Chapter 2 The Global Economic Environment

1
Chapter 2The Global Economic Environment
2
Review of Chapter 1

• What is Global Marketing?
• How is it different from regular marketing?

3
Reasons for Global Marketing

• Growth
• Access to new markets
• Access to resources
• Survival
• Against competitors with lower costs (due to
  increased access to resources)

4
Global Marketing What it is and What it isnt

• Strategy development comes down to two main
  issues similar to single country marketing
• Target market
• Marketing Mix

5
The Importance of Global Marketing

• For US-based companies, 75 of sales potential is
  outside the US.
• About 90 of Coca-Colas operating income is
  generated outside the US.
• For Japanese companies, 85 of potential 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

7
Management Orientations
Ethnocentric Home country is Superior,
sees Similarities in foreign Countries
Polycentric Each host country Is Unique, sees
differences In foreign countries
Regiocentric Sees similarities and differences
in a world Region 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
8
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

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Introduction to Chapter 2

• Market definition People 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

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Top Ten 2000 U.S. TradingPartners ( billions)
Country U.S. Exports U.S. Imports Total Surplus/
Deficit
Canada 176.4 229.2 405.6 -52.8 Mexico 111.7 13
5.9 247.6 -24.2 Japan 65.3 146.5 211.8 -81.3 China
16.3 100.0 116.3 -83.8 Germany 29.3 558.7 88.0 -2
9.5 United Kingdom 41.5 43.5 85.0 -1.9 South
Korea 27.9 40.3 68.2 -12.4 Taiwan 24.4 40.5 64.9 -
16.1 France 21.0 29.0 50.0 -8.0 Singapore 17.4 19.
6 37.0 -2.2
2-2
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Turkish Trading Partners (2005)

• Germany 13,
• UK 8.2,
• Italy 7,
• US 6.9,
• France 5.1,
• Spain 4.2

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Gross National Product TURKEY
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Gross National Product TURKEY
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Source World Bank (2006)
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Gross Domestic Income (Nominal)
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Purchasing Power Parity (per capita)
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Turkey
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Gini coefficient

• The Gini coefficient is a measure of statistical
  dispersion most prominently used as a measure of
  inequality of income distribution or inequality
  of wealth distribution. It is defined as a ratio
  with values between 0 and 1 A low Gini
  coefficient indicates more equal income or wealth
  distribution, while a high Gini coefficient
  indicates more unequal distribution. 0
  corresponds to perfect equality (everyone having
  exactly the same income) and 1 corresponds to
  perfect inequality (where one person has all the
  income, while everyone else has zero income). The
  Gini coefficient requires that no one have a
  negative net income or wealth. Worldwide, Gini
  coefficients range from approximately 0.232 in
  Denmark to 0.707 in Namibia although not every
  country has been assessed.
• The Gini index is the Gini coefficient expressed
  as a percentage. Thus Denmark's Gini index is
  23.2.

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Human Development Index

• The Human Development Index (HDI) is an index
  combining normalized measures of life expectancy,
  literacy, educational attainment, and GDP per
  capita for countries worldwide. It is claimed as
  a standard means of measuring human developmenta
  concept that, according to the United Nations
  Development Program (UNDP), refers to the process
  of widening the options of persons, giving them
  greater opportunities for education, health care,
  income, employment, etc. The basic use of HDI is
  to rank countries by level of "human
  development", which usually also implies to
  determine whether a country is a developed,
  developing, or underdeveloped country.

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Human Development Index
2008 update
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U.S. Multinational in Europe - 1960s
?Fifteen years from now the worlds third
greatest industrial power, just after the United
States and Russia, may not be Europe, but
American industry in Europe.?
2-3
J.S. Servan Schreiber Le Defi American, 1967
What Happened?
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The Nationality of the Worlds 100 Largest
Industrial Corporations (by country of origin)
1963 1979 1984 1990 1993
1995 1996 2000
United States 67 47 47
33 32 24 24
36 Germany 13 13 8 12
14 14 13 12 Britain
7 7 5
6 4 1 2
5 France 4 11 5 10
6 12 13 11 Japan 3
7 12 18 23
37 29 22 Italy 2 3
3 4 4 3 4
3 Netherlands-United Kingdom 2
2 2 2 2 2
2 -- Netherlands 1 3
1 1 1 2
2 5 Switzerland 1 1
2 3 3 3 5
3 Argentina -- -- 1
-- -- -- --
-- Belgium -- 1 1
-- -- -- --
1 Brazil -- 1 -- 1
1 -- -- --
Canada -- 2 3 --
-- -- --
-- India -- -- 1
-- -- -- --
-- Kuwait -- -- 1
-- -- -- --
-- Mexico -- 1 1 1
1 -- 1
-- Venezuela -- 1 1
1 1 -- 1
-- South Korea -- -- 4
2 4 2 4
-- Sweden -- -- 1
2 1 -- --
-- South Africa -- -- 1
1 -- -- --
-- Spain -- -- -- 2
2 -- --
-- Turkey -- -- --
-- 1 -- --
-- China -- -- --
-- -- -- -- 2
2-4
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The World Economy An Overview

• The new realities
• Capital movements have replaced trade as the
  driving force of the world economy
• Production has become uncoupled from employment
• The world economy, not individual countries, is
  the dominating factor

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The World Economy An Overview

• The new realities continued
• 75-year struggle between capitalism and socialism
  has almost ended
• E-Commerce diminishes the importance of national
  barriers and forces companies to re-evaluate
  business models

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Economic Systems

• 4 main types of economic systems
• Market Capitalism
• Centrally planned socialism
• Centrally planned capitalism
• Market socialism

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Economic Systems
Resource Allocation
Market Command
Centrally Planned Capitalism
Private Resource Ownership State
Market Capitalism
Centrally Planned Socialism
Market Socialism
32
Economic Freedom

• Rankings of economic freedom among countries
• Ranges from free to repressed
• Variables considered include such things as
• Trade policy
• Taxation policy
• Banking policy
• Wage and price controls
• Property rights

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Economic Freedom

• Free
• Hong Kong
• Singapore
• Ireland
• New Zealand
• United States
• United Kingdom
• Netherlands
• Australia
• Switzerland

• Repressed
• Bosnia
• Vietnam
• Laos
• Iran
• Cuba
• Iraq
• Libya
• North Korea
• Congo

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Buying Boom for Asia, 1995-2000
What the added Between 1993
and middle class will 1995 2000 buy (In
million)
73.3
Millions of households approaching 18,000 per
year buying power Indexed to Singapore prices
Bedrooms 32 116 Living Rooms 16 58 Kitchens 16 58
Bathrooms 32 116 Living space (sq.m.) 1,200 4,350
Large appliances 16 58 Televisions 24 87 Telephone
s 24 87 Cars 16 58
32.5
14.4
1991
1995
2000
SOURCE Bill Saporito, Where the Global Action
Is. Fortune, Autumn-Winter 1993, p.64.
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What Would One U.S. Dollar Buy? (Selected Years)
1985 1987 1988
1992 1993 1994 1995 1996 1997
1999 2000
British Pound 0.86 0.67 0.54
0.56 0.66 0.68 0.63 0.64
0.59 0.62 0.68 French Franc
9.6 7.55 5.4 5.29 5.67
5.55 4.95 5.12 5.94 6.49
7.28 Japanese Yen 250.23 123.32 123.70
126.70 111.08 102.18 93.96 108.78 129.15
102.58 112.21 Swiss Franc 2.25 2.07
1.29 1.41 1.48 1.37 1.18
1.24 1.43 1.58 1.68 EURO
0.99 1.11 Mexico Peso
0.37 2.21 2.28 3.12 3.11
5.31 6.45 7.60 7.92 9.43
9.47
Foreign Exchange Rates for 1999 and 2000 are
the average rate pf exchange in December.
Source Adapted from www.stat-usa.gov
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The Price of Protectionism
Industry Total Costs to Number of Cost
per Consumers Jobs Saved Job Saved (in
millions)
Textiles and apparel 27,000 640,000 42,000 Car
bon Steel 6,800 9,000 750,000 Autos 5,800 55,000
105,000 Dairy products 5,500 25,000 220,000 S
hipping 3,000 11,000 270,000 Meat 1,800 11,000
160,000
SOURCE Michael McFadden, Protectionism Cant
Protect Jobs, Fortune, May11, 1987, pp. 125.
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Big Emerging Markets

• China
• India
• Indonesia
• South Korea
• Brazil
• Mexico
• Argentina
• South Africa
• Poland
• Turkey

 Emerging markets Developed markets
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Rapidly Developing Economies

• The term "rapidly developing economies" is now
  being used to denote emerging markets such as
• The United Arab Emirates,
• Chile and
• Malaysia
• that are undergoing rapid growth.

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Stages of Market Development
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Stages of Market Development

• World Bank has defined four categories of
  development
• High-income countries
• Upper-middle income countries
• Lower-middle income countries
• Low-income countries
• Based upon Gross National Product (GNP)

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Marketing Opportunities in LDCs

• 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 than
  individually
• Consider first mover advantage
• Set realistic Deadlines

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Turkey
Return
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Influencing the World Economy

• Group of Seven (G-7)
• Organization for Economic Cooperation and
  Development
• The Triad

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The Triad Trade Between the United States and
Canada, the European Community, and Japan, 1997
( billions)
EUROPEAN COMMUNITY
31.4
97.1
110.9
68.8
JAPAN
UNITED STATES CANADA
52.7
99.5
For additional figures see Indicators of Market
Size for 115 Countries I Crossborder Monitor,
August, 1994, pp.4-7
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N-11

• The Next Eleven (or N-11) is a short list of
  countries named by Goldman Sachs investment bank
  on 1 December 2005 as having promising outlooks
  for investment and future growth.

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N-11
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BRIC

• BRIC or BRICs are terms used to refer to the
  combination of Brazil, Russia, India, and China.
• The economies of the BRICs are rapidly developing
  and by the year 2050 will eclipse most of the
  current richest countries of the world.

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BRICET

• "BRIMC" (M for Mexico),
• "BRICS" (S for South Africa)
• "BRICET" (including Eastern Europe and Turkey)
• have become more generic marketing terms to refer
  to these emerging markets.

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Market Characteristics

• Population demographics
• - Age distribution, life expectancy, household
  size, urbanisation
• Income
• - Low, Medium and High
• - GDP per capita
• - Purchasing Power Parity (PPP)
• Consumption Patterns
• - Income spent on necessities and luxuries
• - Product saturation and diffusion
• - Product form differences

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Market Characteristics

• Availability and quality of infrastructure
• - Distribution networks (road, rail)
• - Communication systems for marketing
• - Supply and use of energy
• Foreign involvement in the economy
• - Degree of FDI (foreign direct investments) and
  the industries
• - Investment rules and guidelines
• Impact of economic environment on social
  development
• - urbanisation, life expectancy, literary rates,
  physical quality of life index (PQLI)

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Movie Clip from India
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Marketing Implications of the Stages of
Development

• Product Saturation Levels
• The percentage of potential buyers or households
  that own a particular product
• Graph shows that in India a private phone is
  owned by 1 of the population

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Balance of Payments

• Record of all economic transactions between the
  residents of a country and the rest of the world
• Current account record of all recurring trade
  in merchandise and services, private gifts, and
  public aid between countries
• trade deficit
• trade surplus
• Capital account record of all long-term direct
  investment, portfolio investment, and capital
  flows

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Balance of Payments

• The balance of payments (or BOP) measures the
  payments that flow between any individual country
  and all other countries.

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Balance of Payments (2005)
Blue countries in current account surplus Red
countries in current account deficit, 2005
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US Trade Balance
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Balance of Payments

• U.S. balance of payments statistics for the
  period 1999 to 2003

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Overview of International Finance

• Foreign exchange makes it possible to do business
  across the boundary of a national currency
• Currency of various countries are traded for both
  immediate (spot) and future (forward) delivery
• Increases the risk to organizations that are
  involved in global marketing

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Managed Dirty Float?

• Definitions
• 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
  local currency against other currencies

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Managed Dirty Float?

• Definitions
• Dirty refers to the fact that central banks, as
  well as currency traders, buy and sell currency
  to influence exchange rates

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Foreign Exchange Market Dynamics

• Supply and Demand interaction
• Country sells more goods/services than it buys
• There is a greater demand for the currency
• The currency will appreciate in value

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Purchasing Power Parity (PPP) The Big Mac Index

• Is a certain currency over/under- valued compared
  to another?
• Assumption is that the Big Mac in any country
  should equal the price of the Big Mac in the US
  after being converted to a dollar price

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Big Mac Index for Selected Countries
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Managing Economic Exposure

• Economic exposure refers to the impact of
  currency fluctuations on the present value of the
  companys future cash flows
• Transaction exposure is from sales/purchases
• Real operating exposure arises when currency
  fluctuations, together with price changes, alter
  a companys future revenues and costs

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Managing Economic Exposure

• Numerous techniques and strategies have been
  developed to reduce exchange rate risk
• Hedging involves balancing the risk of loss in
  one currency with a corresponding gain in another
  currency
• Forward Contracts set the price of the exchange
  rate at some point in the future to eliminate
  some risk

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Looking Ahead

• Chapter 3 The Global Trade Environment
  Regional Market Characteristics and Preferential
  Trade Agreements

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Market Capitalism

• Individuals and firms allocate resources
• Production resources are privately owned
• Driven by consumers
• Government should promote competition among firms
  and ensure consumer protection

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Index of Economic Freedom

• In practice, the index measures
• Size of Government Expenditures, Taxes, and
  Enterprises
• Legal Structure and Security of Property Rights
• Access to Sound Money
• Freedom to Trade Internationally
• Regulation of Credit, Labor, and Business

Return
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Centrally Planned Socialism

• Opposite of market capitalism
• State holds broad powers to serve the public
  interest decides what goods and services are
  produced and in what quantities
• Consumers can spend on what is available
• Government owns entire industries
• Demand typically exceeds supply
• Little reliance on product differentiation,
  advertising, pricing strategy

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Centrally-Planned Capitalism

• Economic system in which command resource
  allocation is used extensively in an environment
  of private resource ownership
• Examples
• Sweden
• Japan

Return
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Market Socialism

• Economic system in which market allocation
  policies are permitted within an overall
  environment of state ownership
• Examples
• China
• India

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Low-Income Countries

• GNP per capita of 785 or less
• Characteristics
• Limited industrialization
• High percentage of population involved in farming
• High birth rates
• Low literacy rates
• Heavy reliance on foreign aid
• Political instability and unrest
• Of these, only China and India are BEMs

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Lower-Middle-Income Countries

• GNP per capita between 786 and 3,125
• Sometimes called less-developed countries (LDCs)
• Characteristics
• Early stages of industrialization
• Cheap labor markets
• Factories supply items such as clothing, tires,
  building materials, and packaged foods
• 3 BEMs Poland, Turkey, Indonesia

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Turkey
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Upper-Middle-Income Countries

• GNP per capita between 3,126 to 9,655
• Characteristics
• Rapidly industrializing
• Rising wages
• High rates of literacy and advanced education
• Lower wage costs than advanced countries
• Sometimes called newly industrializing economies
  (NIEs)
• 3 BEMs Argentina, Brazil, Mexico, South Africa

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High-Income Countries

• GNP per capita above 9,656
• Sometimes referred to as post-industrial
  countries
• Characteristics
• Importance of service sector, information
  processing and exchange, and intellectual
  technology
• Knowledge as key strategic resource
• Orientation toward the future

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Group of Seven (G-8)

• Leaders from these high income countries work to
  establish prosperity and ensure monetary stability

World Development Report 2006
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Organization for Economic Cooperation and
Development

• 30 nations each with market-allocation economic
  systems
• Mission to enable its members to achieve the
  highest sustainable economic growth and improve
  the economic and social well-being of their
  populations
• www.oecd.org

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OECD
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OECD Members (2006)
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The Triad

• Dominant economic centers of the world
• Japan
• Western Europe
• United States
• Expanded Triad
• Pacific Region
• North America
• European Union

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EU
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EU Statistics
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APEC

• Asia Pacific Economic Cooperation
• Members
• US, Japan, China, Australasia, Russia,
• Goal
• Lose economic association, forum

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APEC
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Economic Integration in Asia

• Asia-Pacific Economic Cooperation (APEC)
• Association of Southeast Asian Nations (ASEAN)
• East Asia Economic Group
• South Asian Association for Regional Cooperation
  (SAARC)

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Economic Integration in Africa and the Middle East

• Economic Community of West African States
  (ECOWAS)
• Afro-Malagasy Economic Union
• East Africa Customs Union
• West African Economic Community
• Maghreb Economic Community
• Gulf Cooperation Council (GCC)