Chapter 02 The Global Economic Environment

8/10/2019 Chapter 02 The Global Economic Environment

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CHAPTER 2

THE GLOBAL ECONOMICENVIRONMENT

International Marketing

Ms. Adiba Anis, Lecturer, School of Business, Bangladesh Open University 2-1


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Review of Chapter 1


Create value for customers by

improving benefits or reducing

price

Improve the product

Find new distribution channels Create better communications

Cut monetary and non-monetary

costs and prices

Value=Benefits/Price


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Global vs. RegularMarketing


- Scope of activities are outside the home-

country market


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Reasons for Global Marketing

Growth

Access to new markets

Access to resources

Survival Against competitors with lower costs (due

to increased access to resources)



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The Importance of Global Marketing

For US-based companies, 75% of salespotential is outside the US.

About 90% of Coca-Colas operating incomeis generated outside the US.

For Japanese companies, 85% ofpotential is outside Japan.

For German and EU companies, 94% of

potential is outside Germany.



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Standardization versus Adaptation Globalization (Standardization)

Developing standardized products marketed

worldwide with a standardized marketing mix

Essence of mass marketing

Global localization (Adaptation)

Mixing standardization and customization in a

way that minimizes costs while maximizing

satisfaction

Essence of segmentation

Think globally, act locally



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COMPETITIVE ADVANTAGE, GLOBALIZATION &

GLOBAL INDUSTRIES

Focus Concentration and attention on core business and competence

Nestle is focused: We are food and beverages. We are not

running bicycle shops. Even in food we are not in all fields.

There are certain areas we do not touchWe have no softdrinks because I have said we will either buy Coca-Cola or

we leave it alone. This is focus.

~Helmut Maucher, former chairman of Nestl SA~

2-7Ms. Adiba Anis, Lecturer, School of Business, Bangladesh Open University


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GLOBAL MARKETING: What It Is & What It Isnt

Single Country

Marketing Strategy

Target Market Strategy

Marketing Mix

Product

Price

Promotion

Place

Global Marketing

Strategy

Global Market Participation

Marketing Mix Development

4 Ps: Adapt or Standardize?

Concentration of Marketing

Activities

Coordination of Marketing Activities

Integration of Competitive Moves



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STANDARDIZATION vs. ADAPTATION

Globalization (Standardization)

Developing standardized products marketed worldwide with a

standardized marketing mix

Essence of mass marketing

Global localization (Adaptation)

Mixing standardization and customization in a way that

minimizes costs while maximizing satisfaction

Essence of segmentation

Think globally, act locally



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STANDARDIZATION vs. ADAPTATION

The Faces of Coca-Cola Aroundthe World

Arabic

Read right to left

Chinese

delicious/happiness



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How Big Is The Global Market?



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Management Orientations

Ethnocentric:

Home country is

Superior, sees

Similarities in foreign

Countries

Regiocentric:

Sees similarities and

differences in a worldRegion; is ethnocentric or

polycentric in its view of

the rest of the world

Geocentric:

World view, sees

Similarities and

Differences in home

And host countries

Polycentric:

Each host country Is

Unique, sees differences

In foreign countries



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Forces Affecting Global Integration and Global

Marketing

Driving Forces

Regional economic

agreements

Market needs and wants

Technology

Transportation and

communication improvements

Product development costs

Quality

World economic trends

Leverage

Restraining Forces

Management myopia

Organizational culture

National controls


I d i Ch 2


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Introduction to Chapter 2

Market definitionPeople or

organizations with needs and wants;

both have the willingness and ability to

buy or sell The global economic environment plays

a large role in the development of new

markets for organizations


Th W ld E A O i


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The World EconomyAn Overview

The new realities:

Capital movements have replaced trade as the

driving force of the world economy

Production has become uncoupled fromemployment

The world economy, not individual countries,

is the dominating factor


Th W ld E A O i


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The World EconomyAn Overview

The new realities continued:

75-year struggle between capitalism and

socialism has almost ended

E-Commerce diminishes the importance ofnational barriers and forces companies to re-

evaluate business models


Ch th t b ht


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Changes that brought more...


1

the increased volume of capitalmovements. The dollar value ofworld trade in merchandise isrunning at roughly $9.2 trillion per

year. Foreign exchange transactionsare running at approximately $1.5trillion per day worldwidefarsurpassing the dollar volume of

world trade in goods and services.


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2

The relationship betweenproductivity and employment.

Employment in manufacturingremains steady or hasdeclined, productivitycontinues to grow.


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3

The emergence of the world economy as thedominant economic unit.

Company executives and national leadersrecognizing this have the greatest chance ofsuccess. e.g. the real secret of the economic

success of Germany and Japan is the fact thatbusiness leaders and policy makers focus onworld markets and their respective countriescompetitive positions in the world economy.

This change has brought two questions to the

fore: How does the global economy work, andwho is in charge? Unfortunately, the answers tothese questions are not clear cut.


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4

The end of the Cold War.The demise of communism as an economicand political system can be explained in astraightforward manner: Communism is

not an effective economic system.

The overwhelmingly superior performanceof the worlds market economies has givenleaders in socialist countries little choice

but to renounce their ideology.


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5

The personal computer revolution and theadvent of the Internet era have in some waysdiminished the importance of nationalboundaries.

Two-thirds of American households havePCs; worldwide, an estimated 500 millionpersonal computers are installed in homesand businesses. In the so-called Information

age, barriers of time and place have beensubverted by a transnational cyber-worldthat functions 24/7.


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Economic Systems

1

Capitalist2

Socialist3

Mixed



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Dominant Methods of

Resource Allocation

1 Market Allocation

2 Command or Centrally Planed Economy

3 Mixed Allocation



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Economic Systems

3 main types of economicsystems

Market Allocation/Market

Capitalism Command Allocation/Centrally

Planned Economy

Centrally Planned Socialism

Centrally planned capitalism

Mixed System/Market socialism



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Market Capitalism/Market Allocation


Individuals and firms allocate resources

Production resources are privately owned

Driven by consumers

Governments role is to promote

competition among firms and ensure

consumer protection

Many former socialist countries haveadopted this system


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Market Capitalism/Market Allocation


Market capitalism is practiced around the world,

most notably in Western Europe and North

America.

All market-oriented economies do not function

in an identical manner. The U.S. is characterized by its competitive

free-for-all and decentralized initiative.

Japan is sometimes called Japan, Inc. because

it has a tightly run, highly regulated economicsystem that is also market oriented.


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Western Market Systems

Type of System Key Characteristics Countries

Anglo-Saxon

Private ownership free

enterprise

Minimal social safety

net

US, Canada,

Great Britain

Social Market

Economy Model

Private ownership

Inflexible employment

policies,

social partners

France, Germany,

Italy

Economy Model

Mix of state andprivate ownership,

Large safety net,

High taxes

Sweden, Norway



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Command Allocation

Marxism is utterly vanquished, if not yetentirely extinct, as an alternative economicsystem. Capitalism is triumphant. Theideological conflict first joined in the mid-

nineteenth century in response to the rise ofindustrial capitalism, the deep argument thathas preoccupied political imagination for 150years, is ended.

Willian Greidner, One World, Ready or Not:the Manic Logic of Global Capitalism



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Command Allocation/

Centrally Planned Socialism Centrally Planned Capitalism

Opposite of market capitalism

State holds broad powers to serve thepublic interest; decides what goodsand services are produced and in whatquantities

Consumers can spend only what isavailable

Government owns entire industriesand controls distribution

Demand typically exceeds supply

Little reliance on productdifferentiation, advertising, pricing

strategy China, India, and the former USSR now

moving towards some marketallocation and private ownership

Economic system in which

command resource allocation is

used extensively in an

environment of privateresource ownership

Example:

Swedish government controls 2/3s

of all spending; a hybrid of CPS and

capitalism Swedish government plans to

move towards privatization


E i S t


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Economic Systems

Private

Resource

Ownership

State

Market Command

Market

Capitalism

Centrally

Planned

Capitalism

Market

Socialism

Centrally

Planned

Socialism

Resource Allocation



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So can you answer????????

1) Who Allocates Resources?

2) Who Controls the Markets?

3) Which Type of Economic Freedom is

There?4) What Role Does the Government Play?

5) Who are the Adopters of This System?



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Economic Freedom

Variables considered include:

Rankings of economicfreedom among countries Ranges from free to

repressed

1) Trade policy

2) Taxation policy

3) Regulations

4) Banking policy

5) Monetary Policy6) Wage and price controls

7) Property rights

8) Capital flows and foreign

investment

9) Black market10) Government consumption of

economic output



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Economic Freedom (2011 record)

Free1. Hong Kong

2. Singapore

3. Australia

4. New Zealand

5. Switzerland6. Canada

7. Ireland

8. Denmark

9. United States

10. Bahrain

Repressed

169.Turkmenistan170. Timor-Leste

171. Iran

172. Dem. Rep. Congo

173. Libya

174. Burma175. Venezuela

176. Eritrea

177. Cuba

178. Zimbabwe

179. North Korea

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Source:http

://www.heritage.o

rg/

Not ranked: Afghanistan, Iraq, Liechtenstein, Sudan

Stages of Market Development


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g p

World Bank has defined fourcategories of development

High-income countries

Upper-middle income countries Lower-middle income countries

Low-income countries

Based upon Gross NationalProduct (GNP)


Stages in Market Development


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g p

The World Bank has defined fourcategories of development using GrossNational Income (GNI) as a base

BEMs, identified 10 years ago, werecountries in Central Europe, LatinAmerica, and Asia that were to haverapid economic growth

Today, the focus is on BRIC: Brazil,Russia, India, and China


Big Emerging Markets


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g g g

China

India

Indonesia

South Korea

Brazil

Mexico

Argentina

South Africa

Poland Turkey




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Known as Big Emerging Markets (BEMs)

because of the incredible growth potentialwithin each market.

Each one has experienced rapid economicgrowth during the past decade.

These BEMs cut across the four stages ofeconomic development; per capita incomeranges from $10,879 in South Korea to $489in India.

China is the largest, with a population of 1.3billion people; Argentina is the smallest, witha population of 38 million people.




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g g g

Despite these contrasts, experts predict

that the BEMs will be key players in globaltrade even as their track records on

human rights, environmental protection,

and other issues come under closer

scrutiny by their trading partners.

The BEM government leaders will also

come under pressure at home as their

developing market economies creategreater income disparity.


Low Income Countries


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Low-Income Countries

GNP per capita of $996 or less Characteristics

Includes 13% of the worlds population

Limited industrialization

High percentage of population in farming

High birth rates

Low literacy rates

Heavy reliance on foreign aid

Political instability and unrest Concentrated in Sub-Saharan Africa

Uzbekistan and Turkmenistan



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Low-Income Countries The newly independent countries of the former

Soviet Union present an interesting situation:Income is declining, and there is considerableeconomic hardship.

The potential for disruption is certainly high. Arethey problem cases, or are they attractive

opportunities with good potential for moving outof the low-income category?

These countries present an interesting riskreward trade-off; some companies have taken theplunge, but many others are still assessingwhether to take the risk.

Other low-income countries represent genuinemarket opportunities.



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Low-Income Countries Bangladesh is a case in point:

GNI per capita is approximately $590,

garment industry is enjoying burgeoning exports.Finished clothing exports doubled between 2004 and2009;

buyers include Gap, H&M, Tesco, Wal-Mart, Zara, andother retailers. Garments represent fully 80% of thecountrys exports; the president of the Bangladesh

Garments Manufacturers and Exporters Associationexpects that exports will total $25 billion by 2013. Workers in Bangladesh currently have the lowest wages

in the global garment industry. In fall 2010, thegovernment-mandated minimum wage was raised from$24 per month to $44.

An estimated 3 million Bangladeshismostly womenwork in the industry. Bangladeshs garment sector hasbenefited from labor unrest, rising wages, and astronger currency in China.



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Bangladesh failed to achieve its export target

for the fiscal year 2012-13. Failing $981.74m short, although the export

earnings witnessed 11.18% growth over the

previous fiscal year 2011-12.

EPB said: Bangladesh fetched @27.02bn fromexports in the last fiscal year against its

strategic target of $28bn (source UNB). 3.51% shortfall from target



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Low-Income Countries Two low-income former Soviet republics

Uzbekistan and Turkmenistanquite low in

terms of economic freedom. This is one indication of a risky business

environment. Even so, there are marketopportunities here. In fact, GMs sales inUzbekistan for 2010 were up 41 percent over

2009, making this Central Asian country GMs10th largest market! Russia itself, whose economyis in the upper-middle income category, hasslipped to number 143 in the 2011 ranking.

The pace of Russias economic recovery has

lagged that in other emerging markets, and theKremlins search for new sources of revenue tofund its budget outlays has created tensionbetween government ministries and business.

Lower-Middle-Income Countries


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GNI per capita: $996 to $3,945

Characteristics Rapidly expanding consumer

markets

Cheap labor

Mature, standardized, labor-intensive industries like footwear,

textiles and toys

BRIC nations are Brazil, Russia,

India, China

and Bangladesh will soon join!!!

China, Worlds 2ndLargest Economy Since 2010


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China: No democratic reforms. Trading partners

concerned about human rights, intellectual

property protection.

State leaders must deal with a large

bureaucratic system while reforming state

enterprises. GM, Ford, Honda, VW,

Motorola, Siemens AG,

P&G, Avon, and McDonalds are investing there.


Think about India


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India, GNI per capita of $1,180 on 2009, has

transitioned out of the low-income category and

classified as a lower-middle-income country.

In 2007, India commemorated the 60th

anniversary of its independence from Great Britain

For many decades, economic growth was weak. As

the 1990s began, India was in the throes of an

economic crisis: Inflation was high, and foreign

exchange reserves were low. Country leaders

opened Indias economy to trade and

investment and dramatically improved marketopportunities.


Who did it to India and How?


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Manmohan Singh, former governor of the Indiancentral bank and finance minister, KSA Technopark,

India, believed that India had been taking the wrongroad. Accordingly, he set about dismantling theplanned economy by eliminating import licensingrequirements for many products, reducing tariffs,making DFI easier, and liberalizing the rupee.

Firms doing business include Benetton, Cadbury,Coca-Cola, DuPont, Ericsson, Fujitsu, IBM, LOral,MTV, Staples, Unilever, and Wal-Mart.

Indias huge population base also presents

attractive opportunities for automakers. Suzuki,Hyundai, General Motors, and Ford are among theglobal car manufacturers doing business in India.


Looking at Russia


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Russia, with GNI per capita of $9,370

Currently a the upper-middle-income category. Russias economic situation improves and declines as

the price of oil fluctuates. Strong local companies have appeared on the scene,

including Wimm-Bill-Dann Foods, Russias largest

dairy company. Corruption is pervasive, and the bureaucracy often

means a mountain of red tape for companies such asDiageo, Mars, McDonalds, Nestl, and SAB Miller.

Yet, the market opportunity is enticing: Wages have

increased dramatically in recent years, and consumersare showing a tendency to spend rather than save.


Now Look at Brazil


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Now Look at Brazil

Brazil is the largest country in Latin

America in terms of the size of itseconomy, population, and geographic

territory.

Richest reserves of natural resources in

the hemi-sphere; China, Brazils toptrading partner, has an insatiable

appetite for iron ore and other

commodities.


How did Brazil do it?


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Government policies aimed at stabilizingBrazils macroeconomy have yieldedimpressive results: Brazils GNI has grownat an average annual rate of 4% over thepast 8 years. At the same time, nearly50m Brazilians have joined the middle

class as incomes and living standards haverisen.This trend has been a boon toglobal companies doing business in Brazilwhich include Electrolux, Fiat, Ford,

General Motors, Nestl, Nokia, Raytheon,Toyota, Unilever, and Whirlpool.


Now Look at Brazil


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Comparing with other countries at this stage

of development, Brazil is a study incontrasts.

Grocery distribution companies use logistics

software to route their trucks; meanwhile,

horse-drawn carts are still a common sighton many roads.

To keep pace with the volatile financial

environment of the early 1990s, many local

retailers invested in sophisticated computerand communications systems.


Now Look at Brazil


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Brazil uses sophisticated inventorymanagement software to maintain financialcontrol.

Brazils strength is in computers, thecountrys outsourcing sector is growingrapidly.

Former French president Jacque Chiracunderscored Brazils importance on theworld trade scene when he noted,Geographically, Brazil is part of America.

But its European because of its culture andglobal because of its interests.


Upper-Middle-Income Countries

Chilean copper mine


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Also called newly industrializing economies (NIEs) Examples: Brazil, Russia, Malaysia, Chile, Venezuela,

Hungary, Mexico

GNP per capita: $3,946 to$12,195

Characteristics:Rapidly industrializing, lessagricultural employmentIncreasing urbanization

Rising wagesHigh literacy rates and advancededucationLower wage costs thanadvanced countries

NIEs working up


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NIEs working up

In Hungary and other NIEs, many

manufacturing companies received ISO-9000certification for documenting compliance

with quality standards.


Marketing Opportunities in LDCs


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Characterized by a shortage of goods and

services Long-term opportunities must be nurtured

in these countries

Look beyond per capita GNP

Consider the LDCs collectively rather thanindividually

Consider first mover advantage

Set realistic Deadlines


How Marketing Can Help LDCs


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Focus resources on the task of creating and

delivering products that are best suited tolocal needs and incomes.

Appropriate marketing communications

techniques can accelerate acceptance ofthese products.

Marketing can link resources to

opportunities and facilitates thus satisfying

the consumers terms.


Mistaken Assumptions about LDCs


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1. The poor have no money.

2. The poor will not waste money on non-essential goods.

3. Entering developing markets is fruitlessbecause goods there are too cheap to

make a profit.4. People in BOP (bottom of the pyramid)

countries cannot use technology.

5. Global companies doing business in BOP

countries will be seen as exploiting thepoor.


High-Income Countries


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High Income Countries

GNI per capita: $12,196 or more

Also known as advanced, developed, industrialized,

or postindustrial countries

Characteristics:

Sustained economic growth through disciplinedinnovation

Service sector is more than 50% of GNI

Households have high ownership levels of basic

products


High-Income Countries (Cont)


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High Income Countries (Cont)


Characteristics, continued: Importance of information processing and

exchange

Ascendancy of knowledge over capital,

intellectual over machine technology,scientists and professionals over engineersand semiskilled workers

Future oriented

Importance of interpersonal relationships

Extra Reading


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Although the income definition for each of the stages is

arbitrary, countries within a given category generally have a

number of characteristics in common. Thus, the stagesprovide a useful basis for global market segmentation and

target marketing.

BRIC nations are expected to be key players in global trade

even as their track records on human rights, environmental

protection, and other issues are scrutinized by their tradingpartners. The BRIC government leaders will also come

under pressure at home as their developing market

economies create greater income disparity.

Microsofts experience illustrates the nature of the market

opportunity in these countries: In fiscal 2008, the softwaregiants collective revenues from BRIC grew 54 percent,

compared with overall global revenue growth of 18 percent.


How Mistaken are Our Thoughts?


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How Mistaken are Our Thoughts?

1. In the aggregate, the buying power of poor communities canbe substantial. In rural Bangladesh, villagers spendconsiderable sums to use village phones operated by localentrepreneurs.

2. Poor consumers buy TVs and gas stoves to improve their lives.3. Poor people often pay higher prices. There is an opportunity

for efficient competitors to realize attractive margins by

offering quality and low prices.4. Rural residents can and do learn to use cell phones, PCs, and

other devices.5. Informal economies in many poor countries are highly

exploitive. A global company can improve a countrysstandard of living while earning a reasonable ROI.

Ask students to think of low income areas in the U.S.urban or

ruraland apply these assumptions. Yes, the poor do buycell phones and Air Jordans and 50 high def televisions.


Influencing the World Economy


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g y

Group of Eight (G-8)

Organization for Economic Cooperation

and Development

The Triad



2011 G 8 Leaders in Deauville France


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2011 G-8 Leaders in Deauville, France

G-8, the Group of Eight


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G-7 began in 1975 and Russia joined in 1998. The EU is also

represented at all meetings.

The leader of the host country is the president of the G-8.

The group meets every summer. The Presidency of the G8,

and responsibility of hosting all G8 meetings, rotates each

year, with the order of G8 Presidencies as follows:

2004 United States

2005 United Kingdom

2006 Russia

2007 Germany

2008 Japan

2009 Italy

2010 Canada2011 France

2012 United States


Marketing Implications of the Stages of Development


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The % of potential buyers

or households who own aproduct

India: 20% of people have

telephones

Autos: 1 per 43,000Chinese; 21 per 100 Poles;

8 per 1,000 Indians

Computers: 1 PC per

6,000 Chinese; 11 PCs per

100 Poles; 34 PCs per 100

EU citizen


Balance of Payments


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y

Record of all economic transactions betweenthe residents of a country and the rest of theworld Current accountrecord of all recurring trade in

merchandise and services, and humanitarian aid

trade deficitnegative current account trade surpluspositive current account

Capital accountrecord of all long-term directinvestment, portfolio investment, and capital flows


Overview of International Finance


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Foreign exchange makes it possible to dobusiness across the boundary of anational currency

Currency of various countries are traded

for both immediate (spot) and future(forward) delivery

Increases the risk to organizations thatare involved in global marketing


Managed Dirty Float?


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Definitions

Dirty refers to the fact that central banks, as well ascurrency traders, buy and sell currency to influence

exchange rates

Float refers to the system of fluctuating exchange

rates Managed refers to the specific use of fiscal and

monetary policy by governments to influence

exchange rates

Devaluation is a reduction in the value of the localcurrency against other currencies


Managing Economic Exposure


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Economic exposure refers to the impactof currency fluctuations on the present

value of the companys future cash flows The degree to which exchange rates affect a

companys market value as measured by itsstock price is known as economic exposure.



T t i f i


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Two categories of economic exposure:

Transaction exposureis from sales/purchases

Transaction exposure example: Guinness agrees toaccept payment for Scotch whiskey at one rate but

settles at another rate.

Real operating exposurearises when currency

fluctuations, together with price changes, alter a

companys future revenues and costs.

Real operating exposure occurs for firms with

overseas sourcing or manufacturing operations.



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Numerous techniques and strategies havebeen developed to reduce exchange rate

risk

Hedging involves balancing the risk of loss in

one currency with a corresponding gain inanother currency

Forward Contracts set the price of the

exchange rate at some point in the future to

eliminate some risk



Hedging is common among global


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Hedging is common among global

companies. Porsche relies on currency

hedging rather than price increase to boostpretax profits on sales. All of its autos are

produced in Europe but 45% of sales are in

the U.S. Porsche is fully hedged to protect all

its earnings from foreign-exchange

movements.

30-, 60-, and 180-day forward prices of many

currencies are quoted daily in publications

like the Wall Street Journal, Financial Times

or www.ozforex.com.

Organization for Economic

Cooperation and Development


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Cooperation and Development

30 nations each with market-allocation

economic systems

Mission: to enable its members to achieve

the highest sustainable economic growthand improve the economic and social well-

being of their populations

www.oecd.org


The Triad


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Dominant economic centers of the world Japan

Western Europe

United States

Expanded Triad Pacific Region

North America

European Union


Thinking about the Triad

The ascendancy of the global economy has been


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The ascendancy of the global economy has beennoted by many observers in recent years. One of the

most astute is Kenichi Ohmae, former Chairman ofMcKinsey & Company Japan. His 1985 book TriadPower represented one of the first attempts todevelop a coherent conceptualization of the newemerging order.

Ohmae argued that successful global companies hadto be equally strong in Japan, Western Europe, andthe United States. These three regions, which Ohmaecollectively called the Triad, represented thedominant economic centers of the world. Today,

roughly 70 percent of world income as measured byGNP is located in the Triad.


Chapter 02 The Global Economic Environment

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