The Pros and Cons of Adopting a Global Commercial Strategy
By Dr Natalie Truong
Over the last decade, global flow of goods, services, finance, people and data have contributed to at least 10% of global GDP, amounting to US$7.8 trillion in 2014 alone (McKinsey, 2016). In Asia, for example, 46% of Korea’s GDP and 71% of Malaysia’s was derived from its exports of goods and services in 2015 (The World Bank, 2015). Today, growth in global trade of goods and financial flows has flattened and is unlikely to regain its previous peak. Globalisation, however, has taken a new direction and is entering a new phase defined by increasing flows of data and information (McKinsey, 2016). In other words, globalisation has gone digital (Lund et al., 2016).
International flow of data accounted for more than one third of global trade in the past ten years (US$2.8 trillion among US$7.8 trillion of total global trades) and is predicted to increase nine-fold by 2020 (McKinsey, 2016). About 12% of the global goods trade is generated from e-commerce platforms, and 50% of the world’s traded services are delivered digitally (McKinsey, 2016). Consumers themselves generate an essential portion of cross-border digital flows as they post, interact, communicate and shop on social networks such as Facebook, Instagram, Pinterest and online marketplaces such as Amazon, Taobao and Ebay.
The ongoing process of globalisation has brought about a number of benefits to international producers and national economies. For example, the increasing flow of investments and the opening up of emerging economies to international trade have led to growth and improved living standards in developing countries (Pavcnik, 2009). From the perspective of companies, benefits associated with adopting a global strategy are manifold including expanding one’s customer base, creating economies of scale in production, exploring untapped markets, diversification and coping with intense domestic competition.
Adopting a global strategy, however, requires the appropriate approach and talent to overcome various challenges in foreign markets, such as different systems in foreign countries, uncertainties in the market environment (i.e. economy and political conditions), challenges in looking for a local partner, acquiring talents and in catering to groups of consumers with different cultural and language requirements. There are numerous examples of leading multinational companies with high profile brands, enviable resources and management experience whose attempts to expand internationally ended in failure. Several examples include Best Buy in Europe, China, and Turkey, Target in Canada, Walmart in South Korea, and Home Depot in China (Pearson, 2016). A major contributing factor was their failure to fully understand the competitive landscape and local consumers’ needs that would have helped guide them to adjust their strategies. Best Buy brought to European markets the “Big Box” concept which was thriving in the US; however they failed to recognise European consumers’ preference for small shops over mega stores (Groth, 2011). Ebay lost strength to the local Chinese competitor TaoBao; because it failed to take into account the importance of “guanxi” to the Chinese consumer, a concept referring to “relationships” or “connections”. Chinese consumers develop trust based on the relationship between a buyer and a seller that goes beyond a mere transactional relationship. EBay’s site, however, did not allow for direct communication and interaction between the seller and buyer (Jacobs, 2017). Several companies encountered hurdles due to cultural blunders, such as translation mistakes or using colours associated with negative meaning in certain cultures. For instance, KFC’s slogan “finger-lickin’ good” came out as “Eat your fingers off” in China (Brooks, 2013), while Pepsi changed the colour of its vending machines and coolers from deep “Regal” blue to light “Ice” blue which is associated with death and mourning in South East Asia (Fromowitz, 2013).
As firms expand to serve consumers in different cultures with different values and practices, customer-centricity becomes even more important. Nowadays, with various brands offered on the market, consumers are spoilt for choices and are therefore more focused on looking for solutions. In fact, the last five to ten years has witnessed an erosion of brand loyalty in favour of a more distributed attachment to multiple brands that cater to different needs or provide solutions to specific challenges. Thus, brands need to recognise the problems that they solve for each of their different consumer groups. In addition, it is important for companies to understand the megatrends that are taking place across countries. Megatrends are global, sustained and macro-economic forces of development that impact business, economy, society, cultures and personal lives. One example is the behaviour of Generation Y (those currently aged between 15 and 34 years) who are set to become the major customer base of the future. With a global population of 2.56 billion by 2020, this group appreciates personalisation and individualisation, is technology savvy and connected, civic and environmentally friendly and, at the same time, demanding and impatient. Another example of a megatrend is the growing consumer demand for uber convenience, leading to the popularity of omni-channels – a cross-channel business model which ensures a seamless customer journey through multiple platforms.
Leveraging on Local Partnerships
One method of gaining insight into and an enhanced understanding of local consumers is to engage a local partner. These individuals or firms have the necessary contacts to shortcut entry of product or brand into a new market and serve as a source of information in understanding the norms and cultural values. Careful selection of these partners is crucial, however, to ensure a long-term and stable partnership. Examples of successful and unsuccessful stories abound. For example, the Tung Lok group – one of Singapore’s leading restaurant group – partnered successfully with a local firm in Indonesia, but failed to do the same in China. And whilst Groupon made an excellent choice of Tencent as its partner in China, they failed to leverage on the advantages offered by such a partnership, choosing to hire expats to run its operations countrywide instead of drawing more heavily on local talent (Zhu, 2011). As such, its management structure lacked understanding of the cultural nuances of the local Chinese market and this, coupled with some other unfortunate decisions, resulted in the closure of 13 of their Chinese offices and dismissal of 400 staff. Although other companies have managed to hire highly competent local people to serve their overseas markets, they often fail to consider their input when making strategic decisions with inevitable unfortunate consequences (Kelly, 2015).
Managing Cross-Cultural Differences
So what in particular should companies be cautious about when expanding into Asian markets? The first and foremost is the considerable heterogeneity of consumers across different Asian countries. According to a study of consumers across 10 Asian markets conducted by the Institute on Asian Consumer Insight (ACI) difference in attitudes towards religion, tradition, enjoyment and work success abound, leading to marked disparities in purchase behaviours, expectations and value perceptions. And while Asian consumers do share some similarities, such as a strong emphasis on family, savings and future planning, as well as a prominent celebrity culture, their differences across markets often far outweigh their similarities. Secondly, young consumers in once traditional markets in Asia are becoming far more cosmopolitan and seeking to adopt the life styles and preferences typical of Western cultures. Asian Millennials, with rising disposable incomes, increasingly enjoy the dining-out culture in Western fast-casual restaurants, love travelling abroad and are more likely to spend their hard earned cash on leisure activities than their North American and European counterparts, according to a CBRE survey (Lee, 2017). In fact, by 2024 Asian Millennials are predicted to lead the global consumer market and by 2025 they are likely to be leading the growth of the travel industry, with a huge rise in international traffic expected in key markets such as India, China, Malaysia, Thailand and South Korea (Lee, 2017). Thirdly, companies need to tread carefully so as to avoid making significant blunders by misunderstanding cultural norms relating to business etiquette – as Groupon found out to its dismay. In a bid to become China’s largest shopping site, they assumed they could simply emulate their cut-throat but successful US-based strategy of poaching their competitors top employees and accumulating assets. For example, attempting to purchase Lashou – the largest Chinese group buying site – by throwing huge sums of money at them without success. As a consequence, a syndicate of group buying sites joined forces to counter what they perceived as a totally unacceptable show of Western arrogance, contributing to the inevitable failure of Groupon’s planned expansion into China.
Opportunities for Start-ups
Despite these inevitable challenges, this is an exciting time for firms to embrace the shift of globalisation from physical to digital and reach out to customers across different countries. It has never been so easy for even small firms to take on global markets. In the past few years the world has observed start-ups that move quickly to a global strategy. For example, founded in 2009, today Uber operates in 581 cities in 81 countries. Similarly, Airbnb has been connecting people in more than 34,000 cities and 191 countries since 2008. Moreover, governments who are keen to capitalise on the international trade, have never been more supportive of global expansions. However, without the right approach and the right support it is easy for firms to misstep, especially when the growth in a local market has been positive. Successful international expansion requires the right strategy, proper understanding of cross-cultural consumer behaviour, and the right talent who are capable of helping companies with the internationalisation process. Finally, it is essential to gain the right advice from partners who understand local markets to help companies avoid common pitfalls and subsequently maximise their chance of success.
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Author: Dr Natalie Truong
Date: 19 July 2017
About the Author
Dr Natalie Truong is a Research Fellow of the Institute on Asian Consumer Insight.