The Trap of Localization

By Sophie Chen

OBI has performed a drama in the China market, marked by an impressive opening, unfolded in a fluctuating manner and eventually ended with a sudden halt. The closing episode was sad in that the Beaver, characterized by hard work, spirit of teamwork and outstanding surviving skills, lost the battle and gave up the China ¡°dam¡± it had been laboring on.

Many are the rumors about the hidden factors of Dr. Li Fengjiang¡¯s resignation, such as his chaotic internal management, his boastful attitudes, or probably his attempt to become independent; also abundant are the speculations on the real intention of OBI¡¯s decision to sell its China business, including the conjecture that OBI might have earned maximum profits with the prompt closure. Whatever lay behind the events, some core elements stood prominently out of the case and raised some critical questions of universal significance: How should an MNC, in the process of globalization, balance between the requirements of standard operation and the needs of strategic adjustment in line with the local context? How should it negotiate the difficulty in keeping the control and maintaining the culture of the headquarters while leaving plenty of room to the entrepreneurial endeavors and innovations of the local branch? Besides, the drastic measures of ¡°CEO churns¡± in the OBI case offered some insights in the effective management reform.

The OBI case is a complicated one, combining a wide range of issues including the sub-culture of an organization, the training of local management and the career development. By analyzing a few essential problems existing in OBI¡¯s management, we attempt to identify some innate factors which make its dramatic changes in the China market inevitable.

First of all, for any MNC ambitious to go global, it is bound to face one of the biggest challenges of strategic management in running the overseas branches: On one hand, it has to transplant to overseas a standard operation model based on the best practice in its original soil; on the other hand, however, it must make some strategic adjustments to better fit the local situation.

Unfortunately, in managing its China region, OBI had been kept swinging between the two extremes of either standardization or localization instead of taking the initiatives to find a balancing point between the two. In the first store in the China market, the Wuxi store, OBI implanted a complete German version on the basis of the successful operation experience in Germany and Europe. OBI Wuxi store was a perfect copy of its European stores, with exactly the same store layout, merchandising display, shopping environment, and customer service. Moreover, in procurement and store management, the Wuxi store didn¡¯t either take into consideration the fundamental features of the China market, where this absolute European version of OBI store hardly survived in the end. Then, OBI took a radical turn with Dr. Li Fengjiang advocating a thorough localization strategy. All German expatriates were sent home with their service terms cancelled. The procurement ratio was quickly tilted towards local procurement, moving further away from the centralized global/national model. The top executive team was changed into a homogenous group of Chinese managers, with the executive power decentralized rather than centralized. The traditional OBI expansion strategy of franchising was also replaced by a new way of setting up partnership with local Chinese enterprises. OBI China even went beyond the model of family business and chose to establish a joint-venture with other companies and to go public. All these increasingly frustrated the German headquarters of OBI, who was so upset about the possibility of losing the control that finally decided to pull back the wandering horse, i.e. OBI China. But it proved to be, yet again, a rash action. Apart from a new CEO, OBI China was suddenly taken over by a whole group of German expatriates assigned with the key functions of management. Hence, the old pattern of centralized control by the headquarters was completely restored, which was followed by escalating personnel turmoil, stagnated growth and expansion, as well as a sharp fall in sales performance.

As a matter of fact, there is a broad ¡°middle¡± way existing between the extremes of standardization and localization. A critical point in the overseas expansion strategy for an MNC is none other than identifying a strategic emphasis and maintaining a healthy interaction between the two poles. However, in the case of OBI, its headquarters never produced a well-defined and co-ordinated China strategy. Without a clear guidance, OBI China acted like a chariot losing the direction, struggling in the radical changes and torn apart by opposite powers. No wonder it eventually was stuck in the mire of the localization efforts and ended with a total withdrawal from the China market.

The second factor in OBI China¡¯s tragedy lies in its errors regarding the establishment and effective operation of a controlling mechanism in its overseas branches. Usually, to open up a new market means to start up a new business. So an overseas branch is in need of professional managers with entrepreneurial and innovative spirit. Then a classic question is raised: In what way can this entrepreneurship be wisely leveraged to benefit the overall strategy of the organization instead of merely serving the local branch. The key elements in an effective controlling mechanism involve a set of management systems (for a local branch, it refers to delegating, reporting and approval systems), and also include the transplanting and identification of an organizational culture. In the formation of this mechanism, those managerial staff and technological personnel outside the headquarters play a crucial role, for it is these people who are actually introducing and practicing the very mechanism, and who supervise, guide and set role models in the process.

It seemed that OBI had done much work in preparing for stepping into China. They offered two-year training to Li Fengjiang both in the headquarters and in the stores so that he became conversant with the management model and the Beaver culture of OBI. Besides, they sent a large number of German experts to help OBI China with its initial efforts. They later became the scapegoats for the failure of OBI China¡¯s first store and their leaving created a power vacuum. Perhaps, the OBI headquarters agreed to withdraw all these experts in order to give a full play to local talents and the decentralized model of management. But in sharp contrast to this benign intention, this step proved to entail some negative outcomes for lack of delegation and absence of controlling mechanism: the Beaver culture featured by the excellent team work underwent a genetic mutation, demonstrated by the fact that Li Fengjiang assumed the super power in the independent kingdom of OBI China and that its expansion strategy was most probably out of the control of the headquarters (especially the plan of having the joint-venture with Haier listed). Li Fengjiang, instead of OBI, became the name by which the company is known in China. To control the situation, the OBI headquarters announced Li¡¯s resignation and sent a large group of expatriates back to China. This prompt action did successfully bring back the branch to the company, but the organizational and cultural turbulence following the churn up failed to achieve the anticipated standard operation and even paralyzed some reasonable localization strategies. To summarize, the non-action of the OBI headquarters in controlling the China branch partly contributed to the tragic ending of OBI China¡¯s struggle.

Lastly, for any organization including an MNC, an effective reform is a must to get revitalized by pressing on towards the strategic direction while maintaining the flexibility. A great care has to be taken in preparing for the actions, reaching a consensus, choosing the best solution and supervising the process, without which no reform would ever take real effect. In the case of the OBI China, there were several significant management reforms that were intended to address the issues regarding standardization/localization and centralized/decentralized control. No exceptionally, radical measures were employed in every reform, which might bring out some positive changes in the short term, but in the long term, frequently applying strong remedies while scarcely giving sound and patient care will certainly cause more internal damages before they are noticed.

Therefore, OBI¡¯s final withdrawal from the China market was a natural result of the development of its organizational problems. Neither the leaving of Li Fengjiang nor the mistakes made by the OBI headquarters is the single blame. Actually, it is true with any MNC that if it fails to maintain a dynamic balance between standard management and local adjustment, to put in place an effective and flexible controlling mechanism, or to set a long term objective based on the sound consideration regarding management reforms, organizational culture and human resources, it will not be able to avoid the potential pitfalls on the journey of overseas expansion no matter it takes localization or standardization strategy.

The author is Research Fellow in CEIBS¡¯ Case Development Center.