1 – Challenge of Globalization International marketing spotlight : Red Bull * Dietrich Mateschitz, inventor and 49% owner. 2003: will stay CEO at least 7 years more. He will focus on strategic issues, taking a global perspective on business. “Only 1 market: the world Global brand philosophy, global pricing, global media plans. But Austria don’t have a great number of global consumer brands (usually, export to Germany is already being a pioneer! )” * The Yoovidhya, a rich family in Thailand, 51% owner. * 2003: Fleming Sundo, Danish, Chief operating officer at the headquarter in Austria. 2007: loss of sales in Germany because of a deposit system, but the US, UK and Southeast Asian markets helped boost sales. What are the challenges of globalization to management? Globalization of trade Historical development World trade started with barter between neighboring communities, but the result is the same: Provide customers with more and different goods at lower prices. OECD (Organization for Economic Cooperation and Development): * 30 Members, representing only 20% of the world population, but more than 2/3 of total world production, and up to 4/5 of aid to industrially developing countries. It has a global reach thanks to active relationships with other countries) * Planning, coordination and deepening of economic cooperation and development. * Active in all economically and socially relevant sectors. Growth of the global economy: 1. Growing for 200 years, then 300 years stagnation 2. 1820: Asia was the most important region in the world in terms of production. 70% of the world’s population produced 58% of the world’s total goods. 3. With growing industrialization Europe took the lead. In Asia, traditions and bureaucracy impeded the economic and social changes needed. 4. WW: Industrial dominance by the US. . Today: East and Southeast Asia are the most economically dynamic region again. Europe is in danger of a setback due to too much bureaucracy and social inflexibility. From 1820 to 2005, population rose from 1 billion to 6. 5 billion. Average per capita income rose from $650 to $5,120. This more than proportional increase is due to: * Technological change * Accumulation of capital (to finance improvements, etc) * Human resources: better education, specific skills, more efficient management * Liberalization of trade More competition productivity gains, improvements in the quality, etc. 003: World trade reached $9,220 billion. * 63% was contributed by the triad (= the most highly industrialized nations of Western Europe, North America and Japan). These 20 nations represent 900 million consumers, less than ? of the world’s population, but 70% of the world’s GNP. * The leading countries in the world trade were the same than in the previous years: US, Germany, Japan, France and UK. But China moved from rank 11 in 1994 to rank 3 in 2003. Countries from East and Southeast Asia are climbing the ranks: Newly Industrialized Countries (NICs).
The economically Less Developed Countries (LDCs) of Africa and Asia contributed to only 0,5% of international trade (political instability, high national debt, disease). Customers all over the world want to obtain the best products at the best possible prices. To be successful today, most businesses must be able to market to, and to satisfy, customers in a global marketplace. Potential problem of this development? * E. g. Ethics Box 1. 1 Exploitation of financed Taylor’s terror Taylor was president of Liberia.
In 1999, The Dutch businessman Gus van Kouwenhoven bought 5 concessions for cutting timber from the Liberian government. For the operations he cooperated with the Oriental Timber Corporation (OTC) and erased 4’500 hectares of rainforest, villages were burned, fields left behind. European and US timber purchasers were impressed by the efficiency and reliability of OTC’s business. Plus, prices were comparatively low, allowing customers to profit from the exploitation of nature until the UNO imposed an embargo on Liberian timber to stop this terror regime. Trade liberalization Advantages Increase in customers’ choices at lower prices * E. g. : India was a closed market for cars until 1993 They did not have to compete with imports, so the cars were technologically unsophisticated * Continual improvement of productivity (! Losing jobs?! ) * C. f. future issues box 1. 1: Going nowhere fast Japan has invented management tools such as JIT manufacturing, TQM, continuous improvement, kanban manufacturing. Its export companies (Sony, Toyota, etc. ) are then very competitive. But there are few comparing to the domestic sectors of Japan that haven’t improved.
These sectors contain the majority of the workers. Increasing competition in the domestic economy will bring high unemployment. As the population is ageing, Japan’s productivity crisis may become even more significant, as fewer workers will have to perform even more work even more efficiently. The cost of living is one of the highest, because increased costs are passed on to consumers. * Growth of national wealth (GDP, Gross Domestic Product, total domestic value added claimed by the residents of a country) * Opening up of new markets * WTO: World Trade Organization. 46 members who agreed to reduce trade barriers. Rules: * Reciprocity (equivalency of actions) * Liberalization (reduction of tariffs and non-tariff barriers) * Non-discrimination (most favored nation clause, favors to one country have to be extended to all members) Disadvantages * Rising unemployment rates * Hard for the highly industrialized countries, because the liberalization created new workers in less developed countries who are paid much less. * People who lost their job because they were is the non-competitive sectors should be retrained to move to more competitive business activities.
But it takes time. * Exploitation of poor countries by the richer ones (wage + working conditions) Economic integration Economic interdependency Because of world trade, countries are not self-sufficient. They depend on trade with each other to help their citizens to achieve and to ensure a high standard of living. In reaction to this interdependence, governments of the 7 industrially leading nations (Canada, France, Germany, Italy, Japan, UK, US) have installed the G7 series of meetings between prime ministers, presidents, and ministers of finance. 1998: extend to G8 with Russia.
The objective is to cooperate in managing the development of the global economy, to foster stability of currency exchange rates and to master problems of high unemployment rates. Early 2000s: * US and UK: trade deficits. PRC, Japan, Germany, France: trade surpluses. * US has become world’s leading debtor nation (it was the world’s leading supplier of capital before! ). Japan, PRC and some oil-producing countries have become big investors in the US. International economic cooperation From simple agreements on tariff reduction to full-scale political integration. Bilateral agreements: a pact between 2 countries concerning trade in one or a few product groups, in order to reduce/abolish barriers to trade. It often serves as the basis for trade between countries with restrictive conditions, such as: * Non-convertible currencies (that cannot be freely exchanged against each other). E. g. CIS * Centrally controlled economies (where all flows of goods and capital are controlled) * Lack of hard currency (a national currency not accepted by international suppliers). * Multilateral agreements: Free trade area: It removes all formal impediments to trade for a specified group of products. But the individual countries maintain independent policies with regard to non-members * NAFTA (North American Free Trade Association), 1 January 1994. Between Canada, Mexico, and the US. It represents more than 420 million consumers. It has produced positive effects for the respective economies. Mexico extended its exports of good to the US, US brand manufacturers shifted production to Mexico because of the low wages.
Low skilled workers in the US lost their jobs because of plant relocations or import competition, but since to NAFTA, the number of people employed in the US has risen by 200’000 each month. * ASEAN (Association of Southeast Asian Nations), 1993. Between Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam, and now also Cambodia, Laos and Myanmar. However, it must include Japan and China to be really powerful. * APEC (Asia-Pacific Economic Cooperation Forum), 1989.
Between ASEAN countries + Australia, Canada, Chile, PRC, Japan, Mexico, New Zealand, Papua-New Guinea, Peru, Russia, South Korea, Taiwan, and the US. The “Osaka Action Agenda” abolish the barriers to trade among them. But the wide differences in the stage of their economic development, entirely free trade is difficult. * COMESA (Common Market for Eastern and Southern Africa), 1994. 20 members, the founders are Djibouti, Egypt, Kenya, Madagascar, Malawi, Mauritius, Sudan, Zambia, and Zimbabwe. * Andean Pact. Between Bolivia, Colombia, Ecuador, Peru, and Venezuela.
Common market of 100 million inhabitants. * Customs union: Free trade area, but in addition the members establish consistent tariff policies vis-a-vis non-members. Larger market with a shared “tariff wall”. * Southern African Customs Union * Mercosur (Chile, Bolivia, Peru, Ecuador, Colombia, Venezuela). Initially a free trade area, since 2000 it is a customs union. * Common market: It removes tariffs between member countries, harmonize their tariff policies vis-a-vis non members, but also remove all barriers to the free movement of production factors among them. * EU (European Union).
With a population of over 450 million, it represents the largest concentration of purchasing power in the world. The EEA (European Economic Area), gathering Iceland, Liechtenstein, Norway, and Switzerland signed an agreement with the EU for a free trade area (political autonomy not diminished). * Economic union: Members are fully integrated economically. * Maastricht Treaty: the members of the EU agreed to harmonize their tax and subsidy policies as a precondition for the unification of their fiscal and monetary policies. Half of them have a common currency, the euro.
Pros and cons of euro: * Lower transaction costs (it ends currency conversion and hedging cost) * Potential for a strong euro contributing to a stable economic environment with low inflation and interest rates (reduce the cost of corporate capital encourages investment) * Some don’t join the euro because they don’t fill the criteria, have political reasons or their economies have a too different level (would be a shock) * It affects the business: competitive strategy, pricing, financial systems, etc. have to be reviewed. E. g. wages are different service costs is different) * Strategy box 1. 1: Malta plans to become a role model for new EU members Malta joined the EU, and worked hard to fill the criteria for euro. 2008: €. * Political Union: the agreement results in a new country. it is seldom because governments would have to give up too much political sovereignty. * Reunification of Germany Political and social dimensions E. g. A south Korean steelmaker has lower cost than in Taiwan an Japan. Then it can be sold to US at a lower price than steel manufactured there. ffects employment rates in the US and Korea. * Social and ecological “dumping”: When a country sells its products at very low prices based on much lower costs due to a lack of social and ecological standards. Hence, unemployment rates increase in western Europe. * E. g. : child labor c. f. Ethics box 1. 2: 200 million children as work slaves. It cannot change as long as consumers are less sensitive to unethical practices than improving their material standard of living at the expense of child slavery. * Cultural “imperialism”: Lots of films produced in the US are exported throughout the world.
It endangers the production of films in other countries but also risks destroying their cultural identity in favor of a general Americanization. Same for fast-food. The resistance to foreign cultural influences can be strong * Culture box 1. 1: Domino’s survives India’s food fight KFC had to close because of anti-western activists (invoked the cow, hindu symbol). But Domino’s survives because it is showed as an Indian company (no advertisement when came out, omits pepperoni, vegetarian first on the menus, etc. ) * Foreign capital ownership: It is controversial. E. g. : Foreign investment in French wine facilities is seen as undermining the gastronomic traditions of France. * In Hungary, it created an industrial two-class society because foreigners invested only in the fastest growing industries. * Exploitation of the poor: critics charge that economically developed nations are exploiting developing ones. 2 views: * Less developed nations are less able to accumulate the capital needed for the production of goods to export, except for low-value-added products such as raw materials Profits and higher wages all stays in the more economically developed countries. Everyone should win because the less developed nations, if they sell whatever products they have, they can earn money to develop other industries greater profit margins wealthier citizen can buy more (own suppliers + imports) Future issues box 1. 2: Are the rich exploiting the poor? The west increased their income per inhabitant fourfold in 1950-2001, the rest of the world only tripled it World trade widened the gap. But: * South and East Asia: fivefold so it narrowed the gap * Some countries (in Africa + some in Asia and Latin America) have stagnated or even declined International Marketing
International Marketing is the application of marketing orientation and marketing capabilities to international business. Marketing orientation Marketing can by describe as: * a bundle of management skills and resources: marketing capabilities. They allow a company to understand, develop, and maintain exchange relationships with individuals, groups, and organizations to reach its objectives. International marketing capabilities support a company in searching for appropriate markets, in buildings and sustaining competitive advantages in those markets, and in managing the relationships with all important stakeholders belonging to those markets. a basic approach to doing business: marketing orientation. Focus on the management of the business organization’s exchange relationship with stakeholders in the operating environment. Characteristics: * Systems perspective emphasizing the interrelatedness among the organization and its various stakeholders in a market. The LT success depends on a continuous influx of resources that become transformed into resources, and flow back out to customers/stakeholders. To work in time, mutually satisfactory relationships with suppliers and customers have to be established and maintained. Marketing oriented managers: Relationships with customers and other stakeholders should fulfill certain minimum levels of expectations and shoudn’t interfere with each other. ) * Exchange perspective interpreting all interactions among the stakeholders as episodes in an ongoing complex exchange that needs to be balanced. Having lasting stakeholder relationships require that the partners in the relationship are willing and able to contribute in a way that each partner subjectively benefits from the relationship in a direct or indirect manner. Marketing oriented managers: establishment and maintenance of relationships needed for long-term business success has to build on balanced exchange relations between 2 or more partners. ) * Value perspective focusing the mind of all members of a business organization on the values/benefits to be mutually provided in the continual exchanges with stakeholders. Both partners need a good reason to establish this exchange relationship: the partner offers them a solution to an actual/potential problem that is more attractive than other solutions offered: depend on its value! Marketing oriented managers: the company personnel should involve in those relationships to be aware of the actual and potential problems of their partners in order to offer the most appropriate solutions. ) * Process-oriented approach. When making decisions and managing daily actions, members of a business organization need to closely coordinate their activities across all functions. (Marketing oriented managers: all members are part-time marketers, partly responsible for providing superior value to the stakeholders) Marketing orientation requires that the personnel adhere to the 4 perspectives on a long term basis.
It’s important to keep track of current relationships with stakeholders, anticipating future developments, and assessing their implications for the firm. In international business, the conditions for establishing and maintaining these mutually satisfying relationships may differ from one country to another, but the ground rules remain the same worldwide Marketing orientation is a universal approach to international business conduct when long-term success is a major objective. Contrariwise, marketing-oriented managers may adhere to one of two basically different pproaches to international business: a multinational or a global approach. Multinational marketing In mutli-domestic industries, international marketing has traditionally concentrated on differences between product markets in countries that had previously been assessed to be attractive business environment. This approach to marketing concentrates largely on country markets, choosing the country because of its characteristics (ex: Switzerland chooses Germany, a strong economy in good health) and developing afterwards a distinct marketing strategy for each market. Global marketing
Rather than focusing on country markets (differences due to the physical location of the customers group), managers concentrate on product markets (groups of customers seeking shared benefits or to be served with the same technology). Location continues to be important (culture, transports, laws, regulations). First focus: what are the most attractive product markets for the company and where in the world are these groups. Critical point: To what extent shared customer aspirations and similar marketing infrastructure (distribution system, logistics, media, norms, and regulations) exist in different nations.
If they do, the company can develop a relatively standardized marketing strategy, serving a global product market. However it takes into account the differences among local market segments (e. g. : English gin, the brand image is the same everywhere, but the sales personnel react to different sales incentives according to the countries) Arguments in favor of a global product market approach to international marketing: * to benefit from Experience curve effects.
This concept has 2 dimensions: * Increased efficiency due to size effects: more easily attained by larger than by smaller companies and by serving a global rather than a local product market. * Increased effectiveness due to experience (accumulated know-how) effect: occurs when a company “learns by doing” (e. g. : a worker is more effective the second time he does something, the same for a company who enter a foreign market for the second time). * the opportunity to find new and sufficiently large market niches through Global market analysis. The idea is to identify a target market (e. g. igh income, fashion conscious women above 40 in several countries. for Guerlain), and have a highly standardized marketing mix. As this global product market is much larger than a single domestic market, it offers a greater opportunity to take advantage of experience curve effects. ————————————————- 2 – Potential market assessment: Determination of attractive markets International marketing spotlight: RSB-Roundtech RSB is a global player in a rather narrow product market niche: produce formwork material for circular structures such as sewage treatment plants (digesters).
Because of its small size, the right choice of markets is very important. But every country market plays to a different tune. Economic indicators of country market level of industrial development, wealth, or urbanization alone have proved to be no valid criteria for estimating potential success. E. g. : * North Italy: Highly industrialized, densely populated and wealthy, but severe lack of digesters. As the Adriatic Sea – touristic area – is therefore polluted, government paid swimming pool to hotels instead of investing in digesters. China: economically it’s a less interesting market, but the government wants to invest in egg-shaped digesters because it is a symbol of highly industrialized countries. * Singapore: egg-shaped digesters consume much less space than the old technology. It is so densely polluted that this digester cost only 15% of what you can earn by selling the land economized. How can a business organization select a number of assessment criteria to determine the attractiveness of potential country markets in an effective and efficient way? Process of potential market assessment
As the resources are limited, a company cannot serve all potential markets in the world. It has to select the most appropriate markets. (This choice must be based on detailed and continually updated information, but it costs too much to gather and analyze all these data for all the markets). Management must find a way to pre-select the most attractive markets in a quick and low-cost manner, and gather relevant and precise data that leads to an accurate evaluation of this restricted number of potential markets. Figure 2. 1: Process of potential market assessment
Secondary research Primary research ragrdg Secondary research Primary research ragrdg As the process moves forward, the emphasis on research shifts from secondary to primary. Corporate policy Assessment of potential markets is based on a company’s corporate policy, in which top management made a first choice of which markets they should serve. A corporate policy includes the vision, the mission, and the business philosophy. The mission statement begins by defining the general purpose of the company – the vision of its founders or top managers.
E. g. : Strategy box 2. 1: IKEA’s vision. The logo is blue and yellow because of the Swedish flags. Nature and the home plays a big part in Swedish people’s lives. They have a fresh healthy way of life. The IKEA product range carriers these home furnishing traditions: modern but not trendy, functional yet attractive, human centered and child friendly, with colors and material reflecting freshness. The prices are keeping low while quality is reliable because Swedish people live on small means and use their head to make the best choices.
Then, the mission statement defines the business domain of the firm – which benefits the company will provide to which customers and which technologies it will use for that purpose. This defines the relevant product market(s). It/they will usually be distributed over a number of country markets. The choice of the country markets depend on the firm’s major objectives and their priorities as formulated in the corporate mission. Objectives may include: * Growth vs. stability * Return on investment * Market share * Acceptable level of risk Approach to technology and innovation * image and goodwill * Establishment of a specific working climate within the organization * Independence vs. cooperation as a general approach to business Because objectives are not always consistent, the mission statement indicates which priorities should be pursued. Depending on the intended degree of internationalization the firm will either: * Keep its business local: If this is its objective, management has no need to assess the attractiveness of potential markets.
However, it must continually screen the global business environment to make sure that its local competitive advantage can be sustained. Developments in other local parts of the same product market have to be followed to prevent surprises from competitors intruding into the home market. * Try to expand a local business to a regional one and later one of global size: If the objective is to internationalize the business from a local market base, country markets will have a prominent position in managers’ mind. Characteristics relevant to the attractiveness of geographically limited product markets have to be determined. Do business on a global level: If the company adopted a global perspective of international marketing, management will think primarily in product market terms – serving cross-national customer segments with particular values (benefits). Specific characteristics of geographic sub-markets will only be used for the purposes of adaptation of marketing mixes and resource allocation decisions. The business philosophy formulates the basic values and rules of behavior a company wants its personnel to respect inside the organization and in contacts with external stakeholders.
Those values and rules may lead management to avoid certain country markets (e. g. ethics code has to be respected (see Ethics box 2. 1: ABB’s ethical standards: no bribes can be accepted, etc. )). Market assessment criteria To allow a comparison of geographic sub-markets’ attractiveness, characteristics relevant to business success in the selected product market(s) have to be assessed. Such characteristics can be found in the macro-environment and the operating environment of the country markets. Market selection will also be strongly influency by the internal environment of the firm. Figure 2. 2: Types of business environment
Macro-environment A company’s macro-environment is defined as the political, legal, economic, ecological, social, cultural, and technological dimensions of the universe in which the operating environment of the firm is embedded. (Whereas the macro-environment strongly influences the structure of the operating environment, individuals of the operating environment are restricted in their influence on the development of the macro-environment. ) Management has to determine and analyze the relevant dimensions of the macro-environment. Hence, the great number of country markets is reduced to a small set of highly attractive markets.
Operating environment These highly attractive markets have to be analyzed in more detail. This analysis uses evaluation criteria related to the firm’s operating environment such as: * Purchasing power of potential customers * intensity of competition * Availability of skilled labor force The operating environment of a firm contains all actors who have aspirations concerning the behavior and performance of the company in doing business. These stakeholders are customers, intermediaries, suppliers, competitors, workforce, media, administration, pressure groups.
They have an impact on the success of a firm, but may also be influenced by the firm. Management must consider the self-interests, capabilities and power of the stakeholders and manage the relationships with the important ones to help achieve the objectives. Internal environment The internal environment of the firm is made up by the following elements: A corporate policy that lays out the ground rules of how the organization wants to function. A portfolio strategy and a competitive strategy, basic indications of where to do business and how, based on management systems (e. g. he organization structure or the controlling system), as well as capabilities (combinations of personal skills and resources) that result in specific actions. These elements define the border of the firm’s operating environment. The internal environment also limits the firm’s potential influence on the development of its operating environment. (E. g. : When a large and global firm like Novartis decides to centralize the production and close the subsidiaries, the trade unions will probably react. A small drug manufacturer would have fewer problems if they change the location of the factory. ) Boundaries
The internal, operating and macro-environments of a firm are not separated by objective and clear-cut boundaries. Depending on the business of a company and its resources, varying parts belong to its operating and macro-environments. (E. g. Nokia: Have reached such a level of importance that regulators consult them before introducing new norms Parts of the regulatory environment can be personalized). The internal and operating environments of a firm may overlap. This trend is reinforced by the increasing numbers of cooperative agreements between companies to improve their competitive positions in globalizing industries.
Indeed, management often has to consider internal environments of partner firms when taking decisions. Assessment of potential country markets As a result of applying the selected criteria, the company possesses a shortlist of country markets ranked according to their attractiveness. Assessment of country markets To assess the geographic sub-markets of their firm’s global product market(s), managers need to select assessment criteria that are relevant to the business domain of the company. (E. g. Fast-food firm: the factors will be disposable household income, availability of reliable food suppliers, habits concerning dining out, etc. . The information gathered on these criteria is then compared in a market exclusion procedure to find a small number of currently attractive country markets. Potential future changes in factors influencing their attractiveness are assessed. They will further reduce the number of attractive geographic areas in which the local product markets are to be analyzed in detail. Selection of market assessment criteria To limit the cost of data gathering and the time for decision making, manager will first choose only those characteristics of the macro- and operating environments that: * are relevant to their product market(s) can be evaluated through secondary research * have an exclusive impact on the number of markets to be considered. (E. g. : Number of major competitors present Yes. Marketing strategies of the local competitors No. ) Primary sources of information are used only at later steps, when only a small number of remaining local product markets have to be evaluated in detail. Assessment criteria concerning the macro-environment Criteria for the assessment of country markets can be most easily found in their macro-environment. Geographic proximity The location of country markets is often used as a basis for evaluation.
Physical proximity most often results in low psychological distance, which leads to a perception of lower market-entry risk. It can make sense, for example if the costs of transporting a product are high relative to production costs. However, a different market-entry technique, such as direct investment, may be appropriate for a more distant market and yield considerably higher long-term profits. It’s tempting to argue that markets located in the same geographic area are likely to share cultural traits and geographic conditions, and should therefore by grouped together as a potential target market.
But there is no guarantee that two target markets will be similar. Therefore, grouping geographically close countries have some value, but is rarely enough. Central and Eastern Europe: Cf. chapter 3. Latin America and East Asia: below. They are of interest because of their supplies in critical raw materials, their fast developing economies, and their changing political and economic environments. Latin America For decades, Imports were discouraged or even prohibited. But the “lost decade” of the 1980s (stagnation, inflation and debt) has led to Latin America to look to free trade and free enterprise.
Governments of the most important countries are pursuing remarkably similar market policies, including trade liberalization, privatization, and fiscal discipline. Most countries have returned to the democratic fold. With a booming population of 400 million, this market region has an interesting potential. * Mexico: Population of 100 million, membership in NAFTA, economic growth of 3% a year, exports increased (mostly metal products, machinery, equipment), mainly in the US, Inflation decreased, communication and transportation infrastructure have improved, income per capita increased from $3’700 in the mid 1990s to $5’500.
An improvement of the education, key to competitiveness and population control (the average is a six-grade education! ). But if properly recruited, trained and motivated, they can be as productive as US workers. The long pent-up demand for quality goods and services in areas such as cars, cosmetics, clothes, computers, cellular phones, consultancy and canned goods represents an attractive business potential. * Brazil: economic growth of 3% a year, improving infrastructure, one of the world’s leading exporters of agricultural products (but also export-oriented automotive metal and chemical industries, shoes, etc. , increase of tourists. But there’s a high percentage of impoverished people. The payoff from privatization and trade liberalization has gone to the higher income classes. Working conditions are bad. * Argentina: Large agricultural sector (grain, soybeans, beef), GDP per capita and education level are the highest of Latin America. But it experienced ups and downs. After a period of growth until 1997, different factors (e. g. 1 September, weakening currency of Brazil, decrease in foreign investment, etc) led to a recession, which led to a severe financial crisis. A political stabilization in 2003 stabilized the economy, but still 50% of the population live below the poverty line. * Chile: Growth rate of 6. 3% from 1990 to 2001, high level of foreign trade (lumber, fruit, software and niches like ice cream sticks, etc. ), free trade agreements with the US and EU. Together with Venezuela, these countries account for more than 90% of Latin American exports of manufactured goods.
Their growth in basic industries such as steel, machinery, pulp and paper, gas, hydroelectric power, and home appliances is based on imports of capital, machinery, materials, and intermediate goods. They are attractive markets if governments can secure economic social stability (but never sure! ). Future issues box 2. 1: One America. A free trade area tying up all the nations of the Americas? Pros: It would channel investment and technology to Latin nations, restructuring their economies It would give US firms a head start in capturing business there.
More than 2 million additional jobs would be created in the US through this trade expansion In Latin America free trade would lift millions from poverty US opponents: NAFTA is already degrading blue-collar wages, health, and environmental standards throughout North America because Mexico’s wages are still low and its environmental enforcement lax Giving US businesses a choice of poor countries in which to set up business duty free, would depress standards even more: high unemployment rates in the US and a lower standard of living.
Latin America opponents: the heavily subsidized US agricultural sector would partly destroy the Latin American agriculture potential disaster for all countries heavily depending on that part of their economy. East Asia In the first half of the 1990s, South and East Asia experienced the fastest economic growth in the world (? 8%). But in 1997 Southeast Asia countries were sharply hit by banking, currency, and foreign debt crises. Since 2000, the economies have stabilized and are back on a less steep growth path (? %). Enduring economic stability will depend on the stability of the currencies and the financial sectors. Most of these nations practice a brand capitalism that combines industrial policy with freewheeling competition. Beside China, the most dynamic economies have been the newly industrialized countries (NICs) of east Asia: Singapore, South Korea, Taiwan (and Hong Kong before handed back to China in 1997). Thailand and Malaysia started their development later but since then have attracted much interest.
Despite the financial crisis, the NICs remained highly competitive, export-oriented manufacturing countries thanks to low wages, long working hours, and strong management. Political stability and market-oriented public policies have been top priorities. All the NICs import technology and consumer products. The problems are still a partial lack of modern infrastructure and an increasing lack of a highly educated workforce. The lack of qualified workforce increases production costs and demand for capital goods.
In reaction, an increasing amount of manufacturing has been transferred to neighboring countries with lower wages (China, Indonesia, or Vietnam, or even back to parts of Europe). * South Korea: The country’s economy is characterized by a few very large industrial conglomerates (“chaebols”), which in the 1970s were selected by government to prosper and grow. They were granted of preferential treatments. (2003: Hyundai, Samsung, Daewoo, and LG Electronics). The financial crisis of 1997/98 hit the country very hard. Economic reforms were needed.
To attract foreign capital, eight publicly owned companies were privatized and markets opened up further recovered quickly. * Taiwan: The country’s economy is characterized by a host of small and medium-sized privately owned companies with highly skilled workers and a high level of technical expertise. The companies are very flexible in their response to changes in customers’ needs, but vulnerable to low-price competition from neighboring developing countries. In spite of high barriers against imports, it has become a viable market for high technology.
The high surpluses in its trade balances forced the government to open up its markets. Taiwan remained largely untouched by the financial crisis of 1997/98. But because of its high percentage of exports to the US and its strong reliance on exports of electronic product and IT, the country was more strongly hi by the economic downturn in the US and the worldwide crisis of the electronics and IT sectors. Tawain’s companies are important investors in China, Malaysia, Thailand, the Philippines and Vietnam. They set up plants for products that can no longer be manufactured competitively in Taiwan. People’s Republic of China: The most populated country (1. 3 billion), the second largest economy (GNP of about $960 per capita), growth rates of 10% annually between 1990 and 2001. , member of WTO since 2001, $438 billion of exports in 2003 (1/4 of global trade expansion) producing a surplus over imports of $26 billion. But: It’s still not more than 5% of total international trade. Since 1990 foreign investment have increased every year. (In 2002 China was the second country attracting the most direct investments.
The same year, more than 150’000 companies with foreign capital accounted for half of China’s external trade. ) Such economic success mainly resulted from: * Economic liberalization, allowing small private enterprise * Set-up of special economic zones (coast) that offer preferential treatment to foreign investors * Guangdong Province: It combines Taiwan’s technology and financial power, Hong Kong’s international marketing skills, and China’s land, workers, and ambition. Standard of living is increasing, but labor costs in China are still among the lowest. Hong Kong: Handed back to China in 1997, it was already economically linked before that, investing a lot in each other. It will remain a special region, keeping its economic and social system for another 50 years. HK has the second largest per capita income in East Asia after Japan. It’s the world’s third-largest venter of financial transactions and it’s a major manufacturing center for watches, electronic consumer goods, toys, etc. It’s current economic problems are due to: * Increasing competition from special economic zones in China. The damage on sales and tourism income due to SARS in 2003 * The low value of the yen, decreasing the inflow of wealthy Japanese tourist Despite social problems and bureaucratic impediments (cf. future issues box 2. 2), political uncertainties and cultural differences, China’s market potential is extremely attractive to most international marketers. The fast economic development results in a rising demand for consumer goods, in particular foreign brands. Future issues box 2. 2: Explosion of social inequalities In China the state-owned industrial sector has traditionally assured mployment for a large part of China’s salaried employees, shielded from competition by subsidies. Not able to pay full wages anymore, laws concerning bankruptcy, the dissolution of conglomerates and transparency in the top governance structures of big companies have been voted. Economic problems need to be solved in order to further raise the level of economic development: 1. Budget deficits: Coupled with high growth rates, they trigger increased inflation rates that wipe out much of the improvement in people’s standard of living.
Further spending is needed to build the country, but the government struggles to collect revenues 2. The consequences of ending the “Iron Rice Bowl” policy (provide cradle-to-grave job security), which, coupled with widening differences in living standards could lead to social unrest. 3. The lack of efficiency of its state-run enterprises that still lose money. The banking system is weak, which limits the development of the private sectors (limited access to bank financing). 4. Insufficient infrastructure and deterioration in the environment. Strategy box 2. : Motorola’s China Challenge China is the world’s largest mobile phone market. Motorola enjoyed the top position in sales in China, but today suffers from competition from local suppliers. As competition grows, China is no longer the dynamic market it was. Growth is slowing to around 10% a year. A particular challenge for the company is the location of that demand. The 3 big metropolitan areas (Beijing, Shanghai, and Pearl River Delta) are close to saturation. Now companies need to look to smaller cities and the countryside for growth. That is where local competitors have a big advantage.
Also, it’s important to cultivate close relationships with Chinese officials in order to be viewed with less suspicion. Natural environment Evaluating natural environment may help identify markets with differing attractiveness. Examples of major roles natural environment can play in market assessment: * Climatic condition: tourism industry: special storage techniques to ensure proper conditions of food? * Mountainous areas: Quid transportation infrastructure? But it cannot be taken alone to create the ranking. It would overlook the complexities of business systems. Political system
It may be an important criterion for the assessment of market attractiveness under the following conditions: * Business opportunities depend on the political system * The firm’s business requires big investments (e. g. oil), which may be jeopardized by political instability * Business is done directly with the political authorities of the country Problems when using the political system as a criterion: 1. Classify countries’ political system is tricky 2. Even if country markets could be compared and grouped according to their similar political systems, those systems may generate quite different public policies.
Economic conditions may still differ significantly and result in different business opportunities. Legal system It determines the rules that govern the conduct of business in that country, and the norms and standards that products and services have to fulfill. International marketers must consider the consequences of different “rules of the game” in various potential markets. Country markets may be rated according to whether their legal systems are based on common or code law. But 2 countries belonging to the same group of law systems may still have different regulations governing business activities.
E. g. The UK regulates advertising more strictly than does the US. Compare the legal systems in general terms won’t provide precise enough info regarding the attractiveness. By the same token, norms and regulations specific to the business of the firm, (e. g. prohibition of alcohol)m may quickly lead to the exclusion of a country market from further analysis. Cultural and social influences The cultural and social environment of any country strongly influences customers’ needs, tastes, and expectations. The social organization of a society influences disposable income and purchasing processes.
Education and living conditions influence product choices as well as the communication methods available to marketers. * Language: A nation’s language affects the way in which marketers communicate with customers and other stakeholders. For example, the use of advertising and packaging is simplified when the same language can be used in different country. But although language must be considered (can the firm communicate effectively in this language? ), it cannot be used by itself as a basis for evaluating country markets attractiveness.
For example, grouping countries with a language derived from Latin would result in a heterogeneous set of markets (Argentina, France, etc. ) * Religion: Many kinds of behavior, including buying behavior are based on religion beliefs. Markets differ significantly from other according to the religion. Therefore, in some cases religion may represent a relevant criterion for determining the attractiveness of markets (e. g. Saudi Arabia is attractive for an orange juice producer, as alcohol is avoided for religious reasons).
But it is not a viable criterion because countries with the same dominant religion can still have big differences. Level of economic development We can range countries according to their levels of economic development. It results in groups of markets with comparable average purchasing power, demand for industrial products, and development of infrastructure. Approaches to evaluate the economic development: * Gross national product (GNP) or Income per capita: It’s the simplest approach but can be misleading. On this basis, oil-producing countries are in the same income group than Canada, Italy, etc. ut their level of economic development is not directly comparable. * Complex indicators: to create a more realistic picture of the markets, income measures can be combined with other characteristics such as: * Social class structure * National resources * Environmental conditions * Level of technological sophistication * Current infrastructure * Level of education * Cultural and behavioral variables It’s useful in the early stages of market assessment, but there are specific differences between markets that may be obscured by aggregate economic data.
For example, a firm considering developing countries should be aware of the big difference in the consumption patterns between the well-educated and affluent people of a society and its workers, unemployed, and rural poor. Thus, differences in income, age, and educational level within a population together with environment they live in give rise to different lifestyles that must be taken into account in marketing consumer products or services to developing countries. Another factor that has to be considered is the dynamics of economic development.
Even though some countries have a low per capita income, they may combine the right skills, low wages, political stability and industrialization programs enabling them to produce respectable economic growth rates, and shouldn’t just be considered as low-cost production sites. This approach is useful but still oriented too much toward national averages, and product markets are not necessarily homogenous. Cooperative agreements Every company assessing the attractiveness of country markets must know whether the countries involved have signed cooperative agreements with others.
Each type of economic cooperation has different effects on the conduct of business and the nature of competition. The following effects on international marketing can be expected: 1. Larger markets accompanied by opportunities for mass production, mass marketing, and more efficient use of resources. As a result, industries will increasingly move toward duality: a few major international competitors involved in most of the product market segments, and small competitors focused on a niche. 2.
Higher income in the cooperating markets, which in turn stimulates internal trade and creates opportunities for external suppliers of industrial goods, consumer goods, and services. (E. g. internal trade: thanks to Mercosur, a company doesn’t need to have production facilities in all of the Latin America countries anymore). But external suppliers also find increased business opportunities. 3. The possibility of direct investment, to avoid tariff and non-tariff barriers and to profit from the increase in internal trade.
Indeed, sometimes the members of a cooperative agreement abolish the barriers among themselves, but keep barriers for non-members (e. g. tariffs, restrictions on foreign ownership, etc. ). This gives an advantage to companies located inside the barrier wall. 4. An increase in the number of mergers, acquisitions, and alliances initiated by firms inside as well as outside cooperative agreements. Acquisitions may help foreign firms ensure that a local subsidiary avoids the negative effects of cooperative legislation that might confront a “pure” foreign firm.
Such subsidiaries are also able to take advantage of subsidized research programs within a cooperative agreement, which would not be available to the foreign firm on its own. But economic cooperation does not mean that customer expectations, tastes or behavior become unified! We observe increasing similarities but differences will stay. Closer economic cooperation mainly intensifies competition, allows companies to profit from regional cost and regulatory differences, and makes international business easier, but before choosing a country market, the company needs to examine closer its specific environments.
Assessment criteria concerning the operating environment International marketers may use criteria concerning the operating environment relevant to their business to assess the attractiveness of country markets. To make the assessment process fast and cost efficient, criteria demanding secondary data will be preferred. Structure of the local operating environment The company should know who, besides potential customers and competitors, are the major stakeholders in its product market, what interests they have, and what influence they can exert on market processes.
Building relationships with these stakeholders is easier if their structure is comparable to the structure in currently served markets. Substance of local product market The substance of a local product market is determined mainly by: * Size, that is, the number of customers * Their purchasing power or investment expenses * Their creditworthiness * Rate of growth Size: A product market’s size may be expressed: * in terms of sales, measured in some standard unit (e. g. tons) * in terms of value (currency unit volume) = market volume Toolbox 2. 1: Estimating market volume
If neither the number of customers nor their purchasing power can be determined from available statistics, total exports of similar products from the most important industrialized countries can estimate the market volume. However, such an estimate does not account for exports from the country in question or for the activity of domestic competitors. Management can compare the size of the same industries in a potential market. Relating those figures to the market share attained in served markets and expressing market share in terms of total sales leads to a rough estimate of the market volume in the potential market.
If the company is internationally active in b2b markets and management has some indications about the approximate size of customer industries in a potential market compared to served markets, it can estimate the volume of the potential market based on the company’s market share achieved in served markets expressed as share of the firm’s total sales. Rate of growth: It can be viewed as an indicator of the product’s lifecycle stage. (Early stages: greater potential, growing market volume, improving return on investment.
Later stages: stagnant or declining sales, low potential return on investment for new entrants). Beside the local product market’s current growth rate, the company should consider potential additional sales that may be generate through its specific marketing mix. The potential of total sales in a market is never totally exhausted. By applying gap analysis, the marketer can determine the firm’s potential to expand the current total sales volume in this market. Toolbox 2. 2: Gap analysis:
Ways to increase the current volume of total sales achieved : Ways to increase the current volume of total sales achieved : The assessment of gaps between the current treatment of markets and the aspirations of the various stakeholders reveals potentials for increasing the total sales volume of the market. Through a gap analyzis, the company can estimate the potential additional sales to be generated through a specific marketing mix. Potentiaal of total sales in a markect Potentiaal of total sales in a markect Volume of total sales in a market
Volume of total sales in a market Accessibility of local product market Accessibility refers to the marketer’s ability to reach the potential customers in a country market effectively. It depends on: * Distribution channels (and transportation). A marketer needs to obtain information about available intermediaries, including their: * Organization * Negotiation power * Capital equipment * Relatedness to competitors of the firm * Approach to doing business * Level of information * Portion of the market * Product range
If no appropriate intermediaries exist, international marketers may have to invest considerably to enter a new country market effectively. Special problems can occur: for example in Japan, transfer business from one intermediary to another is unusual, hence a close inspection in more important. * Communication infrastructure * Relationships. Compared to consumer markets, most b2b and government markets have a limited number of customers, who are nearly exhaustively listed. As it is transparent, it is important to have good relationships with the customers ( they will choose you when needed! ).
Close contacts are based on a local presence. Some form of strategic partnership or direct investment may be necessary to gain access to local administration/government markets. * Suppliers. When evaluating potential suppliers of services, parts or systems, management should consider: * Size and number of such firms * Potentially available substitutions * Importance of supplied service or good to their firm’s product * Importance of their firm as a customer of their suppliers * Threat of potential forward integration by the supplier Like intermediaries, suppliers may be linked to certain competitors.
Many auto firms commonly sign long-range contracts with their suppliers. These suppliers conform strictly to the customer’s product specification and may profit from its technical and financial assistance. Strong links. Supply risks should still be evaluated! * Disruption of supply (especially if JIT) * Quality (especially for sophisticated products. E. g. Low wages in Vietnam, but quid quality? ) * Labor force. Management should consider: * The number of potential employees seeking a job and their level of education and skills * The existence of strong labor unions Cultural factors (E. g. : few Japanese accept to work for non-Japanese firms! * Legal measures and administrative procedures. Management should consider them because they can be effective barriers to entry (E. g. Restriction on import licenses and advertising (e. g. tobacco in China) Responsiveness of local product market Responsiveness refers to whether potential customers and intermediaries in a market will react favorably to the company’s offer. To avoid the risk of guessing, it is reasonable to determine the most important factors that influence a market’s responsiveness.
But this may require primary research, which is expensive. To estimate responsiveness, international marketers can evaluate current direct (deals solicited from customers in those markets) or indirect (e. g. business made via peers (competitors) located in those markets) contacts with customers from that market. Other indicators of responsiveness: * Cultural or political prejudices, which strongly influence the image of the international marketer’s home country (e. g. technical skills of Germans) * Level and kind of country’s predominant international commercial relations.
If potential customers are used to having business contacts with suppliers from our country, it’ll be easier to approach them. Intensity of competition To find out if entry to a market is attractive, management should determine: (c. f. 6) * The number of major current and potentially arising competitors, * Their market position and competitive strategy, * Their expected reactions to the market entry of a new contender. Their reaction depends on: * The new firm’s strength, weaknesses and strategy * The competitor’s view of the threat
The impact of their reactions depends on: * Their intensity * Their speed Profitability If a local product market is substantial, accessible, and responsive to a marketer’s product and the intensity of competition seems to be acceptable, the product market has to be checked for its potential profitability. The estimated income generated by closing a deal effectively with an individual customer should be higher than the estimated costs it would take to arrive at that point plus the costs of performance delivery. But sometimes it is lower for a few years but enables us to achieve a comfortable market share and make sustainable profits later. ) Criteria selection guidelines Corporate objectives and priorities can be used to guide the decision of what criteria are most relevant for assessing the attractiveness of potential markets. Return on investment If a high return on investment is sought, the company must select markets in which: * It can become a leader criteria: size of competitors Demand is high in relation to supply criteria: ratio of market potential to market volume * Customers have sufficient purchasing power criteria: economic wealth of potential customers Level of technology Companies that give a high priority to technological innovation tend to favor country markets characterized by high levels of technological sophistication, where customers seek technical solutions requiring R&D. Others prefer markets where their level of applied technology fits the needs of the targeted customers.
Criteria: * Level of technological sophistication reached * Quality of infrastructure * Availability and quality of higher education institution Global identity and goodwill Companies that rely on their global identity and the goodwill of intermediaries, customers and suppliers will look for markets where their home country or company name has a positive reputation. Criteria: * Volume of imports * Amount of political influence on individual firms * Legal restrictions concerning the product market * Influence of religion on purchase decisions