Adaptation—creating global value by changing one or more elements of a company’s offer to meet local requirements or preferences—is probably the most widely used global strategy. The reason for this will be readily apparent: some degree of adaptation is essential or unavoidable for virtually all products in all parts of the world. The taste of Coca-Cola in Europe is different from that in the United States, reflecting differences in water quality and the kind and amount of sugar added. The packaging of construction adhesive in the United States informs customers how many square feet it will cover; the same package in Europe must do so in square meters. Even commodities such as cement are not immune: its pricing in different geographies reflects local energy and transportation costs and what percentage is bought in bulk. Ghemawat subdivides adaptation strategies into five categories: variation,focus, externalization,design, and innovation(Figure 3.1).
Variation strategies not only involve making changes in products and services but also making adjustments to policies,business positioning, and even expectations for success. The product dimension will be obvious: Whirlpool, for example, offers smaller washers and dryers in Europe than in the United States, reflecting the space constraints prevalent in many European homes. The need to consider adapting policies is less obvious. An example is Google’s dilemma in China to conform to local censorship rules. Changing a company’s overall positioning in a country goes well beyond changing products or even policies. Initially, Coke did little more than “skim the cream” off big emerging markets such as India and China. To boost volume and market share, it had to reposition itself to a “lower margin–higher volume” strategy that involved lowering price points, reducing costs, and expanding distribution. Changing expectations for, say, the rate of return on investment in a country, while a company is trying to create a presence is also a prevalent form of variation.
A second type of adaptation strategies uses a focus on particular products, geographies,verticalstagesof the value chain, or market segments as a way of reducing the impact of differences across regions. A product focus takes advantage of the fact that wide differences can exist within broad product categories in the degree of variation required to compete effectively in local markets. Ghemawat cites the example of television programs: action films need far less adaptation than local newscasts. Restriction of geographic scope can permit a focus on countries where relatively little adaptation of the domestic value proposition is required. A vertical focus strategy involves limiting a company’s direct involvement to specific steps in the supply chain while outsourcing others. Finally, a segment focus involves targeting a more limited customer base. Rather than adapting a product or service, a company using this strategy chooses to accept the reality that without modification, their products will appeal to a smaller market segment or different distributor network from those in the domestic market. Many luxury good manufacturers use this approach.
Whereas focus strategies overcome regional differences by narrowing scope, externalization strategies transfer—through strategical liances, franchising, useradaptation, or networking—responsibility for specific parts of a company’s business model to partner companies to accommodate local requirements, lower cost, or reduce risk. For example, Eli Lilly extensively uses strategical liances abroad for drug development and testing. McDonald’s growth strategy abroad uses franchising as well as company-owned stores. And software companies heavily depend on both user adaptation and networking for the development of applications for their basic software platforms.
A fourth type of adaptation focuses on design to reduce the cost of, rather than the need for, variation. Manufacturing costs can often be achieved by introducing design flexibility so as to overcome supply differences. Introducing standard production platformsand modularityin components also helps to reduce cost. A good example of a company focused on design is Tata Motors, which has successfully introduced a car in India that is affordable to a significant number of citizens.
A fifth approach to adaptation is innovation, which, given its crosscutting effects, can be characterized as improving the effectiveness of adaptation efforts. For instance, IKEA’s flat-pack design, which has reduced the impact of geographic distance by cutting transportation costs, has helped that retailer expand into 3 dozen countries.
Minicase: McDonald’s McAloo Tikki
1When Ray Kroc opened his first McDonald’s in Des Plaines, Illinois, he could hardly have envisioned the golden arches rising 5 decades later in one of the oldest commercial streets in the world. But McDonald’s began dreaming of India in 1991, a year after opening its first restaurant in China. The attraction was obvious: 1.1 billion people, with 300 million destined for middle-class status.
But how do you sell hamburgers in a land where cows are sacred and 1 in 5 people are vegetarian? And how do you serve a largely poor consumer market that stretches from the Himalayas to the shores of the Indian Ocean? McDonald’s executives in Oak Brook struggled for years with these questions before finding the road to success.
McDonald’s has made big gains since the debut of its first two restaurants in India, in Delhi and Mumbai, in October 1996. Since then, the fast-food chain has grown to more than 160 outlets. The Indian market represents a small fraction of McDonald’s $24 billion in annual revenues. But it is not insignificant because the company is increasingly focused on high-growth markets. “The decision to go in wasn’t complicated,” James Skinner, McDonald’s chief executive officer, once said. “The complicated part was deciding what to sell.”
At first, McDonald’s path into India was fraught with missteps. First, there was the nonbeef burger made with mutton. But the science was off: mutton is 5% fat (beef is 25% fat), making it rubbery and dry. Then there was the french fry debacle. McDonald’s started off using potatoes grown in India, but the local variety had too much water content, making the fries soggy. Chicken kabob burgers? Sounds like a winner except that they were skewered by consumers. Salad sandwiches were another flop: Indians prefer cooked foods.
If that was not enough, in May 2001, the company was picketed by protesters after reports surfaced in the United States that the chain’s fries were injected with beef extracts to boost flavor—a serious infraction for vegetarians. McDonald’s executives in India denied the charges, claiming their fries were different from those sold in America.
But the company persevered, learned, and succeeded. It figured out what Indians wanted to eat and what they would pay for it. It built, from scratch, a mammoth supply chain—from farms to factories—in a country where elephants, goats, and trucks share the same roads. To deal with India’s massive geography, the company divided the country into two regions: the north and east, and the south and west. Then it formed 50-50 joint ventures with two well-connected Indian entrepreneurs: Vikram Bakshi, who made his fortune in real estate, runs the northern region; and Amit Jatia, an entrepreneur who comes from a family of successful industrialists, manages the south.
Even though neither had any restaurant experience, this joint-venture management structure gave the company what it needed: local faces at the top. The two entrepreneurs also brought money: before the first restaurant opened, the partners invested $10 million into building a workable supply chain, establishing distribution centers, procuring refrigerated trucks, and finding production facilities with adequate hygiene. They also invested $15 million in Vista Processed Foods, a food processing plant outside Mumbai. In addition, Mr. Jatia, Mr. Bakshi, and 38 staff members spent an entire year in the Indonesian capital of Jakarta studying how McDonald’s operated in another Asian country.
Next, the Indian executives embarked on basic-menu research and development (R&D). After awhile, they hit on a veggie burger with a name Indians could understand: the McAloo Tikki (an “aloo tikki” is a cheap potato cake locals buy from roadside vendors).
The lesson in the McDonald’s India case: local input matters. Today, 70% of the menu is designed to suit Indians: the Paneer Salsa Wrap, the Chicken Maharaja Mac, the Veg McCurry Pan. The McAloo, by far the best-selling product, also is being shipped to McDonald’s in the Middle East, where potato dishes are popular. And in India, it does double duty: it not only appeals to the masses; it is also a hit with the country’s 200 million vegetarians.
Another lesson learned from the McDonald’s case: vegetarian items should not come into contact with non-vegetarian products or ingredients. Walk into any Indian McDonald’s and you will find half of the employees wearing green aprons and the other half in red. Those in green handle vegetarian orders. The red-clad ones serve non-vegetarians. It is a separation that extends throughout the restaurant and its supply chain. Each restaurant’s grills, refrigerators, and storage areas are designated as “veg” or “non- veg.” At the Vista Processed Foods plant, at every turn, managers stressed the “non-veg” side was in one part of the facility, and the “vegetarian only” section was in another.
Today, after many missteps, one can truly imagine the ghost of Ray Kroc asking Indians one of the greatest questions of all time—the one that translates into so many cultures: “You want fries with that?” Yes, Ray, they do.
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