09 Jan 2012  Research & Ideas

Location, Location, Location: The Strategy of Place

Business success in one geographic location doesn't necessarily follow a company to a new setting. Professor Juan Alcácer discusses the importance of taking a long-term strategic view. Key concepts include:

  • Many companies think of geographic strategy as a short-term checkers match rather than as a long-term chess game.
  • Establishing new locations is resource intensive, so a wrong decision can sap the energy out of an organization and cause it to lose focus.

 

When companies thrive in their home base, temptation can be great to expand to new locations, either across town or around the world. The problem: Many companies think of geographic strategy as a short-term checkers match rather than as a long-term chess game.

"Many companies don't understand that what works in one location may not work somewhere else."

"The decision to expand is sometimes driven by the wrong reasons," says Associate Professor Juan Alcácer, who teaches in the Strategy Unit at Harvard Business School. "In many cases companies are not thinking of the long-term consequences of what they are doing."

Such snap decisions can result in geo-mistakes that sap energy out of an organization and cause it to lose focus on what it was doing well in the first place.

Geographic expansion should provide access to a fresh market and to additional resources. But companies that take a strategic view also realize that the new territory should increase a firm's competitive advantage by complementing and adding value to its current business.

After all, the strategic value of a new location depends on three things, Alcácer says: the strength of available resources, such as nearby supporting industries; the company's ability to seek and retrieve knowledge in this setting; and its capability to do something better than competitors.

An example of a firm playing tactical checkers instead of strategic chess is one that decides to expand simply by finding the cheapest places to open up shop; Alcácer says it's a mistake to allow low costs to completely override other factors.

"You should not only think about whether there's a market there or cheaper labor," he says. "You also have to think about what your competitors are doing, whether it's the right time to enter or exit that location. Reducing your costs might not provide you with a competitive advantage at all."

Walmart has been a smart expander since it opened its first store in Rogers, Arkansas, in 1962. Sam Walton slowly branched his growing enterprise to other small rural towns, where the retailer was able to outmaneuver mom-and-pop competitors. The management team again waited until they had developed enough resources before going head-to-head in suburban areas against big-box retailers like Kmart.

Timing is critical

A crucial consideration for managers to get right early on is whether the business can afford to spend the required resources—especially when it means siphoning time and attention away from an existing successful business.

"When you open a new operation, it requires not only money but also the time and energy of managers to make sure it's going the right way, and that means you can't focus as much on the base business back home," Alcácer says.

In addition to making sure the resources are in place, corporate strategists must decide which locations to target. Companies often blindly follow their rivals from city to city or country to country without analyzing whether that same situation is right for them. Many businesses that jumped on the China expansion bandwagon are now sorry they made that move, says Alcácer. "They are realizing that they were not well prepared for the market or that it wasn't the right market for them."

Alcácer advises companies to consider sending an advance team to live in a target locale to research the market and business models before expanding.

Another problem with following competitors: an increasing risk that those rivals will gain insight into your operations and even poach highly skilled workers. Sometimes it's best to avoid following the herd and seek out an original niche.

That was the road taken by animation studio Pixar, which established itself near the mudflats of Emeryville, across the bay from San Francisco. Pixar deliberately steered clear of LA, where the bulk of the movie industry resides. Alcácer says that when Disney bought Pixar in 2006, Pixar executives asked to remain based in Northern California because they didn't want the company's culture to be negatively affected by the culture in Southern California.

In some industries, however, executives believe they don't have much choice but to cozy near the competition, especially when they need to plug into unique knowledge that exists in certain areas. Biotech companies, for instance, often operate close to top-notch universities to interact with scientists and cutting-edge research that could potentially feed growth, even if their competitors are also on the same block. Detroit and Silicon Valley, likewise, provided valuable clusters of talent and suppliers where, Alcácer realized, "whenever you saw one firm, you saw the other ones."

In an effort to keep key information from spreading around town, firms operating in these types of highly competitive environments need to maintain strong internal linkages between units and create a culture of collaboration among workers across distances, according to the working paper Local R&D Strategies and Multi-Location Firms: The Role of Internal Linkages, by Alcácer and Minyuan Zhao of the University of Michigan's Ross School of Business. By internalizing its innovations better and faster than nearby competitors, a firm can gain lead-time and a stronger competitive product position in the market.

A company can also prevent pilfering of key information by cutting a project into pieces and shuffling the parts piecemeal to workers in different regions. Alcácer says this model can work like a "need-to-know" spy operation, in which certain information is assigned to specific employees, who are not privy to the whole picture.

Going global

Expanding operations to another country brings a whole new set of complications, says Alcácer. For one, businesses that expand internationally need to adjust their offerings to a completely different market since each country has its own "knowledge profile."

"Companies often don't consider adapting products to the different markets," he says. "Successful companies that expand assume that by doing the exact same thing they are doing in the home market, they will be successful overseas. But many companies don't understand that what works in one location may not work somewhere else. We tend to believe that technology has made us homogeneous, but distance matters. Countries are different; consumers are different. People in India are different than the people in the United States."

Vodafone learned that lesson the hard way. The London-based telecommunications venture initially forayed into Japan on a learning expedition to better understand the country's sophisticated consumers, but was soon captivated by the established market. The exploratory mission quickly morphed into sell mode. Vodafone bought handsets used in Europe in bulk and tried to introduce them in Japan. Unfortunately, Japanese consumers were hooked on a completely different technology, forcing Vodafone to abandon ship after a few rocky years.

"Vodafone needed to study the Japanese handset," Alcácer says. "When you enter a market to provide a service or product and try to learn at the same time, these two [goals] can be conflicting. You can successfully do both at the same time, but you need to be conscious of the two activities."

Another consideration for an international expansion is that the resources required are greatly magnified, and success might only make matters worse in the short run. "When you start to expand overseas, you often see a negative effect on your operations back home. You are literally going through growing pains, and the more quickly you grow, the more likely you are to have problems."

About the author

Dina Gerdeman is a writer based in Mansfield, Massachusetts.

Post A Comment





By hitting “Submit” you agree that your comment, in whole or in edited form, may be posted online. Comments are selected on the basis of relevancy and variety; not all will be posted.

 

Comments

    • Alain Sanouiller
    • Managing Director, Sanouiller Medical Pty Ltd

    My modest contribution would be that prior to expansion, a Company has to become very much aware of its own culture--thus all the implicit assumptions it makes about the outside world. Then it can adapt and open to others .

     
     
     
    • Steve Gorton
    • MD, Enabling Development Ltd

    "Countries are different; consumers are different. People in India are different than the people in the United States."

    And one of the main examples several years ago was the lack of awareness or even arrogance from Disney that they could transplant an American culture and approach into France with Eurodisney.

    Initially an expensive mistake they then learned some lessons for later expansion.

    The HSBC adverts in the UK do make a point of the differing country cultures etc

     
     
     
    • Caroline Mlambo

    I used to work for a large banking group and acquisitions that looked very good on paper were not so rosy after takeover due to failure to adapt to suit local requirements. The moulding of different staff cultures is also a very big challenge when there is a top down approach. I think smaller outfits are more fluid and are able to change drastically both service offerings and organisational cultures compared to large organisations. The red tape and bureaucracy hamper timely responsiveness to changing market conditions.

     
     
     
    • Rob Dietel
    • Vice Consul, British Consulate General - Boston

    Companies considering international expansion should also leverage resources available from government economic development agencies to navigate the variety of issues they may encounter. When a final decision is made, these same organizations can help accelerate market entry and facilitate introductions to key potential customers, suppliers, and more.

     
     
     
    • Saheel Shah
    • Manager, Infosys Limited

    "Countries are different; consumers are different. People in India are different than the people in the United States." - One of the examples that I have observed closely is Mac Donald restaurant chain. The restaurant has customized it's product (menu) offering to suit the locale culture. Not only is it successfuly changing it's brand image depending upon the cultural shift, such as offering of healthy food menu in USA, but it also capitalizes on perceptions of country people, such as placing itself as a upper middle range restaurant and college hang out place in India.

     
     
     
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited

    At the outset, a Company need to be in full control of the work taken up and likely to be taken up in and around its own area of operation. Once all available opportunities have been exploited and it is felt that further geographical areas could be tapped, selection of where to move to is very important. In particular if it is planned to expand to other countries.For success, global companies need to imbibe the local culture and the special requirements - tastes, etc. - of the natives. Then, the type of response expected from that government and all those who matter. Never need a thrust be planned where there is resistance and apathy towards external entrepreneurship. Placing a local country manager and local staff gives many advantages; there are instances where expats were failures as they tried to force their own sustems and culture on the locals leading to resenyment and non co-operation. Hence, such issues require careful thought right from inception.

     
     
     
    • Mason Oghenejobo
    • Board Chairman, Better Than Gold Institute, Nigeria.

    I agree that location resource, available support and organizational capability are important in strategic location assessment. However, I would argue from my experiance that location culture and location/organizational cultural fit are the key determinants of success in any location. In the global space, organizations that are determined to learn and adapt to local cultures thrive while those that do not want to unlearn some of their old cultures run into cultural challenges and atrophy.

     
     
     
    • David Lindsay
    • Lecturer/Tutor, Edinburgh Napier Business School

    I have to agree that there remains much to short-sightedness in relation to the "quick fix" of expansion with few CEO's acknowledging the scalability of their core products/services. Richard Branson in the UK had similar problems when rolling out the Virgin Cola brand to compete in a market dominated by CocaCola and Pepsi some years ago -mistaking a brand for mere products instead of lifestyle or "part of our family" can be a costly error...Managers are often too arrogant concerning the positioning of their brand[s] and fail to take account of variations in culture, buying behaviour and of course value chains.. one person's value for money product is another person's luxury brand....Nescafe in China, Walmart in Europe and Lenovo in Europe/USA -all seemingly scaleable branded products but all suffered to varying degrees with cultural and familial difficulties. Even within one country's borders there can be immens e differences to brand loyalty and buying behaviour and as the global market place becomes ever-smaller it's not just language or semantics which must be researched in order to evolve a product or service -it's the nature of the new market which should be assimilated by the organisation -chameleon-like -to become one of us and therefore part of our family.. We are all afraid of the unknown!

     
     
     
    • Steven Denk
    • Lecturer, Polytechnic of Namibia

    I know exactly what went missing with the failed strategy in China. Grassroot know-how. We strive on know-how. But driving as hard you know your whole life can lead to a major CRASH!!!!

     
     
     
    • Steven Denk
    • Lecturer, Polytechnic of Namibia

    Definitely a chess game. The Chinese I think made some good strategic choices on location with their opening move (establishing a strong retail footprint in Africa (for one), one Walmart can only dream of). And this is across the spectrum (urban, peri-urban and rural). The Chinese retail (chain) across Africa (and global) have very good insights into what the consumer on the ground want. Transforming grass-roots needs and wants into products. The communication between the links in their value chain (factory(whether local or in China<-->distribution centers,embassies<--->retailoutlet<-->consumer) is clear, critical and responsive to local consumer needs. Middle-game is with the throughput per Chinese factory to meet the demand of the footprint established and ironing out logistical problems experienced. The end-game? I can't speculate on that at this stage as it is in progress and will reveal itself more in 2012. F ights in courtrooms, lobbying with Government and agreements between Governments across the globe will reveal the next dominant group of economic players whether in the market place or market space. With steady and consistent Internet penetration growth across developing countries(especially Africa) opening up key segments across Africa. Pure players(online firms) can tap into new potential through a global presence supported by global transport/freight and communication networks delivering value propositions to the consumer's doorstep. This calls for a different approach to strategy(questions on location) and systems that can deliver global competitive advantage. Outsourcing key activities, interface development(consumers, employees, key partners) across the globe, high levels of standardisation in the value chain (amongst key partners) with the ability to deliver customised products and services to targeted segments across the globe is critical.

     
     
     
    • Malcolm Lanham

    When I read articles like this, I read them through many different lenses. As somebody that has worked with churches on local strategies... and is working with his current church to open up a multiple site model... this article is right on. Some of your comments are correct too, because we have to make sure that we replicate the really good things that are working within our church structure/ systems and make sure that we are not replicating our problems. In addition, we have to make sure that we are not just carbon copying what is working without looking at how it is going to work in a different community. What may work in suburban context, will not necessarily work in a rural community that we want to reach out to.

     
     
     
    • N.Sushil Kumar
    • Head of Operations & SCM, TISPL

    Many firms have set up units in diverse locations. The reason is to leverage supply chain efficiencies that arise out of local manufacturing than importing. In India post independence many MNC's (pharma) have set up plants in India, but importing key items from parent company.This ensured profitabilty for them. Over a time locals have acquired the skills of manufacturing & become so efficient after 25 years most MNC's sold off their plants and getting their product outsourced from them.