Transcript International Business

Market Adaptation
• The “take-away” for this chapter
– Demands are less different than they were but the
world is far from homogenization.
– When selling products in foreign countries, firms
must decide how much to adapt their product and
its “message” to local demands.
– Demands differ for systematic reasons.
– Adaptations may not pass a cost-benefit test.
– Price discriminate, cautiously.
What company? Which country?
What company? Which country?
Levitt’s Claim
• Theodore Levitt, a Harvard Business
School professor wrote a paper in 1983,
arguing…
• Markets are globalized: “The world’s
needs and desires have become
irrevocably homogenized.”
• End of local products: Firms should “sell
the same thing the same way,
everywhere.”
Components of the Levitt Argument
• The new cosmopolitanism
• The underappreciated power of large
volume, low price strategies.
• The power of promotional schemes that
disregard stated wants and focus attention
on ultimate needs.
The Washing Machine Example
• When asked, consumers described
preferences over washing machine
features:
– British wanted top loading, agitator action, no
water heater, and inconspicuous, 700 rpm
speed
– Italians and French wanted front loading,
tumble action.
– But Italians wanted bright colors and 400rpm
spin speed, whereas French wanted elegant
appearance and 600rpm speed.
Every country wants a washing
machine with different features
Or do they?
• Levitt says you shouldn’t ask what people
want from a washing machine, you should
ask what the want from life
• And, he claims, everyone wants the same
thing:
– Clean clothes
– More leisure time
– More money left over to spend on things they
enjoy.
Adaptation to foreign markets
• While Levitt’s claim may reflect some
basic truths, there exists much counterevidence.
• What are examples for firms that have
adapted their product and promotion for
foreign markets?
– Article “Custom-made” provides many cases
Reasons Why Demands Differ
• Different physical environments
• Different levels of development
• Different cultures
Environmental Adaptations
• Topography
• Climate
• Population Density
Population Density in Europe
Products adapted to high density
Developmental Adaptations
• Income effects (Engel curves for “superior”
goods)
– Quality (luxury)
– Safety
• Education effects
– Literacy
– Technical competence
Cultural Adaptation
• Traditions: parental influence effects
– Learning by example
– Imprinting during childhood
• Conformism: peer interaction effects
– Technical product specification standards
– Communication standards
Costs of Adapting Products
• Research & Development (“blueprint”
costs)
• Line costs (new machinery)
• Switching costs (for existing machinery)
• Input price rises
• Consumer confusion costs
Cost versus benefits of product
adaptation
• Suppose an adapted product sells for PA
whereas a standardized product will sell for PS
(<PA). Now assume fixed costs for each
alternative are FS<FA whereas marginal costs
are MCS and MCA. Adaptation is optimal if
• π A – πS > 0
– where πi = Q*(Pi - MCi) - Fi.
Cost versus benefits (cont.)
• Thus
πA – πS =Q*[(PA–PS) – (MCA–MCS)] - (FA–FS) > 0
=> PA–PS > F/Q + (MCA–MCS)
where F = FA–FS
• Influential factors
– Market size: Adaptation is more likely when Q is large
relative to additional fixed costs associated with adaptation
(F)
– Size of differences in demand: The larger is PA–PS the more
likely adaptation
– Heterogeneity of demand within country: There may be
consumers in the foreign country that prefer your existing
product to an adapted one. In this case you can market the
standardized product to them.
The harder (and more realistic) case:
Quantity is a function of MC
Inverse demand
Standard product: PF(S) = 400 - .1Q
Adapted product: PF(A) = 800 - .2Q
Marginal costs
Standard: MC(S) = 150
Adapted: MC(A) = 200
Line-switching costs:
F=$150,000/year
Should firm adapt?
Pricing
• Firms may maximize profits by charging a
different price to different markets. Price is
determined at the point where marginal
revenues (MR) = marginal costs (MC) in each
market. MR may vary across markets due to
differences in demand elasticities.
• What influences demand elasticity?
Long-run pricing issues
• A MNE entering a new market must consider
long-run effects of its pricing decision today
– Costs: learning by doing. The more a firm
produces this year, the lower will production costs
be next year due to learning by doing.
– demand: potential entry, consumer/distributor
awareness, network externalities, price a signal of
quality, durable goods.
Constraints on pricing
• Antidumping law
• Goods arbitrage: consumers/arbitragers buy in
low price market, thereby avoiding high price
market.
– This is sometimes called “grey markets” or
“parallel imports” (i.e., Canadian internet
pharmacies)
Brands that stop at the border
• What is the source of scale economies associated with
global products according to Ulrich Lehners, CEO of
Henkel?
– What does Henkel do? Does it sell the same deodorant
everywhere? How many brands to they sell? How many are sold
by Unilever?
• What happened when P&G consolidated European
products under the Dawn label?
• How was Purex washing powder advertised to
Americans? Would this advertisement work elsewhere?
• What are the “platforms” that allow for a degree of scale
efficiencies and how is it applied in central and eastern
Europe?
– What is regional manufacturing and marketing?
• Why is Persil sold in the Middle East an example of local
product with a global brand?
“Students find $100 Textbook Cost $50,
Purchase Overseas”
• Where are textbooks most expensive? Why? How
large are these differences?
• What have Richard Starkis and David Kinsley done
in response to these price differentials? Is it legal?
• What did book publishers do in response to the newly
developed grey market?
• What besides publisher pricing contributes to high
textbook costs at campus bookstores?