time.

If you have ever taken an international marketing or international business class, it is not unlikely that you’ve heard how Chevrolet blundered in Latin America because of poor translation. Chances are, if you are an instructor who teaches these classes, you will have told this story to your students. For those of you, who don’t know: as the story goes, a particular Chevrolet model, the Nova, supposedly did poorly in Spanish-speaking markets in Latin America, most notably in Mexico and in Venezuela in the 1970s. As can be read in many widely distributed international business textbooks the reasons seems to have been that No-va roughly translates into “doesn’t go” (i.e. “doesn’t drive”) which, of course, can’t be a very appealing name to buyers of new cars. Well, unfortunately, none of this is true, or at least it is highly speculative and gravely inaccurate. As a scholarly colleague of mine, Romie Litrell of AUT in Auckland, New Zealand has recently pointed out on a discussion listserv of international business scholars, there is no evidence whatsoever that there ever was such a marketing fiasco. Neither is there such a linear relationship between “no-va” and the assumption that a car doesn’t function in any variation of the Spanish language, nor is there any hard evidence of poor sales. Also, for the longest time, there was a Mexican gasoline brand called “Nova” that seems to have done pretty well with the same name. To say the best, it is hugely embarrassing that cohorts of publishers, legions of highly respected authors and tens of thousands of instructors worldwide never seem to have questioned this urban myth. Question is, how many more are there out there that haven’t been debunked yet? The one thing that bothers me even more is the fact that even some of the most respected authors and instructors rarely go beyond such simplistic examples when they teach about cultural differences. There’s certainly more to be said about the complexity of cross-border business than to tell jokes and have a good laugh about ignorant multinationals that don’t even get their translations right. Dig deeper, colleagues! Dig deeper!

Approximately 2500 years ago, Confucius supposedly said, “When words loose their meaning, people loose their freedom”. What stuck from my early training as a sinologist tells me that this quote has often been misinterpreted and misused. A less common interpretation is that it is important that people who are engaged in discourse must first agree on the terminology before they can have a meaningful exchange of ideas. This is why one of the first things I discuss with students in my International Business course is the sometimes confusing terminology in the field – international, multinational, transnational, global. Depending on the management silo we find ourselves in – strategy, marketing, human resources, etc. – we may use these words differently. Now, I’m not going to go into this discussion here today, but I wanted to share a different, but related observation. Recently I discovered the Google Ngram Viewer (http://books.google.com/ngrams) that provided me with a more historical perspective on the discussion over international business terminology. Ngram mines digital content that Google has stored in GoogleBooks for user-defined key words. Looking for the occurrence of the key words ‘international business’ and ‘global business’ between 1978 and 2008, we can see an interesting development: while the use of “international business” is relatively stable over time (with maybe even a slight decline from 2000 on), we can see dramatic increases in the use of “global business” at least for the 20 years following the mid 1980s.

Looking for an explanation, I turned to the world trade data as provided by the World Trade Organization. I expected to see a dramatic increase in world trade about the same time the use of the term “global business” took off, maybe with some time lag of 3 to 5 years. However, it looks like the most dramatic increases in world (”global”) trade happened only in the late 1990s and not in the 1980s.

I haven’t yet had a chance to look into FDI data (particularly because clean, comparable global FDI data is hard to come by), so therefore, I don’t have a better explanation yet than to just ascribe the heightened popularity of “global business” to a certain trend among authors and publishers. Which remains yet to be proven, of course. Contributions welcome!