Recently I have been seeing more and more headlines heralding the end of what might be called “cheap China” — an increase in labor costs that is going to be felt throughout most outsourced manufacturing. I think that categorizing this as an “end” is a misnomer; really, what we are seeing is a transformation. China and other emerging markets are transforming from being producers of goods into consumers, presenting Western retailers and brands with an emerging consumer base that numbers in the billions.
For a long time, American and European retailers — and their suppliers — relied on the developing world to manufacture goods and provide services that would then be consumed at home. The operations of many multinational corporations were structured to support goods flowing only inward. Today, this is most certainly not the case; it would be rare to find a retailer or manufacturer that is not at least considering international buying and selling opportunities.
The growing middle-class economies of many developing nations have created a huge growth opportunity for the world’s retailers and brands, and opportunities for retailers can translate into opportunities for their suppliers as well. So how do we tap into this global marketplace?
The challenges to expanding globally are vast, but so are opportunities for those who learn to operate in this new global world. I’ve identified five stages that many companies go through as they prepare to span global boundaries.
Stage 1: Identity Crisis
It is not unusual for manufacturers (and their retail clients) who are expanding overseas to undergo a crisis of identity. The experience of operating overseas transforms the cultural orientation of many organizations. Just as overseas travel gives individuals a more global mindset, the experience of buying from and selling to a global audience is creating truly global corporations.
It is hard to define a corporate identity, and doubly so when a company is given the opportunity to reinvent itself in a foreign country. Each company must answer the question, “Will we simply be an American firm operating overseas, or are we trying to create a foreign company, with its own unique culture?” The answer, as always, lies somewhere between the two.
Stage 2: Discovering new worlds
We would be foolish to think that simply transplanting our domestic operations will translate into success overseas. Walmart attempted such a feat upon entry to the German market, only to retreat after a few years of little foot traffic and meager sales. The experience of opening a store in a foreign market is much like being a tourist there; it takes time to figure out the idiosyncrasies of how things work in an unfamiliar place. In spite of all of the challenges, the accelerating pace of growth in the developing world is driving more and more retailers to aim their expansion plans outside of their home markets.
With the exception of luxury goods (and perhaps Apple products), global brands are often most successful when adjusting their offerings to reflect local tastes. This holds true for store design and retail fixtures as much as it does for the products within. Retailers that have simply transplanted their standard American stores overseas have rarely done well, whereas those that have changed design and product mix to match local tastes have been rewarded with growth sometimes exceeding that of their home market.
Yum Brands, parent company of Pizza Hut and KFC, opened more than 1,500 international locations in 2011, and Gap clothing stores recently stated their intention to have international locations make up one-third of their portfolio. Their success is due in no small part to their ability to adjust their store, products, and operating style to match the demands of the local market.
There are many challenges to overcome as an American retailer expanding overseas. Opening a location in a different country, with different language, culture, and laws is a complex task layered with a high degree of uncertainty. Suppliers to these retailers that have a pre-existing global supply chain are at a clear advantage when negotiating to supply fixtures for an overseas deployment.
Stage 3: Recognizing that the world is not flat
For many years economists have used the emergence of a hyper-connected planet to argue that globalization is erasing the cultural barriers that exist around the world. Despite the growth of an always-on, high-speed internet and a decrease in the costs of worldwide shipping, the world is still very locally focused. In his book “The World Is Flat,” Thomas Friedman argues that rapidly advancing globalization is making cultural and geographical differences irrelevant. For retailers and manufacturers, the opposite is often true. Globalization might make it easier for Papa John’s to open and run pizzerias in mainland China, but it does not make a Chinese citizen crave the same types of pizzas that would typically be served in America. Conversely, the seafood-and-wasabi sauce pizza might not be available in America, but it’s certainly a hit with the pizzeria’s Chinese patrons.
The process of discovering the local preferences of your customers is predicated on having enough time and support to research the local market. Most importantly, success in new markets, whether as a retailer, a supplier, or a manufacturer, is often a function of having the right people on board to support your efforts. In particular, firms that have been successful overseas often have one or more people within their overseas group who can understand and speak to members of both cultures. Beyond simply language ability, these staff members are most valuable for their ability to understand the culture and traditions of more than one country; I often refer to them as the “boundary spanners.”
Stage 4: Spanning the boundaries
Just as those that possess multi-lingual ability can comprehend multiple languages, the “boundary spanners” I referred to above possess an ability to comprehend multiple cultures. Whether you are opening a retail store, a factory, or a representative office in a foreign country, the boundary spanner is the person you will rely on to help navigate in unfamiliar territory. In addition, the boundary spanner is the person who will be able to explain to your American headquarters why you need to change the menu to adjust taste to the local market, or why giving everyone on your staff a moon cake is more motivating than a cash bonus.
Stage 5: Globalization, here we come
We are just getting warmed up in the race to bring retail stores and their suppliers to the global marketplace. The potential for profit and diversification is still vast, and as firms begin to consider overseas expansion, they will look towards their vendors and suppliers to help in any way possible. Being ready to span these boundaries will prepare you well to support new and future customers.
Michael Diliberto is a 2009 graduate of Thunderbird School of Global Management. He is a general manager at Lynx Displays China with more than a decade of experience in retail, visual merchandising and consumer marketing.