Globalisation Driving the World to a Converging Commonality? (Levitt, T. 1983)
Theodore Levitt (1983) instigated a vigorous argument twenty years ago when he suggested that the world was being driven to a converging commonality. The world driven by changes in technology and particularly the dramatic changes taking place in communication was effectively shrinking the world and was, he argued, having the effect of driving consumer tastes to a “converging commonality”. This would he argues result in the global standardisation of products.
Levitt was certainly influential. Sir Martin Sorrell, chief executive of WPP, well remembers the day the article appeared. At the time - May 1983 - he was finance director of Saatchi & Saatchi, then a relatively small outfit that was briefly to become the world's biggest advertising and marketing conglomerate. "I read the piece and I remember giving it to Maurice (Saatchi) saying 'this is a key article'. We distributed it to all our key clients and said 'this is the way the world's going and this is the way the Saatchi agency will be positioning itself'." Maurice Saatchi became a passionate believer in Prof Levitt's theory and set about establishing Saatchi as a global operation that would market the new global brands with global advertising campaigns. Soon after the article appeared, the agency put theory into practice with its "Manhattan" advertisement for British Airways, a science fiction-style spectacular that appeared to show the whole of New York's Manhattan island coming in to land at London's Heathrow airport. Describing British Airways as "The world's favourite airline", the same advertisement was dubbed into 20 languages and shown in every country in the world with a developed television network - 35 in all.
Partly as a result of Maurice Saatchi's advocacy, Prof Levitt's prophecy reverberated in boardrooms around the world. Even so, in 1983 it looked a bit of a futuristic fantasy. Many of the world's markets were still closed and nearly a third of its population lived under communism. By the end of the 1980s, however, as the barriers to world trade came down, Prof Levitt was beginning to look more right than he could ever have imagined. People in former communist countries celebrated their freedom by cracking open cans of Coca-Cola, MTV embraced the globe's youth and, in 1990, McDonald's opened in Moscow.
In the 1990s, the share prices of global brand-owners such as Coca-Cola, McDonald's and Walt Disney soared as investors savoured the companies' growth prospects. Another sign of the times was the trend for companies to brand or rebrand themselves with global-sounding names seemingly plucked from Esperanto, such as Diageo, Novartis and Invensys. Then, something un-expected happened: a reaction set in. People around the world started demanding more local sovereignty and more protection for their cultural identities. Most worryingly for global brand-owners, consumers in newly opened markets started expressing a desire for local products - which, as local manufacturers adopted western business methods, were simultaneously showing a big improvement in quality. Tomkins, R., (2003).
The idea of global economic convergence has proven to be a myth, making data gathering on emerging markets essential. Philip Parker points the way to information sources back in the early 1980s, many argued that a globally standardised strategy was the future. Convergence and standardisation went together. Why? Because consumer tastes and preferences were converging across regions, countries and economies. The idea was that companies should cut costs and conquer the world with global economies of scope, scale and branding. Geographic differences would disappear as managers focused on the global village. Parker, P. (2001).
By the end of the 1990s, most global brand-owners were switching chief executives as their share prices plummeted in response to slowing growth rates. In March 2000, in a signed article in the Financial Times, Douglas Daft, Coca-Cola's new chief executive, offered a startling analysis of what had gone wrong. Coca-Cola, Mr Daft wrote, had traditionally been a "multi-local" company but as globalisation had gathered pace, it had centralised its decision-making and standardised its practices. "We were operating as a big, slow, insulated, sometimes even insensitive 'global' company and we were doing it in a new era when nimbleness, speed, transparency and local sensitivity had become absolutely essential to success," he wrote. But Coca-Cola had learnt its lesson, Mr Daft said. It was that "the next big evolutionary step of 'going global' now has to be 'going local'. In other words, we have to rediscover our own multi-local heritage." Astonishingly, it was almost the opposite of what Prof Levitt had advocated. Yet now it is the almost universally accepted wisdom. The one-size-fits-all approach is out; "think local, act local" is in. Coca-Cola owns not one brand but more than 200, mostly local; McDonald's varies its menu to suit local tastes; MTV has different programming to suit different countries and regions.
While homogenisation has affected some product categories - mainly in the technology sector, where there are no cultural barriers to overcome - the paradox of globalisation is that it has led not to a convergence of tastes but to a vast increase in the number of choices available to consumers. People can now buy products from all over the world: global, regional and local. Another paradox is that technology is aiding the fragmentation. "Prof Levitt was assuming that the only way to get scale was through standardisation. It was essentially the Henry Ford argument," says Lowell Bryan, a McKinsey director and a former student of Prof Levitt. "But technology has changed the economics of production. Now, you can have both economies of scale and also deliver very discrete, specialised products." Prof Levitt has retired and does not give interviews. But through an intermediary, he indicates that he stands by his story. "Global consumer products like Coke, Pepsi, McDonald's and Fuji and Kodak film are not fashioned to meet the needs of certain markets. They are simply sold in those markets about the same way they're successfully sold at home," he says. Few would agree that Prof Levitt's prophecy has been borne out. But 20 years after its publication, his article is still widely quoted and read. And you do not have to be right to be interesting. "Sometimes, even if they are wrong, ideas can set off a chain of debate that results in greater knowledge," says Richard Tedlow, professor of business administration at Harvard Business School. "So a brilliant idea that may not be right but that gets people thinking can be of greater value than a standard idea that doesn't stimulate thought at all." Tomkins, R., (2003).
If you are still thinking this way, it is time to reconsider. The data are in and standardisation is out. Eighty per cent of companies divide the world into three time zones: the Americas (Latin America being run out of Miami or New York); the Asia-Pacific segment, encompassing Beijing, Sydney and everything between; and the Euro segment (Africa and the Middle East being handled out of London, Paris, Geneva or Athens). This allows managers to communicate within a segment in business hours. Parker, P. (2001).
Ted Levitt wasn’t wrong about globalisation!
Another perspective is put forward by Alan Mitchell (2003) where he takes a slightly different perspective asking whether Levitt was wrong or whether we are still missing his real message. Mitchell suggests that in fact Levitt was not talking about global brands but rather about the way in which changes in technology was connecting with human needs. He argues that people globally are embracing the fruit of technology, in the form of refrigeration, air conditioning and electric lighting, air travel, antibiotics, computing, communications technology, etc. People around the world have many characteristics which unit them with characteristics such as; “love, hate, fear, greed, envy, joy..” Levitt, T. (1983).
Levitt, Mitchell (2003) saw these factors as universal and part of the drive towards easing the problems of life and the expansion of discretionary time and spending power. Mitchell accepts that there is a general recognition that the old style Multi National organisation has been found to be too slow and cumbersome; however he argues that Levitt has been vindicated in a number of important areas such as the impact of technology and organisational evolution. Levitt he says was also on the right track with regard to the issue of global branding and the importance of global market segments and global brands “..have a natural advantage where ‘globalness’ is an essential part of the ingredient (Visa for instance) and in science and technology driven markets, where there are only one or two best answers..” (Mitchell, A. 2003, pp 27).
Finally Parker, P. (2001) introduces another factor that should be taken into account suggesting that the colder countries of the world (whether adjacent neighbours or not), seem to be converging to the same level of economic wealth and consumption. Absolute latitude, in fact, explains some 70 per cent of the cross-country variances in income per head and is the single most important factor explaining economic divergence compared with many other variables. Convergence clubs are, in fact "climatic clubs". This effect has been increasing since the second world war, especially as more countries adopt capitalist economic systems. Why is this? First, it is clear that all value chains end with a consumer. All industrial products are transformed via manufacturing or some other value-enhancing process, which in turn are transformed or distributed to end users. These users consume clothes, housing, food, entertainment, transportation and other goods (clothes, food and housing represent between 60 and 95 per cent of all things consumed on the planet). Countries that are hot all year round will, in the long term, consume less clothing, food, housing and energy.
While this view of conditional convergence may seem obtuse, it has secure roots in physics and its effects on human physiology. The world is not a set of countries, but climatic zones with varying resources bases and economic regimes.
Which countries will have faster economic growth in the long term? According to physioeconomics, high growth rates can be expected from countries that currently have low levels of consumption compared with other countries in the same convergence club (that is, countries with similar climates and terrain, or similar natural resources). It is not appropriate, in this view, to compare France with Panama, given that the two countries are not members of the same convergence club. Rather, France should be compared only with countries in its convergence club (such as Germany or the UK), or having similar starting conditions (such as climatic or geographic conditions).
Summarise the key issues and perspectives and evidence raised here and evaluate their relevance to International Business.
References:
Tomkins, R., (2003), “Happy birthday, globalisation: 20 years ago Theodore Levitt prophesied the age of the global corporation” The Financial Times, May 6, 2003 p14
Levitt, T. (1983), “The Globalisation of Markets”, Harvard Business Review May/Jun. Cited in de Wit, B & Meyer, R, (1998), “Strategy Process, Content Context, an International Perspective” 2nd Ed, West. Pp 733-741.
Parker, P. (2001), “Developing strategy for a not-so-global village The Financial Times,” ” The Financial Times, Jan 22, p12.
Mitchell, A., (2003), “Why Ted Levitt wasn’t wrong about globalisation,” Marketing Week June 26, pp26-27.
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