Friday, June 01, 2012

Do Some Global Firms Exhibit Excessive Localization?

Experts frequently criticize large multinationals for failing to customize their products adequately for local markets.  We hear about the fabulous flops, in which firms try to export a popular product developed in the United States or Western Europe, only to experience a huge failure in an emerging market.  I'm quite sure that multinationals do make these mistakes often.  However, I think we hear far less about an equally serious mistake that many firms make.   Some companies have far too many local variations of essentially the same product.  They adapt their goods for every local market around the world, yet perhaps they don't quite need that level of localization. 

These firms don't encounter the same level of criticism. Why?  The economic damage is not as apparent.  After all, these goods may sell very well in each local market.  However, the localization strategy comes with some costs.   By constantly adapting their products for each country, the firms fail to take advantage of potential economies of scale and learning.  As a result, their costs are much higher than they should be.  Moreover, they spend excessive amounts of money building multiple brands in the same product category, rather than investing in the growth of fewer truly global brands.   I'm not saying such a global strategy is ALWAYS better than localization.  Naturally, localization is essential in some products and markets.  However, I do think we fail to levy the same amount of criticism at firms that miss out on key cost savings because of the constant adaptation that they engage in from country to country.

Why does this excessive localization take place in some multinationals?  I would argue that the explanation lies in the organizational structure, not in the minds of those senior executives plotting global strategy.   In many firms, country managers and regional presidents push for localization because it gives them more control and power.  It justifies the existence of larger brand management staffs at the local level, and in general, the country managers control more financial, physical, and human resources.  All else equal, country managers have some personal incentives to push a level of localization that may be higher than optimal.   We often don't hear experts discuss this failure; instead, we hear often about the firm that failed to adapt to a local market.  Yet, both types of mistakes can be equally costly. 

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