978-0134129945 Chapter 2 Lecture Note Part 2

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Marketing Opportunities in LDCs and Developing Countries

Despite many problems in LDCs and developing countries, it is possible to nurture long-term

market opportunities.

Although Nike sells only a small portion of its output in China, it clearly has the future in mind

when it refers to China as a “two-billion-foot market.”

Prahalad and Hammond have identified several assumptions and misconceptions about the

“bottom of the pyramid” (BOP) that need to be corrected:

Mistaken assumption #1: The poor have no money.

The aggregate buying power of poor communities can be substantial. In rural Bangladesh, for

example, villagers spend considerable sums to use village phones operated by local

entrepreneurs.

Mistaken assumption #2: The poor are too concerned with fulfilling basic needs to

“waste” money on non-essential goods.

Consumers who are too poor to purchase a house do buy “luxury” items such as television sets

and gas stoves to improve their lives.

Mistaken assumption #3: The goods sold in developing markets are so inexpensive that

there is no room for a new market entrant to make a profit.

In reality, because the poor often pay higher prices for many goods, there is an opportunity for

efficient competitors to realize attractive margins by offering quality and low prices.

Mistaken assumption #4: People in BOP markets cannot use advanced technology.

Residents of rural areas can and do quickly learn to use cell phones, PCs, and similar devices.

Mistaken assumption #5: Global companies that target BOP markets will be criticized

for exploiting the poor.

The informal economies in many poor countries are highly exploitative. A global company

offering basic goods and services that improve a country’s standard of living can earn a

reasonable return while benefiting society.

Innovation, Entrepreneurship, and the Global Startup – TOMS

Blake Mycoskie is an entrepreneur. He created a brand, developed several innovative products,

and started a company to market them using an innovative business design. Mycoskie’s

innovative idea was based on his recognition of unmet needs. They were the needs of children

whose parents could not afford to buy shoes.

He set up a shoe company, TOMS, with a unique business model and social mission. Each time

a customer buys a pair of TOMS, the company donates a pair of shoes to a child in need.

Mycoskie defines his business as “one-for-one” see Exhibit 2-9).

One of marketing’s roles in developing countries is to focus resources on the task of creating and

delivering products that are best suited to local needs and incomes.

Marketing can be the link that relates resources to opportunity and facilitates need satisfaction on

the consumer’s terms.

Some believe marketing is relevant only in affluent, industrialized countries.

The argument: In less-developed countries the major problem is the allocation of scarce

resources toward obvious production needs. Efforts should focus on production and how

to increase output, not on customer needs and wants.

The converse argument: The role of marketing – to identify people’s needs and wants and

to focus individual and organizational efforts to respond to these needs and wants – is the

same in all countries, irrespective of level of economic development.

There is also an opportunity to help developing countries join the Internet economy. Global

companies can also contribute to economic development by finding creative ways to preserve

old-growth forests and other resources while creating economic opportunities for local

inhabitants.

High-Income Countries

These are advanced, developed, industrialized, or postindustrial countries, having a per capita

GNP of $12,476 or higher. They have reached their present income level through sustained

economic growth.

The phrase “postindustrial countries” describes the United States, Sweden, Japan, and other

advanced, high-income societies.

Product and market opportunities in a postindustrial society are heavily dependent upon new

products and innovations.

Seven high-income countries—the United States, Japan, Germany, France, Britain, Canada, and

Italy—comprise the Group of Seven (G-7). Finance ministers, central bankers, and heads of

state from the seven nations have worked together for more than a quarter of a century in an

effort to steer the global economy in the direction of prosperity and to ensure monetary stability.

Representatives from OECD member nations work together in committees to review economic

and social policies that affect world trade.

The Triad

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

the most astute is Kenichi Ohmae, former chairman of McKinsey & Company Japan. In his

book Triad Power, Ohmae argued that successful global companies had to be equally strong in

the dominant economic centers of Japan, Western Europe, and the United States.

These three regions, called the Triad, represented the dominant centers of the world and the

location of nearly 75 percent of world income, as measured by GNP.

The expanded Triad includes the entire Pacific region, Canada and Mexico; and the boundary in

Europe is moving eastward.

Marketing Implications of the Stages of Development

Product saturation levels or the percentage of potential buyers or households that own a

particular product, can serve as a guide to marketers.

In China, product saturation levels of private motor vehicles and personal computers are quite

low – 1 PC for every 6,000 people and 1 car for every 43,000 people.

BALANCE OF PAYMENTS

(Learning Objective #4)

The balance of payments is a record of all economic transactions between the residents of a

country and the world. It is divided into the current and capital accounts. (Table 2-5).

The current account is a measure that includes trade in merchandise and services, plus certain

categories of financial transfers such as humanitarian aid.

A country with a negative current account balance has a trade deficit; that is, the outflow of

money to pay for imports exceeds the inflows of money for sales of exports

A country with a positive current account balance has a trade surplus. The capital account is a

record of all long-term direct investment, portfolio investment and other short- and long-term

capital flows.

A country accumulates reserves when the net of its current and capital account transactions

shows a surplus; it gives up reserves when the net shows a deficit.

A close examination of Table 2-5 reveals that the United States regularly posts deficits in both

the current account and the trade balance in goods.

Overall, the U.S. post balance of payments deficits while important trading partners, such as

China, have surpluses. (Table 2-6).

TRADE IN MERCHANDISE AND SERVICES

Thanks in part to the achievements of GATT and the WTO, world merchandise trade has grown

at a faster rate than world production since the end of World War II.

According to figures compiled by the World Trade Organization, the dollar value of world trade

in 2009 totaled $11.8 trillion.

(Learning Objective #5)

In 2003, Germany surpassed the United States as the world’s top merchandise exporter. Exports

generate 40 percent of Germany’s gross domestic product, and 9 million jobs are export related.

In 2009, China leapfrogged Germany in the global merchandise export rankings (see Table 2-7).

China’s top-place ranking underscores its role as an export powerhouse; the country has

demonstrated continued economic strength by achieving double-digit export growth.

Chinese exports to the United States have surged since China joined the World Trade

Organization in 2001; in fact, policymakers in Washington are pressuring Beijing to boost the

value of the yuan in an effort to stem the tide of imports.

The fastest-growing sector of world trade is trade in services. Services include travel and

entertainment; education; business services, such as accounting, advertising, engineering,

investment banking, and legal services; and royalties and license fees that represent payments for

intellectual property. One of the major issues in trade relations between the high- and lower–

income countries is trade in services.

The United States is a major service trader. As shown in Figure 2-2, U.S. services exports in

2013 totaled nearly $690 billion. This represents about one-third of total U.S. exports. The U.S.

services surplus (service exports minus imports) stood at $207 billion. This surplus partially

offset the U.S. merchandise trade deficit, which declined to $701 billion in 2013 from a record

$835 billion in 2006. American Express, Walt Disney, IBM, Microsoft, and UPS are a few of the

U.S. companies that have experienced rapid growth in demand for their services around the

world.

OVERVIEW OF INTERNATIONAL FINANCE

Foreign exchange makes it possible for a company in one country to conduct business in other

countries with different currencies.

The foreign exchange market consists of a buyer’s market and a seller’s market where currencies

are traded for both spot and future delivery on a continuous basis.

Devaluation can result from government action or an economic crisis; devaluation is a reduction

in the value of a nation’s currency against other currencies.

To the extent that a country sells more goods and services abroad than it buys, there will be a

greater demand for its currency and a tendency for it to appreciate in value—unless the

government pursues foreign-exchange policies that do not allow the currency to fluctuate. In

international economics, such policies are called mercantilism or competitive-currency politics

because they favor domestic industries at the expense of foreign competitors.

The Big Mac Index

One way to answer the question is to compare world prices for a single well-known product:

McDonald’s Big Mac hamburger. The so-called “Big Mac Index” is a ‘quick and dirty’ way of

determining which of the world’s currencies are too weak or strong.

The underlying assumption is that the price of a Big Mac in any world currency should, after

being converted to dollars, equal the price of a Big Mac in the United States.

A country’s currency would be overvalued if the Big Mac price (converted to $) is higher than

the U.S. price. Conversely, a country’s currency would be undervalued if the converted Big Mac

price is lower than the U.S. price.

Economic Exposure

Economic exposure reflects the impact of currency fluctuations on a company’s financial

performance. Economic exposure can occur when a company’s business transactions result in

sales or purchases denominated in foreign currencies.

Managing Exchange Rate Exposure

(Learning Objective #6)

It should be clear from this discussion that accurately forecasting exchange rate movements is a

major challenge. Over the years, the search for ways of managing cash flows to eliminate or

reduce exchange rate risks has resulted in the development of numerous techniques and financial

strategies.

Hedging exchange rate exposure involves establishing an offsetting currency position such that

the loss or gain of one currency position is offset by a corresponding gain or loss in some other

currency.

External hedging methods for managing both transaction and translation exposure require

companies to participate in the foreign currency market. Specific hedging tools include forward

contracts and currency options.

Internal hedging methods include price adjustment clauses and intra-corporate borrowing or

lending in foreign currencies.

The forward market is a mechanism for buying and selling currencies at a preset price for future

delivery.

For a foreign currency, option is best for such situations. A put option gives the buyer the right,

not the obligation, to sell a specified number of foreign currency units at a fixed price, up to the

option’s expiration date.

Conversely, a call option is the right, but not the obligation, to buy the foreign currency. In other

words, the U.S. company locks in the value of the contract in dollars. Thus, if the project is

granted, the future foreign currency cash inflow has been hedged by means of the put option. If

the project is not granted, the company can trade the put option in the options market without

exercising it; remember: options are rights, not obligations.

TEACHING TOOLS AND EXERCISES

Additional Cases

“Cherries With Charm: Turkey’s Alara Agri” by Michael R. Pearce and Jordan Mitchell, June

2009. HBS: 909A19-PDF-ENG.

“Pan Boricua: Developing a Market Strategy for the Hispanic Market in the United States” by

Victor Quinones; Julia Sagebien; Marisol Perez-Savelli; Eva Perez; Jennifer Catinchi

HBS: 909A20-PDF-ENG

“Global Wine War 2009: New World versus Old.” Christopher A. Bartlett, HBS, 910405.

Out-Of-Class Reading: Assign the following seminal article on marketing and ask students to

apply the concepts presented to global marketing.

Theodore Levitt, “Marketing Myopia,” Harvard Business Review 80, no. 7/8 (July-

August 2004), pp. 138-149.

Internet Exercise: Have students go to http://finance.yahoo.com/currency?u. This site offers a

foreign exchange calculator that allows easy comparison of currency exchange rates. Students

will select a few currencies such as the Thai baht, the Chinese yuan, the Malaysian ringed, and

Indonesian rupee and compare exchange rates.

Activity: Either in groups or individually, students should begin preparing their Cultural and

Economic Analysis and Marketing Plan as noted in Chapter 1.

Videos:

This video was produced by the Tuck School of Business at Dartmouth. He explains how people

in the Western world, India for example, weigh more heavily on advertisement than people in

America do. The presenter explains that cultural awareness and cultural knowledge are necessary

prerequisites to be successful in a global market. At the end he gives advice to students including

learning another language, and becoming informed of another culture, developing empathy, etc.

These traits will help you open up more to managing a global business. 3 ½ minutes long.

Link: http://www.youtube.com/watch?v=fbBMOjoMDA4&feature=relmfu

Film: Have students watch the movie “Wall Street.” Although not dealing directly with

international finance, the film gives students insight into various financial dealings and

transactions and the potential outcomes associated.