Excerpts from The Kimchi Matters

Read Reviews | In the News | Read Excerpts | About the Authors

Why does the Kimchi matter? Sam Wilkin explains in this excerpt that appeared in Barron's...

Microsoft's success in the U.S. market is uncanny and ongoing. But in countries on opposite sides of the world, things sometimes go wrong for the wizards of Redmond. Brazilian authorities have announced plans to convert five federal government ministries from Windows to mandatory use of open-source software. In Beijing, representatives of the Chinese, Japanese and Korean governments have been meeting to hash out a joint plan to promote the usage of Linux. And in Europe, the competition authorities handed down a monopoly ruling and fine that cut deeply into Microsoft's global earnings.

This may seem out of character for Microsoft, a company known for its unerring command of strategy. Or perhaps coincidental. But far from it. Consider the telling blunder Microsoft made in the Korean software market in the summer of 1998.

That summer, in the face of determined local competition, Microsoft was struggling with a minority market share. Then the company's strategists hit on a bold plan. The Korean software firm that dominated the local word processing market was bleeding cash. Because of rampant software piracy, many Koreans were using the company's software, but few were paying for it. Cash-rich Microsoft negotiated a deal in which the Korean company would discontinue producing its software in return for a bailout from Microsoft -- leaving the word-processing market open for domination by Microsoft Word.

An aggressive strategy. But what Microsoft failed to understand is that there is something unique about the Korean written language. Most alphabets have evolved organically over the centuries and aren't related to national boundaries. (The letters A through Z are used, with some modification, to inscribe everything from Finnish to Turkish.) Korea's alphabet, called Hangul, was, by contrast, decreed into being in the 1400s by a Korean king who declared, "Koreans are in great need of their own letters."

When Japan forcibly colonized Korea in the early 1900s, it outlawed use of Hangul and forced Koreans to take Japanese names. Hence when Korea was liberated at the end of the Second World War, writing in Korea's unique national alphabet became a potent -- indeed spectacularly potent -- symbol of independence, resistance to foreign domination, and patriotism. So much so, that the government established "Hangul Day," Oct. 9, as a national holiday. (It's probably the world's only holiday in honor of an alphabet.)

Lee Chan-jin, the man who produced the first Korean-language word-processing program -- that is, the first program to make composition in Hangul on the computer possible -- became something of a national hero. Indeed, in a late-1990s poll of Korean college students asking about their role models, Lee took second place, only running behind the chairman of Hyundai.

When Microsoft's plans for the forcible retirement of Lee Chan-jin's software were made public, the backlash was spectacular. Korean editorialists penned personal attacks on Bill Gates. Outraged Koreans actually donated money to venture capitalists making a local counter-offer. A grass-roots campaign against Microsoft sprang up. Microsoft was soon forced to abandon its strategy and concede defeat. In the aftermath, patriotic Korean software users, incensed by Microsoft's actions, for the first time began to pay for their software, and that sent Microsoft's local competition on a brief but meteoric upward rise at the end of the 1990s.

To be sure, these extraordinary events had little impact on Microsoft's global performance in 1998. But they revealed a critical flaw that is now returning to haunt the company: When devising international strategy, Microsoft ignores the kimchi.

Kimchi is a Korean staple dish of cabbage fermented in garlic, chilies and vinegar until it is spicy, blood-red in color, and gives off a pungent aroma. Unlike the Big Mac and Coke, the official food and drink combo of globalization, kimchi is still a quintessentially local dish, associated with a particular country and people. While researching a recent book on global business strategy, my co-authors and I came to see kimchi as the symbol for the idiosyncrasies of local politics, economics and culture. To get Korea right, you have to know about the kimchi.

In a strategic context, understanding the kimchi means more than retouching a U.S. product or marketing campaign with a little local flavor. (In Seoul, for instance, McDonald's will sell you a kimchi burger.) Nor is it enough to wine and dine the local leadership. Microsoft, especially in China, has spent ample time and treasure on this.

Rather, it means adjusting business strategies to suit foreign peculiarities. When strategies from a home market are transported abroad without modification, they may underperform or even backfire spectacularly, as happened to Microsoft in Korea. There are national differences in politics, wealth, commercial environment, infrastructure, history, language, and so on.

The result is a stark and persistent pattern in international trade and investment flows: Despite the ongoing decline in transport and communication costs, the volume of business transacted between distant countries remains stubbornly low. It is no longer hard to get products to distant overseas markets. But it is still hard to do well in those markets.

When Microsoft and many other companies craft international strategies, too often they ignore such concerns. The kimchi is not a factor they recognize. Instead they attempt to replicate highly successful U.S. strategies overseas. Microsoft exploits software's economics to attain market dominance in one category, and then spreads to neighboring product categories by bundling them with the first successful product.

But this approach, as the events in Korea hinted, and this year's setbacks in Latin America, Asia and Europe are now proving, does not always work. Microsoft's U.S. strategy already pushes the boundaries of political and judicial acceptability. In foreign markets, this strategy almost inevitably involves crushing national champions and fuels the perception -- however unjustified -- that "monopoly profits" are being stripped from local hands and shipped back to Redmond.

Microsoft declined to comment for this article. In the company's defense, however, it is important to note that in Southeast Asia, Microsoft has just launched an initiative offering stripped-down local-language versions of Windows at sharply reduced prices. That is a step in exactly the right direction, a strategy in tune with local markets. This praise is not yet fully deserved, though: Microsoft only started the program after the Thai government began distributing a low-cost computer pre-loaded with Linux to its citizens.

Could Microsoft get more in tune with the kimchi? It certainly could, but that would involve some strategic innovation. Partnering with national champions, instead of crushing them, for example. That may contradict the company's stunningly successful modus operandi in America. But a strategy that ignores the kimchi, at best, dramatically increases Microsoft's global risks. At worst, it may undermine Microsoft's international expansion.

The Kimchi Matters lays out 15 dynamics that define the emerging markets, showing how investors who understand these dynamics prosper, and investors who don't, make strategies that under-perform or backfire spectacularly.

On the dynamics of social change...

When Gamal Abdul Nasser and his fellow military officers overthrew a British-allied monarch and seized power in Egypt in 1952, they fully intended to transform Egyptian society—and they succeeded. Their policies unleashed a social transformation of tremendous speed and scale. But the universal law of unintended consequences applies: The grander and bolder the scheme, the more likely that its results will be both extraordinary and completely unexpected...

On the dynamics of opposition...

Sri Lanka's Liberation Tigers of Tamil Eelam are [an] opposition movement that, going strictly by the numbers, had little hope of success. The minority Tamil ethnic group makes up only 3.4 million of Sri Lanka’s 19 million inhabitants. The government army is ruthless and government troops have at times outnumbered the Tigers by as many as 45 to 1. And yet, the Tigers prosecuted a guerrilla war against the Sri Lanka government for more than two decades.

This conflict has claimed an estimated 64,000 lives. Scores of prominent politicians, military leaders, and journalists have been killed. The Tigers assassinated Sri Lankan president Ranasinghe Premadasa in 1993, and former Indian prime minister Rajiv Gandhi in 1991. They tried to kill Sri Lankan prime minister Chandrika Kumarutunga, but only managed to get one of her eyes. The Tigers have destroyed a third of the Sri Lankan navy, grounded half the aircraft belonging to the national airline, and blown up the central bank. The Tigers have achieved an extraordinary degree of success—to the extent that killing people, including innocents, can ever be defined as “success.” But how?...

On the dynamics of power...

So how does one build a super state?

Anyone seeking the answer to this question would hardly have expected to find it in the Singapore of 1959—an impoverished, stagnant swamp, with unpaved roads, abundant slums, a raging tuberculosis problem, and an exploding population. Labor unrest was common. Race riots broke out between the island’s Chinese, Malay, and Indian communities. The departing British closed their military base on the island and, at a stroke, Singapore lost a fifth of its GDP.

But something unusual was about to happen...

On the dynamics of leadership...

Tito—President, Supreme Commander, and Marshal—humbly born “Josip Broz” to a Croatian father and a Slovene mother, was in many respects larger than life. Smartly dressed in military uniforms bedecked with medals, or expensively tailored Italians suits; owner of thirty-two homes; shown on television hunting bears or wild boar; ruling his people with empathy and charisma; hiding his advancing age with toupees and hair dye; well known for his extraordinary and infamous appetites for luxury, fine food, expensive cars, and women. Larger than life—and in the end, larger than the country he ruled, Yugoslavia...

On the dynamics of legitimacy...

When it turned out that fifteen of the nineteen September 11 hijackers were citizens of Saudi Arabia, many Americans were stunned. Wasn’t Saudi Arabia a long-time U.S. ally? Hadn't American troops risked their lives defending Saudi Arabia against potential aggression from Iraq?

To understand this extraordinary political dynamic—how guerrillas once backed by the U.S. later transformed themselves into opponents of the Saudi regime, and ultimately into suicidal terrorists attacking the United States—one must understand the Saudi ruling bargain. The side effects of this bargain and its failings provided Usama bin Laden with motives, resources, and recruits...

On the dynamics of corruption...

The walls are the first sign one has stumbled upon their territory. High and often topped by fences or razor wire, these walls enclose a variety of buildings: whitewashed villas in the tropics, sprawling haciendas in Latin America, Black Sea dachas in Russia, the odd restored colonial mansion, the occasional faux Mogul Palace. This diversity may be cause for confusion. But then a gate opens and a gleaming silver Mercedes, windows tinted, speeds out on some urgent errand. And then you are certain. This home belongs to one of the Wabenzi.

The Wabenzi are an unusual “tribe.” The name was coined by some disgruntled African, tired of seeing wealthy elites racing around in gleaming Mercedes. And so he dubbed them the “people of the Benz” (or, in Swahili: “Wabenzi”). The name traveled to Kenya, Tanzania, South Africa, and points beyond, to describe the rich in those countries, who share a fondness for German luxury cars. (In Nigeria, the same tribe is known as the “Beento,” since they have been to exotic foreign locales on expensive vacations.)...

On the dynamics of policy...

1976: After twenty years pegged at the same rate, Mexico’s currency, the peso, undergoes a sudden 60 percent devaluation. This economic shock leads to recession and soaring inflation.

1982: Once again, the Mexican economy collapses. The peso is devalued by nearly 100 percent and the Mexican government announces a unilateral moratorium on foreign debt repayments.

1988: The Mexican inflation rate reaches 150 percent. The stock market plummets. A well-timed bailout package, arranged by the U.S., IMF, and World Bank, keeps the country afloat.

1994: The Mexican government bungles an attempt at a controlled peso devaluation, causing the infamous “Mexican peso crisis” and sending inflation and interest rates soaring. The banking system totters near collapse and the country lurches into its worst recession in fifty years.

Twice is a coincidence. Three times a pattern. Four times a conspiracy. Readers will note that each of these events was separated by a span of six years. Why did the Mexican economy crash, with clockwork regularity, every six years?...

What the Harvard Business Review said investors could gain from reading our explanation of emerging market dynamics:

“Here's a powerful exposition of what to look for...this may be the first book for businesspeople that presents the case with such clarity and insight.”

Read Reviews | In the News | Read Excerpts | About the Authors