It’s not easy to do business as a foreigner

One of the most interesting phases in a company’s growth occurs when it confidently asserts its position in its home market and sees no more than incremental gain in market share. This allows it to think whether it should widen its portfolio within the home market or to take its products/services/honed skills abroad.

If the company opts for the latter, this should come as part of the growth question (as an established local market leader), certainly not because it was not doing well in its own market. In fact, just because a company has developed the recipe for success in its home country is no guarantee, that it would be able to replicate the same success in other geographies.

It is often easy to take a simplistic view of the world, where globalization, enabled by technology, is shortening distances at an ever-increasing pace. ‘People are wearing similar kinds of clothes, speaking English, developing similar tastes in popular music and fast food, then by extension they would also adopt our products and services’ does not work. Even in a ‘global’ world, distance matters. Alternatively, the world continues to be more ‘local’, than we would like to believe.

Professor Pankaj Ghemawat of IESE, summarizes it quite well as part of his CAGE framework, where an understanding (or lack thereof) of Cultural, Administrative, Geographic and Economic distances, predicts the (in)ability of a company to take its brands successfully to a foreign market.

• Cultural distances manifest themselves as differences in language, religion, social norms etc. For e.g. Turkish dramas work on a Pakistani channel since they have been dubbed in Urdu and both countries share religious and some cultural values.
• Administrative distances occur due to political, monetary/fiscal policy differences or inherent strength of institutions. For e.g. if corruption is deeply rooted in a country, even large companies lose out to local competition which are more ‘flexible’ in doing what it takes to make things happen. Similarly, governments could have large custom and duty structures on imports to promote local manufacturing which could make profitability and even survival difficult for an exporter.
• Geographic distances are literally due to the distance between two countries. France and Germany despite linguistic differences would be closer partners in business as compared to their relationship with Australia or the United States.
• Economic distances are based on the difference in the demand curve between the home and the foreign market due to different income structures, skill/educational levels etc. Case in point: It’s really difficult to sell luxury cars in Uganda, where only 8–9 people in a 1000 can afford to have a car.

Typically, there are 4 different strategies that companies can adopt once they have decided to engage in international business as explained by Porter (’86) and Bartlett/Soumantra Ghoshal (‘89):

• In an international strategy, where there is low focus on cost efficiency or arbitrage stemming out of operation as well as low tailoring to customized local needs, the primary form of business is exports.
• In a multinational or multi-domestic strategy, the portfolio/palate increases to cater to local tastes — for e.g. despite its proclivity for standardization, McDonald’s got to learn the hard way that its Beef Big Mac wouldn’t work in India.
• In a global strategy, there is a focus on costs and efficiency. Typically, money is invested into developing a strong umbrella brand and homogeneous offerings across markets yielding economies of scale.
• In a transnational strategy, local units are given sufficient power to make decisions about what works best but learning networks are deeply rooted and embedded in culture, which helps bring innovations from foreign markets to home. For e.g. GE Healthcare’s medical device innovations in India were adopted in the U.S. and across the globe. By this stage, the difference between what is home and what is foreign has blurred.

It goes without saying that typically companies move through these stages in an order, as they grow.

Deciding to engage in international business is a major step for any company. The answer to going abroad, should only be yes, once leadership has matched its appetite and ambition with a specific set of capabilities required purely for surviving and thriving in foreign markets.

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*Would like to thank Prof. Subi Rangan under whose tutelage at INSEAD, I developed my initial notions around global strategy and international business.