Theodore Levitt’s the Globalization of Markets

In The Globalization of Markets, Theodore Levitt proposed that firms must adopt a homogenised approach to marketing in order to succeed in the international market. Discuss this view, drawing on relevant organisations/products in order to support your points. Theodore Levitt’s The Globalization of Markets, published in 1983, is considered in retrospect to be flawed. Yet it remains one of the most widely-read papers among business managers and students. A number of Harvard Business School seminars continue to make it required reading (Tedlow et al 2003: 20). The paper puts forward several theories: the most often cited is the suggestion that homogenisation of approach to global markets is required for success. However, a homogenous approach may suffer from insensitivity to local markets and fail to meet consumer requirements. However, Levitt’s theory is more complex than it first appears. It will be argued that certain levels of homogenisation can bring economies of scale, particularly if developed with a knowledge of cultural similarities as well as differences. Its other arguments continue to be persuasive: Levitt argues that the perceived requirements of consumers may change according to the features and pricing of other offers. Furthermore he acknowledges that the macroenvironment is not a constant, and that there will be times when homogeneity is not viable. The changes in the global market since 1983 are considerable and continue to develop, yet Levitt’s paper still has much to offer today’s business managers.

At the time Levitt was writing The Globalization of Markets, the global political situation was very different from today. The two most powerful nations were the US and the former USSR, which was still Communist, as was much of Eastern Europe. The Cold War tension between the West and Communist nations was still high. The Internet would not begin to become a commercial tool to any great degree until the mid-1990s. Penetration of computers for business and domestic use was still low. Business documents were typically produced on typewriters, some models of which had basic word-processing capabilities. Faxes were taking over from telex machines which had been around since the 1920s. Mobile phones were heavy, suffered from poor coverage and were not widely used. The resulting situation was a world where communications over long distances were often difficult, and where 32% of the population lived under Communism and was simply not a target market because of the very minimal levels of international trade with Communist nations (Tedlow et al 2003:10). When Levitt discusses globalisation, therefore, it is in the context of a far smaller market than today. Levitt’s paper was positioned to be provocative: “He does not offer a tenstep program…Instead he shouts: ‘Wake up!’” (Tedlow et al 2003: 14).

He asserts that “Companies that do not adapt to the new global realities will become victims of those that do” (Levitt 1983: 102). Levitt begins by outlining the difference between the international and global approaches. International organisations adjust operations for each country in which they have a commercial presence. The global organisation, on the other hand, does not use differentiation: “It sells the same things in the same way everywhere” (ibid: 92). Levitt cites global brands – Coca-Cola and Pepsi, Revlon, McDonalds, Sony, Levi jeans – as examples of success without tailoring products to specific markets (ibid:93). He does not rule out digressing from the route of standardisation, but stresses that this must only occur when absolutely necessary, and a return to standardisation should be the objective (ibid: 94): standardisation has cost efficiencies enabling global companies to compete with local suppliers (ibid: 94) Levitt recognises barriers to trade such as taxes on imports but argues that the situation is constantly changing (ibid: 99).

Levitt argues that it is wrong to assume that the customer’s expressed needs must be met (ibid). While consumers may have a preference regarding their ideal product, many prefer to compromise on features in favour of a lower-priced item. Levitt demonstrates this through a case study of Hoover: market research showed that German consumers liked high specification washing machines, and so Hoover targeted the market with such machines, charging an appropriately high price. However, Italian washing machines, at a much lower specification, and a much lower price, gained favour with the German market to Hoover’s cost (ibid: 96-98). Hoover shows “the perverse practice of the marketing concept and the absence of any kind of marketing imagination let multinational attitudes survive when customers actually want the benefits of global standardisation…It asked people what feature they wanted in a washing machine rather than what they wanted out of life”(ibid: 98) To summarise, Levitt’s key ideas are (1) that homogenisation is more cost efficient, and (2) that consumers will often accept a lower-cost product with fewer features rather than a more expensive item tailored to a local market. He argues that established marketing practice must be approached in more imaginative ways for real business benefits. Levitt’s ideas can be considered in the context of various pertinent marketing concepts and theories. Levitt’s approach can be considered in terms of marketing mix using the 4 ‘P’s:

• product is homogenised, designed to have wide general appeal without offering features that are only relevant to a specific market segment.
• price is low
• place is not considered
• promotion is barely considered

Product

As will be seen in the following sections, the successful global brands cited by Levitt as taking a homogenised approach to the global market do not demonstrate strict adherence to and success with his recommendations. McDonalds’ homogenisation strategy has not been universally successful: as it opened up operations in South Africa in the 1990s, its focus on beef surprised local managers. The main market sector of local black consumers favoured chicken because it was cheaper than beef. Beef was the preference of white consumers. Local competitors acknowledged and used these market segment characteristics to their advantage (Kotler et al 1999: 183). Samsung’s successful approach to the global market has focused on high specification and high price to grow its market share. Its UK market share grew from 2.6% in 2000 to 155 in 2003, and climbed from 4th in the worldwide market in 2002 to 3rd in terms of unit sales and 2nd in terms of revenues the following year (Lee et al 2004: 12). Samsung has also decentralised its design departments, placing them in the US, UK and Japan to cater better for local tastes, but the design and other departments maintain the Samsung brand consistently in all markets. This demonstrates a combination of homogenisation and differentiation. The mobile phone market has characteristics that make it difficult to adopt a completely homogenised approach to achieve success globally.

The Japanese markets typically adopt new technology 2 to 3 years ahead of their European counterparts, and this has been one of the reasons that Vodafone has struggled to perform in Japan and has now exited the market. While the company was able to learn from the Japanese market and use this knowledge to perform well in other countries as they ‘caught up’, Japanese firms appear to have been better positioned and able to capitalise on the understanding of their domestic market. With many markets reaching saturation point for mobile phone ownership, the focus has moved to encouraging consumers to purchase new phones, which compete on functionality (most recently colour screens, cameras and digital music file capabilities) and/or creating a design trend (Motorola’s Razr has successfully achieved this, assisted by bringing out the phone in a range of different colours). Phone purchases are subsidised by network operators who prefer consumers to buy phones with high levels of functionality as this increases their use of them and hence the revenues generated. The iPod is another example of a product which is achieving global dominance through a design which is becoming iconic. It is not the cheapest digital music player, nor does it have as high a specification as some similarly-priced players, yet in the UK, 44% of MP3 players are iPods (XTN 2006: 3) The iPod is a global product, at least in those markets where individuals have the disposable income to purchase one and the technology to transfer audio files to it. Tailoring the product is not necessary, although the iTunes website, providing downloads for the device, is limited by national copyright legislation in the countries where it operates. French MPs recently voted that downloads from iTunes and other similar sites must be compatible with all MP3 players, presenting a further challenge to homogenisation for iTunes: it is anticipated it will pull out of the French market (Chrisafis et al 2006).

Price

The most notable departure from Levitt’s advocated approach by his global brand examples is on price. Coca-Cola, Pepsi, Levis and Sony are premium brands which have, for many years, competed with lower-priced local brands with similar features and functions. The importance of the global brand’s value, recognised by leading contemporary theorists (Lagace 2003), cannot be underestimated, yet its value is arguably diminishing (ibid). McDonalds’ pricing strategy varies from market to market. In the UK, for example, its products are cheaper than many of its competitors’. In the Czech Republic a Big Mac costs the equivalent of $2.60 at January 2006 exchange rates, much lower than the $3.15 US (domestic) price. (www.economist.com/markets/bigmac/displayStory.cfm?story_id=5389856). However, in respect of the local market, it is a premium-product: if the price is considered in relation to average salary, the Czech price is the equivalent of a US consumer paying $12, and other restaurant/fast food options are often cheaper (www.czechpoint101.com/costofliving.html).

Place

While Levitt does not consider place of sale, his theories can nevertheless be applied to sales channels. Homogenisation enables operations such as distribution to be standardised, potentially reducing costs. While it might be assumed that local retail practices should be adhered to in order to compete with local products, this may not be the case. Dell, for example, reduces costs through not having retail outlets in a market where many of its competitors do. While the internet may have given a competitive edge to some businesses because of reduction of overheads, traditional retailers are moving into multiple platform selling, with high street stores and websites reinforcing brand and providing a tangible element that some consumers find reassuring: Madslien (2005) cites research by Deloitte showing that for Christmas shopping in the UK, the websites of high street retailers were the most popular. However, this economy is dependent on the market having access to the Internet sales platform. Ryanair’s experience demonstrates the difficulties of regional internet sites, let alone global sites. Its website is identical for each European country in which it operates, but because many East Europeans do not use credit cards and Internet penetration is lower than in Western Europe (Economist 2004: 69), sales have been compromised. This shows how homogenising sales channels to cut costs can be an unsuccessful strategy.

Promotion

Promotion can be homogenised but may prove less effective in some countries as a result. For example, magazines are more popular in Italy than in Austria (Kotler et al 1999: 214), so can achieve much greater penetration. Homogenised approaches require localised research beforehand to be effective, particularly with product names, which can translate badly. For example, the Nova car had disappointing sales in Spain, where Nova translates as ‘doesn’t go’ (MarcousA© et al 2003: 38). For a domestic brand which subsequently looks to expand into a wider market, a change of name may be necessary to take advantage of economies of scale in production and marketing, but can weaken the brand’s identity in the market in which the change is made if it is already established there. Kotler et al suggest an approach which has echoes of Levitt’s theories but is less uncompromising, and can enable homogenised promotion. They define global marketing as “concerned with integrating or standardizing marketing actions across a number of geographic markets”, advocating a departure from the standard where a local market demands it, but maintaining consistency to as great a degree as possible. They suggest focusing on similarities: this requires a great deal of local knowledge of markets, but rather than using that to tailor a campaign for one area, it is used to produce a promotional strategy for a wider geographical area (Kotler et al 1999: 185). This approach enabled Gillette to promote the Sensor razor by finding three characteristics of concern to shavers in all global markets – closeness, safety and comfort – and using these as the basis for the message in a highly successful promotional campaign (ibid: 211). While it is frequently argued that cultural differences mean that promotion and the should be tailored to each country that an organisation operates in, Dahl argues that research into cultural differences and advertising shows a bias, with researchers comparing countries which are specifically selected because of their differences, rather than investigating similarities (2004: 22). Additionally, he notes that research covering advertising looks at advert content rather than consumer response to content (ibid: 21). However, there are advantages if homogenisation is viable: Silk et al identify a cost advantage of 1% to 2% through economies of scale serving both the domestic and overseas markets in marketing and advertising agencies (2003:2): this may seem little, but costs may run into billions for the larger agencies, and the aim is for a margin of 15% (ibid: 38)

Porter’s Five Forces Theory

Levitt’s model gives limited consideration to the various factors that may help or hinder organisations in any market, and these are no less applicable to organisations with the capacity to trade globally. Porter (1979) looks at five areas influencing a business: supplier power, buyer power, degree of rivalry, threat of substitutes and barriers to entry. To these can also be added barriers to exit, collusion (e.g. between competitors) and strategic alliances, and several of these aspects are of particular relevance here. Global operations require certain supply strategies. As the scale of operations is larger, there is increased likelihood that one supplier will not be able to service all demand from the organisation, yet having a number of suppliers is likely to reduce economies of scale and requires additional administration and negotiation, adding to costs. Minimising costs is core to Levitt’s model. Using one or two larger suppliers may reduce costs, but increases risk as if one supplier has difficulties, it impacts on a far larger proportion of production. The trend in recent decades has been for global businesses to source as well as supply globally. There has been a particular preference for developing manufacturing capacity in low wage areas in order to keep costs down. This also helps global organisations compete with local businesses. However, there have been growing concerns among consumers regarding ethics and corporate social responsibility. Gap and Nike have acknowledged issues with the labour conditions at some of their suppliers (ETI 2005: 3) and have sought to improve these. Although this may appear to increase costs, products tend to be of higher quality because workers are less tired (ibid: 4), and suppliers are more likely to be delivered on time (ibid). This helps improve efficiency in distribution and creates savings in other areas. Additionally, it helps reduce the risk of consumer backlash, which Nike in particular suffered from in the late 1990s (Klein 2000:377). Boycotts of brands perceived to be ethically unsound demonstrate the power of the buyer. When Levitt suggests that consumers will compromise on features in order to buy goods at a lower price, it might be assumed that the global business is in the position to dictate to the market what products it will buy.

The observations regarding Hoover actually reflect a more complex relationship between product and buyer, relating to a perception of whether the cost per benefit reflects value. The supermarket model raises several issues with regard to Levitt. The first is the establishment of global supply chains, not only to compete with local producers in foreign markets, but also to compete in domestic markets by undercutting local producers. Organisations such as Wal-Mart in the US and Tesco in the UK have sought to establish global supply chains to reduce costs while originally operating in the domestic market. Both have subsequently moved to operate globally, with Tesco’s overseas sales rising 13% in 2005 (Fletcher 2006). The second issue is the extent to which a homogenised supermarket model can be exported, and there is a strong argument for tailoring to a specific market in areas such as food, which is an integral element of cultures yet varies hugely from country to country. Tesco’s approach is strongly localised, particularly in East Asia. Its Chinese stores are the result of a joint venture and their success can be partly attributed to the input of local partners who have helped them create an atmosphere instore that mirrors outdoor markets (ibid). A lack of success by a number of supermarkets attempting to export their UK model (Marks and Spencer in Europe, Sainsbury in the US, Tesco in France) suggests that local practices need to be incorporated into any retailing strategy. However a third issue shows adherence to Levitt principles: the acceptance by the consumer of lower specification at a lower cost. In order to prolong shelf-life, supermarkets use “premature picking and over-refrigeration” (Blythman 2005: 82) leading to underripe products on supermarket shelves, but because consumers place value on the convenience of supermarket shopping and prices of many lines are cheaper than from shops who only operate locally, poorer quality produce is accepted. The consumer’s expectations are more complex than Levitt implies. In a summary of papers presented at Harvard Business School’s 2003 Globalization of Markets Colloquium, Legace cites a presentation by Holt, Quelch and Taylor identifying five ‘lenses’ through which the consumer views global brands. Expectations of higher quality among global brands are common, particularly of those with US, European and Japanese identities, and there is also a perception that purchase global brands confers a higher status onto the consumer.

These observations would seem to be at odds with the ‘basic product’ advocated by Levitt, and with the attempts to drive down costs by sourcing in countries where production costs are lower. Strategic alliances are not discussed by Levitt, and may be key to an operator moving into a global market. Samsung’s initial venture into the US demonstrates a tailored, internationalist approach. The company worked with Sprint to develop jointly-branded phones as part of a $600m, 3 year contract signed in 1996 (Lee et al 2004: 10). This leads onto the issue of entry into a market. Levitt’s paper appears to be more applicable to organisations that already have a presence in a number of markets. For those expanding from a domestic market into global supply, the creation of the necessary infrastructure will require significant levels of investment. Kotler identifies three main methods of approach to entering foreign markets: exporting, joint venturing and direct investment (1999: 204-208). Exporting is the simplest, as many of the functions remain in the organisation’s home country. However, this may involve higher production costs than competitors in the foreign market.

Use of intermediaries may help smooth the initial move into a market, but adds a link to the distribution chain, and hence adds a cost. Joint venturing moves more of the operation into the foreign market enabling an organisation to utilise local knowledge more effectively, but reduces control. Direct investment involves setting up operations in a foreign country, but requires a large amount of investment. Direct investment could mean a more tailored approach in a particular market, which conflicts with Levitt’s suggestions, but could also be part of a global supply network built by an organisation that helps reduce costs. Levitt does appear to conflict with Porter on the issue of differentiation. By focusing on reduced specification products that compete on price, an organisation increases the ease with which a competitor can produce a similar item. A cost-based strategy assumes that competitors are inefficient (Hammonds 2001), and relying on competitor ineptitude is risk-laden – Porter is particularly critical of Internet-based companies who take this approach (2001: 72). He also emphasises differentiation and acceptance that the offer may not appeal to the whole market, but that there should not be compromise to appeal to a wider market base (Hammonds 2001). Levitt’s advocated approach appears to compromise on product to appeal to the widest possible market.

Further Areas to Consider

The Globalization of Markets functions primarily as a short article suggesting that businesses rethink accepted ways of operating, and does not try to speculate on future developments, other than to argue that those ignoring its advice will struggle to compete against those who take Levitt’s ideas on board (Levitt 1983: 102). It is inevitable that in a changing world, various factors have come into play which define new issues for the global operator. Levitt does not consider the possibility of reactions against globalisation (Tedlow et al 2003: 27). These can in turn lead to opportunities for businesses catering for specific markets. An example is Mecca Cola (Murphy 2003), a product developed in France targeted at Muslims not wishing to drink US brands, and which is now sold in the Middle East, Europe, Africa and some parts of the Americas. Research by Weber Shandwick in 2003, found that the US were boycotters as well as boycotted, with 43% of US consumers surveyed saying they were less likely to buy French products because of lack of support from France for the Iraq invasion (www.webershandwick.com/newsroom/newsrelease.cfm/contentid,9047.html).

An important element of cost structure for globalisation is not covered by Levitt, but is evident in Sharma’s description of local Indian brands competing with global brands. Sharma (2004: 6) identifies Nirma as the leading detergent brand in India, due to its pricing strategy. A low-cost model operated in all the business’s areas providing “adequate quality at affordable prices”. Nirma holds companies producing ingredients for its products, helping keep its costs down. It has provided strong competition for Hindustan Lever, part of the global Lever operation, although Lever dominates due to its extensive product portfolio. The discussion above suggests that the application of Levitt’s theories is relevant to many businesses to some degree. Certain markets seem more suited to homogenisation than others, but there is a strong argument for a carefully considered approach. Kotler et al cite 1982 research identifying the main factors underlying a market’s potential: these are demographics, geography and economic factors (1999: 203). Yet the examples discussed suggest that equally important is consideration of cultural similarities between different markets. It may be more viable to open markets in a number of countries where economies of scale are possible because of similarities between them, rather than to focus on characteristics of a country in isolation from other markets. While the message of Levitt’s article at first seems an extreme call to operate in the same way in all markets, its core ideas, if adapted according to the needs of businesses, can deliver greater profitability and efficienty. There are two important lessons for business managers:

1. Recognition of the flexibility of the consumer to consider alternatives

This may involve relatively detailed assessments of the importance of different characteristics to a market, and how much value is attached to each

2. The possibility of homogenising at least some areas of global operation

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Internet References

1. www.ryanair.com www.webershandwick.com/newsroom/newsrelease.cfm/contentid,9047.html www.qibla-cola.com
2. www.czechpoint101.com/costofliving.html www.economist.com/markets/bigmac/displayStory.cfm?story_id=5389856

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