Localization Have Pursued Strategies of the Revolution in Consumer Markets Standardization
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www.hbr.org For a quarter century, the big winners in consumer markets Localization have pursued strategies of The Revolution in Consumer Markets standardization. But success for retailers and product manufacturers now hinges on by Darrell K. Rigby and Vijay Vishwanath their ability to cater to local differences—while maintaining scale efficiencies. Reprint R0604E For a quarter century, the big winners in consumer markets have pursued strategies of standardization. But success for retailers and product manufacturers now hinges on their ability to cater to local differences—while maintaining scale efficiencies. Localization The Revolution in Consumer Markets by Darrell K. Rigby and Vijay Vishwanath We’re in the early stages of a quiet revolution sponse, smart retailers and consumer goods in consumer markets. For decades, the chains companies are starting to customize their of- that have dominated the landscape—titans ferings to local markets, rolling out different like Wal-Mart, Best Buy, and McDonald’s— types of stores, product lines, and alternative have pursued single-minded strategies of stan- approaches to pricing, marketing, staffing, and dardization. They’ve fine-tuned their store customer service. They’re moving from stan- formats, merchandise mixes, and operating dardization to localization. and marketing processes, and they’ve rolled Combining sophisticated data analysis with out their winning formulas internationally. innovative organizational structures, they’re They’ve demanded equally rigorous consis- gaining the efficiencies of centralized manage- tency from suppliers, pushing the standardiza- ment without losing the responsiveness of tion ethic deep into consumer product compa- local authority. The greatest benefit of moving nies and across the entire consumer supply from standardization to localization is strate- chain. gic. Standardized offerings discourage experi- But the era of standardization is ending. mentation and are easy for competitors to Consumer communities are growing more di- copy. (Sam Walton openly referred to Kmart as verse—in ethnicity, wealth, lifestyle, and val- the “laboratory” he copied while growing Wal- ues. Many areas, moreover, are now satu- Mart.) Customization encourages local experi- rated with big-box outlets, and customers mentation and is difficult for competitors to are rebelling against cookie-cutter chain stores track, let alone replicate. When well executed, that threaten the unique characteristics, such localization strategies can provide a durable as architectural styles and favored brands, competitive edge for retailers and product of their neighborhoods. When it comes to con- manufacturers alike. sumer markets, one size no longer fits all. In re- OPYRIGHT © 2006 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED. OPYRIGHT © 2006 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. C harvard business review • april 2006 page 1 Localization Reinventing the Big Box stores, products, and services with unprece- Although standardization has been a power- dented precision. (For an example of the new ful strategy in consumer markets, it’s reached insights technology can deliver, see the sidebar the point of diminishing returns. Customers “Mining the Internet.”) are becoming more diverse, according to Our analysis of 30 localization leaders, in- studies by geodemographers, people who cluding Best Buy, Tesco, and VF, documents study the population characteristics of spe- these benefits. Even Wal-Mart, the sultan of cific geographic areas. Measuring ethnicity, standardization, is moving toward localization. age, wealth, urbanization, housing styles, and The company has made customization the even family structures, the demographic cornerstone of its “store of the community” company Claritas determined in the 1970s strategy, announcing that it plans to tailor for- that 40 lifestyle segments were sufficient to mats and products to the local clientele in define the U.S. populace. Today, that number every store in its chain. has grown to 66, a 65% increase. Wal-Mart uses a rigorous process to ensure Diversity is not the only nail in standardiza- that customization does not undermine its tra- tion’s coffin. Many large chains have erected so ditional efficiency. That process begins when a many stores that they’re literally running out store is still on the drawing board. Company of room to expand. They can’t open new out- real-estate teams deeply research the local lets without cannibalizing old ones. Standard- customer base when scouting for locations. ized chains are also meeting with other con- Designers then create the store’s format by straints: Where attractive locations are still combining suitable templates—stores near of- available, attempts to build stores often face fice parks, for example, with prominent islands fierce resistance from community activists. featuring ready-made meals for busy workers. From California to Florida to New Jersey, Templates allow Wal-Mart to maintain consid- neighborhoods are passing ordinances that erable economies of scale. The company has dictate the sizes and even architectural styles also developed a sophisticated logistics system, of new shops. Building more of the same— encompassing 110 distribution centers in the long the cornerstone of retailer growth—has United States alone, to manage complex de- been tapped out as a strategy. livery schedules quickly and efficiently. Finally, standardization can do the most stra- Through its Retail Link program, Wal-Mart tegic damage by forcing products and practices works with suppliers to tailor store merchan- into molds. The resulting homogenization of dise with similar precision. Built on a vast data- business tends to undermine innovation, all base, Retail Link provides both local Wal-Mart the way up the supply chain. Managers become managers and vendors with a two-year history so focused on meeting tight operational tar- of every item’s daily sales in every Wal-Mart gets—and stamping out exceptions—that they store. Using the Retail Link Web portal, Wal- begin to consciously avoid the experimentation Mart and its suppliers can create maps of local that leads to attractive new products, services, customer demand, indicating which merchan- and processes. In the end, standardization dise should be stocked when and where. For erodes strategic differentiation and leads inexo- example, Wal-Mart stocks about 60 types of rably toward commoditization—and the lower canned chili but carries only three nationwide. growth and profitability that accompany it. The rest are allocated according to local tastes. The good news is that there’s a way out of Five years ago, Wal-Mart used just five plano- standardization’s dead end. Technological ad- grams (diagrams showing how and where Darrell K. Rigby is a Boston-based vances, from checkout scanners and data- products should be placed on retail shelves) to partner of Bain & Company and leads mining software to Internet stores and radio adapt its soup selection to local preferences. the firm’s global retail practice. A fre- frequency identification (a wireless technol- Today, with the help of Retail Link, Wal-Mart quent contributor to HBR, he coau- ogy that uses small electronic tags to identify and its suppliers use more than 200 finely thored “CRM Done Right” (November and track objects), are providing retailers and tuned planograms to match soup assortments 2004). Vijay Vishwanath, also a their suppliers with deep insight into local to each store’s demand patterns—raising partner in Boston, leads Bain’s glo- preferences and buying behaviors. For the first soup’s growth rate by several points in the pro- bal consumer products practice. He time, mismatches in supply and demand at in- cess. Product companies also use the system to coauthored “Expanding in China” dividual stores can be pinpointed immediately. track their sales and inventory levels in Wal- (March 2005). The new data make it possible to “localize” Mart’s stores and distribution centers and to harvard business review • april 2006 page 2 Localization develop pricing and marketing programs to seen sales increase dramatically, according to boost sales. John Westling, senior vice president. Of course, customization has its limits. Even Thinking in Clusters with rich data, a company can’t customize As Wal-Mart and other leaders have discov- every element of its business in every location. ered, successful localization hinges on getting The sheer complexity would be overwhelming, the balance right. Too much localization can leading to spiraling costs, if not paralysis. corrupt the brand and lead to ballooning That’s why leading localizers have begun using costs. Too much standardization can bring clustering techniques to simplify and smooth stagnation, dooming a company to dwindling decision making, focusing their efforts on the market share and shrinking profit. relatively small number of variables that usu- Striking the right balance means under- ally drive the bulk of consumer purchases. standing which elements of a business should Rather than letting local managers’ decen- be considered for localization, how costly tralized decisions fragment economies of scale, they are to customize, and how much impact the pioneering companies have developed a they will have from one store to another. science of analyzing data on local buying pat- Far from being an all-or-nothing game, localiza- terns to identify communities that exhibit simi- tion can take place in myriad ways (see the larities in demand. For example, American