Microsoft's Kimchi Problem

Microsoft, known for its unerring command of business strategy, has recently stumbled badly in markets on opposite sides of the world. In Brazil, China, and Europe, governments have announced anti-Microsoft initiatives. Why are things suddenly going wrong? The answer can be found in a little-known slipup Microsoft made in South Korea many years ago.

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.

[This article originally appeared in Barron's on September 20, 2004 - Ed.]

Posted on January 18, 2005