Tuesday, September 30, 2008

Company cloning – how to change a winning formula

I am sure many of you know some of the ludicrous examples of when companies expanded into a foreign market and failed to adapt to the local circumstances.* It can be because they didn’t adapt their product, their way of doing business, or even their name.

For example, United Airlines famously handed out white flowers on flights from Hong Kong, where white flowers represent death and bad luck. India’s M.P. Been Products was used to printing a swastika on all their products (a symbol of good luck in many far eastern countries); it did not go down well when they launched “German Pilsner”, while also Japan’s “Kinki Nippon Tourist Company” noticed it attracted quite some unwelcome customers when they first expanded abroad.

And it’s a problem of all time. Coca Cola, when entering the Chinese market in the 1920s with less than moderate success, translated the sound of its name into Chinese characters, only to find out later that it, fairly unappealingly, translated into “bite the wax tadpole”. Even further back, England’s East India Company just might have lost control over India in 1857 when it continued to supply bullets encased in pigs wax to its Indian soldiers; the tops of which had to be bitten of before they could be fired. Since it was adamantly against their religion to eat pork, it seemed to have greatly whetted their appetite for pacifism.

The message that always comes with these examples is: “Adapt to local circumstances, stupid!” Don’t just implement what you’ve been doing somewhere else, but implement an altered form of it; adapted to the local context.

Well, in spite of these examples, I am not so sure…

Organisations and their business models are incredibly complex systems, consisting of many tangible and intangible elements. And often we don’t quite know what is causing their success – and, what’s more, often people from the company itself don’t quite know what is making it a success... Take the phenomenally successful Southwest Airlines. Is their success due to their swift logistics, the standardization of their procedures, materials and airplanes, their coherent corporate culture, leadership style, recruitment procedures, etc.? We don’t quite know; probably a combination of all of the above (and more).

Take Starbucks. Is it so successful because of the quality of their coffee, the training of their personnel, the lay-out of their bars, the logistics of the coffee-making processes, the ambiance, etc.? Well… probably all the elements interact, and create the competitive advantage in combination.

The problem of such a complex system is that when you change two or three elements of it, you don’t quite know what will happen… Because all the elements interact, you may be screwing the whole thing up in ways you hadn’t anticipated and won’t even be able to untangle and understand.

Therefore, Professors Gabriel Szulanski and Sid Winter – from INSEAD and the Wharton School – recommend: “replicate”. That is, before even thinking about making local adaptations, copy exactly what you have been doing before at some other locality. Only once you’ve got it working, adapt it, very slowly, one step at a time.

Consider again Starbucks. It was originally replicated by its founder, Howard Schultz, modelled perfectly on an Italian espresso bar. “But it doesn’t look at all like an Italian espresso bar!?” you might shout. Very true. But initially – the first one in Seattle – it did. There was standing room only, full fat milk, opera music, personnel with bow-ties, etc. Only when Howard got that to work, he slowly started to make some alterations, through trial-and-error, one step at a time. Had Howard tried to make all sorts of adaptations right from the outset, it may not have worked at all.

Thus, rather than trying to create local perfection from scratch, first be cautious and modest: replicate exactly, get it to work to an acceptable level, and only then think about very gradually introducing some alterations.

* See, for instance, the book “Blunders in International Business”