Theodore Levitts The Globalization of Markets - Case Study Example

Name: xxxxxxxxxxx Course: xxxxxxxxxxx Institution: xxxxxxxxxxx Title: Critical Analysis of “The Globalization of Markets” by Theodore Levitt Date: xxxxxxxxxxxxx Introduction Theodore Levitt’s 1983 article The Globalization of Markets has been described as a seminal and influential article in globalization and business discourse (Vignali 2001). In this article, Levitt outlined his bold global standardization hypothesis in which he argued that the future for large corporations in a rapidly homogenizing market driven by technology was to go global by offering standardized products and not customizing products for markets as was the practice for multinational corporations. This essay will critically analyze Theodore Levitt’s The Globalization of Markets. First, the essay will summarize Levitt’s main ideas and arguments in The Globalization of Markets. The essay will then will discuss some of the strengths and weaknesses of Levitt’s views and analyze counter arguments to Levitt’s hypotheses. The Globalization of Markets In The Globalization of Markets, one of the key pillars of Levitt’s argument is that the world is rapidly being driven into convergence through modern technology. From the onset, he argues that new technologies have “proletarianized” communication, transport and travel and people from all corners of the globe have been exposed to modern products (Levitt 1983, p 2). As a result, he points that that the new commercial reality is characterized by global markets for these modern standardized consumer products that transcend regional and national preferences. People seem to prefer these global products at affordable or low prices irrespective of their presumed national preferences. From this premise, Levitt outlines which strategies companies should use in the global market to remain relevant and competitive. He compares two types of corporations; the global corporation as a superior and the traditional multinational corporation which is facing its demise. He makes the distinction between the two by comparing the global corporation to a hedgehog and the multinational corporation to a fox (Levitt 1983 p 7). The multinational is presented as a company which operates in different national markets, with its products paying attention to or accommodating the different tastes and preferences in each market (customization), while the global corporation simply treats the global market as a single entity (Baker and Sterenberg 2002). He lauds the global corporation’s business model as superior due to their high-quality standardized products produced at low prices. He reinforces this position by stating that standardized markets come with advantages such as economies of scale in production, distribution, marketing and management unlike customized markets. Levitt argues that for companies to survive, they must adopt a global business strategy, producing high quality and low cost standardized goods. Using examples such as McDonald’s, Sony and Coca Cola, he demonstrates how global corporations have successfully transcended ethnic and regional barriers of preferences by offering high quality standardized products at low prices. He gives examples of the global proliferation of commodities unique to ethnicities such as Chinese food as evidence of homogenization of consumer choices. According to Levitt, consumers prefer value and dislike scarcity and would therefore desire low priced and higher quality modern products such as Television sets, cosmetics and Levi jeans regardless of national preferences. He argues that these differences have become vestigial and companies that struggle to accommodate them do so at their expense. As an example, he attributes Hoover’s failure in the European market due to their attempt to accommodate national preferences while a low priced machine backed by heavy promotion would have succeeded (Levitt 1983). However, Levitt cautions against standardization by arguing that many companies fail due to other shortcomings such as lack of imagination or creativity at the execution stage. The one-size-fits-all notion is dispelled and corporations must find creative solutions to circumvent the realities or conditions they face in different market segments. He illustrates that global corporations such as Coca Cola, KFC and Pepsi have standardized processes but different product lines which accommodate their different market segments such as varying sugar levels in soft drinks. In light of his argument, he defends these practices as achieving distinction and not accommodating differences. This also augurs well with creating strong standardized global brands under which corporations can accommodate unique features of markets such as left hand versus right hand drive vehicles, distribution patterns or road conditions (Levitt 1983). In conclusion, Levitt argues that technology and globalization are the two forces which determine preferences and realities in the global market. Thus for corporations to survive in a world with converging tastes and preferences, they need to adopt global strategies and focus on providing what everyone wants at affordable prices. Corporations need to organize themselves to win by taking advantage of economies of scale to provide high quality and reliable standardized products at low cost (Levitt 1983). Strengths of Levitt’s Arguments Levitt’ international standardization argument has received support on the basis of its appropriateness for certain companies in operating in certain market conditions. For instance, Douglas and Wind (1987) argue that global standardization would be ideal for companies which manufacture industrial goods or personal luxury items targeting the higher income market segment (Douglas and Wind 1987, p21). Levitt’s prediction of global convergence driven has also been proven to a large extent. On the supply side, there is increasing convergence in management practices, supply chain management and manufacturing. Automobile parts computer hardware components for example, are being produced on standardized global platforms. Multinationals such as Ford and Sony, for instance, subsequently relocated their operations to take advantage of access to raw materials, cheap labour and less stringent pollution standards (Douglas and Wind 1987, p24). A study conducted by Quelch, Holt and Taylor (2003) has also demonstrated the validity of Levitt’s global standardization argument (Baker and Sterenberg 2002). In the study, it was proven that customers’ preferences towards certain consumer goods were mainly based on what they believed were higher quality standards due to global presence. The implication on Levitt’s argument is that true to his prediction, more and more people are demanding modern products which they believe offer the best value for money. These perceptions are reinforced through strong global brands. Weaknesses of Levitt’s Arguments Despite ceding that Levitt was more “right than wrong”; his homogenization thesis has been characterized by Baker and Sterenberg (2002) as “the search for brand Utopia” (Quelach, Holt & Taylor 2003). The weaknesses in Levitt’s arguments as captured by critics to his article arise from the assumptions on which he bases his global standardization argument. For instance, the three main assumptions behind Levitt’s global standardization philosophy have been faulted by Douglas and Wind (1987). First, Douglas and Wind question the validity of Levitt’s argument of homogenization of consumer needs by pointing out that there is a lack of sufficient evidence to prove this. As an illustration, it is shown that even so called global corporations such as Coca Cola have developed product lines suited to the idiosyncrasies of particular market segments. Douglas and Wind also challenge the premise of homogenization by referring to evidence of intra country segmentation price sensitivity. This is characterized by different lifestyle segments and by extension, different market segments. Secondly, they fault the assumption that customers have universal preferences for standardized goods at low prices regardless of national preferences by arguing that there is insufficient evidence to prove so. To the contrary, they argue that in markets for products and services such as home computers, insurance and televisions, customers are becoming increasingly selective over the features they desire and there is no guarantee that they would willingly sacrifice these preferences for low prices. They also argue that the global corporation’s standardized low price threshold may still be above local prices (or overpriced) in which case global standardization would not work. Thirdly, Levitt’s argument that global standardization implies economies of scale has been challenged. According to Douglas and Wind (1987), developments in technology such as flexible factory automation can yield the same benefits for corporations who manufacture products for specific markets. In addition, they argue that production costs are a minor component of total cost and other costs such as promotion and advertising, transport and distribution may wipe out the benefits of economies of scale (Douglas and Wind 1987). Douglas and Wind also argue that Levitt’s global standardization hypothesis can only hold true under certain conditions. They argue that some of the conditions necessary for Levitt’s envisioned strategy to work are the existence of global market segments, synergies associated with global standardization processes such as coordination of production in different markets and an international communication and distribution structure. These conditions are yet to be optimally realized and while they may eventually be realized through advances in technology, global standardization may still not be feasible until constraints such as barriers to trade are removed as governments move in to protect their markets (Douglas and Wind 1987). Douglas and Wind thus contend that global standardization is not the way forward for every corporation but that each needs to evaluate its own strengths and weaknesses and exploit opportunities which give it differential advantage. In some cases, this may necessitate adapting products and lines to local conditions, tastes and preferences. Counter Arguments; Glocalization Wilken and Sinclair (2007) conclude from a study of McDonald’s and Procter and Gamble that Levitt’s prophecy of global standardization has never, or is unlikely to materialize. Instead, they use the term “glocalization” to refer to what they believe is the most appropriate and currently dominant business model for corporations (Wilken and Sinclair 2007, p3). Glocalization as a strategy is referred to as a hybrid between Levitt’s global standardization strategy or globalization and local adaptation or a combination of the two. According to the proponents of this school of thought, by focusing on the “glocal”, corporations can shift its marketing or communications approach depending on which level of operations best suits the circumstances. Corporations such as fast food giant McDonald’s have actively localized their products in oriental Asia through the menu which has such as Chicken and Beef rice burgers or Teriyaki burgers that cater to local preferences (Wilken and Sinclair 2007 p7). However, they have retained their trademark, signature standardized item- their French fries. This “glocalization” strategy is captured by the phrase “think global, act local” and has proven to be successful in the case of McDonalds (Vignali 2001 p2). Conclusion The main thrust behind Theodore Levitt’s influential 1983 article is that technology and globalization are rapidly homogenizing the world. He argues that due to the proletarianization of communication, transport and travel, people throughout the globe have been exposed to and now demand modern products which offer better value for money. Regional or ethnic differences in markets are increasingly becoming vestigial and demand for standardized products transcends regional or national tastes and preferences. As a result, the global corporation has come into a position of prominence and superiority by treating the world market as one, selling standardized products instead of customizing as is done by multinational corporations. For corporations to survive in this new commercial reality, they must embark on global standardization. Their strategy should focus on providing high quality, reliable and low priced products that everybody wants instead of paying attention to the idiosyncrasies of particular markets. He defends the performance of brands which have seemingly “accommodated” as achieving distinction to cope with the realities of the markets they operate in and warns that a one size fits all approach would be doomed to fail if not matched by imagination and creativity. According to Levitt, corporations should thus organize themselves to win by using their economies of scale to prove high quality, reliable and low priced commodities which give consumers value for money (Levitt 1983). While Levitt makes a compelling argument for global standardization, his arguments have been criticized on the basis of the assumptions that they make. Authors such as Douglas and Wind have questioned the validity of Levitt’s argument claiming that globalization is a “myth” and that the only way for corporations to remain competitive in the global marketplace is by seeking differential advantage based on their strengths and weaknesses. Other challenges to Levitt’s views are that global standardization requires removal of trade barriers or the existence of international communication and distribution structure. The predominant counter argument made against Levitt’s global standardization is glocalization, a combination of both global strategies and local adaptation. Proponents argue that Levitt’s ideas were utopian and that a company must pay attention to local tastes and preferences. Using the example of McDonalds, it has been demonstrated how corporations can combine local and global strategies and still achieve success. Bibliography Baker, M. & Sterenberg, G., 2002, International Branding: How to Resolve the Global-Local Dilemma. Market Leader (Autumn). Douglas, S. & Yoram, W. 1987, The Myth of Globalization. Columbia Journal of World Business Winter: 19-29. Theodore, L., 1983, The Globalization of Markets, Harvard Business Review, May-June 1983. Quelch, J., Holt, D. & Taylor, E., 2003, Managing the Transnational Brand: How Global Perceptions Drive Value. Paper presented at the Harvard Business School’s Globalization of Markets Colloquium May 28, 2003. Vignali, C., 2001, McDonald’s: “think global, act local” – the marketing mix. British Food Journal, 103(2), 97-111. Wilken, R. & Sinclair J., 2010, Global Vision, Regional Focus, “Glocal” Reality: Global Marketers, Marketing Communications, and Strategic Regionalism, ANZCA2007 Conference Proceedings, University of Melbourne. Read More