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Attachment 1


PART III: Market Audit and Competitive Market Analysis

This section relates to Part 4 of the textbook, which are chapters 10, 11, 12, 13, 14, and 15. Of the guidelines presented, this is the most product or brand specific. Information in the other guidelines is general in nature, focusing on product categories, whereas data in this guideline are brand specific and are used to determine competitive market conditions and market potential.

Two different components of the planning process are reflected in this guideline. Information in Parts I and II, Cultural Analysis and Economic Analysis, serve as the basis for an evaluation of the product or brand in a specific country market.

Information in this guideline provides an estimate of market potential and an evaluation of the strengths and weaknesses of competitive marketing efforts. The data generated in this step are used to determine the extent of adaptation of the company’s marketing mix necessary for successful market entry and to develop the final step, the action plan.

The detailed information needed to complete this guideline is not necessarily available without conducting a thorough marketing research investigation. Thus another purpose of this part of the country notebook is to identify the correct questions to ask in a formal market study.

Write at least one (1) paragraph on each in each of these areas.

I. Introduction

II. The Product

A. Evaluate the product as an innovation as it is perceive by the intended market.

1. Relative advantage

2. Compatibility

3. Complexity

4. Trialability

5. Observability

B Major problems and resistance to product acceptance based on the preceding evaluation

III. The Market

A. Describe the market(s) in which the product is to be sold

1. Geographical region(s)

2. Forms of transportation and communication available in that (those) region(s)

3. Consumer buying habits

a. Product-use patterns

b. Product feature preferences

c. Shopping habits

4. Distribution of the product

a. typical retail outlets

b. Product sales by other middlemen

5. Advertising and promotion

a. Advertising media usually used to reach your target market(s)

b. Sales promotions customarily used (sampling, coupons, etc.)

6. Pricing strategy

a. Customary markup

b. Types of discounts available

B. Compare and contrast your product and the competition’s product(s).

1. Competitor’s product(s)

a. Brand name

b. Features

c. Package

2. Competitor’s prices

3. Competitor’s promotion and advertising methods

4. Competitor’s distribution channels

C. Market size

1. Estimated industry sales for the planning year

2. Estimated sales for your company for the planning Year

D. Government participation in the marketplace

1. Agencies that can help you.

2. Regulations you must follow

SUGGESTED READINGS

Books

Arnold, David. The Mirage of Global Markets. Upper Saddle River, NJ: Pearson Education, 2004.

Barnet, Richard J., and John Cavanaugh. Global Dreams: Imperial Corporations and the New World Order. New York: Simon & Schuster, 1994.

Bartlett, Christopher A., Sumantra Ghoshal, and Paul W. Beamish. Transnational Management, 5th edition. New York: McGraw-Hill/Irwin, 2006.

Bryan, Lowell. Race for the World: Strategies to Build a Great Global Firm. Boston: Harvard Business School Press, 1999.

Doremus, Paul. The Myth of the Global Corporation. Princeton, NJ: Princeton University Press, 1998.

Friedman, Thomas L. The World Is Flat 3.0: A Brief History of the Twenty-First Century, New York, Picador 2005.

Friedman, Thomas L. The Lexus and the Olive Tree. New York: Anchor Books, 2000.

Garten, Jeffrey. World View: Global Strategies for the New Economy. Cambridge, MA: Harvard University Press, 2000.

Greider, William. One World, Ready or Not: The Manic Logic of Global Capitalism. New York: Simon & Schuster, 1997.

Johnson, Chalmers. Japan, Who Governs? The Rise of the Developmental State. New York: W. W. Norton, 1995.

Kets de Vries, Manfred F.R., and Elizabeth Florent-Treacy. The New Global Leaders: Richard Branson, Percy Barnevik, David Simon and the Remaking of International Business. San Francisco: Jossey-Bass, 1999.

Kynge, James. China Shakes the World. New York: Houghton Mifflin, 2006.

McGregor, James. One Billion Customers: Lessons from the Front Lines of Doing Business with China. New York: Free Press, 2005.

Micklethwait, John, and Adrian Wooldridge. A Future Perfect: The Challenge and Hidden Promise of Globalization. New York: Crown Publishers, 2000.

Ohmae, Kenichi. The End of the Nation State: The Rise of Regional Economies. New York: Free Press, 1995.

Watson, James L., ed. Golden Arches East: McDonald's in East Asia. Stanford, CA: Stanford University Press, 1997.

Wendt, Henry. Global Embrace: Corporate Challenges in a Transnational World. New York: HarperBusiness, 1993.

Yergin, Daniel, and Joseph Stanislaw. The Commanding Heights. New York: Simon & Schuster, 1998.

Articles

Bartlett, Christopher A., and Sumantra Ghoshal. “Going Global: Lessons from Late Movers.” Harvard Business Review 78, no. 2 (March-April 2000), pp. 132-142.

Craig, C. Samuel, and Susan P. Douglas. “Responding to the Challenges of Global Markets: Change, Complexity, Competition, and Conscience.” Columbia Journal of World Business 31, no. 4 (Winter 1996), pp. 6-18.

Griffith, David A. "Understanding Multi-level Institutional Convergence Effects on International Market Segments and Global Marketing Strategy" Journal of World Business Volume 45, Issue 1, January 2010, Pages 59–67.

Halal, William E. “Global Strategic Management in a New World Order.” Business Horizons 36, no. 6 (November-December 1993), pp. 5-10.

Hu, Tao-Su. “Global or Stateless Corporations are National Firms with International Operations.” California Management Review 34, no. 2 (Winter 1992), pp.107-126.

Lazer, William. “Changing Dimensions of International Marketing Management.” Journal of International Marketing 1, no. 3 (1993), pp. 93-103.

Li Jiato, and Stephen Guisinger, “How Well Do Foreign Firms Compete in the United States?” Business Horizons 34, No. 6 (November-December 1991), pp. 49-53.

Morrison, Allen J., David A. Ricks, and Kendall Roth. “Globalization Versus Regionalization: Which Way for the Multinational?” Organizational Dynamics (Winter 1991), pp. 17-29.

Quelch, John A. and Edward J. Hoff. “Customizing Global Marketing.” Harvard Business Review (May-June 1986), pp. 59-68.

Zou, Shaoming, and S. Tamer Cavusgil. “The GMS: A Broad Conceptualization of Global Marketing Strategy and Its Effect on Performance.” Journal of Marketing 66 (October 2002), pp. 40-56.

The following assessment criteria will be used for team presentations of marketing plans:

Content & organization

· Did the main topic or problem introduced and clearly defined?

· Did major points have specific details?

· Were all points supported?

· Was information well organized and follows logical sequence?

· Was a proper summary/conclusion done?

· Was everybody knowledgeable (and therefore did not have to read their entire presentation)?

Visuals and materials

· Was Power Point visually pleasing?

· Were slides easy to read (Size and amount of text is excellent)?

· Were visuals appropriate and professional?

· Use of appropriated graphics to explain presentation?

Delivery

· Did members show enthusiasm and make good eye contact?

· Did members uses appropriated voice volume?

· Did group has excellent use of the time

Overall professionalism and teamwork

· Did group members address the audience in a professional manner?

· Was there a proper introduction of group members and topic areas to be covered?

· Were there proper transitions between speakers?

· Did group members present themselves in a professional manner?

· Did the group respond to questions with knowledge and professionalism?

The following assessment criteria will be used for written marketing plans:

Written Content/Development - 50%

· Content is comprehensive/accurate/persuasive and demonstrates critical thinking.

· Displays an understanding of client and environmental issues.

· Major points supported by specific details/examples and critical analysis.

· Research is adequate/timely

· Writer has gone beyond textbook for resources

Higher-Order Thinking – 20%

· Suggestions are show a comprehension of market factors as well as client strengths and capabilities.

· Is able to integrate theory and best practices into thoughtful suggestions for client. As such, team has critically analyzed the various aspects of the market and applied these to the problem at hand.

Organization -- 15%

· Use of template as outlined in text.

· The introduction provides sufficient background on the topic, major points

· Structure is clear, logical, and easy to follow

· Subsequent sections develop/support central theme

· Conclusion/recommendations follow logically from the body of the paper

Style/Mechanics - 15%

· Format

· Citations/reference page follow guidelines

· Properly cites ideas/info from other sources

· Paper is laid out effectively--uses, heading and other reader-friendly tools

· Paper is neat/shows attention to detail

· Grammar/Punctuation/Spelling

· Rules of grammar, usage, punctuation are followed

· Spelling is correct

· Readability/Style

· Sentences are complete, clear, and concise

· Sentences are well-constructed with varied structure

· Transitions between sentences paragraphs and sections help maintain the flow of thought

· Words used are precise and unambiguous

· The tone is appropriate to audience, content, and assignment

Attachment 2


2

Lululemon Global Marketing Strategy for India

Mina Khosravi (1814634)

Tejinder Pal (1911844)

Rekha Choudhary (1813635)

Yilin Liu (1913036)

Elham Khani (1810327)

University Canada West

MRKT 627: INTERNATIONAL MARKETING

Professor: Dr. Ho Shuna

September 10, 2020

PART I: Introduction to the Culture of the Country

Executive Summary

We choose Lululemon, a popular brand in the North American market, as our target company to expand to the Indian market. In order to better adapt to the Indian market, we summarize the key information that is worth noting in this part.

The complex geological condition and religious system greatly increase the richness of the Indian culture. There exists a significant difference among people who live in different areas. That disparity is more pronounced between urban and rural areas. People in cities enjoy advanced education, health, and political system, while most people in rural areas are living in poverty. The religious system is another factor that may strongly affect the operation of the business. The difference in religion can be reflected in the clothes and lifestyles.

However, the rapid development of the urban economy and the increasingly popular traditional India yoga provides potential market opportunities for Lululemon brings its product and value to Indian consumers. By combing Lululemon's products with a variety of local culture and tradition, Lululemon can explore a broader range of potential customers.

Lululemon profiles

Lululemon is a Canadian company founded in 1998 by Chip Wilson to design and produce yoga-inspired sportswear. The company has expanded into the sale of sportswear, including shirts, shorts, pants, and light clothing and yoga accessories for men and women. Based on the Lululemon website, this company's mission is "To elevate the world from mediocrity to greatness" (2020). Therefore, it has seven basic values ​​: product, quality, balance, integrity, entertainment, entrepreneurship, and greatness. Despite strong competitors like Nike, this company has seen rapid success and growth over the past decade and has generated more than $565.11 Billion in 2018 (Statista, 2020). It also has 491 stores in North America, Europe, Asian Pacific, although half of these stores are in the United States (Statista, 2020). Lululemon believes that community involvement can lead to customer attraction and increase its mission to create a healthy lifestyle, so this brand is actively involved in CSR. 

Indian history

Yoga is an ancient Indian system that is of great importance to the Indians. After careful consideration of the various options, it was found that Lululemon's designed products originated in India because they are inspired by Hindu spiritual art. This Canadian company has a strong presence in the local market and is on the verge of becoming a global organization. In addition to the Indian origins of yoga, increasing urbanization and public awareness of a healthy lifestyle with the increasing use of the Internet make this market an opportunity for Lululemon to enter India.

Geographical setting

location

Locate in the south part of Asia (Champakalakshmi, 2020), India is a country surrounded by the sea. The Arabian Sea bordered the southwest side of India, while the southeast side is bordered by the Bay of Bengal ("India," n.d.). On the northeast side, the mountain Himalayan separates it from other parts of Asia (UKEssays, 2018).

India has a total area of 3,287,263 square kilometres (Champakalakshmi, 2020.), which account for 2.4% of the total area on the earth. India is the seventh-largest country all around the world. The mainland of India looks like a rhombus, which has a similar height and length of 3000km ("Size and Location of India", n.d.)

Climate

India has a wide range of weather, and the climate is significantly different for different parts of its mainland. In total, it has mainly four kinds of climates. They are the tropical wet, tropical dry, Sub-tropical Humid Climate and mountain climate ("Map of Climatic Regions in India", n.d.). The different climates contribute to different geology. For example, there are deserts in the west, glaciers in the north and rainforest in the southwest ("Climate of India", n.d.).

In general, there are four kinds of season, which are the winter, summer, monsoon, and post-monsoon. Monsson is a special description of the season, which indicates the fact that the climate of India mostly depends on the monsoon winds ("Climate of India", n.d.) .

The highest temperature occurs from March to May with an average of 27 to 33 degrees for most of the region, while the lowest temperature appears in December to February with a wide range average from 4 to 23 degrees ("Climate of India", n.d.).

Topography

The topography of India is greatly diverse. The geography varies from plains, plateaus, desert to mountains. India has part of the highest mountain in the world, which is the Himalayan mountain. Other mountains such as Shivalik, Vindhya and Sapura Range are in a different section of the mainland. The Indo-Gangetic plain, which includes 0.7 million square kilometres, is the most intense area for farms, and the population density is extremely high. ("Geography of India", n.d.)

Social institutions

In India, the traditional joint family follows the same principles of collectivism, however

With one of the most important changes being the disintegration of the common family and the emergence of the nuclear system and the extended family, society is changing. Indian families adhere to a patriarchal ideology, have family orientations, support traditional gender role preferences, and according to their traditional Hindu view, marriage is a sacred ritual. Besides, urbanization has increased, and with the bombardment of the Internet in Indian social space, which now has 687.6 million active users (Statista, 2020), public awareness of a healthy lifestyle has increased. 

Education

Based on the reform of education policy and its orientation, the Government of India has set up various social and educational plans and programs through various five-year plans. These plans focus on greater equality, gender equality, skills and education, cultural transmission and development, peace and reconciliation. (Dudhe, 2014). In 1964, The education commission proposed that more than 6% of GDP should allocate to the educational system to create a considerable growth rate. this allocation and plans created an average growth of 70% in 2005-2010 (Education in India, 2016). (Figure 1). 

The five-year compulsory elementary school for Indians includes math, science and technology, the arts and physical education. Assessment and progress are usually based on periodic exams, other school-based assessment forms, and annual school year-end exams. In the stage of upper elementary, students learn three languages: Native, English, and Modern Hindi and getting admission for the secondary school, which is not compulsory, is depending on getting the completion letter from the previous stage. based on this educational system, 1.6 million of Indian students passed the exams and received the SSC (Secondary school Certificate) that this number was 87 percent in 2018. Higher education has drastically expanded in India since the number of tertiary students grew from 5.7 million to 36.6 million over the past two decades. Likewise, the number of universities increased from 190 to 903. India's literacy rate is 71.2%, and most private schools try to stimulate children to learn multiple languages, sometimes starting in elementary school. The GER (Gross Enrollment Ratio) in India was 25.8 percent in 2017, and the government has planned to increase it to 30 percent at the end of 2020 (Trines. 2018).

Political System

With a political stability index of -0.96 in 2018, India has three main organs of government: the judiciary, the executive and the legislature (Global Economy, 2020) (Figure 2). Together, they perform the duties of government, maintain law and order, and care for the people's welfare. Also, political parties are either a national party or a state party. The two major national parties that have played a dominant role in Indian politics are the left coalition (UPA) and the right central alliance (NDA). India's tax structure follows a three-tier federal system, including the central government, local municipal bodies make up this structure and state governments.  

Legal System

India has a combined legal system with a combination of civil law, custom, Islamic ethics or religious law that the legal framework inherited from the colonial era. The various laws first introduced by Britain are still being revised. The Constitution of India was written on January 26, 1950 and is the world's largest constitution. The source of law in India is the constitution, as well as the supreme law of India. 

India has laws that cover different intellectual property areas like trademarks, patents, Industrial design, geographical indication, etc. Also, India's obligations under the TRIPS contract to protect trademarks include protecting distinctive brands, identifying service marks, unlimited periodic renewal of registration, revocation of mandatory trademark licenses, etc. (Dalmia, 2017).

Business customs and practices

Building good business relationships and trust in India is very important, so you should expect to spend a lot of time in meetings, dinners and social clubs with your potential business partners. Like some other Asian cultures, Indians like to make personal connections first. So expect to hear about your family and get ready to ask your questions. Like other countries, Indian business custom includes greeting and titles, body language, business cards, corporate culture and dress code. 

Religion and aesthetics

Religion

Religion is an important component of Indian history and culture. The most influential religion is Hinduism, which consists of many different doctrines, and the lifestyles take up nearly 80% of the population. Besides, Muslims are the second-largest faith, which accounts for 14% of the population. The distribution of religion is not even. For example, Hindus majored in most of the states, excluding Jammu and Kashmir. While for Lakshadweep, it is monopolized by Muslims.

Caste is another important system dominate Indian society for thousands of years. It is a system that differentiates people according to their birth, which puts people into the different social hierarchy. The people within each hierarchy are only supposed to behave and live under a specific set of rules or terms. And it is very hard for people to move up to a higher level of Caste. (Champakalakshmi, 2020.)

Aesthetics

Among all Indian art, Rasa lay the foundation for the mental state, which is a major emotional theme for Indian art. In terms of forms, there are sculptures, paintings, and architecture. The sculpture is one of the most respectful types of art that reveals the cultural diversity of India. (Niveditha, 2016)

Similar to visual art, Indian music, also diverse due to cultural diversity. A hundred kinds of language, different geographic contribute to a wide range of music styles. The unique thing about Indian music is that they are seldom written down. Instead, they use the special rhythm to inherit from generation to generation. ("Music of India", n.d)

Folktales in India are used to convey religious knowledge. Despite the language difference, the same folk epics are found in different areas and cultures. To better spread those folks, the folk's art appeared, which use painting or drawing to convey the main idea of folks and stories. ("Folklore of India", n.d.)

Living conditions

Diet and nutrition

Due to the difference in climate, religions, historical reason, the food vary greatly for different places. The nine religions influence the appetite of the food for different people. For example, Muslims don't eat pork, while Hindus avoid beef. Climate change usually affects the harvest of certain ingredients, such as rice, maize and wheat. The cuisines are provided base on the ingredients that harvest most in the current season. (Springer, 2020)

Housing

A huge difference in housing appears between wealth and poverty. Thirty-one percent of the population is living in cities with many slums. The major kind of housing is low-rise apartment buildings. Most of the houses have many years of history built by multiple family generations. The extra floors are adding to the existing housing with no architect. However, in big cities such as Mumbai, there are more houses and high apartment buildings served for rich and middle-class residents. (Teoalida, 2012)

Clothing

For most of the Indian, their dressing is simple. Male usually wear just broadcloth dhoti (Champakalakshmi, 2020.). The traditional Indian cloth is different base on culture, climate, and geography. Indians use garments worn to protect their culture. Their traditional dressing is frequently used in a celebration such as festivals and weddings. For modern dressing, more and more people are accepting western cloth styles (Sawe, 2017).

Recreation

Entertainment is an essential part of social communication in India. The main source of recreation includes music, dance, films and so on. There are different kinds of dance. For example, Kathak is popular in the north part of India, while Bharat Natyam is famous in Tamil Nadu.

Social security

The social security system in India mainly consists of a provident fund scheme, pension scheme, and deposit-linked insurance scheme. The employee and employer pay 12% and 12.5% of basic wages into the Employees' Provident Fund. The Pension scheme can provide the benefit for people retired or disabled during work and pay to the family when a member dead. The old-age pension is designed for people older than 58 years, with at least ten years working ("Social Security Guide", 2020).

Health Care

The healthcare system in India is vast, but different between city and rural areas. The public health care system is universal but has inadequate coverage, which makes many people turn to a private one. The health care for the traveller is cheap but has high quality. The private hospital his more reliable for the higher class of people or international students, while the local clinic is more valuable to small disease. ("Healthcare System In India", n.d.)

Language

The languages ​​spoken in India are the two main language families: Indo-European and Dravidian. The rest are mainly from Austro-Asian and Tibetan-Burmese language families. Indian students across the country must learn three languages ​​, such as English, Hindi and their mother tongue. Also, in India, there are 22 official languages ​​such as Bengali, Nepali, Urdu, etc. and 1,369 dialects, while Hindi is the official language of the central government along with English (Castillo, 2019). 

Reference

Admin. (2009). What Do People do for Entertainment in India? Retrieved from, IndiaFolks, https://www.indiafolks.com/history-and-culture/what-do-people-do-for-entertainment-in-india/

Castillo, V. (2019, February 15). Which language is spoken in India? Babbel Magazine. https://www.babbel.com/en/magazine/what-languages-are-spoken-in-india

Champakalakshmi, R. (2020). India. Retrieved from, Encyclopædia Britannica, https://www.britannica.com/place/India.

Climate of India. (n.d.). Retrieved from New World Encyclopedia, https://www.newworldencyclopedia.org/entry/Climate_of_India

Dalmia, V. (2017, September 13). India: Intellectual Property Laws In India- Everything You Must Know. Vaish Associates Advocates. https://www.mondaq.com/india/trademark/654712/intellectual-property-laws-in-india-everything-you-must-know

Dudhe, S. (2014, December). THE ROLE OF EDUCATION FOR IMPROVEMENT THE STANDARD OF SOCIETY IN CURRENT SCENARIO. https://www.journalijdr.com/sites/default/files/issue-pdf/2354.pdf

Education in India. (2016). Topper. https://www.toppr.com/guides/economics/human-capital formation-in-india/education-in-india/

Folklore of India. (n.d.). Retrieved from New World Encyclopedia, https://www.newworldencyclopedia.org/entry/Folklore_of_India

Geography of India. (n.d.). Retrieved from https://www.cs.mcgill.ca/~rwest/wikispeedia/wpcd/wp/g/Geography_of_India.htm

Healthcare System In India. (n.d). Retrieved from https://www.internationalstudentinsurance.com/india-student-insurance/healthcare-system-in-india.php

India. (n.d.). Retrieved from India Map, National Geographic Maps, https://kids.nationalgeographic.com/explore/countries/india/

Map of Climatic Regions in India. (n.d.). Retrieved from Mapsofindia, https://www.mapsofindia.com/maps/india/climaticregions.htm

Music of India. (n.d.). Retrieved from, Kennedy center, https://www.kennedy-center.org/education/resources-for-educators/classroom-resources/media-and-interactives/media/international/music-of-india/

Niveditha. (2016). Indian aesthetics. Retrieved from https://www.openart.in/general-topics/indian-aesthetics/

The Global economy. (2020). India: political Stability.https://www.theglobaleconomy.com/India/wb_political_stability/

Lululemon. (2020). History. https://info.lululemon.com/about/our-story/history

Sawe, B. E. (2017). What Are Examples of Traditional Indian Clothing? Retrieved from https://www.worldatlas.com/articles/what-are-the-traditional-dresses-of-india.html

Size and Location of India. (n.d.). Retrieved from toppr, https://www.toppr.com/guides/geography/india-size-and-location/size-and-location-of-india/

Social Security Guide. (2020). Retrieved from https://guides.dss.gov.au/guide-social-security-law/10/32/1/30

Springer, K. (2020). Indian food: The best dishes in each region. Retrieved from https://www.cnn.com/travel/article/indian-food-dishes/index.html

Statista. (2020, September 08). Revenue of lululemon athletica in Canada from 2012 to 2019. https://www.statista.com/statistics/485785/revenue-of-lululemon-canada/

Statista (2020), Internet Usage in India. https://www-statista- com.ezproxy.myucwest.ca/study/22628/internet-usage-in-india-statista-dossier/.

Teoalida. (2012). Housing in India. Retrieved from https://www.teoalida.com/world/india/

Trines, S. (2018, September 13). Education in India. WENR. https://wenr.wes.org/2018/09/education-in-india

UKEssays. (November 2018). Geographic Setting Of India History Essay. Retrieved from https://www.ukessays.com/essays/history/geographic-setting-of-india-history-essay.php?vref=1

Appendix

Figure 1

Education growth rate

Note. Adopted from Education in India, by Topper, 2016 (https://www.toppr.com/guides/economics/human-capital

formation-in-india/education-in-india/)

Figure 2

India Political stability

Note. Adopted form India: political Stability, by The Global economy, 2020 (https://www.theglobaleconomy.com/India/wb_political_stability/)

Attachment 3


0

PART II: The Economic Analysis of the Country

Introduction

India was among the fastest-growing import markets between 2017 – 2018. The capital city of the Republic of India is New Delhi (formally called the National Capital Territory of Delhi), with over 29 million population. India has 35 cities and urban agglomerations. In 2018, India's GDP was recorded at $2.72T, which is experiencing a steady growth rate from 2008, and the quality was a staggering number of 127% in 2018 compared to the previous year. The total amount of product exports from India has a value of $326B. The accumulative amount of goods and services imported to India in the same year was calculated $492B, a $53B increase compared to 2013, giving the country's import per capita at $364. A study of OEC World ranked the economic complexity of India 45 (0.57) compared to other 137 nations and the most complex economy, according to the Economic Complexity Index (ECI). In 2018, India was granted the top economies in the world. A wide array of consumer goods made the country the number 11 trade destination globally (The Observatory of Economic Complexity, 2020). The majority of imports led by Crude Petroleum (20.6%) and the major import partners are China ($75.5B) and the United States ($31.6B). Total textile imported has been calculated at $8.44B, footwear and head ware had a total value of $1.15B.

Society:

India has one of the largest populations in the world. With an increasing population at an average rate of 1%, which consider a plunge compared to the previous rate, in 2018, the number of Indians passed over 1.35 billion people. The birth rate in 2020 was 18.2 birth/1,000 population, and the death rate was 7.2 deaths/1,000 population. An average life expectancy among Indians was 69.7 years. The age structure of Indian demographic 2020 was the following; 0-14 years composed 29% (male more than female), 15-64 years written 64% (male outweigh female), and over 65 female and male composed the remaining with the majority of female in this segment. The sex ratio, as already mentioned, is slightly male dominant, but roughly the rate is the same for both genders. The mortality rate in India has been decreasing (World Population by Country, 2020). The population growth has been experiencing the same trend. More than 50% of the population of the country included youth below 25 years old. It is expected that this trend makes an average of 29 years for Indian by 2030. The sex ratio is 944 females.

Demography:

Over two thousand ethnic groups exist in India. Four primary language families are representing those significant religious schools. Indo-European, Dravidian, Austroasiatic and Sino-Tibetan languages. Anglo-Indians composed 1,000,000 people in India, and Westerners from the United States living in India are 700,000, representing more than 0.1% of India's total population. India has 36 different states, and the distribution of population in Uttar Pradesh (16.5% of the total population), Maharashtra (9.28%), and Bihar (8.6%) has dwelled over 400 million citizens in total. The capital city of Delhi has 16 million population (1.39%). Another important city in the region is Punjab (27 million). The major cities based on the Urban population are Maharashtra, Uttar Pradesh, Tamil Nadu (34 million), West Bengal (29 million), and Gujarat (25 million). The vastest cities in the region are Rajasthan (342 thousand km2), Madhya Pradesh (308 thousand km2), and Maharashtra (307 thousand km2).

Education and Literacy:

India has a diverse range of religions, including Hinduism, Islam, Christianity, Sikhism, Buddhism, Jainism, and others. The main bulk of religious beliefs belongs to Hinduism, with 79% (the highest) Hindus of 1.2 billion religious Indians. The next on the list are Muslims, which is growing in number and is 15%. Characteristic of the main religious groups in terms of sex ratio, literacy, and work participation are the following; the growth rate of Islam was 24%, sex ration (the urban area was 941), sex ratio (child) 943, literacy at 68.5% (the lowest), and work participation of labour force is 32% (the lowest). Accordingly, for Hinduism, the sex ratio (urban area) is 921, sex ratio (child) is 913, and the literacy percentages were 74%, with the work participation of 41%. Christianity is the third major religion in India. The sex ratio in an urban area is 1046 (the highest), 84% literacy, and work participation of 41%. Buddhists' work participation is the highest among other religious groups at 43.1%. The minority group is Jainism with less than 1 percent but has the highest literacy rate by almost 94%.

Language:

Many Indians speak more than one language. The total number of languages and dialects census exceed more than 114 languages (22 of which are told by the majority) varied by source and counting method. Mother tongues or dialects are further categorizing census lists 216 spoken by 50,000 or more speakers. Eight hundred fifty languages are estimated to be used daily; the Government claims this number is more than 1,600 dialects. The most commonly spoken is Hindi, which is the official language in India. All the dialect is not mutually comprehensible. English also has official status. Widely using among business and politics, English acknowledgment varies from a few words to fluency. Union territories and most states are teaching Hindi and English. Twenty-two other languages are officially recognized by the political constitution and various educational and other institutions: Assamese, Oriya, Tamil, Punjabi, Sanskrit, Santhal, Sindhi, Bengali, Bodo, Kashmiri, Konkani, Manipuri, Marathi, Dogri, Gujarati, Maithili, Malayalam Hindi, Kannada Nepali, Telugu, and Urdu.

Ethnic Group:

Scholars estimated the exact number of ethnic groups depends on the source and method of counting. Only Africa exceeds the diversity of ethnicity of linguistic, cultural and genetic of India. 70% of the Indo-Aryan population composes, 20% are Dravidian, and the rest are Mongoloid and others. Subdividing each of these groups further in various languages changing, religion, and often caste. It is technically illegal to consider the Hindu caste system, but generally, more in rural areas, it is commonly practiced. Hindu caste system comprises four major categories (varnas), sub-categories (jatis), often found in specific regions, Sikh and Muslim communities. Among those, hereditary and occupational social hierarchies exist.

Health:

National health indicators showed dramatic improvement nationwide, although they are generally lower than in developing countries. Human Development Index, which is measuring income, education, and developmental health by the United Nations, is 0.647— which puts the country in the medium human development category (UNDP, 2019). Life expectancy and India's GNI per capita is increasing between 1990 and 2018. Education and HDI are slightly dropping within the last year. Trends are often comparing with Pakistan and Bangladesh. Gender Inequality or GII in India has a value of 0.501, ranking it 122 out of 162 countries in the 2018 index. Multidimensional Poverty Index (MPI). In India, 27.9 percent of the population accounts for 373,735 thousand multidimensionally poor people. 19.3 percent are classified as vulnerable to multidimensional poverty, which is counted at 258,002 thousand people. The breadth of deprivation or intensity experienced by people in India score in multifaceted poverty is 43.9 percent. MPIs of Bangladesh and Pakistan have 0.198 and 0.198, respectively.

Environment:

About one-third of the united states, India is the seventh-largest country in the world. Occupied by the subcontinent of South Asia, mainland India stretches eastward from Pakistan to Bangladesh in the west and Burma. North neighbours of India are China and Nepal, and Bhutan. The Indian Ocean on the south and the Arabian sea and Seri Lanka. Total land boundaries are 15,200 kilometres. The climate in India varied over the region. From permanently snow-capped Himalayas in the north to the tropical southern area. India is a four-season country. It is relatively cool and dry in December through February. It is hot and dry from March through May, predominating southwest winds from June to September brings monsoons rains and continues to October and November with retreating dry monsoons. Average temperatures range from 12.5 Centigrade to 30 Centigrade, which varies in the northwest than northeast 12.5C, south 22.5-30 C, and in the northeast 17.5C. Average annual 1,000 to 1,500 millimetres rainfall for much of the country, but lowest in the northeast and highest for the west coast.

The environmental factors about India are the vulnerability of nature. There are natural hazards, particularly various cyclones, and the annual monsoon that creates floods. Combinations of industrialization, poverty, increasing individual consumption, maldistribution of resources such as soil erosion, salinity and waterlogging. One other involving factor is civil conflict. They have taken arable land and forests, which is more occurred in northeastern and eastern states. However, water supply, by contrast, has not to link to any erosion. Political tension, international and national violent conflict as previously anticipated to the water distribution from Kaveri River surrounding actual population displacement by dam projects. The Time zone in India is under the same time zone, Greenwich Mean Time +5.5 hours.

Economic statistics and activity:

The economy in India is very diverse. It is encompassing traditional and modern farming, handicrafts and modern industries, and a multitude of services. Services account for more than two-thirds of India'sIndia's primary source of economic growth, but less than one-third of the labour force and slightly less than half of the workforce is in agriculture. The recent implication of the Modi administration and its government liberalization measures (privatization of state-owned enterprises, industrial deregulation, and reduced controls on foreign trade and investment) hugely impacted India's economy. Per capita income in Indian nevertheless remained below the world; it has capitalized on the educated English-speaking population to become primary outsourcing services and software workers for multinational businesses and exporter of information technology services.

Gross Domestic Product (GDP)/Power Purchasing Parity (PPP):

India's GDP is predicted to grow 8 percent a year between 2018 and 2022, and the economy being propelled by strong macroeconomics. India thrived for keeping its autarkic policies, yet develop into an open-market economy from 1997 to 2017. The countries growth accelerated at an average rate of 7% per year, which is higher than GDP growth for the European Union and the United States. GDP, purchasing power parity, in 2017, was estimated at $9.474 trillion, compared to $8.88 trillion in 2016 and $8.291 trillion in 2015 (India Brand Equity Foundation, 2019). GDP as an official exchange rate in 2017 was $2.602 trillion. The real growth rate was at 6.7% and GDP per capita (PPP) was $7,200 (2017), $6,800 (2016), and $6,500 (2015). Growth Nation Saving dropped by 1% in 2017 compared to the previous year at 28.8%. During the last two decades, the economy of India became more complex. In terms of ECI value, India after Thailand and China is the highest in the ranking. Most specialized products are spice seeds, organic compounds, granite, coconut and vegetable, processed hair, knotted carpets, non-retail pure cotton, and cotton waste. Median Household Income in India in 2020 was $3,168, which compile $616 median per-capita income.

Figure 1Monthly Trade-Data from UN Comtrade- United Nations International Trade Statistics Database-2018

Trade restrictions:

The highest tariff products belonged to Alcoholic liqueurs and fermented beverages (150%). Tarif 59: ASEAN India Free Trade Area (ASEAN) Association of Southeast Asian Nations. India-MERCOSUR Preferential Trade Agreement. Canada and India and the USA and India have Textile tariff values 9.94%, Foot ware and head ware 15% (Federal Research Division, 2015).

Distribution of wealth:

Marked differences in portfolio structures, India has more deposits (almost 60%) than securities and insurances. It is estimated that the top ten percent of the population held 77% of the whole national wealth. The wealthiest person in India has a net worth of about 47.3 billion US dollars. India has a low unemployment rate (5.36% in 2019), maintained throughout the 2000s. However, the youth unemployment rate, the workforce aged 15 to 24 years and without a job, has been hovering around the 22% mark, significantly higher the national unemployment rate. India is estimated to announce 70 new millionaires every day. There are more than 100 billionaires in India, their fortune fortunes increased by almost ten times over a decade. Each year 63 million Indians pushed to poverty due to healthcare costs. India has income inequality, the bottom 50% population lower than the total population, and the top 1% now owns more than 20% of the total income (Federal Research Division, 2015). Based on the 2020 level utilizing the nominal growth rate, 93% of Indian households earn less than $10,000 per year. Higher incomes are more likely to create a whole new class of consumers, according to the founder of Genesis Luxury, an Indian luxury retail conglomerate, Sanjay Kapoor: "We are moving on toward the 'gold collar' worker. It's a term that defines the well-paid, highly paid professionals who are happy to look good, happy to feel good, and are expanding the consumption of today."

Communication:

Telephone, Internet, radio, television and satellite diversified communications systems link all parts of India. With 1.1724 billion subscribers in 2019, India is the largest in the world after China by the number of fixed and mobile telephone uses. Also, the country has the lowest call-tariffs in the world. Telecommunication has narrowed down the rural-urban and supported the socioeconomic development of India. The world's second-largest Internet user-base with 661.94 as of 31 Dec 2019, belongs to India with million broadband internet subscribers in the country. 1.23 billion people have digital biometric cards, 43% of the total population has access to smartphones, and the internet shows 51 percent growth in e-commerce. India's internet economy was US$ 250 billion in 2020, backed primarily by E-commerce. E-commerce revenue is whooping from US$ 39 billion in 2017 to US$ 120 billion in 2020; this a growing annual rate of 51 percent, which is the highest in the world (Federal Research Division, 2015).

Foreign Investment:

According to the Department for Promotion of Industry and Internal Trade (DPIIT), during April 2000 and March 2020, Foreign Direct Investment (FDI) equity inflow in India stood at $ 469.99 billion. This is an indicator that the Government is improving the ease of doing business and relaxing FDI norms. In 2019-20 FDI $ 49.97 billion equity inflow indicates that the service sector attracted the highest FDI equity inflow of $ 7.85 billion. The attraction of investment by sectors followed by computer software and hardware at US$ 7.67 billion, trading at $ 4.57 billion, and the telecommunications sector at $ 4.44 billion. India received the maximum FDI equity inflow from Singapore, Mauritius, Netherlands, USA ($ 4.22 billion) and Japan. One of India's most important FDI deals with Saudi Aramco was in 2020. Some of the recent FDI announcements are as follows:

· August 21, 2020, the offering of mall developer Phoenix Mills Ltd was announced by the Government of Singapore investment of $ 63.84 million in the qualified institutional placement (QIP).

· On August 14, 2020, machine-learning-based log analytics and monitoring solution, Cora-Logix, Israel-based provider of announced a strategic expansion into India with a commitment to invest over $ 30 million in the next five years.

Retailers:

The retail industry of India is among the fastest-growing in the world. It is expected to reach up to $1.1 trillion by 2020. According to the World Bank’s Doing Business 2020, India ranked 63 and ranked 73 in the United Nations Conference on Trade and Development's Business-to-Consumer (B2C) E-commerce Index in 2019. In the same year, the direct selling industry was recorded sales of $ 2.47 billion (Bharti & Chancel, 2019). India is a global destination for retail, with the fifth largest and preferred retail with one of the highest per capita retail store availability. The exponential growth in the sector with retail development occurs in major cities and metro towns and tier II and II cities. Some of the factors involving India's retail market's growth are changing consumer tastes and preferences, healthy economic growth, changing demographic profile, increasing disposable income, and urbanization (Bharti & Chancel, 2019).

Several retailers:

The organized and unorganized Indian retail and logistics industry, in combination, employs about 40 million Indians, which is about 3.3% of the Indian population. Typically, Indian retail shops are small. Over 14 million outlets operate in the country. Online shopping absorbing popularity among Indians. 10.7 percent by 2024 versus 4.7 percent in 2019, for example, is the online penetration of. It is estimated to exceed sales of about $ 3.19 billion in 2020, which is a significant peak of 76 percent growth compared to 2019. India's E-commerce business is estimated to reach $ 99 billion by 2024.

Apparel Market:

The rise of the growing middle class and an increasingly strong manufacturing sector in India make it a focal point. Two other components helping to exaggerate the Indian market's importance are strong economic fundamentals and growing tech-savvy. Indeed, the Business of Fashion (BoF) of India was on the top 10 trends in Fashion ascent (Amed et al., 2019). India is expanding its middle class by 1.4 percent a year, outpacing China, Mexico, and Brazil. As a result, India is set to become one of the most attractive consumer markets from a sourcing hub. According to data from McKinsey’s FashionScope, it is expected that the Indian apparel market grows up to $59.3 billion in 2022, and it becomes the sixth-largest in the world. Within the next two years, it is expected that more than 300 international fashion brands open in India. However, with only 35 percent of sales accounting for formal retail, the apparel business is still unorganized (Amed et al., 2019).

Investment Opportunities:

The momentum around conventional stores, retailers are leveraging technology through online stores to enhance the in-store experience by digital marketing display and checkout. E-commerce is moving to lead solutions based on artificial intelligence. "Personalization and curation based on personal taste will become a lot more important," says the chief executive of Myntra, a fashion e-commerce with over 70% control over the market. With a robust supply side of the industry, the growth of the textile is almost guaranteed. According to a 2017 McKinsey survey, due to lower than China's labour cost, and compare to Vietnam, 41 percent of chief procurement officers tended to increase the share of their sourcing from India. Participation in the entire fashion value chain was made easy by using cotton, wool, silk, jute, and other raw materials. Inherent challenges are considered—mosaic climate and taste in the north, east, south, and west. Indian women kept many of the traditions and sensibility. Investors heed that the choices for the woman, which are almost 70% of sales in 2017. Low-quality Indian infrastructure challenges the logistic and stock inventory. Relaxed foreign direct investment regulations allow 100% foreign-owned single-brand retail operations (Amed et al., 2019).

Sources of information

Amed, I., Balchandani, A., Beltrami, M., Berg, A., Hedrich, S., & Rölkens, F. (2019, February 3). Trends in the fashion industry India | McKinsey. Www.Mckinsey.Com. https://www.mckinsey.com/industries/retail/our-insights/how-indias-ascent-could-change-the-fashion-industry#

Bharti, N., & Chancel, L. (2019). Tackling inequality in India Is the 2019 election campaign up to the challenge? WORLD INEQUALITY LAB.

https://wid.world/document/india2019/

Federal Research Division, L. of C. (2015). Country Profiles : Country Studies - Federal Research Division, Library of Congress. Loc.Gov.

https://www.loc.gov/rr/frd/cs/profiles.html

‌ Human Development Report, 2019. Human Development Report 2015 Work for human development Briefing note for countries on the 2015 Human Development Report. http://hdr.undp.org/sites/all/themes/hdr_theme/country-notes/IND.pdf

‌ India Brand Equity Foundation. (2019a). E-commerce in India: Industry Overview, Market Size & Growth| IBEF. Ibef.Org.

https://www.ibef.org/industry/ecommerce.aspx

‌ India Brand Equity Foundation. (2019b). FDI in India: Foreign Direct Investment Opportunities, Policy | IBEF. Ibef.Org.

https://www.ibef.org/economy/foreign-direct-investment.aspx

The Observatory of Economic Complexity. (2020, February 29). India (IND) Exports, Imports, and Trade Partners. OEC.World.

https://oec.world/en/profile/country/ind

World Population by Country. (2020, February 3). Median Income By Country 2020. Worldpopulationreview.Com.

https://worldpopulationreview.com/country-rankings/median-income-by-country

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In Memoriam: Warren J. Keegan 1936–2014

—MCG

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Mark C. Green Simpson College

Warren J. Keegan Late, Pace University

GLOBAL MARKETING

TENTH EDITION

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ISBN 10: 0-13-489975-X ISBN 13: 978-0-13-489975-6

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v

Brief Contents

Preface xvi Acknowledgments xx

PART ONE INTRODUCTION 2

Chapter 1 Introduction to Global Marketing 2

PART TWO THE GLOBAL MARKETING ENVIRONMENT 40

Chapter 2 The Global Economic Environment 40 Chapter 3 The Global Trade Environment 72 Chapter 4 Social and Cultural Environments 106 Chapter 5 The Political, Legal, and Regulatory Environments 138

PART THREE APPROACHING GLOBAL MARKETS 174

Chapter 6 Global Information Systems and Market Research 174 Chapter 7 Segmentation, Targeting, and Positioning 212 Chapter 8 Importing, Exporting, and Sourcing 246 Chapter 9 Global Market-Entry Strategies: Licensing, Investment, and

Strategic Alliances 276

PART FOUR THE GLOBAL MARKETING MIX 306

Chapter 10 Brand and Product Decisions in Global Marketing 306 Chapter 11 Pricing Decisions 340 Chapter 12 Global Marketing Channels and Physical Distribution 376 Chapter 13 Global Marketing Communications Decisions I 412 Chapter 14 Global Marketing Communications Decisions II 444 Chapter 15 Global Marketing and the Digital Revolution 478

PART FIVE STRATEGY AND LEADERSHIP IN THE TWENTY-FIRST CENTURY 510

Chapter 16 Strategic Elements of Competitive Advantage 510 Chapter 17 Leadership, Organization, and Corporate Social

Responsibility 542

Glossary 573 Author/Name Index 587 Subject/Organization Index 597

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vii

Preface xvi Acknowledgments xx

PART ONE INTRODUCTION 2

Chapter 1 Introduction to Global Marketing 2 Case 1-1 The Global Marketplace Is Also Local 2

1-1 Introduction and Overview 3 1-2 Principles of Marketing: A Review 5

Competitive Advantage, Globalization, and Global Industries 6

1-3 Global Marketing: What it is and What it isn’t 9 1-4 The Importance of Global Marketing 16 1-5 Management Orientations 17

Ethnocentric Orientation 17 Polycentric Orientation 18 Regiocentric Orientation 18 Geocentric Orientation 18

1-6 Forces Affecting Global Integration and Global Marketing 21 Driving Forces 21

MULTILATERAL TRADE AGREEMENTS 21 CONVERGING MARKET NEEDS AND WANTS AND THE INFORMATION REVOLUTION 21 TRANSPORTATION AND COMMUNICATION IMPROVEMENTS 22 PRODUCT DEVELOPMENT COSTS 22 QUALITY 23 WORLD ECONOMIC TRENDS 23 LEVERAGE 24

Experience Transfers 24 Scale Economies 24

RESOURCE UTILIZATION 25 GLOBAL STRATEGY 25 INNOVATION AND ENTREPRENEURSHIP 25

Restraining Forces 26 MANAGEMENT MYOPIA AND ORGANIZATIONAL CULTURE 26 NATIONAL CONTROLS 26 OPPOSITION TO GLOBALIZATION 26

1-7 Outline of This Book 27 Summary 28 Discussion Questions 29

Case 1-1 The Global Marketplace (continued) 30 Case 1-2 McDonald’s Expands Globally While Adjusting Its Local Recipe 31 Case 1-3 Apple versus Samsung: The Battle for Smartphone

Supremacy Heats Up 35

PART TWO THE GLOBAL MARKETING ENVIRONMENT 40

Chapter 2 The Global Economic Environment 40 Case 2-1 India’s Economy at the Crossroads: Can Prime Minister Narendra Modi Deliver

Acche Din? 40 2-1 The World Economy—Overview of Major Changes 41 2-2 Economic Systems 43

Contents

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viii CONTENTS

Market Capitalism 44 Centrally Planned Socialism 44 Centrally Planned Capitalism and Market Socialism 45

2-3 Stages of Market Development 48 Low-Income Countries 49 Lower-Middle-Income Countries 50 Upper-Middle-Income Countries 51 Marketing Opportunities in LDCs and Developing Countries 54 High-Income Countries 57 Marketing Implications of the Stages of Development 58

2-4 Balance of Payments 59 2-5 Trade in Merchandise and Services 61

Overview of International Finance 62 Economic Exposure 64 Managing Exchange Rate Exposure 64

Summary 65 Discussion Questions 66

Case 2-1 India’s Economy at the Crossroads: Can Prime Minister Narendra Modi Deliver Acche Din? (continued) 67

Case 2-2 A Day in the Life of a Contracts Analyst at Cargill 69

Chapter 3 The Global Trade Environment 72 Case 3-1 Breaking Up Is Hard to Do: Britons Contemplate “Brexit” 72

3-1 The World Trade Organization and Gatt 73 3-2 Preferential Trade Agreements 74

Free Trade Area 75 Customs Union 76 Common Market 76 Economic Union 76

3-3 North America 77 3-4 Latin America: Sica, Andean Community, Mercosur, and Caricom 80

Central American Integration System 80 Andean Community 82 Common Market of the South (Mercosur) 84 Caribbean Community and Common Market (CARICOM) 85

3-5 Asia-Pacific: The Association of Southeast Asian Nations 87 Marketing Issues in the Asia-Pacific Region 88

3-6 Western, Central, and Eastern Europe 89 The European Union 89 Marketing Issues in the EU 93 Central and Eastern Europe 94

3-7 The Middle East 94 Cooperation Council for the Arab States of the Gulf 95 Marketing Issues in the Middle East 96

3-8 Africa 97 Economic Community of West African States 97 East African Community 97 Southern African Development Community 98 Marketing Issues in Africa 98

Summary 99 Discussion Questions 99

Case 3-1 Breaking Up Is Hard to Do: Britons Contemplate “Brexit” (continued) 101 Case 3-2 Can Global Trade Talks Survive in an Era of Populism and Protectionism? 103

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CONTENTS ix

Chapter 4 Social and Cultural Environments 106 Case 4-1 Strange Brew: Coffee Culture Around the World 106

4-1 Society, Culture, and Global Consumer Culture 107 Attitudes, Beliefs, and Values 108 Religion 109 Aesthetics 110 Dietary Preferences 111 Language and Communication 112 Marketing’s Impact on Culture 117

4-2 High- and Low-Context Cultures 118 4-3 Hofstede’s Cultural Typology 119 4-4 The Self-Reference Criterion and Perception 121 4-5 Diffusion Theory 124

The Adoption Process 124 Characteristics of Innovations 124 Adopter Categories 125 Diffusion of Innovations in Pacific Rim Countries 126

4-6 Marketing Implications of Social and Cultural Environments 126 Summary 128 Discussion Questions 129

Case 4-1 Coffee Culture Around the World (continued) 129 Case 4-2 Is Tourism the Savior or the Scourge of Venice? 133

Chapter 5 The Political, Legal, and Regulatory Environments 138 Case 5-1 Travis Kalanick and Uber 138

5-1 The Political Environment 139 Nation-States and Sovereignty 140 Political Risk 142 Taxes 143 Seizure of Assets 145

5-2 International Law 145 Common Law versus Civil Law 147 Islamic Law 148

5-3 Sidestepping Legal Problems: Important Business Issues 148 Jurisdiction 149 Intellectual Property: Patents, Trademarks, and Copyrights 149 Antitrust 155 Licensing and Trade Secrets 159 Bribery and Corruption: Legal and Ethical Issues 160

5-4 Conflict Resolution, Dispute Settlement, and Litigation 162 Alternatives to Litigation for Dispute Settlement 163

5-5 The Regulatory Environment 164 Regional Economic Organizations: The EU Example 165

Summary 167 Discussion Questions 167

Case 5-1 Travis Kalanick and Uber (continued) 168 Case 5-2 Putin’s Russia versus the West: Cold War 2.0? 170

PART THREE APPROACHING GLOBAL MARKETS 174

Chapter 6 Global Information Systems and Market Research 174 Case 6-1 Big Data: “Number One with a Bullet” in the Music Industry 174

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x CONTENTS

6-1 Information Technology, Management Information Systems, and Big Data for Global Marketing 176 6-2 Sources of Market Information 181 6-3 Formal Market Research 183

Step 1: Information Requirements 183 Step 2: Problem Definition 184 Step 3: Choosing the Unit of Analysis 185 Step 4: Examining Data Availability 185 Step 5: Assessing the Value of Research 187 Step 6: Research Design 187

ISSUES IN DATA COLLECTION 188 RESEARCH METHODOLOGIES 189 SCALE DEVELOPMENT 194 SAMPLING 194

Step 7: Data Analysis 194 COMPARATIVE ANALYSIS AND MARKET ESTIMATION BY ANALOGY 198

Step 8: Interpretation and Presentation 199

6-4 Headquarters’ Control of Market Research 200 6-5 The Marketing Information System as a Strategic Asset 201 Summary 202 Discussion Questions 202

Case 6-1 Big Data Transforms the Music Business and Artist Careers (continued) 203 Case 6-2 A Day in the Life of a Business Systems and Analytics Manager 207

Chapter 7 Segmentation, Targeting, and Positioning 212 Case 7-1 Segmenting the Chinese Luxury Goods Market 212

7-1 Global Market Segmentation 213 Contrasting Views of Global Segmentation 214 Demographic Segmentation 215

SEGMENTING GLOBAL MARKETS BY INCOME AND POPULATION 216 AGE SEGMENTATION 220 GENDER SEGMENTATION 221

Psychographic Segmentation 221 Behavior Segmentation 224 Benefit Segmentation 224 Ethnic Segmentation 225

7-2 Assessing Market Potential and Choosing Target Markets or Segments 226

Current Segment Size and Growth Potential 226 Potential Competition 228 Feasibility and Compatibility 229 A Framework for Selecting Target Markets 230

7-3 Product–Market Decisions 231 7-4 Targeting and Target Market Strategy Options 233

Standardized Global Marketing 233 Concentrated Global Marketing 234 Differentiated Global Marketing 235

7-5 Positioning 236 Attribute or Benefit 236 Quality and Price 236 Use or User 237 Competition 237 Global, Foreign, and Local Consumer Culture Positioning 237

Summary 240 Discussion Questions 240

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CONTENTS xi

Case 7-1 Segmenting the Chinese Luxury Goods Market (continued) 241 Case 7-2 Cosmetics Giants Segment the Global Health and Beauty Market 243

Chapter 8 Importing, Exporting, and Sourcing 246 Case 8-1 The Game’s Afoot: Exports Revive Britain’s Shoe Industry 246

8-1 Export Selling and Export Marketing: A Comparison 247 8-2 Organizational Export Activities 249 8-3 National Policies Governing Exports and Imports 250

Government Programs That Support Exports 250 Governmental Actions to Discourage Imports and Block Market Access 252

8-4 Tariff Systems 257 Customs Duties 259 Other Duties and Import Charges 259

8-5 Key Export Participants 260 8-6 Organizing for Exporting in the Manufacturer’s Country 261 8-7 Organizing for Exporting in the Market Country 262 8-8 Trade Financing and Methods of Payment 262

Letters of Credit 263 Documentary Collections (Sight or Time Drafts) 264 Navigating the Real World: A Brief Case Study 264 Navigating the Real World: Another Brief Case Study 265 Additional Export and Import Issues 265

8-9 Sourcing 266 Management Vision 267 Factor Costs and Conditions 268 Customer Needs 269 Logistics 269 Country Infrastructure 269 Political Factors 270 Foreign Exchange Rates 270

Summary 270 Discussion Questions 271

Case 8-1 Great Britain’s Shoe Export Boom (continued) 271 Case 8-2 A Day in the Life of an Export Coordinator 273

Chapter 9 Global Market-Entry Strategies: Licensing, Investment, and Strategic Alliances 276

Case 9-1 AB InBev and SABMiller: A Match Made in (Beer) Heaven? 276 9-1 Licensing 278

Special Licensing Arrangements 280

9-2 Investment 281 Joint Ventures 283 Investment via Equity Stake or Full Ownership 284

9-3 Global Strategic Partnerships 288 The Nature of Global Strategic Partnerships 288 Success Factors 291 Alliances with Asian Competitors 291 CFM International, GE, and Snecma: A Success Story 292 Boeing and Japan: A Controversy 292

9-4 International Partnerships in Developing Countries 293 9-5 Cooperative Strategies in Asia 294

Cooperative Strategies in Japan: Keiretsu 294 HOW KEIRETSU AFFECT AMERICAN BUSINESS: TWO EXAMPLES 295

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Cooperative Strategies in South Korea: Chaebol 296

9-6 Twenty-First-Century Cooperative Strategies 297 9-7 Market Expansion Strategies 298 Summary 298 Discussion Questions 299

Case 9-1 AB InBev and SABMiller: A Match Made in (Beer) Heaven? (continued) 300 Case 9-2 Jaguar’s Passage to India 302

PART FOUR THE GLOBAL MARKETING MIX 306

Chapter 10 Brand and Product Decisions in Global Marketing 306 Case 10-1 Alphabet 306

10-1 Basic Product Concepts 307 Product Types 308 Product Warranties 308 Packaging 308 Labeling 309 Aesthetics 310

10-2 Basic Branding Concepts 310 Local Products and Brands 311 International Products and Brands 312 Global Products and Brands 312 Global Brand Development 315

10-3 A Needs-Based Approach To Product Planning 319 10-4 “Country of Origin” as a Brand Element 322 10-5 Extend, Adapt, Create: Strategic Alternatives in Global Marketing 324

Strategy 1: Product-Communication Extension (Dual Extension) 325 Strategy 2: Product Extension–Communication Adaptation 326 Strategy 3: Product Adaptation–Communication Extension 327 Strategy 4: Product-Communication Adaptation (Dual Adaptation) 328 Strategy 5: Innovation 329 How to Choose a Strategy 329

10-6 New Products in Global Marketing 330 Identifying New-Product Ideas 330 New-Product Development 331 The International New-Product Department 333 Testing New Products 333

Summary 334 Discussion Questions 335

Case 10-1 Google (continued) 335

Chapter 11 Pricing Decisions 340 Case 11-1 Global Automakers Target Low-Income Consumers 340

11-1 Basic Pricing Concepts 341 11-2 Global Pricing Objectives and Strategies 342

Market Skimming and Financial Objectives 342 Penetration Pricing and Nonfinancial Objectives 344 Companion Products: Captive (“Razors and Blades”) Pricing 344 Target Costing 345 Calculating Prices: Cost-Plus Pricing and Export Price Escalation 346

11-3 Incoterms 347 11-4 Environmental Influences on Pricing Decisions 351

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Currency Fluctuations 351 Inflationary Environment 354 Government Controls, Subsidies, and Regulations 355 Competitive Behavior 356 Using Sourcing as a Strategic Pricing Tool 357

11-5 Global Pricing: Three Policy Alternatives 357 Extension or Ethnocentric Pricing 357 Adaptation or Polycentric Pricing 358 Geocentric Pricing 358

11-6 Gray Market Goods 359 11-7 Dumping 360 11-8 Price Fixing 361 11-9 Transfer Pricing 362

Tax Regulations and Transfer Prices 362 Sales of Tangible and Intangible Property 363

11-10 Countertrade 364 Barter 364 Counterpurchase 365 Offset 365 Compensation Trading 365 Switch Trading 366

Summary 366 Discussion Questions 367

Case 11-1 Global Automakers Target Low-Income Consumers (continued) 367 Case 11-2 Global Consumer-Products Companies Target Low-Income Consumers 369 Case 11-3 LVMH and Luxury Goods Marketing 371

Chapter 12 Global Marketing Channels and Physical Distribution 376 Case 12-1 Welcome to the World of Fast Fashion 376

12-1 Distribution Channels: Objectives, Terminology, and Structure 377

Consumer Products and Services 378 Industrial Products 382

12-2 Establishing Channels and Working With Channel Intermediaries 383

12-3 Global Retailing 386 Types of Retail Operations 387 Trends in Global Retailing 391 Global Retailing Market Expansion Strategies 394

12-4 Physical Distribution, Supply Chains, and Logistics Management 397

Order Processing 399 Warehousing 400 Inventory Management 400 Transportation 400 Logistics Management: A Brief Case Study 403

Summary 403 Discussion Questions 404

Case 12-1 Welcome to the World of Fast Fashion (continued) 405 Case 12-2 Can Walmart Crack the Retail Code in India? 408

Chapter 13 Global Marketing Communications Decisions I 412 Case 13-1 Volkswagen’s “Dieselgate” Nightmare 412

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13-1 Global Advertising 413 Global Advertising Content: Standardization versus Adaptation 415

13-2 Advertising Agencies: Organizations and Brands 419 Selecting an Advertising Agency in the Era of Digital Disruption 420

13-3 Creating Global Advertising 424 Art Direction and Art Directors 425 Copy and Copywriters 426 Additional Cultural Considerations 426

13-4 Global Media Decisions 429 Global Advertising Expenditures and Media Vehicles 430 Media Decisions 430

13-5 Public Relations and Publicity 431 The Growing Role of PR in Global Marketing Communications 435 How PR Practices Differ Around the World 436

Summary 437 Discussion Questions 437

Case 13-1 Volkswagen’s “Dieselgate” Nightmare (continued) 438 Case 13-2 Coca-Cola: Using Advertising and Public Relations to Respond to a Changing

World 440

Chapter 14 Global Marketing Communications Decisions II 444 Case 14-1 Milan Expo 2015 444

14-1 Sales Promotion 446 Sampling 448 Couponing 449 Sales Promotion: Issues and Problems 450

14-2 Personal Selling 451 The Strategic/Consultative Selling Model 453

14-3 Sales Force Nationality 457 14-4 Special Forms of Marketing Communications: Direct Marketing 460

Direct Mail 461 Catalogs 461 Infomercials, Teleshopping, and Interactive Television 463

14-5 Special Forms of Marketing Communications: Support Media, Sponsorship, and Product Placement 464

Support Media 464 Sponsorship 466 Product Placement: Motion Pictures, Television Shows, and Public Figures 468

Summary 470 Discussion Questions 471

Case 14-1 Milan Expo 2015 (continued) 472 Case 14-2 Red Bull 474

Chapter 15 Global Marketing and the Digital Revolution 478 Case 15-1 How Do You Like Your Reality? Virtual? Augmented? Mixed? 478

15-1 The Digital Revolution: A Brief History 479 15-2 Convergence 483 15-3 Value Networks and Disruptive Technologies 484 15-4 Global E-Commerce 487 15-5 Web Site Design and Implementation 490 15-6 New Products and Services 492

Broadband 492 Cloud Computing 494

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Smartphones 494 Mobile Advertising and Mobile Commerce 494 Autonomous Mobility 497 Mobile Music 498 Mobile Gaming 498 Online Gaming and e-Sports 499 Mobile Payments 499 Streaming Video 500 Internet Phone Service 500 Digital Books and Electronic Reading Devices 500 Wearables 501

Summary 502 Discussion Questions 503

Case 15-1 How Do You Like Your Reality: Virtual? Augmented? Mixed? (continued) 504 Case 15-2 Africa 3.0 506

PART FIVE STRATEGY AND LEADERSHIP IN THE TWENTY-FIRST CENTURY 510

Chapter 16 Strategic Elements of Competitive Advantage 510 Case 16-1 IKEA 510

16-1 Industry Analysis: Forces Influencing Competition 511 Threat of New Entrants 512 Threat of Substitute Products 513 Bargaining Power of Buyers 513 Bargaining Power of Suppliers 514 Rivalry among Competitors 514

16-2 Competitive Advantage 515 Generic Strategies for Creating Competitive Advantage 515

BROAD MARKET STRATEGIES: COST LEADERSHIP AND DIFFERENTIATION 515 NARROW TARGET STRATEGIES: COST FOCUS AND FOCUSED DIFFERENTIATION 517

Creating Competitive Advantage via Strategic Intent 519 LAYERS OF ADVANTAGE 519 LOOSE BRICKS 520 CHANGING THE RULES 520 COLLABORATING 521

16-3 Global Competition and National Competitive Advantage 521 Factor Conditions 522

HUMAN RESOURCES 522 PHYSICAL RESOURCES 522 KNOWLEDGE RESOURCES 522 CAPITAL RESOURCES 523 INFRASTRUCTURE RESOURCES 523

Demand Conditions 523 COMPOSITION OF HOME DEMAND 525 SIZE AND PATTERN OF GROWTH OF HOME DEMAND 525 RAPID HOME-MARKET GROWTH 525 MEANS BY WHICH A NATION’S PRODUCTS AND SERVICES ARE PUSHED OR PULLED INTO FOREIGN COUNTRIES 525

Related and Supporting Industries 525 Firm Strategy, Structure, and Rivalry 526 Chance 526 Government 527

16-4 Current Issues in Competitive Advantage 527 Hypercompetitive Industries 527

COST AND QUALITY 529

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TIMING AND KNOW-HOW 529 ENTRY BARRIERS 531

The Flagship Firm: The Business Network with Five Partners 532 Blue Ocean Strategy 533 Additional Research on Competitive Advantage 534

Summary 535 Discussion Questions 535

Case 16-1 IKEA (continued) 536 Case 16-2 “Everything Is Awesome, Everything Is Cool” at LEGO 538

Chapter 17 Leadership, Organization, and Corporate Social Responsibility 542

Case 17-1 A Changing of the Guard at Unilever 542 17-1 Leadership 543

Top Management Nationality 544 Leadership and Core Competence 546

17-2 Organizing For Global Marketing 547 Patterns of International Organizational Development 550

INTERNATIONAL DIVISION STRUCTURE 550 REGIONAL MANAGEMENT CENTERS 552 GEOGRAPHIC AND PRODUCT DIVISION STRUCTURES 554 THE MATRIX DESIGN 555

17-3 Lean Production: Organizing The Japanese Way 558 Assembler Value Chains 558 Downstream Value Chains 559

17-4 Ethics, Corporate Social Responsibility, and Social Responsiveness in the Globalization Era 560

Summary 566 Discussion Questions 567

Case 17-1 Unilever (continued) 567

Glossary 573 Author/Name Index 587 Subject/Organization Index 597

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xvii

We are proud that this Tenth Edition of Global Marketing marks more than two decades of pub- lication success. In this new edition, as in prior editions, we take an environmental and strategic approach to global marketing by outlining the major dimensions of the global business environ- ment. We also provide a set of conceptual and analytical tools that prepare students to success- fully apply the 4Ps when pursuing careers in global marketing or related areas.

Guided by our experience using the text in undergraduate and graduate classrooms and in corporate training seminars, we have revised, updated, and expanded Global Marketing. One of our challenges in developing a new edition of Global Marketing is the rate of change in the global business environment. Yesterday’s impossibility becomes today’s reality; new companies explode onto the scene; company leadership changes abruptly. In short, any book can be quickly outdated by events. Even so, we set out to create a compelling narrative that captures the unfold- ing drama that is in inherent in marketing in the globalization era.

When Principles of Global Marketing first appeared in 1996, we invited readers to “look ahead” to such developments as the ending of America’s trade embargo with Vietnam, Europe’s new single market, Daimler AG’s Smart car, Volkswagen’s global ambitions, and Whirlpool’s expansion into emerging markets. This newly revised edition also surveys important current developments in the international arena, including Britain’s tortuous path towards Brexit, China’s ascendance on the world stage, evolving trade relations in the Trump era, achievements by entrepreneurs such as Elon Musk, plus much more.

We are passionate about the subject of global marketing; if our readers detect a note of enthusiasm in our writing, then we have been successful. Our goal for all ten editions has been the same: to write a book that is authoritative in content yet relaxed and assured in style and tone. One instructor using the Ninth Edition wrote us to say, “I love the text, and really like the way it engages students. That is invaluable.” We believe that you will find latest edition of Global Marketing to be the most engaging, up-to-date, relevant, useful text of its kind.

We recommend pairing the Tenth Edition with Pearson’s MyLab Marketing. MyLab Mar- keting is a teaching and learning platform that empowers you to reach every student. By combin- ing content from Global Marketing with digital tools and a flexible platform, MyLab Marketing personalizes the learning experience and will help your students learn and retain key course concepts while developing skills that future employers are seeking in their candidates.

Preface

ChAPTER 1 • INTRODUCTION TO GlObAl MARkETING 35

Exhibit 1-14 Apple cofounder Steve Jobs wore many hats during his illustri- ous career, including inventor, entrepreneur, CEO, and visionary technolo- gist. He was also a master showman, a storyteller, and marketing genius. His appearances at product launches are the stuff of legend, and under his guidance Apple’s must-have products—including the iPod, the iPhone, and the iPad—were, simply put, the epitome of “cool.” Source: Paul Sakuma/AP Images.

CASE 1-3

Apple versus Samsung: The Battle for Smartphone Supremacy Heats Up

When Steve Jobs died in October 2011, the world lost one of the towering figures of the modern business era (see Exhibit 1-14). Apple, the company Jobs cofounded, was a pioneer in the consumer electronics world; its key product introductions included the Apple II (1977), the Macintosh (1984), the iPod and iTunes (2001), the Apple Store (2001), the iPhone (2007), and the iPad (2009). At the time of Jobs’s death, Apple was the most valuable tech company in the world. By September 2012, Apple stock had soared to record levels, with its price briefly rising above $700 per share. In addition, Apple had amassed more than $100 billion in cash, most of it held abroad as foreign earnings. Meanwhile, once-dominant tech industry giants such as Nokia, Sony, Dell, and BlackBerry were struggling.

Despite strong 2012 sales for the iPhone 5, industry observers began to wonder whether Apple’s hot streak of hit product introduc- tions was starting to cool. Apple’s reputation was based on its proven ability to disrupt existing markets (e.g., the music and telecommunica- tions industries) and to create new markets through the introduction of technical and design innovations. However, some viewed the 2012 launch of the iPhone 5 as an evolutionary step rather than a revolution- ary breakthrough. In fact, many consumers opted to buy the slower, cheaper iPhone 4 or 4S rather than upgrade to the iPhone 5. Without Jobs, who was considered by many to be the heart and soul of the company, were Apple’s best days behind it?

The Competitive Threat As growth in the key smartphone sector began to slow, Apple’s most formidable competitor was Samsung Electronics, a division of Korean industrial giant Samsung Group, whose products range from semicon- ductors to household appliances to smartphones. Samsung’s popular Galaxy series of phones are powered by Android, an operating system developed by Google. Some Galaxy models, including the Galaxy Note (also known as a “phablet”), have larger screens than the iPhone—a point of difference that has helped drive sales of those devices. The

rivalry between Apple and Samsung has been heated, with the two sides squaring off in court over alleged patent infringement.

China and Europe are two of Samsung’s key markets; in 2012, the company launched the Galaxy S III in Europe. In 2013, however, Samsung staged a lavish event at Radio City Music Hall in New York to launch the Galaxy S4. Why the change? As J. K. Shin, the executive in charge of Samsung’s mobile business, noted, “We’re a global player in the smartphone market and a global company, and the U.S. is an impor- tant market for us. . . . I’m not satisfied with our U.S. market share.”

In many developing countries, there is strong demand for inexpen- sive mobile phones. Some Android-based models from Samsung and other companies sell for much less than Apple’s cheapest models. For many years, Apple did not offer a lower-cost version of the iPhone. In the United States, wireless carriers such as Verizon and AT&T subsidized the price of the iPhone for consumers who signed multiyear service contracts—a factor that explained why an American iPhone 5 sold for $199. By contrast, in other countries consumers paid the full, unsubsi- dized price of the iPhone but were not tied to a contract. Moreover, the iPhone 5 was the same in every world market. By contrast, Samsung made several versions of the Galaxy S4—using different processors, for example—to suit the needs of different regions.

Not surprisingly, smartphone makers are setting their sights on China, India, and other emerging markets. For example, Greater China, which includes China, Hong Kong, and Taiwan, is now Apple’s second- largest market. In 2013, Cook announced that China Mobile, the larg- est carrier in the region and the world’s largest carrier overall, would begin selling the iPhone. Apple faces strong competition from local competitors such as Oppo and Xiaomi; Oppo’s R9 bested the iPhone 6 as the top-selling smartphone in 2016. Distribution is critical, and Cook is aggressively expanding the number of outlets in China that sell iPhones.

As growth in China and Europe slows, India, the number 2 smart- phone market, is becoming increasingly important. Here, however, Apple’s 3 percent market share means that it lags far behind Samsung and Chinese producers in terms of smartphone shipments. Two-thirds of the phones sold in India cost less than $180. By contrast, Indian con- sumers pay about $300 for an iPhone 5S, the older model that Apple launched in 2013. These devices are sold through small, independent retailers; for entry-level buyers, Apple’s Web site offers only the iPhone SE and iPhone 6. In May 2017, Apple began manufacturing the SE in India, bringing the price down to approximately $325. Local manufac- turing will also allow Apple to open its own flagship stores in India.

Famously, Steve Jobs downplayed the importance of formal mar- ket research, saying that consumers don’t know what they want. By contrast, Samsung Electronics relies heavily on market research; it has 60,000 staff members working in dozens of research centers in China, Great Britain, India, Japan, the United States, and elsewhere. Samsung designers have backgrounds in such diverse disciplines as psychology, sociology, and engineering. Researchers track trends in fashion and interior design. Also, Samsung spends more on advertising and promo- tion than does Apple.

The Post-Jobs Era Begins In the months following Jobs’s death, Cook made a number of key stra- tegic decisions. For example, he authorized the introduction of the iPad mini, a product that Jobs had opposed. It quickly became a bestseller.

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New to This Edition As with previous editions, the Tenth Edition offers up-to-date, original insights into the complexities and subtleties of shifts in the external environment and their implications for global marketers. Specific updates and revisions include:

● More than fifty percent of the chapter-opening vignettes and related end- of-chapter cases are new to the Tenth Edition. Cases retained from the prior edition have also been revised and updated for this new edition.

● Revised and updated end-of-chapter cases include Case 1-2, “McDonald’s Expands Globally While Adjusting Its Local Recipe”; Case 1-3, “Apple versus Samsung: The Battle for Smartphone Supremacy Heats Up”; Case 4-2, “Will Tourism Ruin Venice?”; Case 10-1, “Google”; Case 11-1, “Global Automakers Target Low-Income Consumers”; Case 16-1, “IKEA.”

● New cases in the Tenth Edition include Case 2-1, “India’s Economy at the Crossroads: Can Prime Minister Narendra Modi Deliver Acche Din?”; Case 3-1, “Breaking Up Is Hard to Do: Britons Contemplate ‘Brexit’”; Case 4-1, “Strange Brew: Coffee Culture Around the World”; Case 5-1, “Travis Kalanick and Uber"; Case 12-1, “Welcome to the World of Fast Fashion”; Case 15-1, “How Do You Like Your Reality? Virtual? Augmented? Mixed?”

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xviii PREFACE

● New discussion of social media is integrated throughout the Tenth Edition. Chapter 15, “Global Marketing and the Digital Revolution,” has been thoroughly revised and updated to include discussion of location-based mobile platforms, cloud computing, tablets, wearable devices, autonomous mobility, and other cutting-edge topics.

● In MyLab Marketing, in this edition, new Mini Sims put students in professional roles and give them the opportunity to apply course concepts and develop decision-making skills through real-world business challenges.20 PART 1 • INTRODUCTION

Kevin Systrom and Mike Krieger are entrepreneurs. They developed an innovative product, created a brand, and cofounded a company to market it. By applying the basic tools and principles of modern market- ing, the two Stanford University graduates have achieved remarkable success.

As is true with many entrepreneurs, Systrom’s idea was based on his recognition of a problem that needed to be solved and his own needs and wants. Systrom had a passion for photography, and also appreciated the potential of social media. He hit upon an idea for a location-based photo-sharing app that he dubbed Burbn (after his favorite distilled spirit). He then recruited Krieger, who was working on his own app called Meebo. Krieger liked Systrom’s idea, but the two agreed that Burbn was overloaded with functionality. Realizing that “There has to be a better way,” the duo stripped out everything but the photo-sharing function, which they conceptualized as an “instant telegram” (see Exhibit 1-9).

In October 2010, Systrom and Krieger launched Instagram on Apple’s App Store. Within two years, the photo-filtering and photo- sharing app had 30 million users. Soon thereafter, the platform was also launched on the Android and Windows Phone platforms.

Systrom’s insight was that, even in prehistoric times, people com- municated visually. Today, Instagram makes visual information acces- sible, just as Gutenberg’s printing press made the printed word more accessible. Instagram’s popularity is due in part to the dozens of filters that users can apply to their photos (the idea for filters came from Systrom’s girlfriend Nicole).

In 2012, Facebook acquired Instagram for $1 billion. Today, Ins- tagram has more than 600 million users who upload approximately 100 million photographs and videos each day; only 20 percent of users are in the United States. In 2016, Instagram generated more than $1.5 billion in revenues from mobile ads.

Social-media savvy companies in the luxury goods industry have been quick to embrace Instagram. To justify their products’ high prices,

managers of luxury brands need to help consumers understand the craftsmanship and heritage that are integral to the brand stories. Using photo images and videos, companies can take consumers “behind the scenes” and show the process by which luxury products are made by skilled artisans.

Nearly two-thirds of Instagram users use the app to learn about products and brands. Companies can leverage parent Facebook’s pow- erful data and online advertising tools to reach different segments— say, current versus potential luxury consumers—by inserting targeted, photography-based ads in their respective Instagram feeds. One such segment is known as “Henrys,” referring to younger Millennials who are described as “high earning, not rich yet.”

Food is another category that is driving Instagram’s popularity; to date, users have “IG-ed” (i.e., Instagrammed) more than 200 mil- lion posts with the hashtag #food. In response to this trend, social- media–conscious hospitality managers in London, New York, and other food-centric cities are taking steps to ensure that a restaurant’s inte- rior design, menus, and dishes lend themselves to Instagram posts. These range from Michelin-approved restaurants with posh addresses to Mexican-themed chains that feature burritos wrapped in branded foil. The most popular color? “Millennial Pink.” Recent trending food items include “freakshakes” and “unicorn lattes.”

Two new Instagram features, Stories and Live, launched in August 2016; they allow users to upload short video clips, live feeds, and photos that disappear within 24 hours. The features proved to be so addictive that parent company Facebook added similar functionality to WhatsApp, Messenger, and Facebook. Some critics have observed that, with Stories, Instagram was simply copying Snapchat. Systrom disagrees. To him, execution trumps originality. Stories “clearly pro- vides unique value to people that they’re not getting elsewhere,” he says.

The music industry’s embrace of Instagram and Stories illus- trates Systrom’s point. Musicians and bands of all types—from global superstars like Adele and Beyoncé to indie artists seeking to break through—are using the platform to connect with fans in an organic way. According to Nielsen, Instagram users spend more time listening to music and are likely to pay for streaming music services than nonus- ers. Artists use Stories and Live to announce new releases and tours, and to provide behind-the-scenes looks at the creative process. Popular posts can quickly go viral, allowing record companies and the artists themselves to see the impact on music sales.

Sources: John Paul Titlow, “How Instagram Became the Music Industry’s Secret Weapon,” Fast Company (September 29, 2017); Deepa Seetharaman, “A Copy- cat? No, Call It Competition,” The Wall Street Journal (May 31, 2017), p. B5; Deepa Seetharaman, “‘Efficiency Guru’ Sharpens Instagram,” The Wall Street Journal (April 14, 2017), p. B4; Deepa Seetharaman Natalie Whittle, “A Square Meal: How Restau- rants Are Courting the Instagram Crowd,” FT Magazine (April 7, 2017); Alexandra Wolfe, “Weekend Confidential: Kevin Systrom,” The Wall Street Journal (July 2–3, 2016), p. C11; Hannah Kuchler, “Snap Happy: Instagram Rolls out Carpet for Fashion Brands,” Financial Times—FT Special Report: The Business of Luxury (May 23, 2016), p. 2; Murad Ahmed, “The Camera-Shy Half of Instagram’s Founding Duo,” Financial Times (November 24, 2015), p. 10.

ENTREPRENEURIAL LEADERSHIP, CREATIVE THINKING, AND THE GLOBAL STARTUP

Kevin Systrom and Mike Krieger, Instagram

Exhibit 1-9 Stanford University graduates Kevin Systrom and Mike Krieger are Instagram's co-founders.

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90 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

Exhibit 3-8 GNH (gross national happiness), rather than GNP (gross national product), guides policy in Bhutan. Some critics argue that promoting happiness in the Himalayan state has resulted in some negative consequences. For example, the emphasis on the Buddhist culture shared by the majority of the population has caused resentment among the Nepalese minority living in the south.

When Britain’s Prince William visited Bhutan in 2016 with his wife Catherine, the Duchess of Cambridge, the world got a rare glimpse into a country that has been called the “forbidden kingdom.” Why “for- bidden?” For one thing, the country’s leaders limit tourism; only about 57,000 foreign visitors traveled to Bhutan in 2015. One hopes that the royal couple were able to glean some insights into their host country’s secret regarding happiness.

Bhutan is a kingdom of 754,000 people in the Himalaya Mountains (see Exhibit 3-8). Per capita GNI is approximately $2,330; using this fig- ure as a metric, Bhutan is included in the ranks of lower-middle-income nations. However, for the past several decades, Bhutan has relied on another measure besides economic growth to assess its success—namely, gross national happiness (GNH).

It has been argued that indicators such as GDP and GNI per capita are inadequate when explaining a nation’s well-being. For example, China’s GDP has doubled twice since 1990, yet ordinary Chinese citi- zens do not appear any happier today than they were when the coun- try’s leaders began transitioning to a free market economy. If increased income and consumption don’t correlate with happiness, then what does? According to some economists and policymakers, supplemental indicators that measure factors such as social progress, quality of life, and sustainability are needed.

The GNH Index includes both objective and subjective indicators: psychological well-being, time use, community vitality, culture, health, education, environmental diversity, living standards, and governance. As Lyonpo Jigmi Thinley, home minister of Bhutan, explained, “We have to think of human well-being in broader terms. Material well-being is only one component. That doesn’t ensure that you’re at peace with your envi- ronment and in harmony with each other.”

Not surprisingly, there is some disagreement among social scientists regarding the best way to define, track, and measure such intangibles as happiness and quality of life. In Britain, for example, officials have devel- oped a summary of “sustainable development indicators” that include measures of traffic, pollution, and crime. In another approach, survey

participants report the feelings they experience as they go about their daily routines, with these activities ranging from paying bills to participat- ing in sports activities. In France, former President Nicolas Sarkozy estab- lished the Commission on the Measurement of Economic Performance and Social Progress to address issues related to national well-being.

Meanwhile, officials in Bhutan have launched a number of initia- tives to promote happiness in the kingdom. For example, teachers are rotated between rural and urban areas to ensure all schoolchildren have access to a top-quality education. As Thakur S. Powdyel, an official at Bhutan’s Ministry of Education, puts it, “The goal of life should not be limited to production, consumption, more production, and more consumption. There is no necessary relationship between the level of possession and the level of well-being.”

With the global economic crisis as a backdrop, a first-ever Happi- ness Congress was held in Madrid in the fall of 2010. The Congress was sponsored by the Coca-Cola Company, which uses the tagline “Open Happiness” in its global advertising. The global beverage giant also established the Coca-Cola Institute of Happiness in Spain after research indicated that Spanish consumers associate Coke, more than any other brand, with happiness.

Minister Thinley from Bhutan was the keynote speaker at the Con- gress; his address was titled “Happiness in Difficult Times.” As Thin- ley told attendees, “Our economic models are greatly, deeply flawed. They are not sustainable.” The 7th International Congress was held in November 2017 in Thimphu, Bhutan.

Sources: Kai Schultz, “In Bhutan, Happiness Index as Gauge for Social Ills,” The New York Times (January 28, 2017), p. A6; “Forbidden Kingdom,” CBS Sunday Morning (April 17, 2016); Jody Rosen, “Higher State of Being,” New York Times Style Magazine: Travel (November 2, 2014), pp. 144–151; Richard Easterlin, “When Growth Outpaces Happiness,” The New York Times (September 28, 2012), p. A31; Tim Harford, “Happi- ness: A Measure of Cheer,” Financial Times (December 27, 2010), p. 5; Victor Mallet, “Bhutan and Coke Join Hands for Happiness,” Financial Times (October 22, 2010), Andrew C. Revkin, “A New Measure of Well-Being from a Happy Little Kingdom,” The New York Times (October 4, 2005), p. F1.

THE CULTURAL CONTEXT

Bhutan and GNH (Gross National Happiness)

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As the data in Figure 3-5 clearly show, Brazil is an economic powerhouse in South America. Brazil has the largest geographical territory and the larg- est population in the region. It has emerged on the world stage as a strong exporter, and its rapid economic growth has given Brazilian policymakers a greater presence on the global stage and more clout at global trade talks.

One symbol of Brazil’s new role in the global economy is Embraer, a jet aircraft manufacturer (see Exhibit 3-6). Specializing in regional jets that seat between 37 and 124 passengers, Embraer has won orders from a variety of carriers. A cornerstone of Embraer’s strategy is its management’s policy of sourcing the best components available anywhere in the world. This approach, known as reverse outsourcing, has proved its worth in the development of new models such as the E-170/175. In that program, more than one dozen partners, including GE and Honeywell, shared the development risks in exchange for a percentage of revenue from aircraft sales. To sell more regional jets to China, Embraer has also established a $50 million joint venture with China Aviation Industry Corporation.

In the United States alone, more than 850 Embraer jets are cur- rently in service. The reason is simple: It is a huge market. As Paulo Cesar Silva, Embraer’s top executive for Commercial Aviation, notes, “For us, North America is—and will continue to be—the most impor- tant market in terms of the potential to sell new products here. Aviation in North America is about 40 percent of aviation in the world.” Embraer is also aggressively pursuing the defense sector with its light attack aircraft, the Super Tucano. The U.S. military has expressed interest, and orders have come in from Colombia, Indonesia, and other nations.

Brazil’s agricultural sector is also a leading exporter. Brazil is the world’s number 1 exporter of beef, coffee, orange juice (check the label on your orange juice carton), and sugar. Annual coffee bean production totals 40 million 60-kilo bags—one-third of the world total. JBS is the world’s largest meat processor. Brazil is also rapidly gaining a reputation as a producer of sugar-based ethanol fuel. Says Ermor Zambello, man- ager of the Grupo Farias sugar mill, “Globalization has made us think more about foreign markets. Now, we have more of a global outlook, and we are concerned about global production.”

The central issue in the stalled Doha Round of WTO negotiations was agriculture. Brazil and India are taking the lead of the Group of Twenty developing nations calling for agricultural sector reform. For example, the

average tariff on Brazil’s exports to the 34 Organisation for the Economic Co-operation and Development (OECD) nations is 27 percent.

Government subsidies are also a key issue. In the EU, government spending accounts for approximately one-third of gross farm receipts; in the United States, the government provides about one-fourth of gross farm receipts. By contrast, Brazil farm support spending amounts to only 3 percent of farm receipts.

Moving forward, Brazil faces a number of other challenges. Reper- cussions are still being felt from Lava Jato (“Car Wash”), a massive corruption scandal that ensnared politicians and top officials at Brazil’s national oil company. Former president Luiz Inácio Lula da Silva was convicted on corruption charges and sentenced to prison. In the wake of the scandal, Brazil’s current president, Michel Temer, is privatizing a wide range of state-owned businesses.

Despite improvements made prior to the country’s hosting of the 2016 Summer Olympics, Brazil’s infrastructure remains woefully under- developed. Significant investment is required to improve highways, rail- roads, and ports. Businesspeople speak of “the Brazil cost,” a phrase that refers to delays related to excessive red tape.

Trade with China is presenting both opportunities and threats. In 2009, China surpassed the United States to become Brazil’s top trading partner and is investing tens of billions of dollars in the country. China’s explosive economic growth has created great demand for soybeans, iron ore, and other Brazilian commodity exports. However, Brazilian manufac- turers in light-industry sectors such as toys, eyeglasses, and footwear are facing increased competition from low-priced Chinese imports.

Sources: Joe Leahy, Andres Schipani, and Lucy Hornby, “‘Suddenly Everything Is for Sale,’” Financial Times (November 14, 2017), p. 9; Ben Mutzabaugh, “Brazil’s Embraer Jets Are Sized Just Right,” USA Today (July 6, 2012), pp. 1B, 2B; Joe Leahy, “In Search of More High-Flyers,” Financial Times (April 17, 2012), p. 10; Joe Leahy, “The Brazilian Economy: A High-Flyer Now Flags,” Financial Times (January 11, 2012), p. 7; Antonia Regalado, “Soccer, Samba, and Outsourcing?”, The Wall Street Journal (January 25, 2007), pp. B1, B8; David J. Lynch, “Brazil Hopes to Build on Its Ethanol Success,” USA Today (March 29, 2006), pp. 1B, 2B; David J. Lynch, “China’s Growing Pull Puts Brazil in a Bind,” USA Today (March 21, 2006), pp. 1B, 2B; David J. Lynch, “Comeback Kid Embraer Has Hot New Jet, and Fiery CEO to Match,” USA Today (March 7, 2006), pp. 1B, 2B; David J. Lynch, “Brazil’s Agricultural Exports Cast Long Shadow,” USA Today (March 10, 2006), pp. 1B, 2B.

EMERGING MARKETS BRIEFING BOOK

Brazil

Exhibit 3-6 Embraer is the world’s fourth-largest aircraft manufacturer, but is second only to Canada’s Bom- bardier in the regional aircraft sector. Source: Alexandre Meneghini/AP Images.

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● In addition, most chapters contain sidebar features on the following themes: Emerging Markets Briefing Book; Entrepreneurial Leadership, Creative Thinking, and the Global Startup; and The Cultural Context.

● Among the entrepreneurs profiled in these sidebars are Kevin Systrom (Instagram); Reed Hastings (Netflix); Daniel Ek (Spotify); Oscar Farinetti (Eataly); Elon Musk (Tesla); Jack Ma (Alibaba), Sir James Dyson (Dyson), and Brian Chesky and Joe Gebbia (Airbnb).

● The Entrepreneurial Leadership, Creative Thinking, and the Global Startup sidebars also contain expanded coverage of digital entrepreneurship, includ- ing financial technology (“fintech”), in this Tenth Edition.

● All tables containing key company, country, and industry data have been updated. Examples include Table 2-3, “Index of Economic Freedom”; all the income and population tables in Chapters 3 and 7; Table 10-2, “The World’s Most Valuable Brands”; Table 13-1, “Top 25 Global Marketers”; and Table 13-2, “Top 20 Global Advertising Agency Companies.”

● The discussion of the BRICS nations has been updated to incorporate the impact of slowing growth in China and the volatility of commodity prices.

● Income and population data in Chapter 3 have been reorganized for improved clarity, comparability, and visual impact.

● More infographics have been incorporated into the text to enhance clarity and visual appeal.

Solving Teaching and Learning Challenges Today’s Millennial and Generation Z students are networked and technology-savvy. They have access to more content across more platforms than previous generations. Many are also taking on substantial debt loads as they pursue their college degrees. For these and other reasons, it is important to give them a textbook that is “worth the money,” and that provides an experience that is rewarding and motivates them to “keep reading.”

We have been gratified to receive positive feedback from students who have benefited from college courses in which Global Marketing was the required text. The following student comments suggest that Global Marketing does exactly that:

“The textbook is very clear and easy to understand.” “An excellent textbook with many real-life examples.” “The authors use simple language and clearly state the important points.” “This is the best textbook that I am using this term.” “The authors have done an excellent job of writing a text that can be read easily.”

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PREFACE xix

The Tenth Edition helps students develop cross-cultural awareness and engage with issues relating to sustainability and corporate social responsibility. The new edition also profiles some of the most innovative thinkers and entrepreneurial leaders of the modern era.

Each chapter opens with a brief case study introducing a company, a country, a product, or a global marketing issue that directly relates to chapter themes and content. The cases were written with the same objectives in mind: to raise issues that will encourage student interest and learning; to stimulate class discussion; to give students a chance to apply theory and concepts while developing critical-thinking skills; and to enhance the classroom experience for students and instructors alike. Every chapter and case has been classroom-tested in both undergraduate and graduate courses.

Throughout the text, we have added scores of current examples of global marketing practice as well as quotations from global marketing practitioners and industry experts. Organizational Web sites are referenced for further student study and exploration.

We have benefited tremendously from adopter feedback and input; we also continue to draw on our direct experience in key world regions. The result is a text that addresses your needs and the needs of instructors in every part of the world.

Developing Employability Skills Employers at global companies want to know that the people they hire understand and can think critically about contemporary issues such as the dynamics of globalization and growth opportunities in emerging markets. One MBA student wrote to say that reading Global Marketing for coursework in 2017 provided her with a competitive advantage when pursuing a new career opportunity. She said, “I used many of the text’s theories during my interview process, and I incorporate the lessons learned on a daily basis as I work with our offices in 12+ locations around the world!”

The Tenth Edition addresses current global trends and issues, including the economic dis- ruption and social disruption that are among the forces at work in the world today. The resulting shifts in global market opportunities and threats are important themes in this revision, as are the rise of economic nationalism and populism. Terms such as austerity, capital flight, currency wars, double-dip recession, global imbalances, global rebalancing, quantitative easing (QE), secular stagnation, sovereign-debt crisis, and negative interest rates appear regularly in the busi- ness news. New terms such as tax inversion are now part of the conversation as well.

Recent research findings have been integrated into each chapter of Global Marketing to help students be conversant in the most current conversations that are happening in this field. For example, our thinking about the benefits of globalization has been influenced by Richard Baldwin’s 2016 book, The Great Convergence: Information Technology and the New Globalization. As Baldwin notes, the process of removing constraints on the costs of moving goods, people, and ideas began in the late 19th century. The first wave of globalization was driven by the falling costs of water transport (e.g., ocean-going freighters) and land transport (e.g., the railroads). In keeping with the theory of competitive advantage, this meant that coun- tries with manufacturing prowess benefited by trading with countries whose primary outputs were agricultural production. The current wave of globalization has resulted in part from the digital revolution that allows supply chains to stretch around the world.

Instructor Teaching Resources The following supplements are available with this text:

Supplements available to instructors at www.pearsonhighered.com

Features of the Supplement

Instructor’s Manual authored by Kerry Walsh from University of South Florida

• Chapter-by-chapter summaries

• Examples and activities not in the main book

• Teaching outlines

• Teaching tips

• Solutions to all questions and problems in the book

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xx PREFACE

Supplements available to instructors at www.pearsonhighered.com

Features of the Supplement

Test Bank authored by Mahmood Khan from Pamplin College of Business, Virginia Tech

4,000 multiple-choice, true/false, short- answer, and graphing questions with these annotations:

• Difficulty level (1 for straight recall, 2 for some analysis, 3 for complex analysis)

• Type (Multiple-choice, true/false, short-answer, essay

• Topic (The term or concept the question supports)

• Learning outcome

• AACSB learning standard (Written and Oral Communication; Ethical Understanding and Reasoning; Analytical Thinking; Information Technology; Interpersonal Relations and Teamwork; Diverse and Multicultural Work; Reflective Thinking; Application of Knowledge)

Page number in the text

Computerized TestGen TestGen allows instructors to: • Customize, save, and generate classroom tests

• Edit, add, or delete questions from the Test Item Files

• Analyze test results

• Organize a database of tests and student results.

PowerPoints authored by Jill Solomon from University of South Florida

Slides include all the graphs, tables, and equations in the textbook. PowerPoints meet accessibility standards for students with disabilities. Features include, but not limited to:

• Keyboard and Screen Reader access

• Alternative text for images

• High color contrast between background and foreground colors

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xxi

I am indebted to the many colleagues, friends, and adopters who carefully read and critiqued individual manuscript sections and chapters. Their comments improved the clarity and read- ability of the text. In particular, I would like to thank Steven J. Archambault, James A. Baggett, Hunter Clark, Frank Colella, Dave Collins, Diana Dickinson, Mark Freyberg, Lora Friedrich, Alexandre Gilfanov, Carl Halgren, Kathy Hill, Mark Juffernbruch, David Kochel, Peter Kvetko, Keith Miller, Gayle Moberg, Christopher “Kit” Nagel, Alexandre Plokhov, Chatt Pongpatipat, Yao Lu Swanson, David Wolf, and Thomas Wright.

Many individuals were instrumental in helping us secure permissions, and I want to acknowledge everyone who “went the extra mile” in supporting this revision. I would especially like to thank Nicholas Arnold, Meredith Corporation; Jane Bachmann, DuPont; John Baloff, ATI Amplifier Technologies; Jeremy Banks, banxcartoons; William Bassett, Kikkoman; Julien Benatar, Pandora; Chris Boyens, Deere & Company; Paul Button, Jill Camp, Kohler; Lee Carter, Mower; Buzz Delano, Delano Associates; Kirk Edmondson, Lexus Advanced Business Development; Jemma Gould, IPG; Mandy Guss, Las Cruces; Jennifer Hall, Champagne Bureau, USA; Emma Hamm, Subaru; Sean Higgins, Frrester Research; David Johnson, Meredith Corporation; Allison Joyce, Allison Joyce Photojournalism; Tom Kingsbury, Bridgestone Americas, Inc.; Denise Lavoie, Henkel; Ilana McCabe, QVC Inc.; Edward Linsmier, Edward Linsmier Photography; Mike Lovell, Meredith Corporation; Katherine Miller, Nucor; Brad Miller, New Balance Athletic Shoe, Inc.; Morgan Molinoff, Edelman; Kerry Ann Nolan, Subaru; Meghan Reutzel, GoDaddy; Lenore Rice, Seibert & Rice; Michael Ross, Michael Ross Photography; Vivian Santangelo, Meredith Corporation; Mara Seibert, Seibert & Rice; Greg Selfe, Two Sides UK; Lindsy Shrewsberry, STIHL USA; Brady Spangenberg, BASF; Katie Szadziewska, McArthurGlen; and Vibhav Valdore, Bridgestone Latin America.

Colleagues and adopters at several institutions contributed material to this revision and made helpful suggestions. Thanks to Professor Steven Archambault, Cal-Poly Pomona Univer- sity, and Professor Christopher “Kit” Nagel of Concordia University–Irvine, for suggestions that we incorporated in Chapter 2 and Chapter 8. Dominic Standish, a colleague at CIMBA Italy, organized the panel discussion “Death in Venice: Is Tourism Killing or Saving the City?” in fall 2011. That panel, our subsequent discussions during my visits to London and Venice, and Domi- nic’s book Venice in Environmental Peril? Myth and Reality all were key resources for the open- ing case in Chapter 4. Lora Friedrich, Professor of Sociology at Simpson College, and Chatt Pongpatipat, Assistant Professor of Marketing at Saginaw Valley State University, contributed the Chapter 7 sidebar about Thailand. Paul Button created a wonderful new set of infographic maps for Chapter 3. Thanks also to my daughter, Lauren Konrad, for additional last-minute help with infographic design.

I would also like to thank the many present and former students at Simpson College and the University of Iowa who have offered feedback on previous editions of Global Marketing, contrib- uted case studies, and suggested improvements. These include Han Wang’s contributions to the Chapter 7 opening case on segmenting the Chinese luxury market. Glynis Gallagher, a University of Iowa graduate, contributed a wonderful Chapter 2 case about her experience as a contracts analyst at Cargill. Brady Spangenberg wrote in detail about his vocational journey to BASF in a new case in Chapter 6. Simpson alumna Beth Dorrell graciously offered her expertise on export documentation. Mikkel Jakobsen wrote about his first job in global marketing for Case 8-2.

The students in my international marketing course at CIMBA Italy worked collaboratively on the issue of tourism in Venice; Case 4-2 represents, in part, a mashup of the various team efforts. Hats off to Kaleb Beckett, Luci Boat, Leslie Bourland, Lauren Camerieri, Lucas Commodore, Jeff Dellinger, Chris Duncan, Jacque Ford, Brian Fry, Glynis Gallagher, Katie Greif, Kim Halamicek, Harper Hier, Jake Hirsch, Mike Johnson, Sarah Jones, Josh Kroll, Sean Miller, Chris Nucero, Mark Parmalee, Jack Roeder, Chris Shonkwiler, Slava Sinitsyn, and Chloe Suh. All were enthusiastic participants in the project and our work together in Italy made a lasting impression on me.

It was a great pleasure working with the Pearson team that managed the production of this edition. Thanks to: Stephanie Wall, Editor-in-Chief; Lynn M. Huddon, Executive Portfolio Man- ager; and Michelle Zeng, Content Producer, for their continued support. The production moved

Acknowledgments

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xxii ACKNOWLEDGMENTS

along smoothly, thanks to our friends at SPi Global. These include Anna Iremedio and Michelle Alojera, Content Production Managers; Maya Lane, Rights and Permissions Project Manager; Gowri Duraiswamy, Senior Project Manager. Kudos also to our photo researcher, Jason Acibes, for demonstrating once again that “every picture tells a story.” Thanks also to the marketing team for the fantastic work on marketing support materials, and to the entire Pearson sales team for helping promote the book in the field. I also want to acknowledge the contributions of Mah- mood Khan for in-depth updates to the TestBank, Kerry Walsh for her fine work on the Instruc- tor’s Manual, and Jill Solomon for preparing a new set of PowerPoint slides.

Mark C. Green September 2018

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2

Consider the following proposition: We live in a global marketplace. Apple iPhones, Burberry trench coats, Caterpillar earthmoving equipment, Facebook, LEGO toys, McDonald’s restau- rants, Samsung HDTVs, and Swatch watches are found practically everywhere on the planet. Global companies are fierce rivals in key markets. For example, American auto industry giants General Motors and Ford are locked in a competitive struggle with Toyota, Hyundai, and other global Asian rivals as well as European companies such as Volkswagen. U.S.-based Intel, the world’s largest chip maker, competes with South Korea’s Samsung. In the global smartphone market, Apple (United States), Motorola (China), and Samsung are dominant players. The globalization of the appliance industry means that Bosch, Electrolux, Haier Group, LG, and Whirlpool all compete for precious retail floor space and consumer awareness and preference.

Now consider a second proposition: We live in a world in which markets are local. In China, for example, Yum! Brands’ East Dawning fast-food chain competes with local restaurants such as New Asia Snack and Haidi Lao. Likewise, the best-selling smartphone in China isn’t marketed by Samsung or Apple. In fact, the top four smartphone brands in China—Huawei, Vivo, Oppo, and Xiaomi—are all from domestic producers.

In Taiwan, 85C has overtaken Starbucks as the largest chain of coffee shops. In India, Dunkin’ Donuts goes head-to-head with local chain Mad Over Doughnuts. In Poland, many consumers frequent small, family-owned shops rather than huge stores operated by France’s Carrefour and U.K.–based Tesco.1 In Southeast Asia, Uber jockeys for position with ride-hailing service Grab. Similarly, Brazilian com- panies such as Natura Cosméticos and O Boticário compete with Avon for direct-sale customers. Across Latin America, e-commerce giants eBay and Amazon compete with local market leader MercadoLibre.

Introduction to Global Marketing

CASE 1-1

The Global Marketplace Is Also Local

L E A R N I N G O B J E C T I V E S

1-1 Use the product/market growth matrix to explain the various ways a company can expand globally.

1-2 Describe how companies in global industries pursue competitive advantage.

1-3 Compare and contrast a single- country marketing strategy with a global marketing strategy (GMS).

1-4 Identify the companies at the top of the Global 500 rankings.

1-5 Explain the stages a company goes through as its management orien- tation evolves from domestic and ethnocentric to global and geocentric.

1-6 Discuss the driving and restraining forces affecting global integration today.

1

PA RT O N E

INTRODUCTION

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3

brand? When is a Japanese car not a Japanese car? Even U.S. President Donald Trump appeared to be unaware of the global nature of the automobile business when, in 2017, he threatened to slap tariffs on German cars sold in the United States. Consider:

• In 2016, BMW produced 411,000 vehicles at its plant in South Carolina. More than two-thirds of the plant’s production is exported, making BMW America’s top auto exporter.

• A Mercedes-Benz plant in Alabama produces 300,000 cars annually. • For several years, the top-selling “American” car (assembled in the

United States with at least 75 percent domestic content) was the Toyota Camry.

At the end of this chapter, you will find the rest of Case 1-1. Taken together, the two parts give you the opportunity to learn more about the global marketplace and test your knowledge of current issues in global marketing. You may be surprised at what you learn!

The “global marketplace versus local markets” paradox lies at the heart of this textbook. In later chapters, we will investigate the nature of local markets in more detail. For now, however, we will focus on the first part of the paradox. Think for a moment about brands and products that are found throughout the world. Ask the average consumer where this global “horn of plenty” comes from, and you’ll likely hear a variety of answers. It’s certainly true that some brands—McDonald’s, Dos Equis, Swatch, Waterford, Ferragamo, Volkswagen, and Burberry, for instance—are strongly identified with a specific country. In much of the world, Coca-Cola and McDonald’s are recognized as iconic American brands, just as Ferragamo and Versace are synonymous with classic Italian style (see Exhibit 1-1).

However, for many other products, brands, and companies, the sense of identity with a specific country is becoming blurred. Which brands are Japanese? American? Korean? German? Indian? Can you name the corporate owner of the Nokia smartphone

1-1 Introduction and Overview As the preceding examples illustrate, the global marketplace finds expression in many ways. Some are quite subtle; others are not. While shopping, you may have noticed more multilan- guage labeling on your favorite products and brands. Chances are you were one of the millions of people around the world who tuned in to television coverage of the World Cup Soccer cham- pionship in 2018. On the highway, you may have seen a semitrailer truck from FedEx’s Global Supply Chain Services fleet. Or perhaps you are one of the hundreds of millions of Apple iTunes customers who got a free download of U2’s 2014 album Songs of Innocence—whether you wanted it or not! When you pick up a pound of Central American coffee at your favorite café, you will find that some beans are labeled Fair Trade Certified.

Exhibit 1-1 Salvatore Ferragamo, based in Florence, Italy, is one of the world’s leading fashion brands. Ferragamo and other companies in the luxury sector face challenges as consumer habits change. Historically, the luxury shopper was brand loyal and had an eye for classic designs. Now, many shoppers pursue the “next big thing” via online retail channels. Source: Roussel Bernard/Alamy Stock Photo.

1-1 Use the product/market growth matrix to explain the various ways a company can expand globally.

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4 PART 1 • INTRODUCTION

The growing importance of global marketing is one aspect of a sweeping transformation that has profoundly affected the people and industries of many nations during the past 160 years. International trade has existed for centuries. Beginning in 200 b.c., for example, the legendary Silk Road was a land route connecting China with Mediterranean Europe. From the mid-1800s to the early 1920s, with Great Britain the dominant economic power in the world, international trade flourished. However, a series of global upheavals, including World War I, the Bolshevik Revolution, and the Great Depression, brought that era to an end. Then, following World War II, a new era began. Unparalleled expansion into global markets by companies that previously served only customers located in their respective home countries is one hallmark of this new global era.

Four decades ago, the phrase global marketing did not exist. Today, businesspeople use global marketing to realize their companies’ full commercial potential. That is why, no matter whether you live in Asia, Europe, North America, or South America, you may be familiar with the brands mentioned in the opening paragraphs of this chapter. However, there is another, even more critical reason why companies need to take global marketing seriously: survival. A management team that fails to understand the importance of global marketing risks losing its domestic business to competitors with lower costs, more experience, and better products.

But what is global marketing? How does it differ from “regular” marketing as it is typically practiced and taught in an introductory course? Marketing can be defined as the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.2 Marketing activities center on an organization’s efforts to satisfy customer wants and needs with products and services that offer competitive value. The marketing mix (the four Ps of product, price, place, and promo- tion) represents the contemporary marketer’s primary tools in achieving this goal. Marketing is a universal discipline, as applicable in Argentina as it is in Zimbabwe.

This book is about global marketing. An organization that engages in global marketing focuses its resources and competencies on global market opportunities and threats. A fundamental difference between regular marketing and global marketing is the scope of activities. A company that engages in global marketing conducts important business activities outside the home-country market. The scope issue can be conceptualized in terms of the familiar product/market matrix of growth strategies (see Table 1-1). Some companies pursue a market development strategy, which involves seeking new customers by introducing existing products or services to a new market seg- ment or to a new geographical market. Global marketing can also take the form of a diversification strategy in which a company creates new product or service offerings targeting a new segment, a new country, or a new region.

Starbucks provides a good case study of a global marketer that can simultaneously execute all four of the growth strategies shown in Table 1-1:

Market penetration: Starbucks is building on its loyalty card and rewards program with a smartphone app that enables customers to pay for purchases electronically. The app dis- plays a bar code that the customer can scan.

Market development: Starbucks entered Italy in 2018, starting with a 25,000-square-foot flagship Reserve Roastery in Milan. Walking distance from the landmark Duomo, the Roastery will offer pastries by local bakery Princi as well as the aperitivo beverages that are so popular throughout Italy.3

Product development: Starbucks created a new instant-coffee brand, Via, to enable its customers to enjoy coffee at the office and other locations where brewed coffee is not available. After a successful launch in the United States, Starbucks rolled out Via in Great

TA B L E 1 - 1 Product/Market Growth Matrix

Product Orientation

Existing Products New Products

Market Orientation Existing markets Market penetration strategy Product development strategy

New markets Market development strategy Diversification strategy

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ChAPTER 1 • INTRODUCTION TO GlObAl MARkETING 5

Britain, Japan, South Korea, and several other Asian countries. Starbucks also recently introduced its first coffee machine. The Versimo allows Starbucks’ customers to “prepare their favorite beverages at home.”

Diversification: In 2011, Starbucks dropped the word “Coffee” from its logo. It recently acquired a juice maker, Evolution Fresh; the Bay Bread bakery, and tea retailer Teavana Holdings. Next up: Revamping select stores so they can serve as wine bars and attract new customers in the evening.4

To get some practice applying the matrix shown in Table 1-1, create a product/market growth matrix for another global company. IKEA, LEGO, and Walt Disney are all good candidates for this type of exercise.

Companies that engage in global marketing frequently encounter unique or unfamiliar fea- tures in specific countries or regions of the world. In China, for example, product counterfeiting and piracy are rampant. Companies doing business there must take extra care to protect their intel- lectual property and deal with “knockoffs.” In some regions of the world, bribery and corruption are deeply entrenched. A successful global marketer understands specific concepts and has a broad and deep understanding of the world’s varied business environments.

The global marketer also must understand the strategies that, when skillfully implemented in conjunction with universal marketing fundamentals, increase the likelihood of market suc- cess. And, as John Quelch and Katherine Jocz assert, “The best global brands are also the best local brands.” That is, managers at global companies understand the importance of local excel- lence.5 This book concentrates on the major dimensions of global marketing. A brief overview of marketing is presented next, although the authors assume that the reader has completed an introductory marketing course or has equivalent experience.

1-2 Principles of Marketing: A Review As defined in the previous section, marketing is one of the functional areas of a business, distinct from finance and operations. Marketing can also be thought of as a set of activities and processes that, along with product design, manufacturing, and transportation logistics, compose a firm’s value chain. Decisions at every stage, from idea conception to support after the sale, should be assessed in terms of their ability to create value for customers.

For any organization operating anywhere in the world, the essence of marketing is to surpass the competition at the task of creating perceived value—that is, to provide a superior value propo- sition—for customers. The value equation is a guide to this task:

Value = Benefits / Price (money, time, effort, etc.)

The marketing mix is integral to the value equation because benefits are a combination of the product, the promotion, and the distribution. As a general rule, value, as the customer perceives it, can be increased in these ways. Markets can offer customers an improved bundle of benefits or lower prices (or both!). Marketers may strive to improve the product itself, to design new channels of distribution, to create better communications strategies, or a combination of all three.

Marketers may also seek to increase value by finding ways to cut costs and prices. Nonmon- etary costs are also a factor, and marketers may be able to decrease the time and effort that custom- ers must expend to learn about or seek out the product.6 Companies that use price as a competitive weapon may scour the globe to ensure an ample supply of low-wage labor or access to cheap raw materials. Companies can also reduce prices if costs are low because of process efficiencies in manufacturing or because of economies of scale associated with high production volumes.

Recall the definition of a market: people or organizations that are both able and willing to buy. To achieve market success, a product or brand must measure up to a threshold of acceptable quality and be consistent with buyer behavior, expectations, and preferences. If a company is able to offer a combination of superior product, distribution, or promotion benefits and lower prices than the competition does, it should enjoy an extremely advantageous position. Toyota, Nissan, and other Japanese automakers made significant gains in the American market in the 1980s by

1-2 Describe how companies in global industries pursue competitive advantage.

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6 PART 1 • INTRODUCTION

creating a superior value proposition: They offered cars with higher quality, better mileage, and lower prices than those made by General Motors, Ford, and Chrysler.

Today, the auto industry is shifting its attention to emerging markets such as India and Africa. Renault and its rivals are racing to offer middle-class consumers a new value proposition: high- quality vehicles that sell for the equivalent of $10,000 or less. On the heels of Renault’s success with the Dacia Logan have come the $2,500 Nano from India’s Tata Motors and a $3,000 Datsun from Nissan (see Case 11-1).

Achieving success in global marketing often requires persistence and patience. Following World War II, some of Japan’s initial auto exports were market failures. In the late 1960s, for example, Subaru of America began importing the Subaru 360 automobile and selling it for $1,297. After Consumer Reports judged the 360 to be unacceptable, sales ground to a halt. Similarly, the Yugo automobile achieved a modest level of U.S. sales in the 1980s (despite a “don’t buy” rat- ing from a consumer magazine) because its sticker price of $3,999 made it the cheapest new car available. Low quality was the primary reason for the market failure of both the Subaru 360 and the Yugo.7 The Subaru story does have a happy ending, however, due in no small measure to the company’s decades-long efforts to improve its vehicles. In fact, each year, Consumer Reports puts Subaru near the top of its quality rankings, in the same league with Lexus, Mazda, Toyota, and Audi.8 History has not been so kind to the Yugo: It ended up on Time magazine’s list of the “50 Worst Cars of All Time.”

Even some of the world’s biggest, most successful companies stumble while pursuing global opportunities. Walmart’s exit from the German market was due, in part, to the fact that German shoppers could find lower prices at “hard discounters” such as Aldi and Lidl. In addition, many German consumers prefer to go to several small shops rather than seek out the convenience of a single, “all-in-one” store located outside a town center. Likewise, U.K.-based Tesco’s attempts to enter the U.S. market with its Fresh & Easy stores failed, in part, because U.S. consumers were unfamiliar with the private-label goods that made up much of the merchandise stock. And, in 2015, American “cheap chic” retailer Target terminated its operations in Canada, a victim of missteps in terms of store locations and pricing. The cost for closing 133 stores: more than $5 billion.

Competitive Advantage, Globalization, and Global Industries When a company succeeds in creating more value for customers than its competitors do, that company is said to enjoy competitive advantage in an industry.9 Competitive advantage is measured relative to rivals in specific industry sectors. For example, your local laundromat is in a local industry; its competitors are local. In a national industry, competitors are national. In a global industry—consumer electronics, apparel, automobiles, steel, pharmaceuticals, furniture, and dozens of other sectors—the competition is, likewise, global (and, in many industries, local as well). Global marketing is essential if a company competes in a global industry or one that is globalizing.

The transformation of formerly local or national industries into global ones is part of a broader economic process of globalization, which Jagdish Bhagwati defines as follows:

Economic globalization constitutes integration of national economies into the international economy through trade, direct foreign investment (by corporations and multinationals), short-term capital flows, international flows of workers and humanity generally, and flows of technology.10

From a marketing point of view, globalization presents companies with tantalizing opportuni- ties—and challenges—as executives decide whether to offer their products and services every- where. At the same time, globalization presents companies with unprecedented opportunities to reconfigure themselves. As John Micklethwait and Adrian Wooldridge put it, the same global bazaar that allows consumers to buy the best that the world can offer also enables producers to find the best partners.11

For example, globalization is presenting significant marketing opportunities for professional sports organizations such as the National Basketball Association, the National Football League, and Major League Soccer (see Exhibit 1-2). As Major League Soccer commissioner Don Garber noted, “In the global culture the universal language is soccer. That’s the sweet spot. If it weren’t for the shrinking world caused by globalization, we wouldn’t have the opportunity we have today.”12

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ChAPTER 1 • INTRODUCTION TO GlObAl MARkETING 7

Is there more to a global industry than simply “global competition”? Definitely. As defined by management guru Michael Porter, a global industry is one in which competitive advantage can be achieved by integrating and leveraging operations on a worldwide scale. Put another way, an industry is global to the extent that a company’s industry position in one country is interde- pendent with its industry position in other countries. Indicators of globalization include the ratio of cross-border trade to total worldwide production, the ratio of cross-border investment to total capital investment, and the proportion of industry revenue generated by companies that compete in all key world regions.14 One way to determine the degree of globalization in an industry sector is to calculate the ratio of the annual value of global trade in the sector—including the value of components shipped to various countries during the production process—to the annual value of industry sales. In terms of these metrics, the consumer electronics, apparel, automobile, and steel industries are highly globalized.15

Achieving competitive advantage in a global industry requires executives and managers to maintain a well-defined strategic focus. Focus is simply the concentration of attention on a core business or competence. The importance of focus for a global company is evident in the following comment by Helmut Maucher, former chairman of Nestlé SA:

Nestlé is focused: We are food and beverages. We are not running bicycle shops. Even in food we are not in all fields. There are certain areas we do not touch. For the time being we have no biscuits [cookies] in Europe and the United States for competitive reasons, and no margarine. We have no soft drinks because I have said we either buy Coca-Cola or we leave it alone. This is focus.16

Sometimes, however, company management may choose to initiate a change in focus as part of an overall strategy shift. Even Coca-Cola has been forced to sharpen its focus on its core beverage brands. Following sluggish sales for that company in 2000 and 2001, former chairman and chief executive Douglas Daft formed a new alliance with Nestlé that jointly developed and marketed coffees and teas. Daft also set about the task of transforming Coca-Cola’s Minute Maid unit into a global division that markets a variety of juice brands worldwide. As Daft explained:

We’re a network of brands and businesses. You don’t just want to be a total beverage company. Each brand has a different return on investment, is sold differently, drunk for different reasons, and has different managing structures. If you mix them all together, you lose the focus.17

Exhibit 1-2 The National Football League (NFL) promotes American foot- ball globally. The NFL is focusing on a handful of key markets, including Can- ada, China, Germany, Japan, Mexico, and the United Kingdom. Every fall, banners are draped over London’s Regent Street to create awareness of the International Series games played before sellout crowds at Wembley Sta- dium and Twickenham. Source: Alena Kravchenko/Shutterstock.

“We believe a company can only think in one set of terms. If you are premium, you have to focus on it.”13

Helmut Panke, former chair- man, Bayerische Motoren Werke (BMW) AG

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8 PART 1 • INTRODUCTION

Examples abound of corporate executives addressing the issue of focus, often in response to changes in the global business environment. In recent years, Bertelsmann, Colgate, Danone, Electrolux, Fiat, Ford, Fortune Brands, General Motors, Harley-Davidson, Henkel, LEGO, McDonald’s, Royal Philips, Toshiba, Vivendi, and many other companies have stepped up their efforts to sharpen their strategic focus on core businesses and brands.

Specific actions can take a number of different forms; in addition to alliances, these can include mergers, acquisitions, divestitures, and folding some businesses into other company divisions (see Table 1-2). At Royal Philips, CEO Frans van Houten has shed the electronics and engineering units; instead of marketing TV sets and VCRs, today’s Philips is focused on three sectors: health care, lighting, and consumer lifestyle (see Exhibit 1-3). Major changes in the organizational structure such as these must also be accompanied by changes in corporate culture.18

Value, competitive advantage, and the focus required to achieve them are universal in their relevance, and they should guide marketing efforts in any part of the world. Global marketing requires attention to these issues on a worldwide basis and utilization of a business intelligence system capable of monitoring the globe for opportunities and threats. A fundamental premise of this book can be stated as follows: Companies that understand and engage in global marketing can offer more overall value to customers than companies that do not have such understanding. Many business managers and pundits share this conviction. In the mid-1990s, for example, C. Samuel Craig and Susan P. Douglas noted:

Globalization is no longer an abstraction but a stark reality. . . . Choosing not to participate in global markets is no longer an option. All firms, regardless of their size, have to craft strategies in the broader context of world markets to anticipate, respond, and adapt to the changing configuration of these markets.19

Companies in a range of industries are “going global.” For example, three Italian furniture companies have joined together to increase sales outside of Italy and ward off increased competi- tion from Asia. Luxury goods purveyors such as LVMH and Prada Group provided the model for the new business entity, which unites Poltrona Frau, Cassina, and Cappellini.20 Hong Kong’s Tai

Exhibit 1-3 The Dragon Bridge in Da Nang is a major tourist attraction. The LED lighting is provided by Philips. Source: Huu Dai Trinh/Alamy Stock Photo.

TA B L E 1 - 2 Strategic Focus

Company/headquarters Divestiture/buyer

General Electric (United States) Appliance division, sold to Haier (China) for $5.4 billion (2016); NBC Universal, sold to Comcast for $30 billion (2009).

Vivendi (France) Activision Blizzard videogame unit, management buyout for $8.2 billion (2013).

Unilever (United Kingdom/Netherlands) American pasta sauce business, sold to Mizkan Group (Japan) for $2.15 billion (2014).

IBM (United States) Microelectronics division, sold to Global Foundries for $1.5 billion (2014).

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ChAPTER 1 • INTRODUCTION TO GlObAl MARkETING 9

Ping Carpets International is also globalizing. Top managers have been dispersed to different parts of the world; while the finance and technology functions are still in Hong Kong, the marketing chief is based in New York City and the head of operations is in Singapore. As company director John Ying noted, “We’re trying to create a minimultinational.”21

Many gains can be ascribed to globalization. Hundreds of millions of people have been lifted from poverty and have joined the middle class. In countries where globalization has raised wages, living standards have improved. Even so, popular sentiment has been shifting, and a note of caution is in order. A mounting body of evidence indicates that the gains from globaliza- tion have not been evenly distributed. A disproportionate amount of wealth has flowed to the “have lots” and “have yachts,” with not enough going to the “have nots.” U.S. President Donald Trump’s “America First” agenda is just one example of the way some nations are retreating into protectionism and isolation. Some industry observers have noted that we are entering a new era of “globalization in reverse.”

1-3 Global Marketing: What it is and What it isn’t The discipline of marketing is universal. It is natural, however, that marketing practices will vary from country to country for the simple reason that the countries and peoples of the world are different. These differences mean that a marketing approach that has proved successful in one country will not necessarily succeed in another country. Customer preferences, competitors, channels of distribution, and communication media may differ. An important managerial task in global marketing is learning to recognize the extent to which it is possible to extend marketing plans and programs worldwide, as well as the extent to which adaptation is required.

The way a company addresses this task is a manifestation of its global marketing strategy (GMS). In single-country marketing, strategy development addresses two fundamental issues: choosing a target market and developing a marketing mix. The same two issues are at the heart of a firm’s GMS, although they are viewed from a somewhat different perspective (see Table 1-3). Global market participation is the extent to which a company has operations in major world markets. Standardization versus adaptation is the extent to which each marketing mix element is standardized (i.e., executed the same way) or adapted (i.e., executed in different ways) in various country markets. For example, Nike recently adopted the slogan “Here I am” for its pan-European clothing advertising targeting women. The decision to drop the famous “Just do it” tagline in the region was based on research indicating that college-age women in Europe are not as competitive about sports as men are.22

GMS has three additional dimensions that pertain to marketing management. First, concentration of marketing activities is the extent to which activities related to the marketing mix (e.g., promotional campaigns or pricing decisions) are performed in one or a few country

1-3 Compare and contrast a single-country marketing strategy with a global marketing strategy (GMS).

TA B L E 1 - 3 Comparison of Single-Country Marketing Strategy and Global Marketing Strategy

Single-Country Marketing Strategy Global Marketing Strategy

Target market strategy Global market participation

Marketing mix development Marketing mix development

Product Product adaptation or standardization

Price Price adaptation or standardization

Promotion Promotion adaptation or standardization

Place Place adaptation or standardization

Concentration of marketing activities

Coordination of marketing activities

Integration of competitive moves

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10 PART 1 • INTRODUCTION

Rock music has often served as a cultural manifestation of youth movements. In 1960’s “swinging London,” for example, the Beatles, the Rolling Stones, and other British Invasion bands set new trends in sound and style. On the other side of the Atlantic Ocean, American rock groups such as the Grateful Dead and the Jefferson Airplane gave voice to the era’s political and social turmoil during the “Summer of Love.”

In 1976, a new sound emerged. Punk rock was both a musical and a cultural movement. On the musical side, it represented a visceral reaction to, and repudiation of, the prevailing musical styles and tastes of the time. Giant stadium concerts by English progressive rock bands such as Genesis, Pink Floyd, and Yes had become overblown spectacles. Southern California soft-rock, a genre popularized by the Eagles, Linda Ronstadt, and singer-songwriter Jackson Browne, was equally distaste- ful to the punks.

Punk also offered an outlet for the voices of disenfranchised young people and an opportunity to rebel against the establishment. In the United Kingdom in the mid-1970s, the country’s economic stagna- tion meant there were few job opportunities for young people—as well as their elders. The government’s decision to conserve coal sup- plies resulted in power shortages and mandatory three-day working weeks. During the same time period, New York City was in social and economic decline. In the summer of 1976, a serial killer known as the Son of Sam was terrorizing the area. Across America, the energy crisis meant rising prices for gasoline and shortages.

It was in this musical and economic context that young people in both the United States and the United Kingdom discovered that it was relatively easy to learn to play two or three guitar chords. Even better, punk’s “DIY” ethos meant that musicianship was often beside the point. Who needs technique? Who cares what the notes are?

In the United States, punk scenes sprang up on both coasts. Forest Hills, New York, was the breeding ground for the Ramones. Seymour Stein, the Sire Records chief who signed the band to his label, says simply, “New York City needed an infusion.” At the leg- endary CBGB (“Country Bluegrass Blues”) music club in New York’s East Village, the Ramones shared the stage with the Talking Heads, Blondie, and other new bands that were part of the local art-rock scene.

Key to the Ramones’ sound was concise pop songwriting; many songs ranged in length from a mere two minutes (or less) to under three minutes. The look was important, too; the band members carefully cultivated an outcast image by wearing black leather biker jackets and ripped jeans. None of the four was actually named Ramone. Even so, the band was often referred to as “Da Brudders.”

On the U.S. West Coast, a punk scene took shape when bands such as X and Black Flag were formed in Los Angeles. As John Doe, bassist and vocalist for X, recalls, “Rock and roll needed to be hit upside the head!” Despite being dismissed by the mainstream rock world, punk flourished in L.A. as a minority movement in clubs such as the Mask.

In the United Kingdom, the Sex Pistols burst onto the scene in 1976. The Clash, X-Ray Spex and a host of others followed and quickly gained fame and notoriety (see Exhibit 1-4). In July 1976, the Ramones played a landmark show at the Roundhouse in London that some observers credit with sparking the U.K. punk movement. In November 1976, the Sex Pistols released their debut single, “Anarchy in the UK,” on the EMI label.

The following month, the Sex Pistols caused a national furor by swearing on-camera during a live interview with Thames Television presenter Bill Grundy. When Grundy asked what the band had done with its £40,000 advance from EMI, guitarist Steve Jones replied, “We f**kin’ spent it, didn’t we?” The following day, the headline in The Daily Mirror trumpeted, “The Filth and the Fury!” Grundy was fired. (The entire spectacle can viewed on YouTube.)

Vivian Goldman, a former features editor who covered punk for Sounds, a weekly British music paper, notes that punk’s relevance and impact continue today. “In Indonesia, Russia, South Africa, and else- where, people use punk to rage against the system,” she said recently. “Punk’s rebel consciousness represents a flag for a new way of thinking.”

Sources: Peter Aspden, “Infamy in the UK,” Financial Times (June 11–12, 2016), p. 14; Anna Russell, “Punk Takes London by Storm, Again,” The Wall Street Journal (March 25, 2016), p. D6; “Musical Milestones: Celebrating 40 Years of the Ramones,” Conference Presentation, SXSW Music, Film, and Interactive, March 17, 2016; “No Future: 1976 and the Birth of Punk in the UK,” Conference Presentation, SXSW Music, Film, and Interactive, March 16, 2016; Mikal Gilmore, “The Curse of the Ramones: How a Band of Misfits Launched Punk Rock,” Rolling Stone (April 21, 2016), pp. 42–48+; Tom DeSavia and John Doe, Under the Big Black Sun: A Personal History of L.A. Punk (Boston, MA: Da Capo Press, 2016); Tim Jackson, Virgin King: Inside Richard Branson’s Business Empire (London, UK: Harper Collins Publishers, 1995), Chapter 3, “Broken Bottles.”

THE CULTURAL CONTEXT

“1-2-3-4!” 40 Years of Punk Rock, 1976–2016

Exhibit 1-4 Among punk’s positive social effects was the empowerment of women. For example, Exene Cervenka fronted L.A. punk band X, and Poly Sty- rene (shown here) was the singer for London’s X-Ray Spex. Source: Pictorial Press Ltd/Alamy Stock Photo.

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ChAPTER 1 • INTRODUCTION TO GlObAl MARkETING 11

locations. Second, coordination of marketing activities refers to the extent to which market- ing activities related to the marketing mix are planned and executed interdependently around the globe. Third, integration of competitive moves is the extent to which a firm’s competitive marketing tactics in different parts of the world are interdependent. The GMS should enhance the firm’s performance on a worldwide basis.23

The decision to enter one or more particular markets outside the home country depends on a company’s resources, its managerial mind-set, and the nature of opportunities and threats. Today, most observers agree that Brazil, Russia, India, China, and South Africa—five emerging markets known collectively as BRICS—represent significant growth opportunities. Mexico, Indonesia, Nigeria, and Turkey—the so-called MINTs—also hold great potential. Throughout this text, marketing issues in these countries are highlighted in “Emerging Markets Briefing Book” boxes.

We can use Burberry as a case study in global marketing strategy. This U.K.-based luxury brand is available in scores of countries, and Burberry’s recent expansion plans emphasize several geographical areas (see Exhibit 1-5). First are the BRICS nations, where growing numbers of middle-class consumers are developing a taste for luxury brands. Second is the United States, which is dotted with shopping malls whose managers are anxious to entice crowd-pulling luxury goods retailers by sharing fit-out costs and offering attractive, rent-free periods. Under former CEO Angela Ahrendts, Burberry’s marketing mix strategy included the following elements:

Product: Intensify focus on accessories. Boost sales of handbags, belts, and accessories— products whose sales are less cyclical than sales of clothing. Burberry Bespoke allows customers to design their own coats.

Price: “Affordable luxury” is central to the value proposition: more expensive than Coach, less expensive than Prada.

Place: Burberry is opening more independent stores in key U.S. cities, including flagship stores in Los Angeles, San Francisco, and New York; it is also expanding in London and Hong Kong. Such locations generate more than half the company’s revenue and profit.24

Promotion: Encourage advocacy and sharing via social media and online channels such as Twitter, Instagram, and www.artofthetrench.com. Launch Burberry Acoustic to enhance brand relevance and to provide exposure for emerging music talent via www.burberry.com/acoustic.

As you can see in Table 1-3, the next part of the GMS involves the concentration and coordi- nation of marketing activities. At Burberry, haphazard growth had led to a federation of individual operations. Company units in some parts of the world didn’t talk to each other. In some cases, they

Exhibit 1-5 Thomas Burberry is cred- ited with inventing gabardine fabric in the 1850s, paving the way for creation of the trench coat. England’s Burberry Group celebrated its 160th anniversary in 2016. The Burberry trademark is registered in more than 90 countries. Source: Oli Scarff/Getty Images.

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12 PART 1 • INTRODUCTION

competed against each other, and sometimes designed their own products for their own markets and wouldn’t share ideas with other parts of the business. During her tenure as CEO, Angela Ahrendts was very clear in articulating her core strategic vision: Leverage the Franchise. In other words: “One company, one brand.”25

When Christopher Bailey became CEO in 2014, he set about refining and updating Ahrendts’ strategies with an approach he called “Inspire with the Brand.” Bailey used data analytics to lever- age consumer insights gleaned from Burberry’s strong digital presence and its worldwide network of brick-and-mortar stores to project a consistent brand voice.26 Collaborations with musicians also became integral to Bailey’s strategy; he even designed the sequined gown global superstar Adele wore on her 2016 world tour! Bailey also embraced multichannel marketing, adding more mobile marketing to the existing mix of retail and wholesale channels.

An Italian businessman, Marco Gobetti, took over as Burberry’s CEO in 2017. He faces a num- ber of new challenges to the company’s global marketing strategy, including the declining popular- ity of department store shopping in the United States and slowing sales of luxury goods in China.27

The issue of standardization versus adaptation in global marketing has been at the center of a long-standing controversy among both academicians and business practitioners. Much of the controversy dates back to Professor Theodore Levitt’s 1983 article “The Globalization of Markets” in the Harvard Business Review. Levitt argued that marketers were confronted with a “homogeneous global village.” He advised organizations to develop standardized, high-quality world products and market them around the globe by using standardized advertising, pricing, and distribution. Some well-publicized failures by Parker Pen and other companies that had tried to follow Levitt’s advice brought his proposals into question. The business press frequently quoted industry observers who disputed Levitt’s views. As Carl Spielvogel, chairman and CEO of the Backer Spielvogel Bates Worldwide advertising agency, told The Wall Street Journal in the late 1980s, “Theodore Levitt’s comment about the world becoming homogenized is bunk. There are about two products that lend themselves to global marketing—and one of them is Coca-Cola.”28

Global marketing is the key to Coke’s worldwide success—but that success was not based on a total standardization of marketing mix elements. For example, Coca-Cola achieved success in Japan by spending a great deal of time and money to become an insider; the company built a complete local infrastructure with its sales force and vending machine operations. Coke’s success in Japan is a function of its ability to achieve global localization, by being as much of an insider as a local company, yet still reaping the benefits that result from world-scale operations. Although the Coca-Cola Company has experienced a recent sales decline in Japan, that country remains a key market that accounts for about 20 percent of total worldwide operating revenues.29

What does the phrase global localization really mean? In a nutshell, it means that a successful global marketer must have the ability to “think globally and act locally.” Kenichi Ohmae summed up this paradox as follows:

The essence of being a global company is to maintain a kind of tension within the organiza- tion without being undone by it. Some companies say the new world requires homogeneous products—”one size fits all”—everywhere. Others say the world requires endless customiza- tion—special products for every region. The best global companies understand it’s neither and it’s both. They keep the two perspectives in mind simultaneously.30

As we will see many times in this book, global marketing may include a combination of stan- dard (e.g., the actual product itself) and nonstandard (e.g., distribution or packaging) approaches. A global product may be the same product everywhere and yet different. Global marketing requires marketers to think and act in a way that is both global and local by responding to similarities and differences in world markets.

But it is important to bear in mind that “global localization” is a two-way street, and that there is more to the story than “think globally, act locally.” Many companies are learning that it is equally important to think locally and act globally. In practice, this means that companies are discovering the value of leveraging innovations that occur far from headquarters and transporting them back home. For example, McDonald’s restaurants in France don’t look like McDonald’s restaurants elsewhere. Décor colors are muted, and the golden arches are displayed more subtly. After seeing the sales increases posted in France, some American franchisees began undertaking similar renovations. As Burger Business newsletter editor Scott Hume has noted, “Most of the

“The more things globalize, the more people want to affiliate with everything that is local. This has led to unbelievable fragmentation.”31

Peter Ter Kulve, Chief Transforma- tion Officer, Unilever

“One of the top-level lessons is that we have done much more local market customization in India than we did in China.”33

Jeff Bezos, CEO, Amazon

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ChAPTER 1 • INTRODUCTION TO GlObAl MARkETING 13

interesting ideas of McDonald’s are coming from outside the U.S. McDonald’s is becoming a European chain with stores in the U.S.”32 (see Case 1-2).

These reverse flows of innovation are not occurring just between developed regions such as Western Europe and North America. The growing economic power of China, India, and other emerging markets means that many innovations originate there (see Table 1-4). For example, Nestlé, Procter & Gamble, Unilever, and other consumer products companies are learning that low-cost products with less packaging developed for low-income consumers also appeal to cost- conscious consumers in, say, Spain and Greece (see Exhibit 1-6).34

The Coca-Cola Company supports its Coke, Fanta, and Powerade brands with marketing mix elements that are both global and local. Dozens of other companies also have successfully pursued global marketing by creating strong global brands, in various ways. In consumer electronics, Apple is synonymous with hardware and software integration, ease of use, cutting-edge innova- tion, and high-tech design. In appliances, Germany’s reputation for engineering and manufactur- ing excellence is a source of competitive advantage for Bosch (see Exhibit 1-7). Italy’s Benetton utilizes a sophisticated distribution system to quickly deliver the latest fashions to its worldwide network of stores. The backbone of Caterpillar’s global success is a network of dealers who

TA B L E 1 - 4 Think Locally/Act Globally

Company/headquarters Country Product

Cinnabon/USA Cinnabon customers in Central and South America prefer dulce de leche. Products devel- oped for those regions are being introduced in the United States, where the Hispanic popu- lation is a key segment.35

Starbucks/USA Starbucks opened an experimental store in Amsterdam that serves as a testing ground for new design concepts such as locally sourced and recycled building materials. The best concepts will be extended to other parts of Europe. Fast Company magazine included Liz Muller, Director of Creative Design at Starbucks, in its “Most Creative People 2013” ranking.

Kraft Foods/USA Tang drink powder became a $1 billion brand as regional managers in Latin America and the Middle East moved beyond orange (the top-seller) into popular local flavors such as mango and pineapple. Kraft plans to reboot Tang in the U.S. market using lessons learned abroad.36

Exhibit 1-6 For Nestlé, innovation is the key to its expanded presence in emerging markets such as Thailand, Sri Lanka, and Mali. Recently, Nestlé introduced mobile coffee carts from which vendors sell single servings of Nescafé brand coffee. Some of these innovations are being transferred to high-income countries in Europe and elsewhere. Source: adrian arbib/Alamy.

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14 PART 1 • INTRODUCTION

support the company’s promise of “24-hour parts and service” anywhere in the world. As these examples indicate, there are many different paths to success in global markets. In this book, we do not propose that global marketing is a knee-jerk attempt to impose a totally standardized approach on marketing around the world. Instead, a central issue in global marketing is how to tailor the global marketing concept to fit particular products, businesses, and markets.37

As shown in Table 1-5, McDonald’s global marketing strategy is based on a combination of global and local marketing mix elements. For example, a vital element in McDonald’s business model is a restaurant system that can be set up virtually anywhere in the world. McDonald’s offers core menu items—hamburgers, french fries, and soft drinks—in most countries, and the company also customizes menu offerings in accordance with local eating customs. The average price of a Big Mac in the United States is $5.28. By contrast, in China, Big Macs sell for the equivalent of $3.17. In absolute terms, Chinese Big Macs are cheaper than American ones. But is it a fair comparison? Real estate costs vary from country to country, as do per capita incomes.

Exhibit 1-7 MILAN - ITALY - APRIL 2012: Salone internazionale del mobile 2012, furniture fair, Bosch. Source: A. Astes/Alamy Stock Photo.

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ChAPTER 1 • INTRODUCTION TO GlObAl MARkETING 15

The approach to global marketing that a company adopts will depend on industry conditions, shifting economic realities, and its source or sources of competitive advantage. For example:

Harley-Davidson’s motorcycles are perceived around the world as the all-American bike. Should Harley-Davidson start manufacturing motorcycles in a low-wage country such as Thailand?

The success of Honda and Toyota in world markets was initially based on exporting cars from factories in Japan. Today, both companies operate manufacturing and assembly facili- ties in the Americas, Asia, and Europe. From these sites, the automakers both supply cus- tomers in the local market and export their products to the rest of the world. For example, each year Honda exports tens of thousands of Accords and Civics from U.S. plants to Japan and dozens of other countries. Will European consumers continue to buy Honda vehicles exported from America? Will American consumers continue to snap up American-built Toyotas?

Uniqlo, a division of Japan’s Fast Retailing, operates approximately 850 stores in Japan and 300 stores in 12 overseas countries. The company sources 90 percent of its clothing from China. Uniqlo currently has 46 stores in the United States; its plans call for a total of 200 U.S. stores by 2020. Can the company achieve its goal of reaching $50 billion in sales by 2020, thereby becoming the world’s number 1 apparel retailer?

The answer to these questions is: It all depends. Although Harley-Davidson’s competitive advantage is based, in part, on its “Made in the USA” positioning, the company has shifted some production outside the United States. India’s 100 percent tariff on imported motorcycles prompted Harley-Davidson to launch production in the state of Haryana in 2011. To further capitalize on market opportunities in Asia, and to avoid import tariffs that can go as high as 60 percent, the company recently opened a manufacturing facility in Thailand.38

Toyota’s success in the United States was originally attributable to its ability to transfer world-class manufacturing skills—“the Toyota Way”—to its U.S. plants while using advertising to inform prospective customers that American workers build the Avalon, Camry, and Tundra models, with many components purchased from American suppliers. The U.S. market generates approximately two-thirds of Toyota’s profits. However, in its drive to become the world’s top auto- maker, Toyota’s insular corporate culture and focus on cost cutting compromised overall product quality. Under the leadership of Akio Toyoda, the company has rebounded. It sold 10.2 million cars in 2016 and posted record profits; an innovative production system, dubbed Toyota New Global Architecture, is designed to ensure that Toyota can respond quickly to market changes in any part of the world.39

TA B L E 1 - 5 Examples of Effective Global Marketing: McDonald’s

Marketing Mix Element Standardized localized

Product Big Mac McAloo Tikka potato burger, Chicken Maharaja Mac (India); Rye McFeast (Finland); Adagio (Italy)

Promotion Brand name Slang nicknames—for example, Mickey D’s (United States, Canada), Macky D’s (United Kingdom, Ireland), Macca’s (Australia), Mäkkäri (Finland), MakDo (Philippines), McDo (France)

Advertising slogan “i’m lovin’ it”

“Venez comme vous êtes” (“Come as you are”) television ad campaign in France. Various executions show individuals expressing different aspects of their respective personalities. One features a young man dining with his father. The ad’s creative strategy centers on sexual free- dom and rebellion: The father does not realize that his son is gay.

Place Freestanding restaurants in high-traffic public areas

McDonald’s Switzerland operates themed dining cars on the Swiss national rail system; McDonald’s is served on the Stena Line ferry from Helsinki to Oslo; home delivery (India)

Price Average price of Big Mac is $5.28 (United States)

$5.91 (Norway); $3.17 (China)

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16 PART 1 • INTRODUCTION

As noted, about one-fourth of Uniqlo’s 1,200 stores are located outside Japan; key country markets include the United States, China, Russia, Singapore, and South Korea. Shoppers have responded favorably to Uniqlo’s colorful designs and the high service standards for which Japa- nese retailers are famous. According to A. T. Kearney’s 2016 Global Retail Development Index, China is the number 1–ranked emerging market opportunity for retail. In China, Uniqlo’s manage- ment team selectively targets cities with high population densities such as Beijing and Shanghai (see Exhibit 1-8).40

1-4 The Importance of Global Marketing The largest single market in the world in terms of national income is the United States, representing roughly 25 percent of the total world market for all products and services. U.S. companies that wish to achieve their maximum growth potential must “go global,” however, because 75 percent of world market potential is outside their home country. Management at Coca-Cola clearly under- stands this; about 75 percent of the company’s operating income and two-thirds of its operating revenue are generated outside North America.

Non-U.S. companies have an even greater motivation to seek market opportunities beyond their own borders; their opportunities include the 325 million people in the United States. For example, even though the dollar value of the home market for Japanese companies is the third largest in the world (after the United States and China), the market outside Japan is 90 percent of the world potential. For European countries, the picture is even more dramatic. Even though Germany is the largest single-country market in Europe, 94 percent of the world market potential for German companies is outside Germany.

Many companies have recognized the importance of conducting business activities outside their home country. Industries that were essentially national in scope only a few years ago are dominated today by a handful of global companies. In most industries, the companies that will survive and prosper in the twenty-first century will be global enterprises. Some companies that fail to formulate adequate responses to the challenges and opportunities of globalization will be absorbed by more dynamic, visionary enterprises. Others will undergo wrenching transformations and, if their efforts succeed, will emerge from the process greatly transformed. Some companies will simply disappear.

Each year, Fortune magazine compiles a ranking of the 500 largest service and manufacturing companies by revenues.41 Walmart stands atop the 2016 Global 500 rankings, with revenues of

Exhibit 1-8 Japan’s Fast Retailing competes with global companies such as Inditex (Spain), H&M (Sweden), and Gap (U.S.). Fast Retailing founder Tadashi Yanai intends to create the world’s biggest apparel retail operation by 2020. Source: August_0802/ Shutterstock.

1-4 Identify the companies at the top of the Global 500 rankings.

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$486 billion; it currently generates only about one-third of its revenues outside the United States. However, global expansion is key to Walmart’s growth strategy. In all, 5 companies in the top 10 compete in the oil or energy sectors. Toyota and Volkswagen, the only global automakers in the top 10, are locked in a fierce competitive struggle as the German company rebounds from a scandal involving its diesel engines.

Examining the size of individual product markets, measured in terms of annual sales, provides another perspective on global marketing’s importance. Many of the companies identified in the Fortune rankings are key players in the global marketplace.

1-5 Management Orientations The form and substance of a company’s response to global market opportunities depend greatly on its management’s assumptions or beliefs—both conscious and unconscious—about the nature of the world. The worldview of a company’s personnel can be described as ethnocentric, polycentric, regiocentric, or geocentric—collectively known as the EPRG framework.42 This orientation may change over time. Management at a company with a prevailing ethnocen- tric orientation may, for example, consciously make a decision to move in the direction of geocentricism.

Ethnocentric Orientation A person who assumes that his or her home country is superior to the rest of the world is said to have an ethnocentric orientation. Ethnocentrism is sometimes associated with attitudes of national arrogance or assumptions of national superiority; it can also manifest itself as indifference to marketing opportunities outside the home country. Company personnel with an ethnocentric orientation see only similarities in markets and assume that products and practices that succeed in the home country will succeed anywhere.

At some companies, the ethnocentric orientation means that opportunities outside the home country are largely ignored. Such companies are sometimes called domestic companies. Ethnocentric companies that conduct business outside the home country can be described as international companies; they adhere to the notion that the products that succeed in the home country are superior. This point of view leads to a standardized or extension approach to marketing based on the premise that products can be sold everywhere without adaptation.

As the following examples illustrate, an ethnocentric orientation can take a variety of forms:

Nissan’s earliest exports were cars and trucks that had been designed for mild Japanese winters; the vehicles were difficult to start in many parts of the United States during the cold winter months. In northern Japan, many car owners would put blankets over the hoods of their cars. Nissan’s assumption was that Americans would do the same thing. As a Nissan spokesman said, “We tried for a long time to design cars in Japan and shove them down the American consumer’s throat. That didn’t work very well.”43

Until the 1980s, Eli Lilly and Company operated as an ethnocentric company: Activity out- side the United States was tightly controlled by headquarters, and the focus was on selling products originally developed for the U.S. market.44

For many years, executives at California’s Robert Mondavi Corporation operated the com- pany as an ethnocentric international entity. As former CEO Michael Mondavi explained, “Robert Mondavi was a local winery that thought locally, grew locally, produced locally, and sold globally. . . . To be a truly global company, I believe it’s imperative to grow and produce great wines in the world in the best wine-growing regions of the world, regardless of the country or the borders.”45

The cell phone divisions of Toshiba, Sharp, and other Japanese companies prospered by focusing on the domestic market. When handset sales in Japan slowed a few years ago, the Japanese companies realized that Nokia, Motorola, and Samsung already dominated key world markets. Atsutoshi Nishida, president of Toshiba, noted, “We were thinking only about Japan. We really missed our chance.”46

1-5 Explain the stages a company goes through as its management orientation evolves from domestic and ethnocentric to global and geocentric.

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18 PART 1 • INTRODUCTION

In the ethnocentric international company, foreign operations or markets are typically viewed as being secondary or subordinate to domestic ones. (We are using the term domestic to mean the coun- try in which a company is headquartered.) An ethnocentric company operates under the assumption that headquarters’ “tried-and-true” knowledge and organizational capabilities can be applied in other parts of the world. Although this assumption can sometimes work to a company’s advantage, valuable managerial knowledge and experience in local markets may go unnoticed. Even if customer needs or wants diverge from those in the home country, those differences are often ignored at headquarters.

Sixty years ago, most business enterprises—and especially those located in a large country like the United States—could operate quite successfully with an ethnocentric orientation. Today, however, ethnocentrism is one of the major internal weaknesses that must be overcome if a com- pany is to transform itself into an effective global competitor.

Polycentric Orientation The polycentric orientation is the opposite of ethnocentrism. The term polycentric describes management’s belief or assumption that each country in which a company does business is unique. This assumption lays the groundwork for each subsidiary to develop its own unique business and marketing strategies so as to succeed; the term multinational company is often used to describe such a structure. This point of view leads to a localized or adaptation approach that assumes products must be adapted in response to different market conditions. Examples of companies and business units with a polycentric orientation include the following:

At Procter & Gamble, one of Pampers’ many problems in the 1990s was that various regional groups and 80-plus country teams were all acting independently. P&G executives knew they had to address the issue in Pampers’ two biggest organizations, Pampers Europe (run by an Austrian) and Pampers North America (run by an American). The two executives were not collaborating, thereby stifling any potential for their organizations to cooperate in solving the global challenges Pampers faced in research and development, design, manufacturing, and marketing.48

Unilever, the Anglo-Dutch consumer products company, once exhibited a polycentric orientation. For example, its Rexona deodorant brand had 30 different package designs and 48 different formulations. Advertising was also executed on a local basis. Top management spent a decade changing Unilever’s strategic orientation by implementing a reorganization plan that centralizes authority and reduces the power of local country managers.49

Regiocentric Orientation In a company with a regiocentric orientation, a region becomes the relevant geographic unit; management’s goal is to develop an integrated regional strategy. What does regional mean in this context? A U.S. company that focuses on the countries included in the North American Free Trade Agreement (NAFTA)—namely, the United States, Canada, and Mexico—has a regiocentric orien- tation. Similarly, a European company that focuses its attention on Europe is regiocentric. Some companies serve markets throughout the world, but do so on a regional basis. Such a company could be viewed as a variant of the multinational model discussed previously.

For decades, a regiocentric orientation prevailed at General Motors: Executives in different parts of the world—Asia-Pacific and Europe, for example—were given considerable autonomy when designing vehicles for their respective regions. Company engineers in Australia, for exam- ple, developed models for sale in the local market. One result of this approach was that a total of 270 different types of radios were being installed in GM vehicles around the world. As GM Vice Chairman Robert Lutz told an interviewer in 2004, “GM’s global product plan used to be four regional plans stapled together.”50

Geocentric Orientation A company with a geocentric orientation views the entire world as a potential market and strives to develop integrated global strategies. A company whose management has adopted a geocentric orientation is sometimes known as a global or transnational company.51 During the past several years, long-standing regiocentric policies at GM, such as those just discussed, have been replaced by a geocentric approach. Among other changes, the new policy calls for engineering jobs to be assigned on a worldwide basis, with a global council based in Detroit

“What unites us through our brands, markets, and businesses is the group’s identity, which we refer to as ‘a worldwide business with local presence.’ Everywhere we operate, our priority is to create or develop a strong brand that reflects consumer needs in that market as closely as possible.”47

Franck Riboud, honorary chairman, Groupe Danone

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determining the allocation of the company’s $7 billion annual product development budget. One goal of the geocentric approach: to save 40 percent in radio costs by using a total of 50 different radios.

It is a positive sign that, at many companies, management realizes the need to adopt a geocen- tric orientation. However, the transition to new structures and organizational forms can take time to bear fruit. As new global competitors emerge on the scene, management at long-established industry giants such as GM must face up to the challenge of organizational transformation. More than a decade ago, Louis R. Hughes, a GM executive, said, “We are on our way to becoming a transnational corporation.” Basil Drossos, former president of GM de Argentina, echoed his col- league’s words: “We are talking about becoming a global corporation as opposed to a multina- tional company; that implies that the centers of expertise may reside anywhere they best reside.”53 In 2008, Toyota sold more vehicles worldwide than GM for the first time. When GM emerged from bankruptcy in 2009, it did so as a smaller, leaner company.

A global company can be further described as one that either pursues a strategy of serving world markets from a single country, or sources globally for the purposes of focusing on specific country markets. In addition, global companies tend to retain their association with a particular headquarters country. Until recently, Harley-Davidson served world markets from the United States exclusively. Similarly, all the production for luxury fashion marketer Tod’s takes place in Italy.

By contrast, Uniqlo sources its apparel from low-wage countries; a sophisticated supply chain ensures timely delivery to its network of stores. Benetton pursues a mixed approach, sourc- ing some of its apparel from Italy and some from low-wage countries. Harley-Davidson, Tod’s, Uniqlo, and Benetton may all be thought of as global companies.

Transnational companies serve global markets and use global supply chains, which often results in a blurring of national identity. A true transnational would be characterized as “stateless.” Toyota and Honda are two examples of companies that exhibit key characteristics of transna- tionality. At global and transnational companies, management uses a combination of standard- ized (extension) and localized (adaptation) elements in the marketing program. A key factor that distinguishes global and transnational companies from their international or multinational counterparts is mind-set: At global and transnational companies, decisions regarding extension and adaptation are not based on assumptions, but rather made on the basis of ongoing research into market needs and wants.

One way to assess a company’s “degree of transnationality” is to compute an average of three ratios: (1) sales outside the home country to total sales, (2) assets outside the home country to total assets, and (3) employees outside the home country to total employees. Viewed in terms of these metrics, Nestlé, Unilever, Royal Philips Electronics, GlaxoSmithKline, and the News Corporation can also be categorized as transnational companies. Each is headquartered in a relatively small home-country market—a fact of life that has compelled the company’s management to adopt a regiocentric or geocentric orientation to achieve revenue and profit growth.

The geocentric orientation represents a synthesis of ethnocentrism and polycentrism; it is a “worldview” that sees similarities and differences in markets and countries and seeks to create a global strategy that is fully responsive to local needs and wants. A regiocentric manager might be said to have a worldview on a regional scale; the world outside the region of interest will be viewed with an ethnocentric or a polycentric orientation, or a combination of the two. However, research suggests that many companies are seeking to strengthen their regional competitiveness rather than move directly to develop global responses to changes in the competitive environment.54

The ethnocentric company is centralized in its marketing management; the polycentric com- pany is decentralized; and regiocentric and geocentric companies are integrated on a regional or global scale, respectively. A crucial difference among the various orientations is the under- lying assumption for each. The ethnocentric orientation is based on a belief in home-country superiority. The underlying assumption of the polycentric approach is that there are so many differences in cultural, economic, and marketing conditions in the world that it is futile to attempt to transfer experience across national boundaries. A key challenge facing organizational leaders today is managing a company’s evolution beyond an ethnocentric, polycentric, or regiocentric orientation to a geocentric one. As noted in one highly regarded book on global business, “The multinational solution encounters problems by ignoring a number of organizational impedi- ments to the implementation of a global strategy and underestimating the impact of global competition.”55

“These days everyone in the Midwest is begging Honda to come into their hometown. It is no longer viewed as a ‘Japanese’ company, but a ‘ pro-American-worker corporation’ flush with jobs, jobs, jobs.”52

Douglas Brinkley, Professor of History, Tulane University

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20 PART 1 • INTRODUCTION

Kevin Systrom and Mike Krieger are entrepreneurs. They developed an innovative product, created a brand, and cofounded a company to mar- ket it. By applying the basic tools and principles of modern marketing, the two Stanford University graduates have achieved remarkable success.

As is true with many entrepreneurs, Systrom’s idea was based on his recognition of a problem that needed to be solved and his own needs and wants. Systrom had a passion for photography, and also appreciated the potential of social media. He hit upon an idea for a location-based photo-sharing app that he dubbed Burbn (after his favorite distilled spirit). He then recruited Krieger, who was working on his own app called Meebo. Krieger liked Systrom’s idea, but the two agreed that Burbn was overloaded with functionality. Realizing that “There has to be a better way,” the duo stripped out everything but the photo-sharing function, which they conceptualized as an “instant telegram” (see Exhibit 1-9).

In October 2010, Systrom and Krieger launched Instagram on Apple’s App Store. Within two years, the photo-filtering and photo- sharing app had 30 million users. Soon thereafter, the platform was also launched on the Android and Windows Phone platforms.

Systrom’s insight was that, even in prehistoric times, people com- municated visually. Today, Instagram makes visual information acces- sible, just as Gutenberg’s printing press made the printed word more accessible. Instagram’s popularity is due in part to the dozens of filters that users can apply to their photos (the idea for filters came from Systrom’s girlfriend Nicole).

In 2012, Facebook acquired Instagram for $1 billion. Today, Ins- tagram has more than 600 million users who upload approximately 100 million photographs and videos each day; only 20 percent of users are in the United States. In 2016, Instagram generated more than $1.5 billion in revenues from mobile ads.

Social-media savvy companies in the luxury goods industry have been quick to embrace Instagram. To justify their products’ high prices,

managers of luxury brands need to help consumers understand the craftsmanship and heritage that are integral to the brand stories. Using photo images and videos, companies can take consumers “behind the scenes” and show the process by which luxury products are made by skilled artisans.

Nearly two-thirds of Instagram users use the app to learn about products and brands. Companies can leverage parent Facebook’s pow- erful data and online advertising tools to reach different segments— say, current versus potential luxury consumers—by inserting targeted, photography-based ads in their respective Instagram feeds. One such segment is known as “Henrys,” referring to younger Millennials who are described as “high earning, not rich yet.”

Food is another category that is driving Instagram’s popularity; to date, users have “IG-ed” (i.e., Instagrammed) more than 200 mil- lion posts with the hashtag #food. In response to this trend, social- media–conscious hospitality managers in London, New York, and other food-centric cities are taking steps to ensure that a restaurant’s inte- rior design, menus, and dishes lend themselves to Instagram posts. These range from Michelin-approved restaurants with posh addresses to Mexican-themed chains that feature burritos wrapped in branded foil. The most popular color? “Millennial Pink.” Recent trending food items include “freakshakes” and “unicorn lattes.”

Two new Instagram features, Stories and Live, launched in August 2016; they allow users to upload short video clips, live feeds, and photos that disappear within 24 hours. The features proved to be so addictive that parent company Facebook added similar functionality to WhatsApp, Messenger, and Facebook. Some critics have observed that, with Stories, Instagram was simply copying Snapchat. Systrom disagrees. To him, execution trumps originality. Stories “clearly pro- vides unique value to people that they’re not getting elsewhere,” he says.

The music industry’s embrace of Instagram and Stories illus- trates Systrom’s point. Musicians and bands of all types—from global superstars like Adele and Beyoncé to indie artists seeking to break through—are using the platform to connect with fans in an organic way. According to Nielsen, Instagram users spend more time listening to music and are likely to pay for streaming music services than nonus- ers. Artists use Stories and Live to announce new releases and tours, and to provide behind-the-scenes looks at the creative process. Popular posts can quickly go viral, allowing record companies and the artists themselves to see the impact on music sales.

Sources: John Paul Titlow, “How Instagram Became the Music Industry’s Secret Weapon,” Fast Company (September 29, 2017); Deepa Seetharaman, “A Copy- cat? No, Call It Competition,” The Wall Street Journal (May 31, 2017), p. B5; Deepa Seetharaman, “‘Efficiency Guru’ Sharpens Instagram,” The Wall Street Journal (April 14, 2017), p. B4; Deepa Seetharaman Natalie Whittle, “A Square Meal: How Restau- rants Are Courting the Instagram Crowd,” FT Magazine (April 7, 2017); Alexandra Wolfe, “Weekend Confidential: Kevin Systrom,” The Wall Street Journal (July 2–3, 2016), p. C11; Hannah Kuchler, “Snap Happy: Instagram Rolls out Carpet for Fashion Brands,” Financial Times—FT Special Report: The Business of Luxury (May 23, 2016), p. 2; Murad Ahmed, “The Camera-Shy Half of Instagram’s Founding Duo,” Financial Times (November 24, 2015), p. 10.

ENTREPRENEURIAL LEADERSHIP, CREATIVE THINKING, AND THE GLOBAL STARTUP

Kevin Systrom and Mike Krieger, Instagram

Exhibit 1-9 Stanford University graduates Kevin Systrom and Mike Krieger are Instagram's co-founders. Source: CHRISTIE HEMM KLOK/The New York Times/Redux.

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ChAPTER 1 • INTRODUCTION TO GlObAl MARkETING 21

1-6 Forces Affecting Global Integration and Global Marketing

The remarkable growth of the global economy over the past 65 years has been shaped by the dynamic interplay of various driving and restraining forces. During most of those decades, com- panies from different parts of the world in different industries achieved great success by pursu- ing international, multinational, or global strategies. During the 1990s, changes in the business environment presented numerous challenges to established ways of doing business. Today, despite calls for protectionism as a response to the changing political environment, global marketing continues to grow in importance. This is because, even today, driving forces have more momentum than restraining forces. The forces affecting global integration are shown in Figure 1-1.

Driving Forces Regional economic agreements, converging market needs and wants, technological advances, pressure to cut costs, pressure to improve quality, improvements in communication and trans- portation technology, global economic growth, opportunities for leverage, and innovation and entrepreneurship all represent important driving forces; any industry subject to these forces is a candidate for globalization.

MULTILATERAL TRADE AGREEMENTS For years, a number of multilateral trade agreements have accelerated the pace of global integration. NAFTA expanded trade among the United States, Canada, and Mexico. The General Agreement on Tariffs and Trade (GATT), which was ratified by more than 120 nations in 1994, created the World Trade Organization (WTO) to promote and protect free trade. In Europe, the expanding membership of the European Union has lowered boundaries to trade within the region. The creation of a single currency zone and the introduction of the euro have led to increased intra-European trade in the twenty-first century.

CONVERGING MARKET NEEDS AND WANTS AND THE INFORMATION REVOLUTION A person studying markets around the world will discover cultural universals as well as differences. The common elements in human nature provide an underlying basis for the opportunity to create and serve global markets. The use of the word create is deliberate here. Most global markets do not exist in nature; marketing efforts must create them. For example, no one needs soft drinks— and yet today in some countries, per capita soft drink consumption exceeds water consumption. Marketing has driven this change in behavior, so that the soft drink industry is now a truly global one. Today, consumer needs and wants around the world are converging as never before, which in turn creates an opportunity for global marketing. Multinational companies pursuing strategies of product adaptation run the risk of failing to be successful against global competitors that have recognized opportunities to serve global customers.

The information revolution—what some refer to as the “democratization of information”—is one reason for the trend toward convergence. This revolution is fueled by a variety of technologies, products, and services, including satellite dishes; globe-spanning TV networks such as CNN and MTV; widespread access to broadband Internet; and Facebook, Twitter, YouTube, and other social media. Taken together, these communication tools mean that people in the remotest corners of the globe can compare their own lifestyles and standards of living with those of people in other countries. In regional markets such as Europe and Asia, the increasing overlap of advertising across national boundaries and the greater mobility of consumers have created opportunities for marketers to pursue pan-regional product positioning. The Internet is an even stronger driving force: When a company establishes a site on the Internet, the company automatically becomes

1-6 Discuss the driving and restraining forces affecting global integration today.

FIGURE 1-1 Driving and Restraining Forces Affecting Global Integration

Global integration

and global

marketing

R estraining forcesD

riv in

g fo

rc es

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22 PART 1 • INTRODUCTION

global. In addition, the Internet allows people everywhere in the world to reach out to one another and to companies around the globe, buying and selling a virtually unlimited assortment of products and services.

TRANSPORTATION AND COMMUNICATION IMPROVEMENTS The time and cost barriers associ- ated with distance have fallen tremendously over the past 100 years. The jet airplane revolution- ized travel and communication by making it possible for people to go around the world in less than 48 hours. Tourism enables people from many countries to see and experience the newest products sold abroad. In 1970, 75 million passengers traveled internationally; according to figures compiled by the International Air Transport Association, that figure increased to nearly 3.8 billion passengers in 2016.

One essential characteristic of the effective global business is face-to-face communication among employees and between a company and its customers. Modern jet travel made such com- munication feasible. Today’s information technology allows airline alliance partners such as United and Lufthansa to sell seats on each other’s flights, thereby making it easier for travelers to get from point to point. Meanwhile, the cost of international data, voice, and video communication has fallen dramatically over the past several decades. Today, Skype and FaceTime are powerful new communication channels. They are the latest in a series of innovations—including fax, e-mail, video teleconferencing, Wi-Fi, and broadband Internet—that enable managers, executives, and customers to link up electronically from virtually any part of the world without traveling at all.

A similar revolution has occurred in transportation technology. The costs associated with physical distribution, in terms of both money and time, have been greatly reduced in recent years. The per-unit cost of shipping automobiles from Japan and Korea to the United States by specially designed auto-transport ships is less than the cost of overland shipping from Detroit to either U.S. coast. Another key innovation has been the increased utilization of 20- and 40-foot metal contain- ers that can be transferred from trucks to railroad cars to ships.

PRODUCT DEVELOPMENT COSTS The pressure for globalization is intense when new products require major investments and long periods of development time. The pharmaceutical industry provides a striking illustration of this driving force. According to the Pharmaceutical Research and Manufacturers Association, the cost of developing a new drug in 1976 was $54 million. Today, the process of developing a new drug and securing regulatory approval to market it can take 14 years, and the average total cost of bringing a new drug to market is estimated to exceed $400 million.56 Such costs must be recovered in the global marketplace, because no single national market is likely to be large enough to support investments of this size.

In the face of this reality, Pfizer, Merck, GlaxoSmithKline, Novartis, Bristol-Myers Squibb, Sanofi-Aventis, and other leading pharmaceutical companies have little choice but to engage in global marketing. As noted earlier, however, global marketing does not necessarily mean operating everywhere; in the pharmaceutical industry, for example, seven countries account for 75 percent of sales. As shown in Table 1-6, demand for pharmaceuticals in Asia is expected to exhibit double- digit growth in the next few years. Seeking to tap that opportunity and to reduce development costs, Novartis and its rivals are establishing research and development (R&D) centers in China.57

TA B L E 1 - 6 World Pharmaceutical Market by Region

2012 2007–2012 2012–2017

Market Size (US$ billions) CAGR* (%) Forecast CAGR (%)

North America $348.7 3.0% 0.7–3.7%

Europe 222.8 2.4 – 0.4 to 2.6

Asia/Africa/Australia 168.3 15.0 11.4–14.4

Japan 112.1 3.0 1.7–4.7

Latin America 72.5 12.0 10–13

Total world 962.1 5.3 5.3

* Compound annual growth rate. Source: Based on IMS Health Market Prognosis. Courtesy of IMS Health.

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QUALITY Global marketing strategies can generate more revenues and higher operating margins that, in turn, support design and manufacturing quality. For example, a global company and a domestic company may each spend 5 percent of their sales on R&D, but the global company may have many times the total revenue of the domestic company because it serves the world market. It is easy to understand how John Deere, Nissan, Matsushita, Caterpillar, and other global companies have achieved world-class quality (see Exhibit 1-10). Global companies “raise the bar” for all competitors in an industry.

When a global company establishes a benchmark in quality, competitors must quickly make their own improvements and come up to par. For example, starting in the 1960s, U.S. auto manu- facturers saw their market share erode as Japanese carmakers built strong reputations based on their products’ quality and durability. Although the U.S. companies have since made great strides in quality, Detroit now faces a new threat from a U.S. company: Tesla’s all-electric cars have frequently been at or near the top of the quality and safety rankings for several years.

WORLD ECONOMIC TRENDS Prior to the global economic crisis that began in 2008, economic growth had been a driving force in the expansion of the international economy and in the growth of global marketing for three reasons. First, economic growth in key developing countries creates market opportunities that provide a major incentive for companies to expand globally. Thanks to rising per capita incomes in India, China, and elsewhere, the growing ranks of middle-class consumers have more money to spend than in the past. At the same time, slow growth in industrial- ized countries has compelled management to look abroad for opportunities in nations or regions with high rates of growth.

Second, economic growth has reduced resistance that might otherwise have developed in response to the entry of foreign firms into domestic economies. When a country such as China is experiencing rapid economic growth, policymakers are likely to look more favorably on outsiders. A growing country means growing markets; there is often plenty of opportunity for everyone. As a consequence, it is possible for a “foreign” company to enter a domestic economy and establish itself without threatening the existence of local firms. The latter can ultimately be strengthened by the new competitive environment. Without economic growth, however, global enterprises may take business away from domestic ones. In this kind of environment, domestic businesses are more likely to seek governmental intervention to protect their local positions. Predictably, the most recent economic crisis has created new pressure on policymakers in emerging markets to protect domestic markets.

The worldwide movement toward free markets, deregulation, and privatization is a third driving force. The trend toward privatization is opening up formerly closed markets; tremendous

Exhibit 1-10 With annual sales of $26 billion, Moline, Illinois–based Deere & Company is the world’s lead- ing manufacturer of farm equipment. Deere has benefited from booming worldwide demand for agricultural commodities; demand for tractors has been especially strong in Brazil, China, India, and other emerging markets. Source: Courtesy of John Deere.

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24 PART 1 • INTRODUCTION

opportunities are being created as a result. In their book, Daniel Yergin and Joseph Stanislaw described these trends as follows:

It is the greatest sale in the history of the world. Governments are getting out of businesses by disposing of what amounts to trillions of dollars of assets. Everything is going—from steel plants and phone companies and electric utilities to airlines and railroads to hotels, restaurants, and nightclubs. It is happening not only in the former Soviet Union, Eastern Europe, and China but also in Western Europe, Asia, Latin America, and Africa—and in the United States.58

For example, when a nation’s telephone company is a state monopoly, the government can require it to buy equipment and services from national companies. In contrast, an independent company that needs to maximize shareholder value has the freedom to seek vendors that offer the best overall value proposition, regardless of nationality. Privatization of telephone systems around the world created significant opportunities for telecommunications equipment suppliers such as Sweden’s Ericsson; Alcatel-Lucent, a Franco-American company; and Canada-based Nortel Networks. After years of growth, however, most telecom suppliers experienced slower growth as customers cut their spending in the face of the global recession. In 2009, Nortel Networks filed for bankruptcy; in the wake of this move, it auctioned off thousands of patents to an alliance of companies including Apple and Microsoft.

LEVERAGE A global company possesses the unique opportunity to develop leverage. In the con- text of global marketing, leverage means some type of advantage that a company enjoys by virtue of the fact that it has experience in more than one country. Leverage allows a company to conserve resources when pursuing opportunities in new geographical markets. In other words, it enables a company to expend less time, less effort, and/or less money. Four important types of leverage are experience transfers, scale economies, resource utilization, and global strategy.

Experience Transfers A global company can leverage its experience in any market in the world. It can draw upon management practices, strategies, products, advertising appeals, or sales or promotional ideas that have been market tested in one country or region and apply them in other comparable markets. For example, Whirlpool has considerable experience in the United States dealing with powerful retail buyers such as Lowe’s and Best Buy. Most European appliance retailers have plans to establish their own cross-border “power” retailing systems. As former Whirlpool CEO David Whitwam explained, “When power retailers take hold in Europe, we will be ready for it. The skills we’ve developed here are directly transferable.”60

Chevron is another example of a global company that gains leverage through experience transfers. As H. F. Iskander, general manager of Chevron’s Kuwait office, explains:

Chevron is pumping oil in different locations all over the world. There is no problem we have not confronted and solved somewhere. There isn’t a rock we haven’t drilled through. We centralize all that knowledge at our headquarters, analyze it, sort it out, and that enables us to solve any oil-drilling problem anywhere. As a developing country you may have a national oil company that has been pumping your own oil for 20 years. But we tell them, “Look, you have 20 years of experience, but there’s no diversity. It is just one year of knowledge 20 times over.” When you are operating in a multitude of countries, like Chevron, you see a multitude of different problems and you have to come up with a multitude of solutions. You have to, or you won’t be in business. All those solutions are then stored in Chevron’s corporate memory. The key to our business now is to tap that memory, and bring out the solution that we used to solve a problem in Nigeria in order to solve the same problem in China or Kuwait.61

Scale Economies The global company can take advantage of its greater manufacturing volume to obtain traditional scale advantages within a single factory. Also, finished products can be man- ufactured by combining components manufactured in scale-efficient plants in different countries. Japan’s giant Matsushita Electric Company is a classic example of global marketing in action; it achieved scale economies by exporting VCRs, televisions, and other consumer electronics prod- ucts throughout the world from world-scale factories in Japan. The importance of manufacturing scale has diminished somewhat as companies implement flexible manufacturing techniques and

“If we were going to be world-class, we needed to pull together and leverage our global assets around the world to create a powerhouse ‘One Ford.’ It’s exactly why we are here.”59

Alan Mulally, former CEO, Ford Motor Company

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ChAPTER 1 • INTRODUCTION TO GlObAl MARkETING 25

invest in factories outside the home country. Nevertheless, scale economies were clearly a cor- nerstone of many Japanese companies’ success in the 1970s and 1980s.

Leverage from scale economies is not limited to manufacturing. Just as a domestic company can achieve economies in staffing by eliminating duplicate positions after an acquisition, so a global company can achieve the same economies on a global scale by centralizing functional activities. The larger scale of the global company also creates opportunities to improve corporate staff competence and quality.

RESOURCE UTILIZATION A major strength of the global company is its ability to scan the entire world to identify people, money, and raw materials that will enable it to compete most effec- tively in world markets. For a global company, it is not problematic if the value of the “home” currency rises or falls dramatically, because there really is no such thing as a home currency. The world is full of currencies, and a global company seeks financial resources on the best available terms. In turn, it uses them where there is the greatest opportunity to serve a need at a profit.

GLOBAL STRATEGY The global company’s greatest single advantage can be its global strategy. A global strategy is built on an information system that scans the world business environment to identify opportunities, trends, threats, and resources. When opportunities are identified, the global company adheres to the three principles identified earlier: It leverages its skills and focuses its resources to create superior perceived value for customers and achieve competitive advantage. The global strategy is a design to create a winning offering on a global scale. This takes great discipline, much creativity, and constant effort. The reward is not just success; it’s survival.

For example, French automaker Renault operated for many years as a regional company. During that time, its primary struggle was a two-way race with Peugeot Citroën for dominance in the French auto industry. However, in an industry dominated by Toyota and other global competitors, Chairman Louis Schweitzer had no choice but to formulate a global strategy. Initiatives included acquiring a majority stake in Nissan Motor and Romania’s Dacia. Schweitzer has also invested $1 billion in a plant in Brazil and spent hundreds of millions of dollars in South Korea.62

A note of caution is in order: A global strategy is no guarantee of ongoing organizational success. Companies that cannot formulate or successfully implement a coherent global strategy may lose their independence. InBev’s acquisition of Anheuser-Busch at the end of 2008 is a case in point. Some globalization strategies do not yield the expected results, as seen in the unraveling of the DaimlerChrysler merger and the failure of Deutsche Post’s DHL unit to penetrate the U.S. domestic package delivery market.

The severe downturn in the business environment in the early years of the twenty-first century wreaked havoc with strategic plans. This proved true for established global firms as well as newcomers from emerging markets that had only recently come to prominence on the world stage. For example, at Swiss-based ABB, Mexico’s Cemex, and UK supermarket chain Tesco, the ambi- tious global visions of the respective chief executives were undermined by expensive strategic bets that did not pay off.63 Although all three companies survived, they are smaller, more focused entities than before.

INNOVATION AND ENTREPRENEURSHIP Worldwide, new companies are forming. In India, Mexico, Spain, Vietnam, and many other countries, entrepreneurship is flourishing. So, what is an entrepreneur? Management guru Peter Drucker used the term to describe someone who introduces innovations. Entrepreneurs, by definition, are always pioneers in introducing new products and services. According to Drucker:

They are people with exceptional abilities who seize opportunities that others are oblivious to or who create opportunities through their own daring and imagination.... Innovation is the specific instrument of entrepreneurship. Innovation is the act that endows resources with a new capacity to create wealth.... Through innovation, entrepreneurs create new satisfactions or new consumer demand.64

Italy’s Emilia Romagna region is a good example of a place with a distinguished record of entrepreneurship. It is home to some of the world’s most famous brands, including Ferrari, YOOX, Datalogic, and Technogym.65 In this text, we will survey some of the most dynamic developments

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26 PART 1 • INTRODUCTION

in global entrepreneurship so that readers will develop a better understanding of the importance of innovative leadership and creative thinking.

Restraining Forces Despite the impact of the driving forces identified previously, several restraining forces may slow a company’s efforts to engage in global marketing. In addition to the market differences discussed earlier, important restraining forces include management myopia, organizational culture, national controls, and opposition to globalization. As we have noted, in today’s world the driving forces predominate over the restraining forces. That is why the importance of global marketing is steadily growing.

MANAGEMENT MYOPIA AND ORGANIZATIONAL CULTURE In many cases, management simply ignores opportunities to pursue global marketing. A company that is “nearsighted” and ethnocentric will not expand geographically. Anheuser-Busch, the brewer of Budweiser beer, lost its independence after years of focusing primarily on the domestic U.S. market. Myopia is also a recipe for market disaster if headquarters attempts to dictate when it should listen. Global marketing does not work without a strong local team that can provide information about local market conditions.

In companies where subsidiary management “knows it all,” there is no room for vision from the top. Conversely, in companies where headquarters management is all-knowing, there is no room for local initiative or an in-depth knowledge of local needs and conditions. Executives and managers at successful global companies have learned how to integrate global vision and perspective with local market initiative and input. A striking theme emerged during interviews conducted by one of the authors with executives of successful global companies—namely, respect for local initiative and input by headquarters executives, and the corresponding respect for headquarters’ vision by local executives.

NATIONAL CONTROLS Every country protects the commercial interests of its local enterprises by maintaining control over market access and entry into both low- and high-tech industries. Such control ranges from a monopoly controlling access to tobacco markets to national government control of broadcast, equipment, and data transmission markets. Today, tariff barriers have been largely removed in high-income countries, thanks to the WTO, GATT, NAFTA, and other economic agreements.

Even so, nontariff barriers (NTBs) are still very much in evidence. NTBs are nonmonetary restrictions on cross-border trade, such as food safety and labeling rules and other bureaucratic obstacles. For example, the European Union prohibits the use of generic terms such as “Parmesan” for dairy imports to protect cheese producers in Italy. NTBs have the potential to make it difficult for companies to gain access to some individual country and regional markets.

OPPOSITION TO GLOBALIZATION To many people around the world, globalization and global marketing represent a threat. The term globaphobia is sometimes used to describe an attitude of hostility toward trade agreements, global brands, or company policies that appear to result in hardship for some individuals or countries while benefiting others.

Globaphobia manifests itself in various ways, including protests or violence directed at poli- cymakers or well-known global companies (see Exhibit 1-11). Opponents of globalization include politicians, labor unions, college and university students, national and international nongovern- mental organizations (NGOs), and others. Shock Doctrine author Naomi Klein has been an espe- cially outspoken critic of globalization.

Two prominent examples of this restraining force are the election of Donald Trump in the United States and the Brexit vote in the United Kingdom. Shortly after being sworn in as the 45th U.S. president, Trump pulled the United States out of the Transatlantic Trade and Invest- ment Partnership (TTIP) as well as the Trans-Pacific Partnership (TPP). He also campaigned on a pledge to revise or withdraw from NAFTA. Meanwhile, U.K. Prime Minister Theresa May was working to finalize “divorce” arrangements for the United Kingdom’s withdrawal from the European Union.

In the United States, the perception that globalization has depressed the wages of American workers and resulted in the loss of both blue- and white-collar jobs helped Trump win the 2016

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presidential election. Even prior to the election, there was a growing suspicion that the world’s advanced countries—starting with the United States—were reaping a disproportionate amount of the rewards of free trade. As an unemployed miner in Bolivia put it, “Globalization is just another name for submission and domination. We’ve had to live with that here for 500 years and now we want to be our own masters.”66

1-7 Outline of This Book This book has been written for students and businesspeople interested in global marketing. Throughout the book, we present and discuss important concepts and tools specifically applicable to global marketing.

The book is divided into five parts. Part One consists of Chapter 1, an overview of global marketing and the basic theory of global marketing.

Chapters 2 through 5 make up Part Two, in which we cover the environment of global market- ing. Chapter 2 and Chapter 3 examine economic and regional market characteristics, including the locations of income and population, patterns of trade and investment, and stages of market development. In Chapter 4, we examine social and cultural elements, and in Chapter 5 we present the legal, political, and regulatory dimensions.

Part Three is devoted to topics that must be considered when approaching global markets. We cover marketing information systems and research in Chapter 6. Chapter 7 discusses market segmentation, targeting, and positioning. Chapter 8 surveys the basics of importing, exporting, and sourcing. We devote Chapter 9 to various aspects of global strategy, including strategy alternatives for market entry and expansion.

In Part Four, we examine the global context of marketing mix decisions. Guidelines for mak- ing product, price, channel, and marketing communications decisions in response to global market opportunities and threats are presented in detail in Chapters 10 through 14. Chapter 15 explores the ways that the Internet, e-commerce, and other aspects of the digital revolution are creating new opportunities and challenges for global marketers.

The two chapters in Part Five address issues of corporate strategy and leadership, in the twenty-first century. Chapter 16 includes an overview of strategy and competitive advantage. Chapter 17 addresses some of the leadership challenges facing the chief executives of global companies. In addition, this chapter examines the organization and control of global marketing programs as well as the issue of corporate social responsibility.

Exhibit 1-11 American fashion icon Ralph Lauren created the official uniforms that Team USA wore at the opening and closing ceremonies of the 2012 Olympics in China. Controversy erupted after it was revealed that the uniforms—navy blazers, white trousers and skirts, and berets—were “Made in China” rather than in the United States. Critics linked the outsourcing story to the broader issue of the loss of manufacturing jobs in America. Per- haps not surprisingly, the uniforms for the 2016 Summer Games in Rio were “Made in the USA.” Source: Leonard Zhukovsky/Shutterstock.

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28 PART 1 • INTRODUCTION

Summary Marketing is an organizational function and a set of processes for creating, communicating, and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders. A company that engages in global marketing focuses its resources on global market opportunities and threats. Successful global marketers such as Nestlé, Coca-Cola, and Honda use familiar marketing mix elements—the four Ps—to create global marketing programs. Marketing, R&D, manufacturing, and other activities compose a firm’s value chain; firms configure these activities to create superior customer value on a global basis. The value equation (V = B/P) expresses the relationship between value and the marketing mix.

Global companies also maintain strategic focus while relentlessly pursuing competitive advantage. The marketing mix, value chain, competitive advantage, and focus are univer- sal in their applicability, irrespective of whether a company does business only in its home country or has a presence in many markets around the world. However, in a global industry, companies that fail to pursue global opportunities risk being pushed aside by stronger global competitors.

A firm’s global marketing strategy (GMS) can enhance its worldwide performance. The GMS addresses several issues. First is the nature of the marketing program in terms of the balance between a standardized (extension) approach to the marketing mix elements and a localized (adaptation) approach that is responsive to country or regional differences. Second is the concentration of marketing activities in a few countries or the dispersal of such activities across many countries. Companies that engage in global marketing can also engage in coordination of marketing activities. Finally, a firm’s GMS addresses the issue of global market participation.

The importance of global marketing today can be seen in the company rankings compiled by The Wall Street Journal, Fortune, the Financial Times, and other publications. Whether ranked by revenues or some other measure, most of the world’s major corporations are active regionally or globally. The size of global markets for individual industries or product categories helps explain why companies “go global.” Global markets for some product categories represent hundreds of billions of dollars in annual sales; other markets are much smaller. Whatever the size of the opportunity, successful industry competitors find that increasing revenues and profits means seeking markets outside the home country.

Company management can be classified in terms of its orientation toward the world: ethnocentric, polycentric, regiocentric, or geocentric. These terms reflect progressive levels of development or evolution. An ethnocentric orientation characterizes domestic and international companies; international companies pursue marketing opportunities outside the home market by extending various elements of the marketing mix. A polycentric worldview predominates at a multinational company, whose country managers operate autonomously adapt the marketing mix. When management moves to integrate and coordinate activities on a regional basis, the decision reflects a regiocentric orientation. Managers at global and transnational companies are geocentric in their orientation and pursue both extension and adaptation strategies in global markets.

The dynamic interplay of several driving and restraining forces shapes the importance of global marketing. Driving forces include market needs and wants, technology, transportation and communication improvements, product costs, quality, world economic trends, recognition of opportunities to develop leverage by operating globally, and innovation and entrepreneurship. Restraining forces include market differences, management myopia, organizational culture, and national controls such as nontariff barriers (NTBs).

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Discussion Questions 1-1. What are the basic goals of marketing? Are these goals relevant to global marketing?

1-2. What is meant by “global localization”? Is Coca-Cola a global product? Explain.

1-3. A company’s global marketing strategy (GMS) is a crucial competitive tool. Discuss some of the global marketing strategies available to companies. Give examples of com- panies that use the different strategies.

1-4. U.K.-based Burberry is a luxury fashion brand that appeals to both genders and to all ages. To improve Burberry’s competitiveness in the luxury goods market, CEO Marco Gobetti must update the marketing program put in place by his predecessor. The strategy should address key markets that Burberry will participate in, as well as the integration and coordination of marketing activities. Research recent articles about Burberry and discuss Burberry’s GMS.

1-5. Discuss the differences between the global marketing strategies of Harley-Davidson and Toyota.

1-6. Describe the differences among ethnocentric, polycentric, regiocentric, and geocentric management orientations.

1-7. Identify and briefly describe some of the forces that have resulted in increased global integration and the growing importance of global marketing.

1-8. Define leverage and explain the different types of leverage available to companies with global operations.

1-9. Each July, Fortune publishes its Global 500 listing of the world’s largest companies. You can find the current rankings online at www.fortune.com/global500/. Alternatively, you can consult the print edition of Fortune. Browse through the list and choose any company that interests you. Compare its 2017 ranking with the most recent rank- ing. Has the company’s ranking changed? Consult additional sources (e.g., magazine articles, annual reports, the company’s Web site) to get a better understanding of the factors and forces that contributed to the company’s move up or down in the rankings. Write a brief summary of your findings.

1-10. There’s a saying in the business world that “nothing fails like success.” Take Gap, for example. How can a fashion retailer that was once the source for wardrobe staples such as chinos and white T-shirts suddenly lose its marketing edge? Motorola also fell victim to its own success. The company’s Razr cell phone was a huge hit, but Motorola struggled to leverage that success. Google acquired Motorola Mobility but then sold it to Lenovo in 2014. Recently, Starbucks CEO Howard Shultz warned that his company and brand risk becoming commoditized. And, as noted in Case 1-3, some industry observers are saying that Apple has “lost its cool.” If you were to make separate recommendations to management at each of these companies, what would you say?

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CASE 1-1 Continued (refer to page 2)

The Global Marketplace

Now that you have an overview of global marketing, it’s time to test your knowledge of global current events. Some well-known companies and brands are listed in the left-hand column. The question is: In which country is the parent corporation located? Possible answers are shown in the right-hand column. Write the letter corresponding to the country of your choice in the space provided; each country can be used more than once. Answers follow. 1. Firestone Tire & Rubber 2. Ray-Ban 3. Rolls-Royce 4. RCA 5. Budweiser 6. Ben & Jerry’s Homemade 7. Gerber 8. Miller Beer 9. Rollerblade

10. Case New Holland 11. Weed Eater 12. Holiday Inn 13. Wild Turkey bourbon 14. ThinkPad 15. Wilson Sporting Goods 16. Right Guard 17. BFGoodrich 18. Jaguar 19. Burger King 20. Jenny Craig 21. The Body Shop 22. Titleist 23. Swift 24. Gaggia 25. Church’s English shoes 26. American Standard Brands 27. Chicken of the Sea tuna

Answers 1. Japan (Bridgestone) 2. Italy (Luxottica SpA) 3. Germany (V olkswagen) 4. China (TTE) 5. Belgium ( Anheuser-Busch InBev) 6. Great Britain/Netherlands (Unilever) 7. Switzerland (Nestlé) 8. Great Britain (SABMiller) 9. Italy ( Benetton)10. Italy (Fiat)11. Sweden (AB Electrolux)12. Great Britain ( InterContinental Hotels Group PLC)13. Italy (Campari)14. China (Lenovo)15. Finland (Amer Group)16. Germany (Henkel)17. France (Michelin)18. India (Tata Motors)19. Brazil (3G Capital) 20. Switzerland (Nestlé) 21. France (L’Oréal) 22. South Korea (Fila Korea) 23. Brazil (JBS) 24. Netherlan ds (Philips) 25. Italy (Prada Group) 26. Japan (Lixil Corp) 27. Thailand (Thai Union Frozen Products PCL)

Discussion Questions 1-11. Anheuser-Busch (A-B), which has been described as “an

American icon,” is now owned by a company based in Belgium. Responding to reports that some consumers planned to boycott Budweiser products to protest the deal, one industry observer said, “Brand nationality is all about where it was born, and also the ingredients of that beer and how they make the beer. Basically, it doesn’t matter who owns it. We are in a global world right now.” Do you agree?

1-12. Anheuser-Busch has long enjoyed a reputation as a very desirable place to work. Executives were awarded well-appointed corporate suites and traveled on corporate jets; many had secretaries as well as executive assistants. When managers took commercial flights, they flew first class. Most employees received beer for free and could count on donations of beer and merchandise for community events. Tickets to St. Louis Cardinals home baseball games were also used as a marketing tool. A-B spent heavily on advertising and promotion; various advertising agencies produced about 100 new ads for A-B each year. Given these facts, which changes, if any, would you expect A-B’s new owners to make? Why?

1-13. In 2009, Italy’s Fiat acquired a 20 percent stake in Chrysler, another iconic American company. In January 2014, Fiat completed the acquisition and Chrysler is now a subsidiary of Fiat. Are you familiar with Fiat? What do you think CEO Sergio Marchionne hoped to accomplish with this pair of deals? How might Chrysler benefit from the alliance?

1-14. Ben & Jerry’s Homemade is a quirky ice cream marketer based in Burlington, Vermont. Founders Ben Cohen and Jerry Greenfield are legendary for their enlightened business practices, which include a three-part mission statement: product mission, financial mission, and social mission. When the company was acquired by consumer products giant Unilever, some of the brand’s loyal customers were alarmed. What do you think was the source of their concern?

a. Germany b. France c. Japan d. Great Britain e. United States f. Switzerland g. Italy h. Sweden i. Finland j. China k. Netherlands l. Belgium m. India n. Brazil o. South Korea p. Thailand

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CASE 1-2

McDonald’s Expands Globally While Adjusting Its Local Recipe

Exhibit 1-12 Source: Hasan Jamali/AP Wide World Photos.

McDonald’s Corporation is a fast-food legend whose famous golden arches can be found at more than 37,000 locations in 118 different countries. The company is the undisputed leader in the quick-service restaurant (QSR) segment of the hospitality industry, with more than twice the system-wide revenues of Burger King. McDonald’s built its reputation by promising and delivering three things to custom- ers: inexpensive food with consistent taste regardless of location; quick service; and a clean, familiar environment.

The company was also a pioneer in the development of convenience- oriented features such as drive-through windows and indoor play areas for children. Today, thanks to memorable advertising and intensive pro- motion efforts, McDonald’s is one of the world’s most valuable brands: In 2017, Interbrand ranked it as the world’s number 12 brand overall (Apple has been number 1 for several years running). The golden arches are said to be the second-most-recognized symbol in the world, behind the Olympic rings. In 2014, McDonald’s was named Creative Marketer of the Year at the Cannes Lions International Festival of Creativity.

Despite these successes, the company faces competitive attacks from several directions. During the 1990s, a wide range of upscale food and beverage purveyors arrived on the scene. For example, consumers began flocking to Starbucks coffee bars, where they spend freely on lattes and other coffee-based specialty drinks. The “fast-casual” seg- ment of the industry, which includes companies such as Baja Fresh, Chipotle Mexican Grill, Panera Bread, and Cosi, is attracting customers seeking higher-quality menu items in more comfortable surroundings. Millennials, in particular, began shunning McDonald’s and seeking out alternative fast-dining options such as Five Guys, a “better burger” chain that features freshly cut fries made from locally sourced potatoes.

Meanwhile, Subway overtook McDonald’s as the restaurant chain with the most outlets in the United States. McDonald’s U.S. menu offerings had grown rapidly, and, some would say, quality and service had suffered. Some industry observers also suggested that, in terms of both food offerings and marketing, McDonald’s was losing touch with modern American lifestyles.

Until recently, the picture appeared brighter outside the United States. Thanks to changing lifestyles around the globe, more people are embracing the Western-style fast-food culture (see Exhibit 1-12). McDonald’s responded to this opportunity by stepping up its rate of new unit openings. McDonald’s International is organized into three geographic regions: (1) Europe; (2) Asia-Pacific, Middle East, and Africa (APMEA); and (3) Other Countries. In 2005, the offices of the country heads for Europe and Asia were moved from the U.S. headquarters to their respective regions; now, for example, the head of APMEA man- ages his business from Hong Kong. Commenting on the change, Ken Koziol, vice president of worldwide restaurant innovation, explained, “McDonald’s was built on a strong foundation of a core menu that we took around the world but we need to make sure we are more locally relevant. Taste profiles and desires are changing.”

Asia-Pacific The Indian market holds huge potential for McDonald’s. In 1996, the company formed a joint venture with an Indian partner, Vikram Bakshi, and opened restaurants in New Delhi and Bombay. In Delhi, McDonald’s competes with Nirula’s, a QSR chain with multiple outlets; in addition, hundreds of smaller regional chains can be found throughout India. The U.S.-based Subway chain opened its first Indian location in 2001; Pizza Hut, KFC, and Domino’s Pizza have also entered this market.

Indian demand for meals from the major food chains is growing at a double-digit rate; annual total sales exceed $1 billion. With those trends in mind, McDonald’s identifies strategic locations for its restaurants in areas with heavy pedestrian traffic, such as the shopping street in Bandra in the Bombay suburbs. Other restaurant locations include a site near a college in Vile Parle and another opposite the Andheri train station; in all, McDonald’s India operated more than 400 locations at the end of 2017.

Because the Hindu religion prohibits eating beef, McDonald’s developed the Chicken Maharaja Mac specifically for India. Despite protests from several Hindu nationalist groups, the first McDonald’s attracted huge crowds to its site near the Victoria railway terminal; customers included many tourists from across India and from abroad as well as locals commuting to and from work.

McDonald’s has worked steadily to prove that it is sensitive to Indian tastes and traditions. As is true throughout the world, McDon- ald’s emphasizes that most of the food ingredients it uses—as much as 95 percent—are produced locally. In addition, to accommodate veg- etarians, each restaurant has two separate food preparation areas. The “green” kitchen is devoted to vegetarian fare such as the spicy McAloo Tikki potato burger, Pizza McPuff, and Paneer Salsa McWrap. Even the mayonnaise is made without eggs on this side of the kitchen. Meat items, in contrast, are prepared on the red side of the kitchen. Some of the new menu items developed for India are now being introduced in Europe and the United States.

McDonald’s and other fast-food operators have also been instru- mental in providing employment opportunities to Indian women. On a global basis, female participation in the work force is disproportion- ately low. Two-thirds of India’s female labor force works in agriculture. Employers in the fast-food sector have discovered that women employ- ees tend to be friendly and loyal, which is important for quick-serve

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32 PART 1 • INTRODUCTION

restaurants. To reassure conservative parents, McDonald’s invites them to visit restaurant locations to see firsthand that their daughters are working in a safe environment for a company that respects women.

China is currently home to the world’s largest McDonald’s; China is also the fastest-growing market in terms of the number of new restau- rant openings. The first Chinese location opened in mid-1992 in central Beijing, a few blocks from Tiananmen Square. By 2016, McDonald’s had more than 2,700 restaurants in China. The restaurants purchase 95 percent of their supplies, including lettuce, from local sources.

Prior to 2016, the corporate parent owned two-thirds of the McDonald’s stores in China. However, a food-safety scare caused a short-term dip in sales and profitability. In search of improved profit- ability and flexibility, McDonald’s launched an initiative dubbed “Vision 2022” as the blueprint for expanding outside China’s largest cities. In a key strategic move, CEO Steve Easterbrook sold a controlling stake in all 2,700 Chinese stores to a state-run company, Citic, and a U.S.- based private equity group. The sale marked McDonald’s transition to an all-franchise business model in China. As part of the deal, the new partners will build more than 1,000 new McDonald’s stores.

Western Europe The golden arches are a familiar sight in Europe, particularly in France, Germany, and the United Kingdom. There is even a four-star Golden Arch hotel in Zurich. Overall, Europe contributes about 40 percent of both revenue and operating income for the company, making it a key world region for McDonald’s.

France’s tradition of culinary excellence makes it a special case in Europe; French dining options range from legendary three-star Michelin restaurants to humble neighborhood bistros. From the time McDonald’s opened its first French outlet in 1972, policymakers and media commentators have voiced concerns about the impact of fast food on French culture. Even so, with more than 1,400 locations, France today represents McDonald’s second-largest European market (Germany ranks number 1).

Nevertheless, controversy has kept the company in the public eye. For example, some French citizens objected when McDonald’s became the official food of the World Cup finals that were held in France in 1998. In August 1999, a sheep farmer named Jose Bové led a pro- test against construction of the 851st French McDonald’s near the village of Millau. The protesters used construction tools to dismantle the partially finished structure. Bové told the press that the group had singled out McDonald’s because, in his words, it is a symbol of America, “the place where they not only promote globalization and industrially produced food but also unfairly penalize our peasants.” At one point, executives at McDonald’s France even ran an ad in Femme Actuelle magazine suggesting that children should eat only one meal at McDonald’s per week.

McDonald’s French franchisees experience some of the same com- petitive pressures facing the U.S. units; there are also culturally distinct differences. For example, the French are obsessed with bread. Local bis- tro operators have enjoyed great success selling fresh-baked baguettes filled with ham and brie, effectively neutralizing McDonald’s advantage of fast service and low prices. In response, McDonald’s rolled out the McBaguette, a burger made with local Charolais beef and topped with French cheese and mustard.

In addition, executives hired an architecture firm to develop new restaurant designs and reimage the French operations. A total of eight different themes were developed; many of the redesigned restaurants have hardwood floors and exposed brick walls. Signs have muted col- ors rather than featuring the chain’s signature red and yellow, and the golden arches are displayed more subtly. Overall, the restaurants don’t look like McDonald’s restaurants elsewhere.

The first redesigned res- taurant was located on the Champs-Élysées on a site previ- ously occupied by a Burger King; called “Music,” the restaurant provides diners with the oppor- tunity to listen to music on iPods and watch music videos on TV monitors. In some locations, lime green Danish designer armchairs have replaced plastic seats. As McDonald’s locations in France have undergone style makeovers, some franchisees have reported sales increases of 10 to 20 percent. Encouraged by these results, McDonald’s has embarked on an ambi- tious program to refurbish several thousand outlets in various countries.

Central and Eastern Europe January 31, 2015, marked the 25th anniversary of McDonald’s arrival in the Soviet Union. The first Moscow McDonald’s was built on Pushkin Square, near a major metro station just a few blocks from the Kremlin. It has 700 indoor seats and another 200 outside. It boasts 800 employ- ees and features a 70-foot counter with 27 cash registers, equivalent to 20 ordinary McDonald’s restaurants rolled into one. For its 20th- birthday celebration, the Pushkin Square location offered customers a “buy one, get one free” hamburger promotion; accordion-wielding musicians provided background music.

Khamzat Khazbulatov was selected to manage the first restaurant; today, he is CEO of McDonald’s Russia. At present, there approximately 600 McDonald’s restaurants in Russia, and the company employs more than 35,000 people. To ensure a steady supply of high-quality raw materials, the company built McComplex, a huge, $50 million process- ing facility on the outskirts of Moscow. McDonald’s also worked closely with local farmers to boost yields and quality. Now the facility has been turned over to private companies that today provide 80 percent of the ingredients used in Russia. For example, Wimm-Bill-Dann supplies dairy products to McDonald’s; in 2002, it became the first Russian company to be listed on the New York Stock Exchange. Overall, 100,000 people are employed by companies in McDonald’s supply chain.

Ukraine and Belarus are among the other countries in Eastern Europe with newly opened restaurants. The first Ukrainian McDonald’s opened in Kiev in 1997; by 2007, the chain had expanded to 57 loca- tions in 16 cities. Plans call for as many as 100 restaurants, for a total investment of $120 million.

The marketing environment in the region became notably more complicated in 2014. Russian President Vladimir Putin annexed a region in Ukraine called Crimea, forcing McDonald’s to close its three res- taurants there. After Moscow-backed rebels initiated military action in Ukraine in 2014, the United States, Germany, and other Western nations imposed trade sanctions on Russia. In retaliation, Russian consumer-safety officials descended on numerous McDonald’s loca- tions and cited them for alleged food safety, sanitation, and financial violations. Those issues were subsequently resolved, and in the last few years McDonald’s has expanded into new Russian territories such as Siberia.

McDonald’s has also set its sights on Central Europe, where plans call for hundreds of new restaurants to be opened in Croatia, Slovakia, Romania, and other countries. In 2010, McDonald’s Czech Republic restaurants featured a special lineup of New York–themed sandwiches that were promoted with the iconic “I Heart NY” logo. Advertisements promised, “Another burger each week”; the offerings included Wall Street Beef (“grilled beef, cheese, crispy bacon, fresh lettuce and onion

“The tastes of the urban, upwardly mobile Indian are evolving, and more Indians are looking to eat out and experiment. The potential Indian customer base for a McDonald’s or a Subway is larger than the size of entire developed countries.”

Sapna Nayak, food analyst at Raobank India

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with BBQ sauce on an oval bun topped with sesame seeds”) and Broad- way Chicken.

Refocusing on the U.S. Market When Jim Cantalupo became McDonald’s CEO in 2002, he took the extraordinary step of calling a summit meeting of senior creative per- sonnel from 14 advertising agencies representing the company’s 10 largest international markets. Foremost among them was New York– based DDB Worldwide, the lead agency on the McDonald’s account that handles advertising in dozens of countries, including Australia, the United States, and Germany. In addition, Leo Burnett is respon- sible for ads targeting children. McDonald’s marketing and advertising managers from key countries were also summoned to the meeting at company headquarters in Oak Brook, Illinois. As Larry Light, then global chief marketing officer for McDonald’s, noted, “Creative talent is a rare talent, and creative people don’t belong to geographies, to Brazil or France or Australia. We’re going to challenge our agencies to be more open-minded about sharing between geographies.”

Charlie Bell, a former executive at McDonald’s Europe who was promoted to chief operating officer, didn’t mince words about the company’s advertising. “For one of the world’s best brands, we have missed the mark,” he said before the summit meeting. In June 2002, the company announced that “i’m lovin’ it” would be the new global marketing theme; the copy was proposed by Heye & Partner, a DDB Worldwide unit located in Germany. The phrase remains the company’s global tag line today.

After Jim Skinner was named chief executive officer in 2004, he instituted a “Plan to Win” initiative to increase McDonald’s momen- tum. The core idea was to make McDonald’s “better, not just bigger.” Skinner identified five main drivers of McDonald’s: people, products, place, price, and promotion. The results of the initiative were very posi- tive. For example, Consumer Reports lauded the company’s efforts to upgrade its coffee program. Consumers embraced “better-for-you” menu items such as salads and sandwiches. McDonald’s is also striving to be more environmentally conscious by using less plastic packaging and recycling more. Denis Hennequin, the executive in charge of Euro- pean operations, is pleased with the results of his reimaging campaign. He said, “I’m changing the story. We’ve got to be loyal to our roots, we have to be affordable, we have to be convenient . . . but we have to add new dimensions.”

McDonald’s total stock return for the three-year period 2007 through 2009 was the highest among the 30 com- panies that make up the Dow Jones Industrial Average—a remarkable performance, given the difficult economic environ- ment. The company’s strong financial results gave it the resources to move forward with a remodeling initiative for its U.S. restaurants. The price tag: a whopping $1 billion. The upgrades were partly a response to the positive results from revamped European operations; the makeover also reflects the influence of modern retail design principles used by Apple, Starbucks, and other trendsetters. By 2015, most of McDonald’s 14,350 U.S. restaurants had been updated.

McDonald’s executives are intent on creating a modern, stream- lined environment that will encourage customers to stay longer and spend more. Some of the changes are dramatic: Gone are the red roofs and splashes of neon yellow that many associate with iconic spokes-clown Ronald McDonald. The new color palette includes subtle shades of orange, yellow, and green. Also on tap: softer lighting and comfortable, stylish new furniture. As Jim Carras, a senior U.S. execu- tive, noted, “McDonald’s has to change with the times. And we have to do so faster than we ever have before.”

New Challenges at Home for the New Bosses Despite winning accolades for its marketing creativity and investing significant sums in upgrades, McDonald’s faces several challenges in its home market. After taking over the CEO position in 2012, Don Thompson was under constant pressure from public health activists alleging that the company is a major contributor to the wave of obesity striking the United States. In addition, animal rights activists continued to protest the treatment of animals by McDonald’s suppliers. Also, the issue of pay inequality and the minimum wage came to the fore in the United States. Activists targeted the company for paying low wages; the current minimum wage in the United States is $7.25 per hour. McDonald’s responded by noting that the company provides that all- important “first job” for many Americans.

Equally worrying was the worst sales slump in more than a decade, indicative that consumer tastes were changing in the United States. Pledging that McDonald’s would “listen to the customer,” Thompson authorized the rapid rollout of a menu innovation called “Create Your Taste.” The system allowed customers to bypass the counter and go directly to a kiosk to customize orders for a hamburger or chicken sandwich on a tablet. Executives acknowledged that the new platform would take some of the “fast” out of the customer experience; it

“For a market leader, they’ve been really aggressive in a pretty fun- damental way, but at the same time not losing the core of who McDonald’s is.”

Kevin Lane Keller, Professor of Marketing, Tuck School of Business, Dartmouth College

Source: Jeremy Banx/Banx Cartoons.

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34 PART 1 • INTRODUCTION

cannot be used with the drive-through, and the custom sandwiches are more expensive than the traditional offerings. However, with its eye on speed and convenience, McDonald’s rolled out another inno- vation: It adopted Apple Pay to allow customers to pay for their pur- chases with their smartphones.

Don Thompson retired in 2015 after his initiatives failed to reignite sales. Upon his departure, Steve Easterbrook assumed the job of CEO, pledging that he would spearhead McDonald’s transformation into a “modern, progressive burger company.” Easterbrook, who is British, had spent several years engineering a turnaround in McDonald’s U.K. business. Among other things, he objected to the venerable Oxford English Dictionary’s definition of a “McJob” as “an unstimulating, low- paid job.”

One of Easterbrook’s first acts as CEO was to commission a study to determine where McDonald’s had gone wrong. The research indicated that McDonald’s core customers had defected to rival burger chains such as Wendy’s and Burger King. Part of the attraction was value- oriented promotional pricing such as “5 items for $4” Deal Meals. Easterbrook responded by cutting McDonald’s prices on coffee and soft drinks and launching “all-day breakfast.” Responding to Wendy’s brand pledge that its burgers are “fresh, never frozen,” McDonald’s is replacing the frozen beef patties in its Quarter Pounder sandwich with fresh ones. The CEO is also spending more than $1 billion to overhaul stores in the United States as well as France, Germany. and other key country markets.

Discussion Questions 1-15. Identify the key elements in McDonald’s global marketing

strategy. Despite a slowdown in global fast-food consump- tion, McDonald’s continues to be a success story. What is the key to its success? Does McDonald’s think globally and act locally? Does it also think locally and act globally?

1-16. Do you think government officials in developing countries such as Russia, China, and India welcome McDonald’s? Do consum- ers in these countries welcome McDonald’s? Why or why not?

1-17. Is it realistic to expect that McDonald’s—or any well-known company—can expand globally without occasionally making mistakes or generating controversy? Why do antiglobaliza- tion protesters—and sometimes government officials—target McDonald’s?

1-18. Assess the changes McDonald’s has made to its marketing strategy in the United States and around the world.

Visit the Web Site

See www.mcdonalds.com for a directory to country-specific sites.

Sources: Anna Nicolaou, “Flipping the Fortunes of Burgers,” Financial Times—FT Big Read: US Food and Beverage (November 27, 2017), p. 11; Preetika Rana, “Fast-Food Jobs Attract Women in India,” The Wall Street Journal (December 27, 2016), p. B3; Julie Jargon, “McDonald’s Is Losing the Burger War,” The Wall Street Journal (October 7, 2016), pp. A1, A10; Wayne Ma, Rick Carew, and Kane Wu, “McDonald’s Hunts for a Partner in China,” The Wall Street Journal (October 4, 2016), pp. B1, B6; Julie Jargon, “From the Grill: Ways to Rescue McDonald’s,” The Wall Street Journal (December 24, 2014), p. B8; James Marson and Julie Jargon, “Moscow Advances on McDonald’s,” The Wall Street Journal (August 21, 2014), pp. B1, B2; Maureen Morrison, “Is McDonald’s Losing That Lovin’ Feeling?” Advertising Age (February 20, 2012), pp. 1, 20; Marion Issard, “To Tailor Burgers for France, McDonald’s Enlists Baguette,” The Wall Street Journal (February 24, 2012), p. B4; Bruce Horovitz, “McDonald’s Revamps Stores to Look More Upscale,” USA Today (May 8, 2011), pp. 1B, 2B; Andrew E. Kramer, “Rus- sia’s Evolution, as Seen Through the Golden Arches,” The New York Times (February 2, 2010), p. B3; Janet Adamy, “As Burgers Boom in Russia, McDonald’s Touts Discipline,” The Wall Street Journal (October 16, 2007), pp. A1, A17; Jenny Wiggins, “Burger, Fries, and a Shake-Up,” Financial Times (January 27, 2007), p. 7; Steven Gray, “Beyond Burgers: McDonald’s Menu Upgrade Boosts Meal Prices and Results,” The Wall Street Journal (February 18–19, 2006), pp. A1, A7; Jeremy Grant, “Golden Arches Bridge Local Tastes,” Financial Times (February 9, 2006), p. 10.

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ChAPTER 1 • INTRODUCTION TO GlObAl MARkETING 35

Exhibit 1-14 Apple cofounder Steve Jobs wore many hats during his illustri- ous career, including inventor, entrepreneur, CEO, and visionary technolo- gist. He was also a master showman, a storyteller, and marketing genius. His appearances at product launches are the stuff of legend, and under his guidance Apple’s must-have products—including the iPod, the iPhone, and the iPad—were, simply put, the epitome of “cool.” Source: Paul Sakuma/Associated Press.

CASE 1-3

Apple versus Samsung: The Battle for Smartphone Supremacy Heats Up

When Steve Jobs died in October 2011, the world lost one of the towering figures of the modern business era (see Exhibit 1-14). Apple, the company Jobs cofounded, was a pioneer in the consumer electronics world; its key product introductions included the Apple II (1977), the Macintosh (1984), the iPod and iTunes (2001), the Apple Store (2001), the iPhone (2007), and the iPad (2009). At the time of Jobs’s death, Apple was the most valuable tech company in the world. By September 2012, Apple stock had soared to record levels, with its price briefly rising above $700 per share. In addition, Apple had amassed more than $100 billion in cash, most of it held abroad as foreign earnings. Meanwhile, once-dominant tech industry giants such as Nokia, Sony, Dell, and BlackBerry were struggling.

Despite strong 2012 sales for the iPhone 5, industry observers began to wonder whether Apple’s hot streak of hit product introduc- tions was starting to cool. Apple’s reputation was based on its proven ability to disrupt existing markets (e.g., the music and telecommunica- tions industries) and to create new markets through the introduction of technical and design innovations. However, some viewed the 2012 launch of the iPhone 5 as an evolutionary step rather than a revolution- ary breakthrough. In fact, many consumers opted to buy the slower, cheaper iPhone 4 or 4S rather than upgrade to the iPhone 5. Without Jobs, who was considered by many to be the heart and soul of the company, were Apple’s best days behind it?

The Competitive Threat As growth in the key smartphone sector began to slow, Apple’s most formidable competitor was Samsung Electronics, a division of Korean industrial giant Samsung Group, whose products range from semicon- ductors to household appliances to smartphones. Samsung’s popular Galaxy series of phones are powered by Android, an operating system developed by Google. Some Galaxy models, including the Galaxy Note (also known as a “phablet”), have larger screens than the iPhone—a point of difference that has helped drive sales of those devices. The

rivalry between Apple and Samsung has been heated, with the two sides squaring off in court over alleged patent infringement.

China and Europe are two of Samsung’s key markets; in 2012, the company launched the Galaxy S III in Europe. In 2013, however, Samsung staged a lavish event at Radio City Music Hall in New York to launch the Galaxy S4. Why the change? As J. K. Shin, the executive in charge of Samsung’s mobile business, noted, “We’re a global player in the smartphone market and a global company, and the U.S. is an impor- tant market for us. . . . I’m not satisfied with our U.S. market share.”

In many developing countries, there is strong demand for inexpen- sive mobile phones. Some Android-based models from Samsung and other companies sell for much less than Apple’s cheapest models. For many years, Apple did not offer a lower-cost version of the iPhone. In the United States, wireless carriers such as Verizon and AT&T subsidized the price of the iPhone for consumers who signed multiyear service contracts—a factor that explained why an American iPhone 5 sold for $199. By contrast, in other countries consumers paid the full, unsubsi- dized price of the iPhone but were not tied to a contract. Moreover, the iPhone 5 was the same in every world market. By contrast, Samsung made several versions of the Galaxy S4—using different processors, for example—to suit the needs of different regions.

Not surprisingly, smartphone makers are setting their sights on China, India, and other emerging markets. For example, Greater China, which includes China, Hong Kong, and Taiwan, is now Apple’s second- largest market. In 2013, Cook announced that China Mobile, the larg- est carrier in the region and the world’s largest carrier overall, would begin selling the iPhone. Apple faces strong competition from local competitors such as Oppo and Xiaomi; Oppo’s R9 bested the iPhone 6 as the top-selling smartphone in 2016. Distribution is critical, and Cook is aggressively expanding the number of outlets in China that sell iPhones.

As growth in China and Europe slows, India, the number 2 smart- phone market, is becoming increasingly important. Here, however, Apple’s 3 percent market share means that it lags far behind Samsung and Chinese producers in terms of smartphone shipments. Two-thirds of the phones sold in India cost less than $180. By contrast, Indian con- sumers pay about $300 for an iPhone 5S, the older model that Apple launched in 2013. These devices are sold through small, independent retailers; for entry-level buyers, Apple’s Web site offers only the iPhone SE and iPhone 6. In May 2017, Apple began manufacturing the SE in India, bringing the price down to approximately $325. Local manufac- turing will also allow Apple to open its own flagship stores in India.

Famously, Steve Jobs downplayed the importance of formal mar- ket research, saying that consumers don’t know what they want. By contrast, Samsung Electronics relies heavily on market research; it has 60,000 staff members working in dozens of research centers in China, Great Britain, India, Japan, the United States, and elsewhere. Samsung designers have backgrounds in such diverse disciplines as psychology, sociology, and engineering. Researchers track trends in fashion and interior design. Also, Samsung spends more on advertising and promo- tion than does Apple.

The Post-Jobs Era Begins In the months following Jobs’s death, Cook made a number of key stra- tegic decisions. For example, he authorized the introduction of the iPad mini, a product that Jobs had opposed. It quickly became a bestseller.

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36 PART 1 • INTRODUCTION

In fall 2013, in conjunction with the launch of the iPhone 5s and iOS 7, a long-rumored lower-priced iPhone model was unveiled. The iPhone 5c featured a plastic case and was available in several colors; the price was approximately $100 lower than that of the new iPhone 5s. The 5c was designed to appeal especially to consumers in emerging markets who could not afford a top-of-the-line smartphone.

China represented a major opportunity, with a catch: Estimates of the market’s potential were tempered by the rapid emergence of low-cost handsets from Chinese manufacturers such as Xiaomi. As Cook noted in an interview with Bloomberg Businessweek, “We never had an objective to sell a low-cost phone. Our primary objective is to sell a great phone and a great experience, and we figured out a way to do it at a lower cost.”

Cook made key personnel decisions as well. Scott Forstall, the executive in charge of iOS mobile software, was fired. In his place, Cook named chief designer Jonathan Ive and software executive Craig Federighi. Going forward, Ive, who had been senior vice president for industrial design, will be responsible for the “look and feel”—in other words, the user interface—for the iPhone and iPad. When Cook, Ive, and Federighi appeared together on the cover of Bloomberg Business- week in fall 2013, commentators noted that Steve Jobs would have never shared the spotlight in this manner. In another key appoint- ment, Angela Ahrendts, the highly regarded CEO of Burberry PLC, was recruited to take over Apple’s retail operations.

Apple’s Marketing Communications Problem Cook and his team also addressed the issue of Apple’s marketing com- munications. It was widely reported that Phil Schiller, Apple’s senior vice president for global marketing, was concerned that Apple’s advertising had lost its edge. Apple had a long-standing relationship with a single agency: Los Angeles-based Chiat/Day, which had created the legend- ary “1984” television spot that launched the original Macintosh. In the 1990s, that agency, now known as TBWA/Chiat/Day, created the iconic “Think Different” campaign. However, a “Genius Bar” campaign timed to coincide with the 2012 Olympics was deemed a failure. In a subsequent e-mail to TBWA, Schiller admitted that he was impressed by arch-rival Samsung’s 2013 Super Bowl ad; by contrast, he noted, Apple was “struggling to nail a compelling [creative] brief on iPhone.”

The marketing issue was pushed to the forefront during the Acad- emy Awards broadcast in spring 2014. Oscar host Ellen DeGeneres took a star-studded selfie (featuring Bradley Cooper, Jennifer Lawrence, and Brad Pitt, among others) with a Samsung Galaxy phone and posted it on Twitter. The post then made social media history after being retweeted more than 3.5 million times. It turns out that DeGeneres is an iPhone owner; however, Samsung had paid $20 million to sponsor the broad- cast. Although there was some disagreement among industry insiders about the monetary value the publicity the stunt generated, most agreed that Samsung had gotten the better of Apple. Writing in Advertising Age, Mark Bergen summed up the situation bluntly when he noted, “ Samsung is simply out-innovating its archrival when it comes to marketing.”

Spurred into action, Cook and Schiller authorized the formation of an in-house advertising agency at Apple. The company is hiring top talent from some of the ad industry’s best agencies to staff it. The in- house team has been tasked with creating new ads; it will compete against TBWA/Media Arts Lab, as TBWA is now known, in a process known as a “creative shootout.” Schiller has also beefed up Apple’s roster of agencies that specialize in digital marketing.

CEO Tim Cook Asserts Himself By mid-2014, it was clear that CEO Tim Cook was stepping out of the shadow of his legendary predecessor (see Exhibit 1-15). In a move designed to make Apple’s common stock more affordable to investors,

Cook authorized a seven-for-one stock split. Simply put, if an investor held 50 shares of the stock at a price of, say $500 per share before the split, after the split the investor would have 350 shares of stock priced at $71.43 per share.

In May 2014, Cook announced that Apple was acquiring Beats Electronics for $3 billion. The deal brought two more key personnel into the Apple fold—namely, hip-hop star Dr. Dre and music mogul Jimmy Iovine. The two had founded Beats in 2006 to market premium headphones; by the time the deal was announced in May 2014, the duo had also launched an online music streaming service, Beats Radio. Both Dre and Iovine were added to the roster of Apple executives, and it was expected that their close ties to the music industry would be an asset. Moreover, the deal reflected the growing importance of wear- able technology; many believed that “fashion electronics” products such as Beats’ $399 headphones were poised for explosive growth.

In September 2014, CEO Cook and his team introduced the iPhone 6 and iPhone 6 Plus, both of which featured larger screens than earlier iPhones. Apple Pay, a key feature of the new devices, promised to usher in a new era of secure mobile payments. Cook also presided over the launch of a new wearable device, the Apple Watch, in 2015.

In 2016, the iPhone 7 and the larger iPhone 7 Plus went on sale. Their launch coincided with the recall of Samsung’s Galaxy Note 7, a situation that helped drive sales and revenues at Apple. Even so, trouble spots were apparent. In China, for example, Apple’s handsets were losing ground to local brands including Huawei, Oppo, and Vivo.

Even as the iPhone continued to generate significant profits, Cook set the strategic goal of doubling revenues from Apple’s services busi- ness, including the App Store and Apple Music, to $50 billion by 2020. To help achieve that goal, Apple began to experiment with original video programming. As Apple Music chief Jimmy Iovine said, “A music service needs to be more than a bunch of songs and a few playlists. I’m trying to help Apple Music be an overall movement in popular culture.” Among its projects: Carpool Karaoke, based on talk show host James Corden’s popular feature, and Planet of the Apps from will.i.am.

Apple and Autonomous Cars In 2014, word began to circulate that Apple was developing autono- mous-driving technology for a new generation of automobiles. Project Titan, as the initiative was known, involved machine learning, artificial intelligence (AI), and other advanced technologies. Established auto- makers, including Ford and GM, were also speeding up their devel- opment efforts in this area in order to catch industry pioneer Tesla. For example, GM acquired Cruise Automation, an autonomous-car startup; GM has also deployed more than 300 Chevrolet Bolt EVs. Ford invested $1 billion in Argo AI. Meanwhile, other tech companies were jumping into the fray. Waymo, a division of Google, has been working on driverless-car technology since 2009. In 2016, Waymo launched a partnership with Fiat Chrysler Automobiles (FCA). Ride-sharing pioneer Uber also has projects in development.

The iPhone Turns 10 In 2017, anticipation was running high for the 10th-anniversary edi- tion of Apple’s iconic iPhone. At Apple’s Worldwide Developers confer- ence in June 2017, Apple launched ARKit, a technology platform that enables developers to create new apps for the next-generation iOS 11. LEGO and IKEA are two of the first companies to develop augmented- reality (AR) apps. The IKEA app, for example, allows furniture shoppers to use the iPhone’s camera to visualize 3D images of IKEA furniture superimposed on different rooms in their homes and apartments. Some industry observers also predict that Apple will build AR technology and sensors into eyeglasses, in which case users would not need to have

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access to their phones to utilize the AR feature. iOS 11 was released at the end of September 2017.

Analysts had predicted a mammoth upgrade “supercycle,” fueled in part by rumors of major form-factor changes such as a cutting- edge OLED (organic light-emitting diode) screen. The new phone was designed to support both augmented reality and virtual reality tech- nologies as well as artificial intelligence.

On September 12, 2017, CEO Cook took the stage at the Steve Jobs Theater in Apple Park, the company’s new $5 billion campus, to launch the new line of phones. These devices included the iPhone 8 ($699) and iPhone 8 Plus ($799). The special-edition iPhone X, starting at $999, reflected Apple’s strategy of charging its most brand-loyal customers premium prices for hardware upgrades as the smartphone category entered the mature phase of the product life cycle.

In 2018, the company launched HomePod, a $349 home speaker powered by Apple’s Siri voice assistant. Within the tech industry, some viewed the HomePod as Apple’s “late-to-the-game” response to Amazon’s wildly popular Echo digital assistant. Echo’s artificial-intelligence capabilities allow it to respond to the vocal prompt “Alexa,” followed by a verbal command or question. Despite the fact that Amazon commands roughly 70 percent of the market, Apple CEO Cook insists that the key to HomePod’s success will be a feature Echo lacks: high-quality music playback capability. “We’re hitting on something people will be delighted with. It’s gonna blow them away. It’s gonna rock the house,” Cook says.

Discussion Questions 1-19. Are you an iOS user or an Android user? Which brand of

smartphone did you buy, and why? 1-20. Do you think Apple can continue to grow by developing

breakthrough products that create new markets, as it did with the iPod, iPhone, and iPad?

1-21. How has Samsung’s global marketing strategy enabled it to compete so effectively against Apple?

1-22. Assess the prospects for the global success of HomePod. 1-23. Do you think Apple should develop self-driving cars (i.e.,

hardware) or focus on self-driving systems (i.e., software)? 1-24. Which uses for an AI-enabled iPhone can you think of? 1-25. More than 1.3 billion Apple devices are in use worldwide.

The company’s goal is to achieve 100 percent renewable energy and to generate and source 4 gigawatts of new clean energy by 2020. Dig deeper: What is the update on this initiative? Conduct some exploratory research, and write a short essay or present a brief oral report on your findings. Remember to cite your sources!

Sources: Saritha Rai, “Finally, a Cheap(ish) iPhone,” Bloomberg Businessweek (June 19, 2017), pp. 30–32; Megan Murphy, “Tim Cook on Apple’s Future—And His Legacy,” Bloomberg Businessweek (June 19, 2017), p. 54; Lucas Shaw and Alex Webb, “A Star Is Born,” Bloomberg Businessweek (May 1–7, 2017), pp. 22–24; Tim Bradshaw, “Apple Grapples with iPhone Retreat in China,” Financial Times (February 2, 2017), p. 13; Ann-Christine Diaz and Maureen Morrison, “For Apple, Marketing Is a Whole New Game,” Advertising Age (June 9, 2014), pp. 12–14+; Sam Grobart, “What, Us Worry?”, Bloomberg Businessweek (September 19–25, 2013); Sam Grobart, “Think Colossal: How Samsung Became the World’s No. 1 Smartphone Maker,” Bloomberg Businessweek (April 1–7, 2013), pp. 58–64; Yun-Hee Kim, “Samsung Targets Apple’s Home Turf,” The Wall Street Journal (March 15, 2013), pp. B1, B4; Dhanya Ann Thoppil, “In India, iPhone Lags Far Behind,” The Wall Street Journal (February 27, 2013), pp. B1, B4; Brian X. Chen, “Challenging Apple’s Cool,” The New York Times (February 11, 2013), pp. B1, B6; Anton Troianovski, “Fight to Unseat iPhone Intensifies,” The Wall Street Journal (January 25, 2013), pp. B1, B6; Rolfe Winkler, “Apple’s Power Within,” The Wall Street Journal (December 7, 2013), p. C1; Josh Tyrangiel, “Tim Cook’s Freshman Year,” Cover Story, Bloomberg Businessweek (September 10–26, 2012), pp. 62–75.

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38 PART 1 • INTRODUCTION

MyLab Marketing Go to the Assignments section of your MyLab to complete these writing exercises.

1-26. Discuss the differences between the global marketing strategies of Harley-Davidson and Toyota.

1-27. U.K.-based Burberry is a luxury fashion brand that appeals to both genders and to all ages. To improve Burberry’s competitiveness in the luxury goods market, CEO Marco Gobbetti recently updated the marketing programs put in place by his predecessors. The strategy addresses key markets that Burberry will participate in, as well as the integration and coordination of marketing activities. Research recent articles about Burberry and discuss Burberry’s GMS.

Notes 1Jan Cienski, “The Man Who Bet on Tradition,” Financial Times (January 14, 2015), p. 12. 2American Marketing Association. www.ama.org/AboutAMA/Pages/Definition- of-Marketing.aspx. Accessed June 19, 2015. 3Rachel Sanderson, “Starbucks’s Shot at Selling Espresso to the Italians,” Finan- cial Times (February 28, 2017), p. B8. 4Bruce Horovitz, “Starbucks Remakes Its Future with an Eye on Wine and Beer,” USA Today (October 22, 2010), p. 1B. 5Quelch, John A., and Katherine E. Jocz. All Business is Local: Why Place Matters More Than Ever in a Global, Virtual World. New York: Portfolio/Penguin, 2012. 6With certain categories of differentiated goods, including designer clothing and other luxury products, higher price is often associated with increased value. 7The history of the Subaru 360 is documented in Randall Rothman, Where the Suckers Moon: The Life and Death of an Advertising Campaign (New York, NY: Vintage Books, 1994), p. 4. 8“Best and Worst Car Brands,” Consumer Reports (April 2018), p. 12. 9Jay Barney notes that “a firm is said to have a competitive advantage when it is implementing a value-creating strategy not simultaneously being implemented by any current or potential competitors.” See Jay Barney, “Firm Resources and Sus- tained Competitive Advantage,” Journal of Management 17, no. 1 (1991), p. 102. 10Jagdish Bhagwati, In Defense of Globalization (New York, NY: Oxford Univer- sity Press, 2004), p. 3. 11John Micklethwait and Adrian Wooldridge, A Future Perfect: The Challenge and Hidden Promise of Globalization (New York, NY: Crown Publishers, 2000), p. xxvii. 12Grant Wahl, “Football vs. Fútbol,” Sports Illustrated (July 5, 2004), pp. 68–72. 13Scott Miller, “BMW Bucks Diversification to Focus on Luxury Models,” The Wall Street Journal (March 20, 2002), p. B4. 14Vijay Govindarajan and Anil Gupta, “Setting a Course for the New Global Landscape,” Financial Times—Mastering Global Business, part I (1998), p. 3. 15Diana Farrell, “Assessing Your Company’s Global Potential,” Harvard Business Review 82, no. 12 (December 2004), p. 85. 16Elizabeth Ashcroft, “Nestlé and the Twenty-First Century,” Harvard Business School Case 9-595-074, 1995. See also Ernest Beck, “Nestlé Feels Little Pres- sure to Make Big Acquisitions,” The Wall Street Journal (June 22, 2000), p. B4. 17Betsy McKay, “Coke’s ‘Think Local’ Strategy Has Yet to Prove Itself,” The Wall Street Journal (March 1, 2001), p. B6. 18Tony Barber, “Culture Change Is Pivotal as Philips Sheds Its Old Skin,” Finan- cial Times (July 5, 2013), p. 14. 19C. Samuel Craig and Susan P. Douglas, “Responding to the Challenges of Global Markets: Change, Complexity, Competition, and Conscience,” Columbia Journal of World Business 31, no. 4 (Winter 1996), pp. 6–18. 20Gabriel Kahn, “Three Italian Furniture Makers Hope to Create a Global Luxury Powerhouse,” The Wall Street Journal (October 31, 2006), p. B1. 21Phred Dvorak, “Big Changes Drive Small Carpet Firm,” The Wall Street Jour- nal (October 30, 2006), p. B3. 22Aaron O. Patrick, “Softer Nike Pitch Woos Europe’s Women,” The Wall Street Journal (September 11, 2008), p. B6.

23Shaoming Zou and S. Tamer Cavusgil, “The GMS: A Broad Conceptualization of Global Marketing Strategy and Its Effect on Performance,” Journal of Market- ing 66, no. 4 (October 2002), pp. 40–56. 24Paul Sonne and Kathy Gordon, “Burberry Refocusing on World’s Big Cities,” The Wall Street Journal (November 8, 2012), p. B9. 25Angela Ahrendts, “Burberry’s CEO on Turning an Aging British Icon into a Global Luxury Brand,” Harvard Business Review 91, no. 1/2 (January–February 2013), pp. 39–42. 26Vanessa Friedman, “Christopher Bailey Reveals His Plan for Burberry,” The New York Times (November 13, 2014). 27Mark Vandevelde, “Burberry at Creative Crossroads as Bailey Quits,” Financial Times (November 1, 2017), p. 17. 28Joanne Lipman, “Ad Fad: Marketers Turn Sour on Global Sales Pitch Harvard Guru Makes,” The Wall Street Journal (May 12, 1988), p. 1. 29Chad Terhune, “Coke Tries to Pop Back in Vital Japan Market,” The Wall Street Journal (July 11, 2006), pp. C1, C3. 30William C. Taylor and Alan M. Webber, Going Global: Four Entrepreneurs Map the New World Marketplace (New York, NY: Penguin Books USA, 1996), pp. 48, 49. 31Saabira Chaudhuri, “Nipped by Upstarts, Unilever Decides to Imitate Them,” The Wall Street Journal (January 3, 2018), p. A8. 32Greg Farrell, “McDonald’s Relies on Europe for Growth,” Financial Times (April 20, 2010). 33Simon Mundy, “Amazon to Deliver $3 bn Investment in India,” Financial Times (June 8, 2016), p. 10. 34Louise Lucas, “New Accent on Consumer Tastes,” Financial Times ( December 14, 2010), p. 14. 35Leslie Kwoh, “Cinnabon Finds Sweet Success in Russia, Mideast,” The Wall Street Journal (December 26, 2012), p. B5. 36E. J. Schultz, “To the Moon and Back: How Tang Grew to Be a Billion-Dollar Global Brand,” Advertising Age (June 16, 2011), p. 13. 37John A. Quelch and Edward J. Hoff, “Customizing Global Marketing,” Harvard Business Review 64, no. 3 (May–June 1986), p. 59. 38Neil Gough, “An Overseas Kick-Start,” The New York Times (May 24, 2017), pp. B1, B4. 39Kana Inagaki, “Rebirth of a Brand,” Financial Times (June 5, 2015), p. 5. 40Mayumi Negishi, Dana Mattioli, and Ryan Dezember, “Japan’s Uniqlo Sets Goal: No. 1 in the U.S.,” The Wall Street Journal (April 12, 2013), p. B7. See also Hiroyuki Kachi and Kenneth Maxwell, “Uniqlo Woos the World But Falters at Home,” The Wall Street Journal (October 12, 2012), p. B8. 41The complete list can be found online at www.fortune.com/global500/. 42Adapted from Howard Perlmutter, “The Tortuous Evolution of the Multinational Corporation,” Columbia Journal of World Business (January–February 1969). 43Norihiko Shirouzu, “Tailoring World’s Cars to U.S. Tastes,” The Wall Street Journal (January 1, 2001), pp. B1, B6. 44T. W. Malnight, “Globalization of an Ethnocentric Firm: An Evolutionary Per- spective,” Strategic Management Journal 16, no. 2 (February 1995), p. 125.

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45Robert Mondavi, Harvests of Joy: My Passion for Excellence (New York, NY: Harcourt Brace & Company, 1998), p. 333. 46Martin Fackler, “A Second Chance for Japanese Cell Phone Makers,” The New York Times (November 17, 2005), p. C1. 47Franck Riboud, “Think Global, Act Local,” Outlook no. 3 (2003), p. 8. 48Jim Stengel, Grow: How Ideals Power Growth and Profit at the World’s Great- est Companies (New York, NY: Crown Business, 2011), p. 167. 49Deborah Ball, “Too Many Cooks: Despite Revamp, Unwieldy Unilever Falls Behind Rivals,” The Wall Street Journal (January 3, 2005), pp. A1, A5. 50Lee Hawkins, Jr., “New Driver: Reversing 80 Years of History, GM Is Reining in Global Fiefs,” The Wall Street Journal (October 6, 2004), pp. A1, A14. 51Although the definitions provided here are important, to avoid confusion we will use the term global marketing when describing the general activities of global companies. Another note of caution is in order: Usage of the terms international, multinational, and global varies widely. Alert readers of the busi- ness press are likely to recognize inconsistencies; usage does not always reflect the definitions provided here. In particular, companies that are (in the view of the authors as well as numerous other academics) global are often described as multinational enterprises (MNEs) or multinational corporations (MNCs). The United Nations prefers the term transnational company rather than global com- pany. When we refer to an “international company” or a “multinational,” we will do so in a way that maintains the distinctions described in the text. 52Douglas Brinkley, “Hoosier Honda,” The Wall Street Journal (July 18, 2006), p. A14. 53Rebecca Blumenstein, “To Cut Costs, GM Is Adding Four Near-Identical Facilities,” The Wall Street Journal (August 4, 1997). 54Allan J. Morrison, David A. Ricks, and Kendall Roth, “Globalization versus Regionalization: Which Way for the Multinational?” Organizational Dynamics (Winter 1991), p. 18.

55Michael A. Yoshino and U. Srinivasa Rangan, Strategic Alliances: An Entrepre- neurial Approach to Globalization (Boston, MA: Harvard Business School Press, 1995), p. 64. 56Joseph A. DiMasi, Ronald W. Hansen, and Henry G. Grabowski, “The Price of Innovation: New Estimates of Drug Development Costs,” Journal of Health Eco- nomics 22, no. 2 (March 2003), p. 151. 57Nicholas Zamiska, “Novartis to Establish Drug R&D Center in China,” The Wall Street Journal (November 11, 2006), p. A3. 58Daniel Yergin and Joseph Stanislaw, The Commanding Heights (New York, NY: Simon & Schuster, 1998), p. 13. 59Bill Vlasic, “Ford’s Bet: It’s a Small World after All,” The New York Times (January 9, 2010), p. B1. 60William C. Taylor and Alan M. Webber, Going Global: Four Entrepreneurs Map the New World Marketplace (New York, NY: Penguin USA, 1996), p. 18. 61Thomas L. Friedman, The Lexus and the Olive Tree (New York, NY: Anchor Books, 2000), pp. 221–222. 62John Tagliabue, “Renault Pins Its Survival on a Global Gamble,” The New York Times (July 2, 2000), Section 3, pp. 1, 6; Don Kirk and Peter S. Green, “Renault Rolls the Dice on Two Auto Projects Abroad,” The New York Times (August 29, 2002), pp. W1, W7. 63Joel Millman, “The Fallen: Lorenzo Zambrano; Hard Times for Cement Man,” The Wall Street Journal (December 11, 2008), p. A1. 64Peter F. Drucker, Innovation and Entrepreneurship (New York, NY: Harper & Row, 1985), p. 19. 65Rachel Sanderson, “Bologna’s Creative Hub Powers Revival,” Financial Times (December 13, 2017), p. 8. 66Larry Rohter, “Bolivia’s Poor Proclaim Abiding Distrust of Globalization,” The New York Times (October 17, 2003), p. A3.

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During the global recession crisis years from 2008 to 2012, India’s economy was in dismal shape. Average annual economic growth was stalled at about 4 percent, inflation was running in double digits, and foreign companies were being blindsided by substantial tax bills. Prime Minister Manmohan Singh and Finance Minister Pranab Mukherjee lacked the capacity to tame inflation, secure financing for much-needed infrastructure improvements, or deliver wheat and rice to India’s poor. In short, the economic policies of the ruling Congress Party were ineffective.

Today, India’s economy is a combination of good news and bad news. The good news: For several years, India was the world’s fastest-growing large economy, posting annual gross domestic product (GDP) increases ranging from 7 percent to 8 percent. By 2017, however, as India commemorated the 70th anniversary of its independence from Great Britain, growth had slowed. Meanwhile, other macroeconomic issues continue to loom large. For one thing, the Indian economy isn’t creating enough jobs to absorb the 1 million Indians who enter the job market each month. In addition, as capital expenditures have fallen, so has consumer confidence.

Narendra Modi, the Bharatiya Janata Party’s (BJP) candidate, was elected prime minister in 2014. He immediately launched a number of modernization initiatives, including one titled “Make in India” (see Exhibit 2-1). During his first two years in office, Modi loosened investment restrictions and embarked on a global public relations tour to reach out to foreign investors. His efforts paid off. Between March 31, 2015, and March 31, 2016, foreign direct investment (FDI) in India totaled $40 ­billion,­a­29­percent­increase­compared­with­the­year­ended­March­31,­2014.

The Global Economic Environment

CASE 2-1

India’s Economy at the Crossroads: Can Prime Minister Narendra Modi Deliver Acche Din?

L E A R N I N G O B J E C T I V E S

2-1 Identify and briefly explain the major changes in the world economy that have occurred during the past 100 years.

2-2 Compare and contrast the main types of economic systems that are found in different regions of the world.

2-3 Explain the categories of economic development used by the World Bank, and identify the key emerging

country markets at each stage of development.

2-4 Discuss the significance of balance of payments statistics for the world’s major economies.

2-5 Identify world leaders in merchandise and services trade, and explain how currency exchange rates impact a company’s opportunities in different parts of the world.

2

PA RT T W O

THE GLOBAL MARKETING ENVIRONMENT

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4141

Despite such progress, Modi faces the daunting task of working with opposition politicians who are blocking his attempts at eco- nomic reform. For example, Modi was forced to drop a key piece of legislation that would have made it easier for companies to acquire land for greenfield investment. The measure was tabled after nega- tive publicity and opposition from rural voters. Some observers assert that the prime minster still needs to deliver some additional “Big Bang” liberalization measures to further renew India’s economy.

Will Modi be able to make good on his campaign pledges and deliver real economic reform? Or, in the end, will his efforts just amount to lots of talk and very little action? Case 2-1 describes the challenges facing India today and Modi’s efforts to jump-start the economy. (When you are done reading the chapter, study the case and answer the discussion questions.) Needless to say, the current state of India’s economy has created both challenges and opportunities for global marketers.

The situation in India illustrates vividly the dynamic, integrated nature of today’s economic environment. Recall the basic definition

of a market: people or organizations with needs and wants and the willingness and ability to buy or sell. As noted in Chapter 1, many companies engage in global marketing in an effort to reach new customers outside their home countries and thereby increase sales, profits, and market share. Brazil, Russia, India, China, and South Africa deserve special mention; collectively referred to as BRICS, these five country markets are especially dynamic and represent important opportunities.1 The BRICS nations and other emerging markets are also nurturing companies that are challenging established global giants at home and abroad.

This chapter identifies the most salient characteristics of the world economic environment, starting with an overview of the world economy. We then present a survey of economic system types, a discussion of the stages of market development, and an explanation of the concept known as balance of payments. Foreign exchange is discussed in the final section of the chapter. Throughout the chapter, we consider the implications of the recent worldwide economic downturn on global marketing strategies.

Exhibit 2-1 Shortly after taking office in May 2014, Indian Prime Minister Narendra Modi launched an initiative to attract more foreign manufacturing to his country. Manufacturing currently accounts for only 16 percent of India’s economic output; the government is intent on increasing that figure to 25 percent. To reach that goal, India plans to create 100 million new jobs by 2022. Source: Partha Sarkar/Xinhua/Alamy.

2-1 The World Economy—Overview of Major Changes

The world economy has changed profoundly since the end of World War II.2 Perhaps the most fundamental change is the emergence of global markets: Responding to new opportunities, global competitors have steadily displaced or absorbed local competitors in many markets. Concurrently, the integration of the world economy has increased significantly. Economic integration stood at 10 percent at the beginning of the twentieth century; today, it is approximately 50 percent. Integration

2-1 Identify and briefly explain the major changes in the world economy that have occurred during the past 100 years.

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42 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

is particularly striking in the European Union (EU) and the North American Free Trade Area (NAFTA). However, as noted in the last chapter, protectionism and nationalism are emerging forces in some countries that may slow the pace further integration.

Just 75 years ago, the world was far less integrated than it is today. As evidence of the changes that have taken place, consider the automobile. Cars with European nameplates such as Renault, Citroën, Peugeot, Morris, Volvo, and others were once radically different from the American cars from Chevrolet, Ford, or Plymouth or the Japanese models from Toyota or Nissan. They were local cars built by local companies using local supply chains, mostly destined for local or regional markets. Even today, global and regional auto companies make cars for their home-country car buyers that are not marketed abroad.

For automakers BMW, Ford, Honda, Hyundai, Kia, and Toyota, however, the global car has become a reality. The changes in their products reflect organizational changes as well. The world’s largest automakers have, for the most part, evolved into global companies. Supply chains now stretch around the globe. Ford is a case in point: In 2008, the company unveiled an updated version of the Fiesta that is being marketed throughout the world. As Mark Fields, an executive vice president at Ford, explained, “We’ve had cars with the same name, like Escort and Focus, but the products themselves were very regional. This is a real shift point for us in that it’s a real global car.”3

During the past two decades, the world economic environment has become increasingly dynamic; change has been dramatic and far-reaching. To achieve success, executives and market- ers must take into account the following new realities:4

Capital movements have replaced trade as the driving force of the world economy.

Production has become “uncoupled” from employment.

The world economy dominates the scene; individual country economies play a subordinate role.

The 100-year struggle between capitalism and socialism that began in 1917 is largely over.

The growth of e-commerce diminishes the importance of national barriers and forces companies to reevaluate their business models.

The first change is the increased volume of capital movements. The dollar value of world trade in goods was $16.5 trillion in 2015. However, the Bank for International Settlements has calculated that foreign exchange transactions worth approximately $5 trillion are booked every day. This works out to more than $1 quadrillion annually, a figure that far surpasses the dollar value of world trade in goods and services.5 An inescapable conclusion resides in these data: Global capital movements far exceed the dollar volume of global trade. In other words, currency trading represents the world’s largest market.

The second change concerns the relationship between productivity and employment. To illus- trate this relationship, it is necessary to review some basic macroeconomics. Gross domestic product (GDP), a measure of a nation’s economic activity, is calculated by adding consumer spending (C), investment spending (I), government purchases (G), and net exports (NX):

GDP = C + I + G + NX

Economic growth, as measured by GDP, reflects increases in a nation’s productivity. Until the economic crisis of the late 2000s, employment in manufacturing had remained steady or declined while productivity continued to grow. Employment rates declined in countries where a bubble economy of misallocated resources in housing and real estate collapsed. In the United States, manufacturing’s share of GDP declined from 19.2 percent in 1989 to 13 percent in 2009.6 In 2011, approximately 9 percent of the U.S. workforce was employed in manufacturing; in 1971, that figure had been 26 percent. During that 40-year period, productivity increased dramatically.

Similar trends can be found in many other major industrial economies. In the United Kingdom, for example, manufacturing accounts for only 8 percent of the country’s total employ- ment, compared with 24 percent in 1980.7 Manufacturing represents only 10 percent of the U.K. economy; key sectors include automobiles, aerospace, and pharmaceuticals. One recent study of 20 large economies found that between 1995 and 2002, more than 22 million factory

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cHAPTER 2 • THE GLOBAL EcONOMIc ENVIRONMENT 43

jobs were eliminated. Manufacturing is not in decline; rather, it is employment in manufactur- ing that is in decline.8 Creating new job opportunities is one of the most important tasks facing policymakers today.

The third major change in the world economic environment is the emergence of the world economy as the dominant economic unit. Company executives and national leaders who recog- nize this reality have the greatest chance of success. For example, the real secret of the economic success of Germany and Japan is the fact that business leaders and policymakers focus on world markets and their respective countries’ competitive positions in that world economy. This change has brought two questions to the fore: How does the global economy work, and who is in charge? Unfortunately, the answers to these questions are not clear-cut.

The fourth change is the end of the Cold War. The demise of communism as an economic and political system can be explained in a straightforward manner: Communism is not an effective economic system. The overwhelmingly superior performance of the world’s market economies has given leaders in socialist countries little choice but to renounce their ideology. A key policy change in such countries has been the abandonment of futile attempts to manage national economies with a single central plan. This policy change frequently goes hand in hand with governmental efforts to foster increased public participation in matters of state by introducing democratic reforms.

Finally, the personal computer revolution and the advent of the Internet era have in some ways diminished the importance of national boundaries. Worldwide, an estimated 1 billion people use personal computers. In the so-called Information Age, barriers of time and place have been subverted by a transnational cyberworld that functions “24/7.” Alibaba, Amazon.com, eBay, Facebook, Google, Instagram, Netflix, Snapchat, Spotify, Twitter, and YouTube are just a sampling of the companies that are pushing the envelope in this Web 3.0 world.

2-2 Economic Systems Traditionally, economists identified four main types of economic systems: market capitalism, centrally planned socialism, centrally planned capitalism, and market socialism. As shown in Figure 2-1, this classification was based on the dominant method of resource allocation (market versus command) and the dominant form of resource ownership (private versus state). Thanks to globalization, however, economic systems are harder to categorize within the confines of a four- cell matrix. More robust, descriptive criteria include the following:10

Type of economy. Is the nation an advanced industrial state, an emerging economy, a transition economy, or a developing nation?

Type of government. Is the nation ruled by a monarchy, a dictatorship, or a tyrant? Is there an autocratic, one-party system? Is the nation dominated by another state, or is it a democracy with a multiparty system? Is it an unstable or terrorist nation?

Trade and capital flows. Is the nation characterized by almost completely free trade or incomplete free trade, and is it part of a trading bloc? Is there a currency board, or are there exchange controls? Is there no trade, or does the government dominate trade possibilities?

“Only an outbreak of protectionist policies or a sharp rise in international shipping costs could slow or temporarily reverse manufacturing’s declining share of employment in the United States.”9

Steven J. Davis, Professor of Economics, University of Chicago

2-2 Compare and contrast the main types of economic systems that are found in different regions of the world.

FIGURE 2-1 Economic Systems

Market

Market capitalism

Private

Resource Ownership

Resource Allocation

State

Command

Centrally planned

capitalism

Market socialism

Centrally planned socialism

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44 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

The commanding heights. Are these sectors (e.g., the transportation, communications, and energy sectors) state owned and operated? Is there a mix of state and private owner- ship? Are they all private, with or without controlled prices?

Services provided by the state and funded through taxes. Are pensions, health care, and education provided? Pensions and education but not health care? Do privatized systems dominate?

Institutions. Is the nation characterized by transparency, standards, the absence of corruption, and the presence of a free press and strong courts? Or is corruption a fact of life and the press controlled by the government? Are standards ignored and the court system compromised?

Markets. Does the nation have a free market system characterized by high-risk/high- reward entrepreneurial dynamism? Is it a free market that is dominated by monopolies, cartels, and concentrated industries? Is it a socialized market with cooperation among business, government, and labor (but with little entrepreneurial support)? Or is planning, including price and wage controls, dominated by the government?

Market Capitalism Market capitalism is an economic system in which individuals and firms allocate resources and production resources are privately owned. Simply put, consumers decide which goods they desire and firms determine what and how much of those goods to produce; the role of the state in market capitalism is to promote competition among firms and to ensure consumer protection. Today, market capitalism is widely practiced around the world, most notably in North America and the European Union (EU) (see Table 2-1).

It would be a gross oversimplification, however, to assume that all market-oriented economies function in an identical manner. Economist Paul Krugman has remarked that the United States is distinguished by its competitive, “wild free-for-all,” and decentralized initiative. By contrast, out- siders sometimes refer to Japan as “Japan Inc.” This label can be interpreted in different ways, but it basically refers to a tightly run, highly regulated economic system that is also market oriented.

Centrally Planned Socialism At the opposite end of the spectrum from market capitalism is centrally planned socialism. In this type of economic system, the state has broad powers to serve the public interest as it sees fit. State planners make “top-down” decisions about which goods and services are produced and in which quantities; consumers can spend their money on what is available. Government ownership of entire industries as well as individual enterprises is characteristic of centrally planned socialism. Because demand typically exceeds supply in this model, the elements of the marketing mix are not used as strategic variables.11 Little reliance is placed on product differentiation, advertising, or pro- motion; to eliminate “exploitation” by intermediaries, the government also controls distribution.

The clear superiority of market capitalism in delivering the goods and services that people need and want has led to its adoption in many formerly socialist countries. Thus, the socialist

TA B L E 2 - 1 Western Market Systems

Type of System Key characteristics countries

Anglo-Saxon model Private ownership; free enterprise economy; capitalism; minimal social safety net; highly flexible employment policies

United States, Canada, Great Britain

Social market economy model

Private ownership; “social partners” orientation that includes employer groups, unions, and banks; unions and corporations are involved in government, and vice versa; inflexible employment policies

Germany, France, Italy

Nordic model Mix of state ownership and private ownership; high taxes; some market regulation; generous social safety net

Sweden, Norway

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cHAPTER 2 • THE GLOBAL EcONOMIc ENVIRONMENT 45

“Countries with planned economies have never been part of economic global- ization. China’s economy must become a market economy.”12

Long Yongtu, chief WTO negotiator for China

TA B L E 2 - 2 Examples of Government Resource Ownership in Sweden

company Industry Sector State Ownership %

TeliaSonera Telecommunications 45

SAS Airline 21*

Nordea Banking 20

OMX Stock exchange 7

Vin & Spirit Alcohol 100**

*The Danish and Norwegian governments each own 14 percent. **Sold in 2008.

ideology, which was developed in the nineteenth century by Marx and perpetuated in the twentieth century by Lenin and others, has been resoundingly refuted. As William Greider wrote two decades ago:

Marxism is utterly vanquished, if not yet entirely extinct, as an alternative economic system. Capitalism is triumphant. The ideological conflict first joined in the mid-nineteenth century in response to the rise of industrial capitalism, the deep argument that has preoccupied political imagination for 150 years, is ended.13

For decades, the economies of China, the former Soviet Union, and India functioned according to the tenets of centrally planned socialism. Today, however, all three countries are engaged in economic reforms characterized, in varying proportions, by increased reliance on market resource allocation and private ownership. Even as China’s leaders attempt to maintain control over society, they acknowledge the importance of economic reform. At a recent assembly, leaders of the Chinese Communist Party asserted that reform “is an inevitable road for invigorating the country’s economy and promoting social progress, and a great pioneering undertaking without parallel in history.”

Centrally Planned Capitalism and Market Socialism In reality, market capitalism and centrally planned socialism do not exist in “pure” form. In most countries, to a greater or lesser degree, command and market resource allocation are practiced simultaneously, as are private and state resource ownership. The role of government in modern market economies varies widely. An economic system in which command resource allocation is utilized extensively in an overall environment of private resource ownership can be called centrally planned capitalism. A fourth variant, market socialism, is also possible in which market-allocation policies are permitted within an overall environment of state ownership.

In Sweden, for example, where the government controls two-thirds of all expenditures, resource allocation is more “voter” oriented than “market” oriented. Also, as indicated in Table  2-2, the Swedish government has significant holdings in key business sectors. Thus, Sweden’s “welfare state” is based on a hybrid economic system that incorporates elements of both centrally planned socialism and capitalism. The Swedish government is embarking on a privatization plan that calls for selling its stakes in some of the businesses listed in Table 2-2.14 For example, in 2008 Vin & Spirit was sold to France’s Pernod Ricard for $8.34 billion.

As noted previously, China is an example of state-directed socialism. However, China’s communist leadership has given considerable freedom to businesses and individuals in the Guangdong Province to operate within a market system. Today, China’s private sector accounts for approximately 70 percent of national output. Even so, state enterprises still receive more than two-thirds of the credit available from the country’s banks.

Market reforms and nascent capitalism in many parts of the world are creating opportunities for large-scale investments by global companies. Indeed, Coca-Cola returned to India in 1994, two decades after being forced out by the government. A new law allowing 100 percent foreign owner- ship of enterprises helped pave the way for Coke’s renewed efforts in that country. By contrast, Cuba stands as one of the last bastions of the command allocation approach. Daniel Yergin and Joseph Stanislaw sum up the situation this way:

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46 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

Socialists are embracing capitalism, governments are selling off companies they had national- ized, and countries are seeking to entice multinational corporations expelled just two decades earlier. Today, politicians on the left admit that their governments can no longer afford the expansive welfare state. . . . The decamping of the state from the “commanding heights” marks a great divide between the twentieth and twenty-first centuries. It is opening the doors of many formerly closed countries to trade and investment, and vastly increasing the global market.15

The Washington, D.C.–based Heritage Foundation, a conservative think tank, takes a more conventional approach to classifying economies: It compiles data from a survey of more than 180 countries that are ranked by degree of economic freedom (see Table 2-3). A number of key economic variables are considered in the rankings: trade policy, taxation policy, government con- sumption of economic output, monetary policy, capital flows and foreign investment, banking policy, wage and price controls, property rights, regulations, and the black market. Hong Kong and Singapore (see Exhibit 2-2) are currently ranked first and second in terms of economic freedom; Cuba, Venezuela, and North Korea are ranked lowest. Coincidentally, Cuba and North Korea are the only two countries where Coca-Cola is not available through authorized channels!

The market opportunity in Cuba has changed considerably recently (see Exhibit 2-3). In December 2014, with two years left in his administration, then-U.S. President Barack Obama took executive action: He announced that the United States and Cuba were renewing diplomatic

Exhibit 2-2 Home to the world’s second-busiest port, Singapore has long been an important trade hub in Southeast Asia. The city-state is now being remade as a cultural destination. Because developers are running out of real estate, small, new projects are heading underground, as in the Ngee Ann Shopping Mall shown here. Source: Rick Piper Photography/Alamy.

Exhibit 2-3 In March 2016, rock ‘n’ roll legends the Rolling Stones played their first-ever concert in Havana, Cuba. Singer Mick Jagger led the 500,000 attendees in a sing-along during the Stones classic “You Can’t Always Get What You Want.” Source: Ernesto Mastrascusa/LatinContent/ Getty Images.

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cHAPTER 2 • THE GLOBAL EcONOMIc ENVIRONMENT 47

TA B L E 2 - 3 Index of Economic Freedom—2017 Rankings

Free 1. Hong Kong 2. Singapore 3. New Zealand 4. Switzerland 5. Australia

Mostly Free 6. Estonia 7. Canada 8. United Arab Emirates 9. Ireland

10. Chile 11. Taiwan 12. United Kingdom 13. Georgia 14. Luxembourg 15. Netherlands 16. Lithuania 17. United States 18. Denmark 19. Sweden 20. Latvia 21. Mauritius 22. Iceland 23. South Korea 24. Finland 25. Norway 26. Germany 27. Malaysia 28. Czech Republic 29. Qatar 30. Austria 31. Macedonia 32. Macau 33. Armenia 34. Botswana

Moderately Free 35. Brunei Darussalam 36. Israel 37. Colombia 38. Uruguay 39. Romania 40. Japan 41. Jamaica 42. Kazakhstan 43. Peru 44. Bahrain 45. Poland

46. Kosovo 47. Bulgaria 48. Cyprus 49. Belgium 50. Malta 51. Rwanda 52. Vanuatu 53. Jordan 54. Panama 55. Thailand 56. Hungary 57. Slovakia 58. Philippines 59. Saint Vincent and the

Grenadines 60. Turkey 61. Kuwait 62. Saint Lucia 63. Costa Rica 64. Saudi Arabia 65. Albania 66. El Salvador 67. Dominica 68. Azerbaijan 69. Spain 70. Mexico 71. Fiji 72. France 73. Tonga 74. Guatemala 75. Côte d’Ivoire 76. Dominican Republic 77. Portugal 78. Namibia 79. Italy 80. Paraguay 81. South Africa 82. Oman 83. Montenegro 84. Indonesia 85. Seychelles 86. Morocco 87. Trinidad and Tobago 88. Swaziland 89. Kyrgyz Republic 90. Bahamas 91. Uganda 92. Bosnia and Herzegovina

Mostly Unfree 93. Burkina Faso 94. Cambodia 95. Croatia 96. Benin 97. Slovenia 98. Nicaragua 99. Serbia

100. Honduras 101. Belize 102. Mali 103. Gabon 104. Belarus 105. Tanzania 106. Guyana 107. Bhutan 108. Samoa 109. Tajikistan 110. Moldova 111. China 112. Sri Lanka 113. Madagascar 114. Russia 115. Nigeria 116. Cabo Verde 117. Democratic Republic of

Congo 118. Ghana 119. Guinea-Bissau 120. Senegal 121. Comoros 122. Zambia 123. Tunisia 124. São Tomé and Príncipe 125. Nepal 126. Solomon Islands 127. Greece 128. Bangladesh 129. Mongolia 130. Barbados 131. Mauritania 132. Micronesia 133. Laos 134. Lesotho 135. Kenya 136. The Gambia 137. Lebanon 138. Togo

139. Burundi 140. Brazil 141. Pakistan 142. Ethiopia 143. India 144. Egypt 145. Sierra Leone 146. Burma 147. Vietnam 148. Uzbekistan 149. Malawi 150. Cameroon 151. Central African Republic 152. Papua New Guinea 153. Kiribati 154. Niger 155. Iran 156. Argentina 157. Maldives

Repressed 158. Mozambique 159. Haiti 160. Ecuador 161. Liberia 162. Chad 163. Afghanistan 164. Sudan 165. Angola 166. Ukraine 167. Timor-Leste 168. Bolivia 169. Guinea 170. Turkmenistan 171. Djibouti 172. Algeria 173. Timor-Leste 174.

175.

Equatorial Guinea

Zimbabwe 176. Eritrea 177. Republic of Congo 178. Cuba 179. Venezuela 180. North Korea

Source: Adapted from Terry Miller and Kim R. Holmes, 2017 Index of Economic Freedom (Washington, DC: Heritage Foundation and Dow Jones & Company, 2017), available at www.heritage.org/index (accessed January 1, 2018).

Not Ranked

Iraq

Libya

Liechtenstein

Somalia

Syria

Yemen

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48 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

TA B L E 2 - 4 Stages of Market Development

Income Group by per capita GNI 2016 GDP ($ millions)

2016 GNI per capita ($)

World GDP (%)

2016 Population (millions)

High-income countries (OECD)

GNI per capita Ú +12,236 48,557,000 41,208 64 1,190

Upper-middle-income countries

GNI per capita Ú +3,956 to … +12,235

20,624,000 8,177 27 2,579

Lower-middle-income countries

GNI per capita Ú +1,006 but … +3,955 6,263,000 2,079 8 3,012

Low-income countries

GNI per capita … +1,005 402,000 612 1 659

Note: OECD, Organisation for Economic Co-operation and Development.

2-3 Explain the categories of economic development used by the World Bank, and identify the key emerging country markets at each stage of development.

“In a global market, you’re not going to gain your profit by sitting tight in the United States in a flat and declining market. You’re going to make your money in China and Russia and India and Brazil.”17

Tom Pirko, president of BevMark, commenting on InBev’s acquisition of Anheuser-Busch

relations. Within weeks of the announcement, embassies were reestablished. However, full nor- malization of trade relations can come only after the U.S. Congress repeals the embargo.

At the end of 2017, a spokesperson for John Deere indicated that shipments of farm tractors from the United States to Cuba were scheduled to begin soon. In addition, Caterpillar announced the opening of a distribution center in the Mariel Special Economic Development Zone. However, there is a possibility that Obama’s successor, President Donald Trump, will reverse course and once again prohibit U.S. companies from doing business in Cuba.

A high correlation exists between the degree of economic freedom and the extent to which a nation’s mixed economy is market oriented, although the criteria for the ranking have been subject to some debate. For example, author William Greider has observed that the authoritarian state capitalism practiced in Singapore deprives the nation’s citizens of free speech, a free press, and free assembly. Indeed, Singapore once banned the import, manufacture, and sale of chewing gum, because discarded wads of gum were making a mess in public places. Today, gum is available at pharmacies; before buying a pack, however, consumers must register their names and addresses. Greider notes, “Singaporeans are comfortably provided for by a harshly autocratic government that administers paranoid control over press and politics and an effective welfare state that keeps everyone well housed and fed, but not free.”16 As Greider’s observation makes clear, some aspects of “free economies” bear more than a passing resemblance to command-style economic systems.

2-3 Stages of Market Development At any point in time, individual country markets are at different stages of economic development. The World Bank has developed a four-category classification system that uses per capita gross national income (GNI) as a basis for categorizing countries (see Table 2-4). The income defini- tion for each of the stages is derived from the World Bank’s lending categories, and countries within a given category generally have a number of characteristics in common. Thus, the stages provide a useful basis for global market segmentation and target marketing.

Two decades ago, a number of countries in Central Europe, Latin America, and Asia were expected to experience rapid economic growth. The list of these big emerging markets (BEMs) included China, India, Indonesia, South Korea, Brazil, Mexico, Argentina, South Africa, Poland, and Turkey.18 Today, much attention is focused on opportunities in Brazil, Russia, India, China, and South Africa. As previously noted, these five countries are collectively known as BRICS. Experts predict that the BRICS nations will be key players in global trade even as their track records on human rights, environmental protection, and other issues come under closer scrutiny by their trading partners. The BRICS government leaders will also come under pressure at home as their developing market economies create greater income disparity. For each of the stages of economic development discussed here, special attention is given to the BRICS countries.

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cHAPTER 2 • THE GLOBAL EcONOMIc ENVIRONMENT 49

Low-Income Countries Low-income countries have a GNI per capita of $1,005 or less. Countries at this income level share the following general characteristics:

1. Limited industrialization and a high percentage of the population engaged in agriculture and subsistence farming

2. High birth rates, short life expectancy 3. Low literacy rates 4. Heavy reliance on foreign aid 5. Political instability and unrest 6. Concentration in Africa south of the Sahara

Approximately 9 percent of the world’s population resides in countries included in this eco- nomic category. Many low-income countries have such serious economic, social, and political problems that they represent extremely limited opportunities for investment and operations. Some, such as Burundi, are no-growth economies, with a high percentage of the population living at the national poverty line. Others were once relatively stable countries with growing economies that have become divided by political struggles. The result is an unstable environment characterized by civil strife, flat incomes, and considerable danger to residents. Countries embroiled in civil wars are dangerous areas; most companies find it prudent to avoid them.

Other low-income countries have rebounded sharply after years of ethnic turmoil and internal strife. For example, Rwanda’s per-capita GNI increased 100 percent in the decade from 2006 to 2016. President Paul Kagame is investing heavily to bring about economic transformation. A new convention center in Kigali is designed to lure business to the capital city and increase tourism to the country overall (see Exhibit 2-4). Kagame has laid out an ambitious growth agenda dubbed Vision 2050, and he envisions raising the country’s per capita income to $4,035 by 2035. Critics have noted that government-linked businesses known as “partystatals” dominate some industry sectors in Rwanda; however, the president denies that his ruling Rwandan Patriot Front is trying to take over the economy.19

With per capita income of less than $700, Ethiopia is another poor country located in sub-Saharan Africa. However, Ethiopians have enjoyed more than a decade of double-digit economic expansion. Buoyed by foreign investment from China, several industrial parks have opened in the past few years. This has paved the way for garment workers to earn the equivalent of $45 per month making garments for global brands such as J Crew and Burberry. Hong Kong– based TAL Apparel has opened a factory in one of the industrial parks. Roger Lee, chief executive of TAL, recently summed up the advantages of Ethiopia: “We were looking for a country that has a sufficient available workforce, is sufficiently near a seaport for exports, low enough wage levels . . . and duty-free access to the key U.S. and European markets.”20

Exhibit 2-4 Rwanda’s gleaming new $300 million convention center is integral to President Paul Kagame’s strategy for economic growth. Other investments include a new $800 million airport and special economic zones to attract investment. Source: MARCO LONGARI/AFP/ Getty Images.

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50 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

Lower-Middle-Income Countries The United Nations designates 50 countries in the bottom ranks of the low-income category as least-developed countries (LDCs); the term is sometimes used to contrast them with developing countries (i.e., upper ranks of low-income plus lower-middle- and upper-middle-income countries) and developed countries (high-income countries). Lower-middle-income countries have a GNI per capita between $1,006 and $3,955. Consumer markets in these countries are expanding rapidly. Vietnam (GNI per capita +2,050), Indonesia ($3,400), and others in this group represent an increasing competitive threat as they mobilize their relatively cheap—and highly motivated—labor forces to serve the world market. The developing countries in the lower-middle- income category have a major competitive advantage in mature, standardized, labor-intensive light industry sectors such as footwear, textiles, and toys. Case in point: Vietnam and Indonesia are the top two countries in terms of line employee head count in Nike’s worldwide network of more than 500 contractor factories.

With a 2016 GNI per capita of $1,680, India has transitioned out of the low-income category and now is classified as a lower-middle-income country. In 2017, India commemorated the 70th anniversary of its independence from Great Britain. For many decades, economic growth was weak. Indeed, as the 1990s began, India was in the throes of an economic crisis: Inflation was high, and foreign exchange reserves were low. Country leaders opened India’s economy to trade and investment and dramatically improved market opportunities.

During this era, Manmohan Singh was placed in charge of India’s economy. Singh, former governor of the Indian central bank and finance minister, believed that India had been taking the wrong road. Accordingly, he set about dismantling the planned economy by eliminating import licensing requirements for many products, reducing tariffs, easing restrictions on foreign invest- ment, and liberalizing the rupee.

Yashwant Sinha, the country’s former finance minister, once declared that the twenty-first century would be “the century of India.” His words appear prescient: India is now home to a number of world-class companies with growing global reach, including Infosys, Mahindra & Mahindra, Tata, and Wipro. Meanwhile, the list of global companies operating in India is growing longer. They include Benetton, Cadbury, Coca-Cola, DuPont, Ericsson, Fujitsu, IBM, L’Oréal, MTV, Staples, Unilever, and Walmart, among others. India’s huge population base also presents attractive opportunities for automakers. Suzuki, Hyundai, General Motors, and Ford are among the global car manufacturers doing business in India.

Exhibit 2-5 BRCK is a tech company based in Kenya. The company’s breakthrough product, a surge-resistant Internet router with an 8-hour battery, sells for $250. Although low-income African nations are the primary target market for the devices, tech-savvy consumers in Europe and the United States have also snapped up BRCKs. A new product, the Kio Kit, is an affordable educational package that provides digital content to students studying in remote areas. The company has also launched Moja, a free public Wi-Fi network. Source: SIMON MAINA/AFP/Getty Images.

“As the saying goes, if you are not manufactur- ing in China or selling in India, you are as good as finished.”21

Dipankar Halder, Associate Director, KSA Technopak, India

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cHAPTER 2 • THE GLOBAL EcONOMIc ENVIRONMENT 51

Two of the smaller countries from the former Soviet Union, Tajikistan and Uzbekistan, also fall into the lower-middle income categories. Sometimes lumped into a regional group known as “the Stans,” they invite closer study on both an individual and regional basis. Incomes in these countries are low, there is considerable economic hardship, and the potential for disrup- tion is certainly high. Are they problem cases, or are they attractive opportunities with good potential for economic growth? These countries represent an obvious risk–reward trade-off; some companies have taken the plunge, but many others are still assessing whether they ought to join the pioneers.

Table 2-3 ranks Uzbekistan quite low in terms of economic freedom. This is one indication of a risky business environment in a lower-middle-income country. Perhaps that helps explain why there are no Western fast-food chains in Uzbekistan—no Starbucks, no McDonald’s! The good news is that, in the last few years, Uzbekistan has transitioned from “repressed” in the index to “mostly unfree.” And, as befits a nation whose cities were once important trade hubs on the Silk Road, there are market opportunities here. For example, GM is the top car company in Uzbekistan; in 2013, GM Uzbekistan produced its two-millionth car. Overall, this Central Asian country is one of GM’s 10 largest markets worldwide! Moreover, Uzbekistan stands to gain from China’s infrastructure investment in neighboring Kazakhstan.

Russia’s economy has slipped from the high-income category to the upper-middle-income tier; it stands at number 114 in the 2017 economic freedom rankings. The pace of Russia’s eco- nomic recovery has lagged that in other emerging markets. With the collapse in oil prices, the Kremlin’s search for new sources of revenue to fund its budget outlays has created tension between government ministries and business. In fact, some observers have asked whether Russia should still be included in the BRICS grouping. Pundits debated whether President Vladimir Putin would run for a fourth term as elections loomed in 2018.

Upper-Middle-Income Countries Upper-middle-income countries, also known as industrializing or developing countries, are those with GNI per capita ranging from $3,956 to $12,235. In these countries, the percentage of the population engaged in agriculture drops sharply as people move to the industrial sector and the degree of urbanization increases. Chile, Malaysia, Mexico, Venezuela, and many other countries in this stage are rapidly industrializing. They have high literacy rates and strong education systems; wages are rising, but they are still significantly lower than in the advanced countries. Innovative local companies can become formidable competitors and help contribute to their nations’ rapid, export-driven economic growth.

Brazil ($8,840 GNI per capita in 2016), Russia ($9,720), China ($8,260), and South Africa ($5,480) are the four BRICS nations that currently fall into the upper-middle-income category. Brazil is the largest country in Latin America in terms of the size of its economy, population, and geographic territory. Brazil also boasts the richest reserves of natural resources in the hemi- sphere; China, Brazil’s top trading partner, has an insatiable appetite for iron ore and other commodities.

Government policies aimed at stabilizing Brazil’s macroeconomy yielded a decade of impres- sive results: Brazil’s GNI grew steadily between 2003 and 2013. During the same period, tens of millions of Brazilians joined the middle class as their incomes and living standards increased.23 Needless to say, this trend was a boon to global companies doing business in Brazil, which include Electrolux, Fiat, Ford, General Motors, Nestlé, Nokia, Raytheon, Toyota, Unilever, and Whirlpool (see Exhibit 2-7). More recently, Brazil’s economy has been negatively impacted by a series of scandals known as Lavo Jato (“Car Wash”) involving government and business leaders.

As is typical for countries at this stage of development, Brazil is a study in contrasts. Grocery distribution companies use logistics software to route their trucks; meanwhile, horse-drawn carts are still a common sight on many roads. To keep pace with the volatile financial environment of the early 1990s, many local retailers invested in sophisticated computer and communications systems. They use sophisticated inventory management software to maintain financial control. Thanks to Brazil’s strength in computers, the country’s outsourcing sector is growing rapidly.24 Former French President Jacques Chirac underscored Brazil’s importance on the world trade scene when he noted, “Geographically, Brazil is part of America. But it’s European because of its culture and global because of its interests.”25

“It may feel like the tem- perature has only risen a couple of degrees so far, but this heralds the end of India’s economic Ice Age.”22

Vivek Paul, vice chairman, Wipro

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52 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

Myanmar is a low-income country in Southeast Asia with a population of 52 million people. After gaining independence from Great Britain in 1948, the country was ruled for decades by a military junta. In 2003, the U.S. government imposed a trade embargo on Myanmar, effectively slamming the door on opportunities for American businesses in that country.

In 2011, however, the country formerly known as Burma abruptly changed course. For starters, Myanmar’s citizens elected a president, Thein Sein. Other political and economic changes swiftly followed: Political prisoners have been released, and press censorship has been abolished.

Encouraged by Myanmar’s transition from dictatorship toward economic openness and democracy, many Western governments have lifted sanctions such as bans on the country’s imports. These actions have opened the doors to global companies, and Coca-Cola, General Electric (GE), MasterCard, Mitsubishi, Nestlé, Visa, and many others have begun setting up operations in Myanmar (see Exhibit 2-6). Indeed, foreign investment has skyrocketed, from a modest $208 million in 2000 to $850 million in 2011. Coca-Cola alone has pledged to invest $200 million by 2018.

However, those global giants will be playing catch-up. Why? During years of Western sanctions, companies in China, Japan, and other Asian countries maintained a presence in Myanmar. That fact is paying dividends today. Mitsubishi is a case in point. This company established an export office in Yangon years ago. As Mitsuo Ido, Mit- subishi’s general manager, notes, “Japan and Myanmar have had a long relationship, and Japanese companies are now very interested in increasing their involvement here. Myanmar people are very similar to Japanese in some ways.”

U.S. President Barack Obama made a quick visit to Myanmar at the end of 2012. Even now, however, some sanctions remain in place. These include sanctions targeting “Specially Designated Nationals,” who had ties to the former military regime, such as businessman Zaw.

Much remains to be done to improve life in Myanmar. Ethnic con- flict is rife; the fledgling government is struggling to achieve peace and stability in the face of protests. In addition, Myanmar’s economic and physical infrastructures have serious shortcomings. The legal system is undeveloped, and workers lack training. Mobile telecommunications networks need upgrades; most Western cell phones don’t work in Myanmar. According to the Asian Development Bank, only about one- fourth of Myanmar’s population has access to reliable electricity, and power shortages and outages are not unusual. Despite these obstacles, the country’s rich gas and oil reserves represent a major opportunity for GE; Total, a French energy giant; and other companies.

It remains to be seen whether the “gold rush” in Myanmar will yield big successes. Years ago, some companies that attempted to capitalize on new opportunities in Russia and Vietnam ended up los- ing a lot of money. Moreover, corruption is rampant in Myanmar, and many former military leaders have secured licenses in banking and other services. Global soft drinks titan Coca-Cola finds itself compet- ing with inexpensive soft drinks such as Blue Mountain Cola and Fan- tasy Orange. Even so, some business owners in Myanmar worry that foreigners will dominate key business sectors. An executive at a New York–based investment firm summed up the opportunity this way: “If I was 25 years old and single, I’d just go there. It’s just ready for takeoff.”

Sources: Shibani Mahtani, “Gap to Make Old Navy, Banana Republic Apparel in Myanmar,” The Wall Street Journal (June 6–7, 2014), p. B3; Laura Meckler, “Obama Challenges Myanmar on Visit,” The Wall Street Journal (November 20, 2012), p. A8; Patrick Barta, “Final Frontier: Firms Flock to Newly Opened Myanmar,” The Wall Street Journal (November 12, 2012), p. A1; Michiyo Nakamoto and Gwen Robinson, “Japan Looks for Early Lead in Myanmar Race,” Financial Times (October 1, 2012), p. 6; Patrick Barta, “Myanmar Concerns Remain, U.S. Envoy Says,” The Wall Street Journal (August 20, 2012), p. A7; “Myanmar Is Next Real Thing for Coke,” Financial Times (June 15, 2012), p. 16; Simon Hall, “Energy Titans Look to Myanmar,” The Wall Street Journal (June 8, 2012), p. B6; David Pilling and Gwen Robinson, “Myanmar: A Nation Rises,” Financial Times (December 3, 2010), p. 6.

EMERGING MARKETS BRIEFING BOOK

Myanmar Is Open For Business

Exhibit 2-6 An employee takes a call as customers purchase jewelry at a gold shop in Yangon, the former capital of Myanmar. Myanmar’s economy is set for growth as sweeping political, economic, and financial reforms raise hopes of a renaissance for the impoverished nation. Now that trade sanctions have been lifted, global companies in a variety of industries are moving quickly to formulate and implement market-entry strategies. Source: Ye Aung Thu/AFP/Getty Images.

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cHAPTER 2 • THE GLOBAL EcONOMIc ENVIRONMENT 53

In 2016, Russia slipped from the high-income category as its per capita GNI decreased from $14,840 in 2013 to $9,720 (upper-middle income). Overall, Russia’s economic situation rises and falls as the price of oil fluctuates. The current slump in world oil prices has impacted Russia, as have international sanctions. Strong local companies have appeared on the scene, including Wimm-Bill-Dann Foods, Russia’s largest dairy company; PepsiCo acquired it in 2011. However, corruption in Russia is pervasive, and the bureaucracy often creates a mountain of red tape for companies such as Diageo, Mars, McDonald’s, Nestlé, and SAB Miller.

China is the third BRICS nation in the upper-middle-income category; its GNI per capita was $8,260 in 2016. China represents the largest single destination for foreign investment in the developing world. Attracted by the country’s vast size and market potential, companies in Asia, Europe, and North and South America are marking China as a key target in their global strategies. Shenzhen and other special economic zones have attracted billions of dollars in foreign investment. Despite the ongoing market reforms, however, Chinese society lacks a democratic foundation.

China is a case study in how to jump-start a nation’s economic growth. Leveraging the country’s central planning economic model, the government poured money into infrastructure improvements such as highways, railways, and ports. Soon, China’s economy was growing at a double-digit pace. The beneficiaries of this economic boom included companies in Australia, Brazil, Indonesia, and other countries that export goods to China. Avon, Coca-Cola, Dell, Ford, General Motors, Honda, HSBC, JPMorgan Chase, McDonald’s, Motorola, Procter & Gamble, Samsung, Siemens AG, Toyota, and Volkswagen were among the scores of global companies that began actively pursuing opportunities in China.

In 2007, just prior to the global economic crisis, the message from the Chinese government began to change. As words like “unsteady,” “unbalanced,” and “uncoordinated” began to pop up in key political speeches, China watchers sensed that change was in the wind. For years, China’s economic growth has been built on exports and low-wage manufacturing. More recently, GDP growth has begun to weaken. A new leadership team is in place, and Beijing is shifting from an external focus to an internal one in an effort to deal with urgent problems related to the country’s infrastructure, bribery, and corruption.

Meanwhile, China is moving to become less reliant on exports. To achieve this goal, con- sumption by Chinese citizens must increase. President Xi Jinping’s ambitious infrastructure plan, known variously as the “Belt and Road Initiative” (BRI) and “One Belt One Road,” revives the ancient Silk Road trade route. Beijing has also launched a new industrial strategy dubbed “Made in China 2025.” The aim is for China to become a world leader in advanced industries such as

Exhibit 2-7 Nestlé has invested tens of millions of dollars to build several plants in the Brazilian state of Rio de Janeiro. This $83 billion facility in Tres Rios opened in 2011. It produces milk products and was designed with environmental sustainability in mind. Coffee, cookies, noodles, and other items that Nestlé produces locally are adapted to suit Brazilian tastes and pocketbooks. As Ivan Zurita, CEO of Nestlé Brasil, noted, “In our country there are 30 million people consid- ered too poor to be consumers, and we have come to the conclusion that regionalization will speed up our competitiveness in terms of cost and greater operational efficiency.” Source: visicou/Shutterstock.

“If you want to do well globally today, you have to first be successful in China, and we’re already here.”26

Daniel Kirchert, co-founder, Byton (electric vehicle company)

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54 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

robotics and electric vehicles. However, Beijing’s state involvement in industry is one reason why the World Trade Organization (WTO) has still not granted China “market economy” status.

South Africa joined the BRICS group in 2011. In 2017, the Chinese president welcomed leaders from the other four BRICS nations to a summit in Xiamen (see Exhibit 2-8). One topic of discussion at this meeting was the opening of the Africa Regional Centre, funded by the BRICS-supported National Development Bank. The Centre will serve as a source of financing for infrastructure development and other projects. South Africa hosted the tenth BRICS summit in Johannesburg in 2018, providing President Jacob Zuma with an opportunity attract more direct investment in the African continent as a whole.27

Lower-middle- and upper-middle income countries that achieve the highest sustained rates of economic growth are sometimes referred to collectively as newly industrializing economies (NIEs). Overall, NIEs are characterized by greater industrial output than developing economies; heavy manufacturing operations and refined products account for an increasing proportion of their exports. Goldman Sachs, the firm that developed the original BRIC framework more than a decade ago, has identified a new country grouping called Next-11 (N11). Five of the N11 countries are considered NIEs: three lower-middle-income countries (Egypt, Indonesia, and the Philippines) and two upper-middle-income countries (Mexico and Turkey). Among these five countries, Egypt, Indonesia, and the Philippines have posted positive GDP growth over the past several years.

Marketing Opportunities in LDCs and Developing Countries Despite the many problems in LDCs and developing countries, it is possible to nurture long-term market opportunities there. Today, Nike produces and sells only a small portion of its output in China, but when the firm refers to China as a “2-billion-foot market,” it clearly has the future in mind. C. K. Prahalad and Allen Hammond have identified several assumptions and misconcep- tions about the “bottom of the pyramid” (BOP) that need to be corrected:28

Mistaken assumption #1: The poor have no money. In fact, 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 nonessential goods. In fact, 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 fact, because the poor

Exhibit 2-8 Leaders of the BRICS nations met at a summit in Xiamen in 2017 (from left): Brazilian President Michel Temer, Russian President Vladimir Putin, Chinese President Xi Jinping, South African President Jacob Zuma, and Indian Prime Minister Narendra Modi. Source: PIB/Alamy Stock Photo.

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cHAPTER 2 • THE GLOBAL EcONOMIc ENVIRONMENT 55

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. In fact, 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. In fact, 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.

Despite the difficult economic conditions in parts of Southeast Asia, Latin America, Africa, and Eastern Europe, many nations in these regions will evolve into attractive markets. One role of marketing in developing countries is to focus resources on the task of creating and delivering products that are best suited to local needs and incomes. Appropriate marketing communications techniques can also be applied to accelerate acceptance of these products. Marketing can be the link that relates resources to opportunity and facilitates need satisfaction on the consumer’s terms.

An interesting debate in marketing is whether it has any relevance to the process of economic development. Some people believe that marketing is relevant only in affluent, industrialized countries, where the major problem is directing society’s resources into ever-changing output or production to satisfy a dynamic marketplace. In the less-developed country, the argument goes, the major problem is the allocation of scarce resources toward obvious production needs. Efforts should therefore focus on production and ways to increase output, rather than on customer needs and wants.

Conversely, it can be argued that the process of focusing an organization’s resources on envi- ronmental opportunities is a process of universal relevance. The role of marketing—to identify people’s needs and wants and to focus individual and organizational efforts so as to respond to those needs and wants—is the same in all countries, irrespective of the level of economic develop- ment. When global marketers respond to the needs of rural residents in emerging markets such as China and India, they are also more likely to gain all-important government support and approval.

For example, pursuing alternative energy sources is important for two reasons: the lack of coal reserves in many countries and the concerns that heavy reliance on fossil fuels contributes to global warming. Similarly, people everywhere need affordable, safe drinking water. Recognizing this fact, Nestlé launched Pure Life bottled water in Pakistan. The price was set at about 35 cents per bottle, and advertising promised, “Pure safety. Pure trust. The ideal water.” Pure Life quickly captured 50 percent of the bottled water market in Pakistan; the brand has since been rolled out in dozens of other low-income countries.30 The Coca-Cola Company recently began to address dietary and health needs in low-income countries by developing Vitango, a beverage product that can help fight anemia, blindness, and other ailments related to malnutrition.

There is also an opportunity to help developing countries join the Internet economy. Intel Chairman Craig Barrett has been visiting villages in China and India and launching programs to provide Internet access and computer training to the residents there. One aspect of Intel’s World Ahead initiative is the development of a $550 computer that is powered by a car battery. Similarly, Hewlett-Packard engineers are working to develop solar-powered communication devices that can link remote areas to the Internet.31 Meanwhile, an initiative called One Laptop Per Child embarked on a program to develop a laptop computer that governments in developing countries can buy for $100.

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. In Brazil, for example, Daimler AG works with a cooperative of farmers who transform coconut husks into natural rubber to be used in auto seats, headrests, and sun visors. French luxury goods marketer Hermès International has created a line of handbags called “Amazo- nia” made of latex extracted by traditional rubber tappers. Both Daimler and Hermès are respond- ing to the opportunity to promote themselves as environmentally conscious while appealing to “green”-oriented consumers. As Isabela Fortes, director of a company in Rio de Janeiro that retrains forest workers, notes, “You can only prevent forest people from destroying the jungle by giving them viable economic alternatives.”32

“Sustainable energy pioneers who focus on the base of the pyramid could set the stage for one of the biggest bonanzas in the history of commerce, since extensive adoption and experience in developing markets would almost certainly lead to dramatic improvements in cost and quality.”29

Stuart L. Hart and Clayton M. Christensen

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56 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

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. By applying the basic tools and principles of modern marketing, Mycoskie has achieved remarkable success.

As is true with many entrepreneurs, Mycoskie’s innovative idea was based on his recognition of unmet needs. In this particular case, the needs were not his own; rather, they were the needs of children whose parents could not afford to buy shoes.

While competing on the reality TV show The Amazing Race in 2002, Mycoskie and his sister found themselves in Argentina. Although they lost the contest (by a mere 4 minutes!), Mycoskie was captivated by the local people and culture. He returned to Argentina in 2006 for a vacation. Using his own powers of direct observation, he could see that a lightweight canvas shoe called the alpargata was very popular in Argentina. He also noted that many of the local children had no shoes; many suffered from foot disease as a result of going barefoot.

Back home in the United States, Mycoskie started thinking about how he could help the disadvantaged people he had seen. One key decision: Instead of setting up a nonprofit organization, he started a for- profit business, based on a “sell one, give one away” business design. 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. This business model has become known as “One-for-One” or “B1G1” (“Buy One, Give One”); Mycoskie’s title is “Chief Shoe Giver.” In fact, Mycoskie insists TOMS is not a shoe company. Rather, he defines his business as “one-for-one,” and the company’s mission as improving lives (see Exhibit 2-9).

Mycoskie’s business design put him at odds with some of his advi- sors, who urged him to give a percentage of profits, or perhaps donate one pair for every three pairs sold. Undeterred, Mycoskie was intent on giving away as many pairs as possible, while giving shoe custom- ers, which the company calls “supporters,” an intimate “one-for-one” experience.

Mycoskie next turned his attention to the urgent need for eye care in developing countries. Partnering with the Seva Foundation, he introduced TOMS sunglasses in 2011, pledging to donate funds for eye care and surgery for every pair purchased. Instead of a logo, each pair of frames features three painted stripes. As Mycoskie explains, every stripe tells a story: The outside stripes represent the bond between the purchaser and the person in need, while the middle stripe represents TOMS, which brought the other two together.

In 2014, Mycoskie extended the TOMS brand to a third category: premium coffee. While on a trip to Africa, Mycoskie realized that coffee farmers required a lot of water to wash coffee beans. Also, clean drinking water was in very short supply in many villages. He was struck by the irony that the countries that supply the world with the best coffee don’t have adequate water for their own people. Mycoskie part- nered with Water For People, a nonprofit organization whose mission is to ensure that everyone has access to a safe, continuous supply of water. The result was TOMS Roasting Company, which sells coffee beans at Whole Foods stores and other select locations. For every bag of coffee beans purchased, TOMS donates one week of clean water to a person in need.

What’s next for TOMS? As the company reached its 10-year anniversary in 2015, it began to transition from being a wholesaler by opening brick-and-mortar stores. These retail locations currently account for only 5 percent of company sales, but Mycoskie envisions that share increasing to 25 percent within a few years. By embed- ding itself in local communities, TOMS will be better able to “start a movement,” as company executives put it. If supporters want to stop in at a store just to use the Internet or have a cup of coffee, that’s fine with TOMS.

TOMS is experimenting with new media to help encourage customer loyalty. For example, all associates (sales staff) have the opportunity to go on giving trips after they have worked at the company for one year. A giving trip to Peru was filmed and sup- porters can view the event using an Oculus virtual reality (VR) head- set. Even as the company searches for ways to operationalize such leading-edge communication tools in today’s tech environment, it offers TOMS supporters a new way to participate in the TOMS brand experience.

Sources: Blake Mycoskie, “TOMS and the Future of the One-for-One Movement,” SXSW Presentation, March 2014; Blake Mycoskie, Start Something That Matters (New York, NY: Random House, 2011); Andrew Adam Newman, “‘Buy One, Give One’ Spirit Imbues an Online Store,” The New York Times (November 5, 2013), p. B7; Mark Hornickel, “Fit for the Sole,” Northwest Alumni Magazine (Fall 2013), pp. 10–13; Carly Gillis, “TOMS Announces Eyewear as Next ‘One for One’ Product,” The Huffington Post (June 7, 2011).

ENTREPRENEURIAL LEADERSHIP, CREATIVE THINKING, AND THE GLOBAL STARTUP

Blake Mycoskie, TOMS

Exhibit 2-9 Blake Mycoskie is founder and Chief Shoe Giver at TOMS. He pio- neered a business design called “one-for-one” that aims to improve the lives of those in need and promote economic development. Source: Aristidis Vafeiadakis/ZUMA Press, Inc./Alamy.

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cHAPTER 2 • THE GLOBAL EcONOMIc ENVIRONMENT 57

High-Income Countries High-income countries, also known as advanced, developed, industrialized, or postindustrial countries, are those with a GNI per capita of $12,236 or higher. With the exception of a few oil- rich nations, the countries in this category reached their present income level through a process of sustained economic growth.

The phrase postindustrial countries was first used by Daniel Bell of Harvard to describe the United States, Sweden, Japan, and other advanced, high-income societies. In his 1973 book The Coming of the Post-Industrial Society, Bell drew a distinction between the industrial and postindustrial stages of country development that went beyond mere measures of income. Bell’s thesis was that the sources of innovation in postindustrial societies are derived increasingly from the codification of theoretical knowledge rather than from “random” inventions. When a country reaches this level, the service sector accounts for more than half of national output, the processing and exchange of information become increasingly important, and knowledge trumps capital as the key strategic resource.

In addition, in a postindustrial society, intellectual technology is more important than machine technology, and scientists and professionals play a more dominant role than do engineers and semiskilled workers. Further, postindustrial societies exhibit an orientation toward the future and stress the importance of interpersonal relationships in the functioning of society. Taken together, these forces and factors spell big sociological changes for the work and home lives of the residents of postindustrial nations.

Product and market opportunities in a postindustrial society are heavily dependent upon new products and innovations. Ownership levels for basic products are extremely high in most households. As a consequence, organizations seeking to grow often face a difficult task if they attempt to expand their share of existing markets. Alternatively, they can endeavor to create new markets. Today, for example, global companies in a range of communication-related industries are seeking to create new e-commerce markets for interactive forms of electronic communica- tion. A case in point is Barry Diller’s Expedia Inc.; the world’s largest online travel company, it includes the Expedia, Orbitz and Travelocity brands. Diller also founded IAC/InterActiveCorp, which owns Vimeo; the Match.com, OkCupid, and Tinder dating sites; the Web magazine Daily Beast; and other Internet businesses.33

In 2009, the Financial Times Stock Exchange (FTSE) upgraded South Korea’s economic status from “emerging” to “developed.” The change is consistent with the World Bank’s ranking and reflects South Korea’s emergence as a global powerhouse. It is the 11th-largest economy by GDP, and a major importer and exporter. South Korea is home to Samsung Electronics, LG Group, Kia Motors Corporation, Daewoo Corporation, Hyundai Corporation, and other well- known global enterprises. Instead of erecting substantial barriers to free trade, South Korea initiated major reforms in its political and economic systems in response to the “Asian flu” (i.e., the 2009 economic crisis in Asia, which coincided with an influenza pandemic originating in the region).

Even so, investors note the political risk posed by North Korea’s aggressiveness and the missile tests ordered by President Kim Jung Un. Another concern is inconsistent treatment of foreign investors by the government. For example, authorities recently raided the local offices of French retailer Carrefour. Adding to the uncertainty is U.S. President Donald Trump’s pledge to overturn the U.S./Korea Free Trade Agreement.

Seven high-income democracies—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. Whenever a global crisis looms—be it the Latin American debt crisis of the 1980s or Russia’s struggle to transform its economy in the 1990s or the economic crisis in Greece in 2007–2008—representatives from the G-7 nations gather and try to coordinate policy (see Exhibit 2-10).

Starting in the mid-1990s, Russia began attending the G-7 summit meetings. In 1998, Russia became a full participant, giving rise to the Group of Eight (G-8). Russia’s membership was suspended in 2014 after President Vladimir Putin annexed the Crimean peninsula (see

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58 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

Exhibit  2-11 and Case 5-1). The Group of Twenty (G-20) was established in 1999; it is composed of finance ministers and central bank governors from 19 countries plus the European Union. The G-20 includes developing nations such as Argentina, Brazil, India, Indonesia, and Turkey; Russia remains a member.

Another institution to which high-income countries belong is the Organisation for Economic Co-operation and Development (OECD; www.oecd.org). The 35 nations that belong to the OECD believe in market-allocation economic systems and pluralistic democracy. The organiza- tion has been variously described as an “economic think tank” and a “rich-man’s club”; in any event, the OECD’s fundamental task is to “enable its members to achieve the highest sustainable economic growth and improve the economic and social well-being of their populations.” The OECD evolved from a group of European nations that worked together after World War II to rebuild the region’s economy; it is headquartered in Paris. Canada and the United States have been members since 1961, while Japan joined in 1964. Evidence of the increasing importance of the BRICS group is the fact that Brazil, Russia, India, and China have all formally announced their intention to join the OECD. To become members of this organization, applicants must demonstrate progress toward economic reform.

Representatives from OECD member nations work together in committees to review economic and social policies that affect world trade. The secretary-general presides over a council that meets regularly and has decision-making power. Committees of specialists from member countries pro- vide a forum for discussion of trade and other issues. Consultation, peer pressure, and diplomacy are the keys to helping member nations candidly assess their own economic policies and actions. The OECD publishes country surveys and an annual economic outlook.

Recently, the OECD has become more focused on global issues, social policy, and labor market deregulation. For example, it has addressed the vexing problem of bribery: In 1997, it passed a convention that requires members to cooperate when pursuing bribery allegations. In the 20-plus years since this agreement entered into force, Germany, France, and other countries have adopted antibribery laws. Prosecutors from various countries are doing a better job of collaborating across borders, with one case against Siemens AG resulting in a record $1.6 billion fine.34

Marketing Implications of the Stages of Development The stages of economic development described previously can serve as a guide to marketers in evaluating product saturation levels, or the percentage of potential buyers or households that own a particular product. George David is the former CEO of United Technologies; its business

Exhibit 2-10 When the world’s l eaders meet to discuss policy issues, nongovernmental organizations (NGOs) often take advantage of the opportunity to make their voices heard. For example, in 2015, prior to a G7 meeting in Dresden, Germany, protesters from One released giant balloons depicting the faces of G7 leaders. Source: Joerg Koch/Getty Images.

Exhibit 2-11 Source: Jeremy Banx/Banx Cartoons.

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cHAPTER 2 • THE GLOBAL EcONOMIc ENVIRONMENT 59

units include Otis Elevators. David explained the significance of product saturation to his former business as follows:

We measure elevator populations in countries as units installed per thousand people. And in China, the number today is about one half an elevator per thousand people. In most countries of the world outside of the U.S., people live in elevator and storied apartment houses. It’s true all over Europe, all over Asia, South America, certainly true in China. And in a mature market like Europe, the installed population is about six elevators per thousand people. And so we’re on our way to some portion of six.35

As this comment suggests, product saturation levels for many products are low in emerging markets. For example, while Indian consumers have 700 million debit cards, only 700,000 retail outlets in India had card machines in 2016. Overall, India has one card machine for every 1,785 people. By contrast, in Europe the ratio is one machine per 119 people; China has one machine for every 60 people. In the United States, the corresponding figures are one machine for every 25 people.36

Automobile ownership exhibits similar disparity. In India, just 8 out of every 1,000 adults own a car.37 In Russia, 200 people out of 1,000 own cars; in Germany, the figure is 565 out of 1,000.38 Low levels of vehicle ownership are one reason Myanmar represents an attractive market opportunity for global automakers (see “Myanmar Is Open for Business”).

The global market for French Champagne provides another example. Following the Brexit vote in 2016, the British pound fell in value relative to the euro. That translated into higher prices for premium imported bubbly in the United Kingdom, the number 2 export market by sales behind the United States. As budget-conscious British shoppers opt for English sparkling wines or Italian Prosecco, French Champagne producers have been compelled to seek more growth elsewhere. Again, relative product saturation levels show the opportunity. In 2016, Champagne producers shipped two bottles per person in France, one bottle per capita in Switzerland, and one-half bottle per person in Great Britain. As for the United States, shipments totaled just 0.07 bottle per person—less than half a glass. Conclusion: Americans should be popping more Champagne corks!39

2-4 Balance of Payments The balance of payments is a record of all economic transactions between the residents of a country and the rest of the world. U.S. balance of payments statistics for the period 2012 to 2016 are shown in Table 2-5. International trade data for the United States is available from the U.S. Bureau of Economic Analysis (www.bea.gov); the bureau’s interactive Web site enables users to generate customized reports. The International Monetary Fund’s Balance of Payments Statistics Yearbook provides trade statistics and summaries of economic activity for all countries in the world.40

The balance of payments is divided into the current and capital accounts. The current account is a broad measure that includes merchandise trade (i.e., manufactured goods) and services trade (i.e., intangible, experience-based economic output) 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 inflow of money from sales of exports. Conversely, 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. The minus signs signify outflows of cash. For example, in Table 2-5, line 2 shows an outflow of more than $2.2 trillion in 2016 that rep- resents payment for U.S. merchandise imports. (Entries not shown in Table 2-5 represent changes in net errors and omissions, foreign liabilities, and reserves.) These are the entries that constitute the balance of payments balance. In general, 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. The important fact to recognize about the overall bal- ance of payments is that it is always in balance, although imbalances do occur in subsets of

2-4 Discuss the significance of balance of payments statistics for the world’s major economies.

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60 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

TA B L E 2 - 5 U.S. Balance of Payments, 2012–2016 (US$ millions)

2012 2013 2014 2015 2016

A. Current Account −426,198 −349,543 -373,800 -434,598 -451,685 1. Goods Exports 1,561,540 1,592,784 1,632,639 1,510,757 1,455,704

2. Goods Imports -2,303,785 -2,294,453 -2,374,101 -2,272,612 2,208,211

3. Balance on Goods -742,095 -701,669 -741,462 -761,855 -752,507

4. Services: Credit 654,850 687,410 710,565 753,150 752,507

5. Services: Debit -450,360 -462,134 -477,428 -491,740 -504,654

6. Balance on Services 204,490 225,276 233,138 261,410 247,714

7. Balance on Goods and Services

-537,605 -476,392 -508,324 -500,445 -504,793

B. Capital Account 6,904 −412 −45 −42 −59

Source: www.bea.gov. Accessed December 1, 2017.

TA B L E 2 - 6 U.S. Goods and Services Trade with China, India, and Brazil 2016 (US$ millions)

china India Brazil

1. U.S. Goods Exports to 115,988 21,624 30,022

2. Goods Imports from -463,288 -46,125 -24,620

3. Balance on Goods -347,290 -24,501 5,402

4. U.S. Services Exports to 54,157 20,632 24,338

5. Services Imports from -16,139 -25,808 -6,797

6. U.S. Balance on Services 38,018 -5,175 17,541

7. U.S. Balance on Goods and Services

-309,272 -29,676 22,944

Source: www.bea.gov. Accessed December 1, 2017.

the overall balance. For example, a commonly reported balance is the trade balance on goods (line 3 in Table 2-5).

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. The U.S. trade deficit reflects a number of factors, including the high volume of trade with China, a seemingly insatiable consumer demand for imported goods, and the enormous cost of military operations in the Middle East and Afghanistan.

Table 2-6 shows a record of goods and services trade between the United States and the BRIC countries for 2011. A comparison of lines 4 and 5 in Table 2-5 and Table 2-6 shows a bright spot from the U.S. perspective: The United States has maintained a services trade surplus with much of the rest of the world. Overall, however, the United States posts balance of payments deficits while important trading partners, such as China, have surpluses.

China has more than $3 trillion in foreign reserves, more than any other nation. It offsets its trade surpluses with an outflow of capital, while the United States offsets its trade deficit with an inflow of capital. China and other countries with healthy trade surpluses are setting up sovereign wealth funds to invest some of the money. As trading partners, U.S. consumers and businesses own an increasing quantity of foreign products, while foreign investors own more U.S. land, real estate, and government securities. Foreign-owned U.S. assets total $2.5 trillion; China currently owns about $1.2 trillion in U.S. treasury bonds. As Ha Jiming, an economist with China’s largest investment bank, noted, “One trillion is a big amount, but it is also a hot potato.”41 A key focus of U.S. President Trump’s trade policy is America’s trade deficit with China, which pushed past the $300 billion mark in 2013.

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chapter 2 • the Global economic environment 61

2-5 Trade in Merchandise and Services Thanks in part to the achievements of the General Agreement on Tariffs and Trade (GATT) and the WTO, world merchandise trade has grown at a faster rate than world production since the end of World War II. Put differently, import and export growth has outpaced the rate of increase in GNI. According to figures compiled by the WTO, the dollar value of world merchandise trade in 2015 totaled $16.5 trillion, a modest downturn after several years of growth as trade recovered to pre–economic crisis levels. The top exporting and importing countries are shown in Table 2-7.

In 2003, Germany surpassed the United States as the world’s top exporter. German manufacturers of all sizes have benefited from global economic growth because they provide the motors, machines, vehicles, and other capital goods that are required to build factories and country infrastructures; worldwide, machinery and transport equipment constitute approximately one-third of global exports. Overall, approximately two-thirds of Germany’s exports go to other EU nations; France is the number 1 country destination, while the United States ranks second. Today, exports generate 40 percent of Germany’s GDP, and 9 million jobs are export related. In addition, annual sales by the foreign subsidiaries of German-based companies are $1.5 billion.43 To ensure that local companies keep pace with the rate of digital disruption and opportunities associated with the Internet of Things, the German government recently announced an action program dubbed Industrie 4.0, whose centerpiece is a shift toward decentralized “smart” manufacturing.

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 have surged since China joined the WTO in 2001; in fact, policymakers in several countries 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—and it is also one of the major issues in trade relations between the high- and lower-income countries. 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.

As a group, low-, lower-middle, and even upper-middle-income countries are lax in enforc- ing international copyrights and protecting intellectual property and patent laws. Countries that export service products such as computer software, music, and video entertainment suffer a loss of income when these rights are not enforced. According to the Global Software Piracy Study conducted each year by the Business Software Alliance, annual worldwide losses due to software piracy amount to approximately $62.7 billion. In China alone, software piracy cost the industry an estimated $8.8 billion in lost sales in 2013.

The United States is the world’s leading services trader. The United Kingdom ranks second, with services accounting for 45 percent of that country’s total exports. More than one-third of the U.K. services exports go to the EU; the trade in services is a key issue as the United Kingdom proceeds with its plans to exit the EU.44

As shown in Figure 2-2, U.S. services exports in 2016 totaled more than $750 billion, or nearly half of total U.S. exports. The U.S. services surplus (service exports minus imports) stood at $247 billion. This surplus partially offset the U.S. merchandise trade deficit of $758 billion in 2016. Bottom line: The United States runs an annual trade deficit of $0.5 trillion. It is this figure in particular that President Trump has promised to address with his vision of “America First.”

TA B L E 2 - 7 Top Exporters and Importers in World Merchandise Trade, 2015 (US$ billions)42

leading exporters 2015 leading importers 2015

1. China $2,274 1. United States $ 2,308

2. United States 1,504 2. China 1,681

3. Germany 1,329 3. Germany 1,050

4. Japan 624 4. Japan 648

5. Netherlands 567 5. United Kingdom 625

Source: www.wto.org. Accessed December 1, 2017.

2-5 Identify world leaders in merchandise and services trade, and explain how currency exchange rates impact a company’s opportunities in different parts of the world.

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62 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

Many economists, however, argue that trade deficits should not be used as an indication of an economy’s strength, or lack thereof.

Overview of International Finance Foreign exchange makes it possible for a company in one country to conduct business in other countries with different currencies. However, foreign exchange is an aspect of global marketing that involves certain financial risks, decisions, and activities that are completely different from those facing a domestic marketer. Moreover, those risks can be even higher in developing markets such as Thailand, Malaysia, and South Korea. When a company conducts business within a single country or region with customers and suppliers paying in the same currency, there is no exchange risk. All prices, payments, receipts, assets, and liabilities are in the given currency. In contrast, when conducting business across boundaries in countries with different currencies, a company is thrust into the turbulent world of exchange risk.

The foreign exchange market consists literally of a buyer’s and a seller’s market where cur- rencies are traded for both spot and future delivery on a continuous basis. As noted earlier in the chapter, $5 trillion in currencies is traded every day. The spot market is for immediate delivery; the market for future delivery is called the forward market. This is a true market where prices are based on the combined forces of supply and demand that come into play at the moment of any transaction.

Who are the participants in this market? First, a country’s central bank can intervene in currency markets by buying and selling currencies and government securities in an effort to influ- ence exchange rates. Recall that China currently holds trillions of dollars in U.S. treasury securities. Such purchases help ensure that China’s currency is relatively weak compared to the U.S. dollar.45 Second, some of the trading in the foreign exchange market takes the form of transactions needed to settle accounts for the global trade in goods and services. For example, because Porsche is a German company, the dollars spent on Porsche automobiles by American car buyers must be converted to euros. Finally, currency speculators also participate in the foreign exchange market.

Devaluation can result from government action or an economic crisis; whatever the cause, devaluation is reduction in the value of a nation’s currency against other currencies. For example, in August 1998 the Russian economy imploded. The ruble plunged in value, and the government defaulted on its foreign debt obligations. Many Russians faced wage cuts and layoffs; savings were wiped out as banks collapsed. In the decade that followed, however, Russia’s economy made a rapid recovery. Real GDP doubled, in part because import price increases caused by the ruble’s devaluation stimulated local production. As one economist noted, “The crash of ‘98 really cleaned out the macroeconomy.”46 But in 2014, it was “déjà vu all over again.” As world oil prices crashed below $50 per barrel, the ruble was in free fall once again.

In 2014, the European Central Bank (ECB) embarked on a course of action that resulted in a decline of the euro’s value. Using a tool known as quantitative easing, the ECB began buying tens of billions of euros’ worth of government bonds each month, greatly increasing the supply of

FIGURE 2-2 U.S. Trade Balance on Services and on Merchandise Trade (US$ billions) Source: www.bea.gov. Accessed December 1, 2017.

Goods Imports

Goods Exports

Services Exports

Services Imports

Combined Balance

–1,000

–500

0

500

1,000

1,500

2,000

2,500

1992 1996 2000 2004 2008 2012 2016

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cHAPTER 2 • THE GLOBAL EcONOMIc ENVIRONMENT 63

euros. As the supply expanded, the euro’s value declined significantly. Just a few years ago, one euro was equal to $1.35. By early 2015, the exchange rate was €1 equals $1.13. While the stronger dollar was good news for U.S. tourists traveling in Europe, U.S. businesses faced significant losses when euro sales were converted into dollars at the new exchange rate.

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 that currency 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. During the past few years, the Chinese government has been criticized for keeping China’s currency undervalued to support exports. Faced with escalating rhetoric from politicians in the United States and elsewhere, Beijing has responded by adopting a policy of revaluation to allow the yuan to strengthen against the dollar and other currencies.47 Between 2006 and 2008, the yuan appreciated by approximately 20 percent.

What effect would a stronger Chinese currency have? The impacts would be felt both domesti- cally and globally. In the broadest sense, a stronger renminbi (or yuan, as the Chinese currency is called) should help rebalance the global economy. In other words, China’s economic growth would be less dependent on the United States and other countries continuing to snap up its exports. Chinese consumers and companies would enjoy increased purchasing power as imported goods became more affordable. This would put downward pressure on China’s consumer price index, helping Beijing meet its goal of keeping inflation under control. Global automakers such as BMW, General Motors, and Volkswagen that assemble cars in China from imported parts would reap the benefits of lower costs.

Table 2-8 shows how fluctuating currency values can affect financial risk, depending on the terms of payment specified in the contract. Suppose, at the time a deal is made, the exchange rate is €1.10 equals $1.00. How is a U.S. exporter affected if the dollar strengthens against the euro (e.g., €1.25 equals $1.00) and the contract specifies payment in dollars? What happens if the dollar weakens (e.g., €0.85 equals $1.00)? Conversely, what if the European buyer contracts to pay in euros rather than dollars?

Given that currencies fluctuate in value, a reasonable question to ask is whether a particular currency is overvalued or undervalued compared with another currency. Recall from the chapter discussion that a currency’s value can reflect government policy (as in the case of China) or market forces. One way to approach the question is to compare world prices for a single well-known product: McDonald’s Big Mac hamburger. The Economist magazine’s Big Mac Index is a “quick and dirty” way of determining which of the world’s currencies are 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. (Similar indexes have been proposed based on the price of Starbucks coffee and IKEA furniture.48)

A country’s currency would be overvalued if the Big Mac price (converted to dollars) 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. Economists use the concept of purchasing power parity (PPP) when adjusting national income data to improve comparability. For example, let’s take as given that the aver- age U.S. price of a Big Mac is $5.06; in China, the price is 19.19 yuan. If we divide 19.19 by 6.78 (the yuan/dollar exchange rate), we get 2.83. Because this converted price is less than the U.S. price, the yuan must be undervalued. In other words, based on the average U.S. price for a Big Mac, the yuan/ dollar exchange rate ought to be 3.79 to $1 (19.19 , 3.79 = 5.06) rather than 6.78 to $1.49 Make sure you understand that if the exchange rate changes from 6.78 yuan to the dollar to 3.79 yuan to the dollar, the yuan has strengthened relative to the dollar.

TA B L E 2 - 8 Exchange Risks and Gains in Foreign Transactions

$1,000,000 contract €1,100,000 contract

Foreign contract Exchange Rates

U.S. Seller Receives

European Buyer Pays

U.S. Seller Receives

European Buyer Pays

:1.25 = +1 $1,000,000 €1,250,000 $880,000 €1,100,000

:1.10 = +1 $1,000,000 €1,100,000 $1,000,000 €1,100,000

:1.00 = +1 $1,000,000 €1,000,000 $1,100,000 €1,100,000

:0.85 = +1 $1,000,000 €850,000 $1,294,118 €1,100,000

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64 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

Economic Exposure Economic exposure reflects the impact of currency fluctuations on a company’s financial perfor- mance. It can come into play when a company’s business transactions result in sales or purchases denominated in foreign currencies. Diageo, for example, faces economic exposure to the extent that it accepts payment for exports of Scotch whisky at one exchange rate but actually settles its accounts at a different exchange rate.50 Obviously, economic exposure is a critical issue for Nestlé, as 98 percent of that company’s annual sales occur outside Switzerland.

Among countries in the euro zone, GlaxoSmithKline, Daimler AG, BP, Sanofi-Aventis, Royal Dutch Shell, and AstraZeneca all generate more than one-third of total sales in the U.S. market. Given the volatility of the dollar relative to the euro, all of these companies face potential economic exposure. Conversely, GE generates 45 percent of its revenues in the domestic U.S. market and only 14 percent in Europe, so the relative extent of GE’s exposure is less than that of the European companies just listed. Even so, GE does face economic exposure. For example, in a 2014–2015 Securities and Exchange Commission filing, the company noted, “The effects of a stronger U.S. dollar compared to mainly the euro, Brazilian real, and Canadian dollar, decreased consolidated revenues by $4.9 billion.”51

In dealing with the economic exposure introduced by currency fluctuations, a key issue is whether the company can use price as a strategic tool for maintaining its profit margins. Can the company adjust prices in response to a rise or fall of foreign exchange rates in various markets? That depends on the price elasticity of demand. The less price-sensitive the demand, the greater the flexibility a company has in responding to exchange rate changes. In the late 1980s, for example, Porsche raised prices in the United States three times in response to the weak dollar. The result: Porsche’s U.S. sales dropped precipitously, from 30,000 vehicles in 1986 to 4,500 vehicles in 1992. Clearly, U.S. luxury car buyers were exhibiting elastic demand curves for pricey German sports cars!

Managing Exchange Rate Exposure 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. For example, it may be desirable to sell products in the company’s home-country currency. When this is not possible, techniques are available to reduce both transaction and operating exposure.

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 cur- rency. This practice is common among global companies that sell products and maintain operations in different countries. For example, Porsche now relies on currency hedging rather than price increases to boost pretax profits on sales of its automobiles. This automaker manufactures all of its cars in Europe, but generates about 45 percent of its sales in the United States. Thus, Porsche faces economic exposure stemming from the relative value of the dollar to the euro. Porsche is “fully hedged”; that is, it takes currency positions to protect all earnings from foreign exchange movements.52

If company forecasts suggest that the value of the foreign currency will weaken against the home currency, it can hedge to protect against potential transaction losses. Conversely, when it is anticipated that the foreign currency will appreciate (strengthen) against the home currency, then a gain can be expected on foreign transactions when revenues are converted into the home currency. Given this expectation, the best decision may be not to hedge at all. (The operative word is “may”—many companies hedge anyway unless management is convinced the foreign currency will strengthen.) Porsche has profited by (correctly) betting on a weak dollar.

External hedging methods for managing both transaction and translation exposure require com- panies to participate in the foreign currency market. Specific hedging tools include forward contracts and currency options. Internal hedging methods include price adjustment clauses and intracorporate borrowing or lending in foreign currencies. The forward market is a mechanism for buying and sell- ing currencies at a preset price for future delivery. If it is known that a certain amount of foreign cur- rency will be paid out or received at some future date, a company can insure itself against exchange loss by buying or selling forward. With a forward contract, the company can lock in a specific fixed exchange rate for a future date, thereby immunizing itself against the loss (or gain) caused by the exchange rate fluctuation. By consulting sources such as the Financial Times, The Wall Street Jour- nal, or www.ozforex.com, it is possible to determine exchange rates on any given day. In addition to spot prices, 30-, 60-, and 180-day forward prices are quoted for dozens of world currencies.

Companies use the forward market when the currency exposure is known in advance (e.g., when a firm contract for sale of a good exists). In some situations, however, companies are

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cHAPTER 2 • THE GLOBAL EcONOMIc ENVIRONMENT 65

not certain about the future foreign currency cash inflow or outflow. Consider the risk exposure of a U.S. company that bids for a foreign project but won’t know until sometime later if it will be awarded the project. The company needs to protect the dollar value of the contract by hedging the potential foreign currency cash inflow that will be generated if the company turns out to be the winning bidder. In such an instance, forward contracts are not the appropriate hedging tool.

A foreign currency option is the best approach for dealing with such situations. A put option gives the buyer the right—but 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 the example of bidding for the foreign project, the company can take out a put option to sell the foreign currency for dollars at a set price in the future. In other words, the U.S. company locks in the value of the contract in dollars. Thus, if it wins the bid, the company’s future foreign currency cash inflow has been hedged by means of the put option. If it is not awarded the project, the company can trade the put option in the options market without exercising it. Remember, options are rights, not obligations. The only money the company stands to lose is the difference between what it paid for the option and what it receives upon selling it.

Financial officers of global firms can avoid economic exposure altogether by demanding a particular currency as the payment for their foreign sales. As noted, a U.S-based company might demand U.S. dollars as the payment currency for its foreign sales. This, however, does not elimi- nate currency risk; it simply shifts that risk to the customers. In common practice, companies typically attempt to invoice exports (receivables) in strong currencies and invoice imports (pay- ables) in weak currencies. However, in today’s highly competitive world market, such practice may reduce a company’s competitive edge.

Summary The economic environment is a major determinant of global market potential and opportunity. In today’s global economy, capital movements are the key driving force, production has become uncoupled from employment, and capitalism has vanquished communism. Based on patterns of resource allocation and ownership, the world’s national economies can be categorized as market capitalism, centrally planned capitalism, centrally planned socialism, and market socialism. The final years of the twentieth century were marked by a transition toward market capitalism in many countries that had been centrally controlled. Nevertheless, great disparity still exists among the nations of the world in terms of economic freedom.

Countries can be categorized in terms of their stage of economic development: low income, lower-middle income, upper-middle income, and high income. Gross domestic product (GDP) and gross national income (GNI) are commonly used measures of economic development. The 50 poorest countries in the low-income category are sometimes referred to as least-developed countries (LDCs). Upper-middle-income countries with high growth rates are often called newly industrializing economies (NIEs). Several of the world’s economies are notable for their fast growth; for example, the BRICS nations include Brazil (lower-middle income), Russia ( upper-middle income), India (low income), China (lower-middle income), and South Africa (upper-middle income). The Group of Seven (G-7), the Group of Eight (G-8), the Group of Twenty (G-20), and the Organisation for Economic Co-operation and Development (OECD) represent efforts by high-income nations to promote democratic ideals and free market policies throughout the rest of the world. Most of the world’s income is located in Japan and Greater China, the United States, and Western Europe; companies with global aspirations generally have operations in all three areas. Market potential for a product can be evaluated by determining product saturation levels in light of income levels.

A country’s balance of payments is a record of its economic transactions with the rest of the world; this record shows whether a country has a trade surplus (value of exports exceeds value of imports) or a trade deficit (value of imports exceeds value of exports). Trade figures can be further divided into merchandise trade and services trade accounts; a country can run a surplus in both accounts, a deficit in both accounts, or a combination of the two. Although the U.S. merchandise trade deficit was $752 billion in 2016, the United States enjoys an annual services trade surplus. Overall, the United States is a debtor; China enjoys an overall trade surplus and serves as a creditor nation.

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66 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

Foreign exchange provides a means for settling accounts across borders. The dynamics of international finance can have a significant impact on a nation’s economy as well as the fortunes of individual companies. Currencies can be subject to devaluation or revaluation as a result of actions taken by a country’s central bank. Currency trading by international speculators can also lead to devaluation. When a country’s economy is strong or when demand for its goods is high, its currency tends to appreciate in value. When currency values fluctuate, global firms face various types of economic exposure. Firms can manage exchange rate exposure by hedging.

Discussion Questions 2-1. The seven criteria for describing a nation’s economy introduced at the beginning of this

chapter can be combined in a number of different ways. For example, the United States can be characterized as follows:

Type of economy: advanced industrial state Type of government: democracy with a multiparty system Trade and capital flows: incomplete free trade and part of a trading bloc The commanding heights: mix of state and private ownership Services provided by the state and funded through taxes: pensions and education, but not health care Institutions: transparency, standards, no corruption, a free press, and strong courts Markets: free market system characterized by high-risk/high-reward entrepreneurial dynamism

Use these seven criteria (page 44) to develop a profile of one of the BRICS nations, or any other country that interests you. What implications does this profile have for mar- keting opportunities in the country?

2-2. Why are Brazil, Russia, India, China, and South Africa (BRICS) highlighted in this chapter? Identify the current stage of economic development for each BRICS nation.

2-3. Turn to the Index of Economic Freedom (Table 2-3) and identify where the BRICS nations are ranked. How should global marketers use the Index as a guide to global market opportunities?

2-4. The Heritage Foundation’s Index of Economic Freedom is not the only ranking that assesses countries in terms of successful economic policies. For example, the World Eco- nomic Forum (WEF; www.weforum.org) publishes an annual Global Competitiveness Report; in the 2017–2018 report, the United States ranked 2rd, according to the WEF’s metrics. By contrast, Sweden was in 7th place. According to the Index of Economic Freedom’s rankings for 2017, the United States and Sweden are in 17th and 19th place, respectively. Why are the rankings so different? Which criteria does each index consider?

2-5. When the first edition of this textbook was published in 1996, the World Bank defined “low-income country” as one with per capita income of less than $501. In 2003, when the third edition of Global Marketing appeared, “low income” was defined as $785 or less in per capita income. As shown in Table 2-4, $1,005 is the current “low-income” threshold. The other stages of development have been revised in a similar manner. How do you explain the trend in the definition of income categories during the past 20 years?

2-6. A friend is distressed to learn that America’s merchandise trade deficit hit $752  billion in 2016. You want to cheer your friend up by demonstrating that the trade picture is not as bleak as it sounds. What do you say?

2-7. India has been included in the Big Mac Index since 2011. India’s ranking is based on the Maharaja Mac, which is a chicken sandwich. Do you think this is a good substitute? Using the following figures, compute the price of a Big Mac in Norway, Thailand, and Mexico. What is the equivalent price in dollars? Is it higher or lower than the U.S. price? How much is the kroner (or baht or peso) overvalued or undervalued? If you need help, or want to explore other countries, check out the interactive index at www. economist.com/content/big-mac-index.

Norway price: Kroner 49; exchange rate: 7.85/$1 Thailand price: Baht 119; exchange rate: 31.95/$1 Mexico price: Peso 48; exchange rate: 18.66/$1

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CASE 2-1 Continued (refer to page 41)

India’s Economy at the Crossroads: Can Prime Minister Narendra Modi Deliver Acche Din?

“Value creation comes where different businesses collide, not within busi- nesses themselves.”53

Anand Mahindra, Mahindra Group

In mid-2015, Modi announced several policy changes that were designed to open India’s economy even further to foreign investment. One change grants foreign single-brand retailers a three- year grace period for complying with local-content rules requiring that at least 30 percent of manufactured materials in the products they sell are sourced in India. Tech retailers offering “cutting-edge” or “ state-of-the-art” products have an additional five years to comply.

Foreign Investment Increases This policy change paves the way for Apple to open its own stores in the world’s second-largest smartphone market. Apple currently has an approximately 3 percent market share in India. Apple requested an exemption from the local-sourcing requirements, and a government panel ruled in the company’s favor. However, India’s finance minister and the Foreign Investment Promotion Board rejected the panel’s findings, thwarting Apple’s retail plans for the near future.

Amazon is another tech company that is targeting India for its growth potential. In doing so, Amazon India is competing with entrenched local e-commerce companies including Flipkart and Snapdeal. The key to success, according to CEO Jeff Bezos, will be local market customization. This approach embodies lessons learned in Amazon’s failure to penetrate China’s e-commerce market. In India, Amazon will accept payment in cash for shoppers who don’t use credit or debit cards. Also, customers can shop using tablets installed in local shops.

One challenge is that Indian regulations prevent Amazon from using an “inventory-led” business model. In essence, Amazon cannot sell its own goods, but rather must adhere to a “marketplace model” in which the technology platform brings buyers and sellers together. Also, no single vendor is allowed to account for more than 25 percent of products sold. In spite of such restrictions, Amazon’s investment in India has totaled approximately $5 billion to date.

In addition to retail, other sectors of the Indian market are being liberalized. For example, foreign investors will now be allowed to have 100 percent ownership of Indian airlines; previously, ownership stakes by foreign investors were limited to 49 percent. In the defense sector, full foreign ownership of arms-related projects will also be allowed. U.S.-based Boeing is taking advantage of the new rules to form a partnership with India’s Tata Advanced Systems to make aircraft frames.

The Innovation Imperative Fostering innovation is another of Modi’s imperatives, though achieving success on this front will require changing the nature of Indian capitalism. Indeed, in the World Bank’s 2015 Ease of Doing Business index, India’s ranking improved four points, to 130. In the World Economic Forum’s 2015–2016 rankings of global competitive- ness, India ranks 55, one step above Vietnam. High on Modi’s agenda is improving education for girls and providing more opportunities for women.

Another important element of the recent initiatives is “ Digital India,” Modi’s plan to provide more high-speed Internet access throughout India. In September 2015, an audience of 18,000

people attended a town-hall style meeting with Facebook’s Mark Zuck- erberg and the prime minister at the SAP Arena in San Jose, Califor- nia. Many in the audience were Indian-born Facebook employees who greeted the prime minister with chants of “Modi! Modi!” Modi told the crowd, “We are an $8 billion economy today. My dream is to become a $20 trillion economy.” At the time of the meeting, Modi had more than 15 million Twitter followers and more than 30 million Facebook likes.

Thanks to booming sales of low-cost smartphones, approximately one-third of India’s population—some 425 million people—is now connected to the Internet. Local e-commerce startups such as Quikr and Snapdeal offer app-based services in Hindi and other local languages. Baidu, a Chinese e-commerce company, is following suit. Some of these companies feature content translated from English with the aid of machine-learning software. Other Indian companies, such as social networking site ShabdaNaragi and news aggregator Dailyhunt, are creating or sharing content that is native in local Indian languages.

Wipro, Infosys, and Tata Consultancy Services (TCS) are currently India’s Big Three information technology companies. Starting in the 1980s, these companies benefited from the outsourcing trend that saw Western companies taking advantage of India’s low-cost, highly educated labor force. Call centers were one key industry; another was installation and maintenance of computer software systems.

Today, Wipro, Infosys, TCS, and other Indian IT companies are navigating the global shift in IT spending. Competitive threats—and opportunities—are coming from all sides. For example, cloud-based services from Amazon and Microsoft threaten to disrupt the traditional IT services that have long been a bright spot in India’s economy. Some cloud-services companies are focused on specific sectors; an example is U.K.-based Equiniti Financial Services, whose customers include both individuals and organizations. At the same time, companies such as IBM and Accenture are expanding their IT services offerings.

Demonetization: Modi Clamps Down on “Black Money” In November 2016, Prime Minister Modi made a bold move: He announced that, overnight, the government was canceling the coun- try’s Rs500 ($7.66) and Rs1000 currency notes. The move was designed to curb various forms of “black money” obtained through black market transactions and other illegal activities such as corruption or currency counterfeiting. “Black money” also includes money earned legally but not declared as taxable income.

Before the change, roughly 80 percent of consumer transactions in India were conducted in cash. After Modi’s announcement, Indians had a short window of opportunity to deposit the canceled bank notes in their bank accounts or exchange them for new currency. The move basically “demonetized” about 86 percent of the currency—worth a total of $220 billion—circulating through India’s economy. It also provided opportunities for fintech startups such as mobile payments provider Paytm.

Some critics noted that “shock treatment” of this type had previously occurred only in countries experiencing hyperinflation or economic collapse. Why, the critics asked, was Modi resorting to such a drastic measure when India’s GDP was growing at a rate of 7 percent? Swapan Dasgupta, a member of India’s parliament, had this answer:

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68 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

TA B L E 2 - 9 GST Categories

Tax Rate (%) Items Included (Partial List)

0 Milk; fruit; children’s picture books and coloring books; raw coffee beans

3 Gold

5 Packaged food; clothing costing less than Rs 1,000 ($15.50); roasted coffee beans; railway transport; small restaurants without air conditioning

12 Toothpaste; umbrellas; mobile phones; medium-sized restaurants without air conditioning

18 Cookies; cakes, restaurants with air conditioning

28 Chewing gum; deodorant; shampoo; instant coffee

“It’s motivated by a philosophy which is that if you want India to be a meaningful player on the world economic stage you’ve got to take tough measures.”

New Tax Regime In July 2017, Modi’s government launched a new national sales tax system, which included the Goods and Services Tax (GST). The GST was designed to eliminate some of the abundant red tape that kept a damper on India’s economic growth. Previously, products could be taxed at different rates in different Indian states. Instead of a single national sales tax rate, the new system includes six rates, ranging from 0 percent to 28 percent (see Table 2-9). Mass-consumption goods are taxed at the lowest rates. In contrast, luxury cars, tobacco, chewing tobacco, and carbonated soft drinks will be taxed at “sin tax” rates approaching 300 percent. Some categories, including property and alcoholic beverages, are not included in the GST and will be subject to tax at the state level.

Discussion Questions 2-8. Social activists and political opponents in India have voiced

objection to Modi’s economic liberalization initiatives. What do you think is the nature of some of these objections?

2-9. Do you think Modi’s large number of social media “likes” and “followers” are indicative of his potential to achieve economic reform?

2-10. Assess Modi’s two main economic reforms—namely, demon- etization and tax reform.

2-11. What must Wipro, Infosys, TCS, and other companies in India’s IT sector do to avoid being victimized by new trends in technology?

Sources: Simon Mundy, “Bangalore’s Finest Eye the Storm Beyond the Cloud,” Finan- cial Times (July 6, 2016), p. 16; Amy Kazmin, “Modi Hopes Investment Easing Will See India Fly,” Financial Times (June 22, 2016), p. 6; Rajesh Roy, “India Move Could Help Apple Run Own Stores,” The Wall Street Journal (June 21, 2016), pp. B1, B2; Simon Mundy, “India Phone Apps Learn the Vernacular to Reach New Customers,” Financial Times (June 14, 2016), p. 18; Victor Mallet, “Modi Struggles to Realise Indian Dreams,” Financial Times (May 16, 2016), p. 4; Jason Overdorf, “Hopes of Business-Friendly Reforms Fade Away in India,” USA Today (March 1, 2016), p. 5B; Victor Mallet, “Air of Caution as Modi Faces Defining Year,” Financial Times (January 13, 2016), p. 4; John D. Stoll, “Detroit Remains Foreign Car Makers’ Mecca,” The Wall Street Journal (January 11, 2016), pp. B1, B4; Jessica Guynn, “India’s Modi Gets a ‘Like’ at Facebook HQ,” USA Today (September 28, 2015), p. 2B; Amy Kazmin, “Indian Farmers Dig In over Modi ‘Land Grab,’” Financial Times (February 26, 2015), p. 5.

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CASE 2-2

A Day in the Life of a Contracts Analyst at Cargill

G lynis Gallagher works as a contracts analyst at Cargill Risk Manage-ment, which is a business unit within Cargill. Based in Wayzata, Minnesota, Cargill celebrated its 150th anniversary in 2015. Cargill is a truly global company: With operations in more than 60 countries, it markets food, agricultural, financial, and industrial products and services to customers worldwide. The company is one of the world’s top grain traders. In addition, it has global beef operations, and it does business in starches and sweeteners as well. Cargill also processes steel and de-icing salt. Its revenues totaled $109,699 billion in 2017, making Cargill the largest privately owned company in the United States.

Cargill is committed to feeding the world in a responsible way, while also reducing its environmental impact and improving the communities where its employees live and work. Writing in the introduction to his 1979 book Merchants of Grain, author Dan Morgan noted:

Grain is the only resource in the world that is even more central to modern civilization than oil. It goes without saying that grain is essential to human lives and health. . . . As America became the center of the planetary food system, trade routes were transformed, new economic relationships took shape, and grain became one of the foundations of the postwar American Empire.

Today, as the saying goes, “You can’t walk down the grocery aisle without seeing something Cargill has been involved with in one way or another.” A recent article in Forbes described the scope of the com- pany’s operations:

Cargill, the $135 billion (fiscal year 2014 sales) family-owned food behemoth dominates all roads between the world’s farms and your dinner plate. . . . Since the company was founded in 1865, the core of its business has always been trading com- modities—buying, storing, shipping and selling the crops farm- ers grow around the world.

Commodities processing is a high-volume, low-margin business; Cargill crushes large quantities of soybeans each day. Because the company is privately held, Cargill can pursue long-term investment opportunities in many global markets. For example, it has had a major presence in India and other emerging markets for decades. The company has made large investments in cocoa, sugar, and food innovation.

The career path of Greg Page, former Cargill CEO and current exec- utive chairman, shows the range of job opportunities Cargill offers its employees. After graduating from college, Page took a trainee position in the Feed Division. In subsequent years, he held a number of posi- tions in the United States and Singapore. He was also involved with the startup of a poultry processing facility in Thailand. Today, Cargill exports roughly 100 million metric tons of chicken from Thailand every year.

Gallagher graduated from a large Midwestern university in 2012 with a major in marketing. She spent fall semester of her senior year studying in northern Italy. Many of her business courses helped prepare her for her current role. She recalls, “Although I never took a course focused on derivatives and trading exclusively, my math and finance courses gave me a solid foundation in order to understand portfolio exposures, fee schedules, and financing options we utilize every day. My marketing courses have allowed me to use this data in a more customer-focused approach on a daily basis.”

Cargill Risk Management is part of Financial Services, one of Cargill’s six platforms that comprise 65 business units. Cargill, through

Cargill Risk Management, is a registered limited designation swap dealer with the U.S. Commodities Futures Trading Commission (CFTC). Gallagher must make sure that everything she does for customers com- plies with CFTC swap dealing guidelines. Cargill and other commodi- ties trade houses are industry members of the Commodity Markets Council, a trade group that serves as a liaison between companies and the government.

Gallagher is a contracts analyst. She says, “I have always been interested in law. Becoming a contracts analyst in such a regulated industry allowed me to gain exposure to contractual language, legal requirements, and the regulatory environment. For example, if you do not set up a contract properly, you are opening yourself up to unnecessary risk.” As Gallagher explains, “In today’s highly regulated and changing business environment, it is essential to protect yourself while completing business transactions. Being part of this facet of the business is a daily challenge. It pushes me outside of my comfort zone to understand a basic question—namely, what is the true risk here for Cargill?”

As noted previously, Cargill Risk Management is a limited des- ignated swap dealer. What’s a “swap”? Swaps, also known as over- the-counter (OTC) transactions, can be complex financial structures that derive their value from something else—a futures contract, for example. Swaps are traded in direct negotiation between buyer and seller; they represent a $700 trillion market. Who uses swaps? Galla- gher’s business unit services a variety of customers, including farmers, major airlines, food companies, investment funds, oil companies, and many others.

Gallagher’s business unit works with its customers to provide commodities hedges through swaps and structured products. The commodities in question are often agricultural commodities such as grains (e.g., corn, wheat, and soybeans), as well as beef and other animal proteins. Cargill also deals in metals and energy. Hedging is a financial strategy that allows a customer to lock in the price for a specific commodity purchase in the future. An important part of Gallagher’s job is to work diligently to understand customers’ business objectives, and to ensure contractual terms are aligned with these strategies. The Cargill team assists customers by creating tailored risk management solutions to reduce risks and uncertainty by having more diversified hedging portfolios.

Consider the following example: When a large restaurant chain purchases cooking oil, it must manage budgets and mar- gins to ensure profitability. When the price of oil seeds—a com- modity—increases, the company needs to find a way to offset this increase instead of passing along the cost to its customers in the form of higher prices. Of course, market volatility and cost swings are difficult to predict—so how is the restaurant chain able to do this? Helping customers answer this question is an important part of Gallagher’s team’s job.

Summing up her experience, Gallagher says, “I enjoy work- ing with our customers in more than 60 countries throughout the world. With 16 global offices, I am exposed to different cultures and business practices that challenge me to think globally. Under- standing where the customer is coming from allows me to succeed in helping them understand and navigate this complex field. Ulti- mately, I am part of the process which allows enterprises ranging from huge corporations to small farmers succeed in managing their overall risk.”

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Discussion Questions 2-12. What knowledge and skills are required to be successful as a

contracts analyst? 2-13. What do you think is the best part of Gallagher’s job? The

most challenging part? 2-14. What does Gallagher’s career profile tell you about the

importance of professionalism and a good work ethic at a company such as Cargill?

2-15. Cargill engages in a wide range of sustainability initiatives, including ensuring access to food; preventing food waste; supporting urban agriculture; and participating in the

MyLab Marketing Go to the Assignments section of your MyLab to complete these writing exercises.

2-16. Explain how market capitalism, centrally planned capitalism, centrally planned socialism, and market socialism differ. Give an example of a country that illustrates each type of system.

Non-GMO Project. Dig deeper: Choose one of these topics, conduct some exploratory research, and write a short essay or present a brief oral report on your findings. Remember to cite your sources!

Sources: Jacob Bunge, “Demographic Destiny 2050—Chicken to Feed the World,” The Wall Street Journal (December 5–6, 2015), pp. C1, C2; Gregory Meyer and Neil Hume, “Cargill Set to Keep It in the Family 150 Years On,” Financial Times (April 20, 2015), p. 18; Dan Alexander, “Faster Food: Inside Cargill’s Plan to Make the World’s Biggest Food Business Even Bigger,” Forbes (November 24, 2014), pp. 44–48; Dan Morgan, Merchants of Grain (New York, NY: Penguin Books, 1979); Scott Kilman, “Bountiful Harvest: Giant Cargill Resists Pressure to Go Public as It Pursues Growth,” The Wall Street Journal (January 9, 1997), pp. A1, A4.

12Nicholas R. Lardy, Integrating China into the Global Economy ( Washington, DC: Brookings Institution, 2003), p. 21. 13William Greider, One World, Ready or Not: The Manic Logic of Global Capitalism (New York, NY: Simon & Schuster, 1997), p. 37. 14Joel Sherwood and Terence Roth, “Defeat of Sweden’s Ruling Party Clears Way for Sales of State Assets,” The Wall Street Journal (September 19, 2006), p. A8. 15Daniel Yergin and Joseph Stanislaw, “Sale of the Century,” Financial Times Weekend (January 24–25, 1998), p. I. 16William Greider, One World, Ready or Not: The Manic Logic of Global Capitalism (New York, NY: Simon & Schuster, 1997), pp. 36–37. See also John Burton, “Singapore’s Social Contract Shows Signs of Strain,” Financial Times (August 19–20, 2006), p. 3. 17Sarah Theodore, “Beer Has Big Changes on Tap,” Beverage Industry ( September 2008), p. 24. 18For an excellent discussion of BEMs, see Jeffrey E. Garten, The Big Ten: The Big Emerging Markets and How They Will Change Our Lives (New York, NY: Basic Books, 1997). 19John Aglionby and David Pilling, “Slow Growth Blurs Rwanda’s Vision,” Financial Times (September 12, 2017), p. 7. 20John Aglionbi, “Ethiopia Bids to Become the Last Development Frontier,” Financial Times (July 4, 2017), p. 9. 21Saritha Rai, “Tastes of India in U.S. Wrappers,” The New York Times (April 29, 2003), p. W7. 22Manjeet Kirpalani, “The Factories Are Humming,” Businessweek (October 18, 2004), pp. 54–55. 23Joe Leahy, “Brazil Needs to Be Wary as It Enjoys Success Amid ‘Insanity,’ ” Financial Times (August 3, 2011), p. 2. 24Antonio Regalado, “Soccer, Samba and Outsourcing?” The Wall Street Journal (January 25, 2007), p. B1. 25Matt Moffett and Helene Cooper, “Silent Invasion: In Backyard of the U.S., Europe Gains Ground in Trade, Diplomacy,” The Wall Street Journal (September 18, 1997), pp. A1, A8. 26Charles Clover and Sherry Fei Ju, “China’s Larger-Than-Life Electric Car Ambitions,” Financial Times (February 2, 2018), p. 15. 27Patrick McGroarty, “South Africa Trade Hits Bump,” The Wall Street Journal (March 25, 2013), p. A11.

1The “BRIC” designation first appeared in a 2001 report published by Goldman Sachs, the New York–based investment bank, hedge fund, and private equity firm. 2Numerous books and articles survey this subject—for example, Lowell Bryan et al., Race for the World: Strategies to Build a Great Global Firm (Boston, MA: Harvard Business School Press, 1999). See also Thomas Piketty, Capital in the Twenty-First Century (Cambridge, MA: Belknap Press, 2014). 3Bill Vlasic, “Ford Introduces One Small Car for a World of Markets,” The New York Times (February 15, 2008), p. C3. 4William Greider offers a thought-provoking analysis of these new realities in One World, Ready or Not: The Manic Logic of Global Capitalism (New York, NY: Simon & Schuster, 1997). 5Tom Lauricella, “Currency Trading Soars,” The Wall Street Journal (September 1, 2010), p. A1. 6Another economic indicator, gross national income (GNI), comprises GDP plus income generated from nonresident sources. A third metric, gross national product (GNP), is the total value of all final goods and services produced in a country by its residents and domestic business enterprises, plus the value of output produced by citizens working abroad, plus income generated by capital held abroad, minus transfers of net earnings by global companies operating in the country. GDP also measures economic activity; however, GDP includes all income produced within a country’s borders by its residents and domestic enterprises as well as foreign-owned enterprises. Income earned by citizens working abroad is not included. For example, Ireland has attracted a great deal of foreign investment, and foreign-owned firms account for nearly 90 percent of Ireland’s exports. This helps explain the fact that, in 2016, Ireland’s GDP totaled $304 billion while GNI was $247 billion. As a practical matter, GNP, GDP, and GNI figures for many countries will be roughly the same. 7Brian Groom, “Balance and Power,” Financial Times (July 22, 2010), p. 7. 8Jon E. Hilsenrath and Rebecca Buckman, “Factory Employment Is Fall- ing World-Wide,” The Wall Street Journal (October 20, 2003), p. A2. Some companies have cut employment by outsourcing or subcontracting nonmanufac- turing activities such as data processing, accounting, and customer service. 9Tracey Taylor, “A Label of Pride That Pays,” The New York Times (April 23, 2009), p. B4. 10The authors are indebted to Professor Emeritus Francis J. Colella, Department of Economics, Simpson College, for suggesting these criteria. 11Peggy A. Golden, Patricia M. Doney, Denise M. Johnson, and Jerald R. Smith, “The Dynamics of a Marketing Orientation in Transition Economies: A Study of Russian Firms,” Journal of International Marketing 3, no. 2 (1995), pp. 29–49.

Notes

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cHAPTER 2 • THE GLOBAL EcONOMIc ENVIRONMENT 71

28Adapted from C. K. Prahalad and Allen Hammond, “Serving the World’s Poor, Profitably,” Harvard Business Review 80, no. 9 (September 2002), pp. 48–57. 29Stuart L. Hart and Clayton M. Christensen, “The Great Leap: Driving Innovation from the Base of the Pyramid,” MIT Sloan Management Review 44, no. 1 (Fall 2002), p. 56. 30Ernest Beck, “Populist Perrier? Nestlé Pitches Bottled Water to World’s Poor,” The Asian Wall Street Journal (June 18, 1999), p. B1. 31Jason Dean and Peter Wonacott, “Tech Firms Woo ‘Next Billion’ Users,” The Wall Street Journal (November 3, 2006), p. A2. See also David Kirkpatrick, “Looking for Profits in Poverty,” Fortune (February 5, 2001), pp. 174–176. 32Miriam Jordan, “From the Amazon to Your Armrest,” The Wall Street Journal (May 1, 2001), pp. B1, B4. 33Scott McCartney, “Behind Your Online Travel Booking with Barry Diller,” The Wall Street Journal (July 14, 2016), pp. D1, D2. 34Jenny Wiggins, “Brands Make a Dash into Russia,” Financial Times ( September 4, 2008), p. 10. 35Russell Gold and David Crawford, “U.S., Other Nations Step up Bribery Battle,” The Wall Street Journal (September 12, 2008), pp. B1, B6. 36Kiran Stacey, “Card Machine Queue Frustrates Merchants,” Financial Times (December 6, 2016), p. 17. 37Amy Chozik, “Nissan Races to Make Smaller, Cheaper Cars,” The Wall Street Journal (October 22, 2007), p. A12. 38Lukas I. Alpert, “Russia’s Auto Market Shines,” The Wall Street Journal (August 30, 2012), p. B3. 39Saabira Chaudhuri, “Champagne Loses Its Sparkle in U.K.,” Financial Times (March 21, 2017), p. B2. 40Balance of payments data are available from a number of different sources, each of which may show slightly different figures for a given line item.

41Richard McGregor, “The Trillion Dollar Question: China Is Grappling with How to Deploy Its Foreign Exchange Riches,” Financial Times (September 25, 2006). 42www.wto.org/english/res_e/statis_e/its2013_e/its13_world_trade_dev_e.pdf. Accessed February 14, 2015. 43Bertrand Benoit and Richard Milne, “Germany’s Best-Kept Secret: How Its Exporters Are Beating the World,” Financial Times (May 19, 2006), p. 11. 44Valentina Romei, “The ‘Dark Matter That Matters’ in Trade with EU,” Financial Times (December 18, 2017), p. 2. 45Mark Whitehouse, “U.S. Foreign Debt Shows Its Teeth as Rates Climb,” The Wall Street Journal (September 25, 2006), p. A9. 46Damian Paletta and John W. Miller, “China, U.S. Square off over Yuan,” The Wall Street Journal (October 7, 2010), p. A10. 47David J. Lynch, “Russia Brings Revitalized Economy to the Table,” USA Today (July 13, 2006). 48“When the Chips Are Down,” Economist.com (accessed December 1, 2010). 49The authors acknowledge that the PPP theory–based Big Mac Index is simplistic; as noted in this section, exchange rates are also affected by interest rate differentials and monetary and fiscal policies—not just prices. 50John Willman, “Currency Squeeze on Guinness,” Financial Times—Weekend Money (September 27–28, 1997), p. 5. 51“About General Electric,” GE 2015 Form 10-K, p. 30. 52Stephen Power, “Porsche Powers Profit with Currency Play,” The Wall Street Journal (December 8, 2004), p. C3. 53James Crabtree, “India’s Tycoons Still Believe in the Notion That Big Is Beautiful,” Financial Times (November 4, 2015), p. 14.

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“Should we stay or should we go?” That was the question on the minds of voters who went to the polls in June 2016 to decide whether the United Kingdom of Great Britain and Northern Ireland would remain in the European Union (EU). The issue was complicated by the election of Jeremy Corbyn, a far-left candidate, as leader of the Labor Party in September 2015. Britain was also witnessing the rise of populist movements, as evidenced by the fact that nearly 4 million people voted for the anti-EU U.K. Independence Party (UKIP). UKIP’s leader, Nigel Farage, had long been a vocal critic of the EU.

Disillusionment was also evident among members of the Tory party who had opposed Britain’s initial inclusion in the EU, which dated to 1973. In the 1990s, some Tories had also opposed Britain’s participation in the Maastricht treaty that established Europe’s Single Market.

In 2013, Prime Minister David Cameron, a member of the Conservative party, had announced that he was calling a referendum on the issue. At the time, Cameron was convinced that, after sufficient public debate, most U.K. citizens would opt for the status quo. By the time the referendum was put to a vote three years later, however, the opposition movement had gathered considerable momentum and rhetoric on both sides became heated. When the votes were tallied, the “Exit” camp prevailed: The United Kingdom would leave the EU.

As a member of the EU, the United Kingdom has access to a free, open market of nearly 500 million people. For that reason alone, many members of the U.K. business community were

The Global Trade Environment

CASE 3-1

Breaking Up Is Hard to Do: Britons Contemplate “Brexit”

L E A R N I N G O B J E C T I V E S

3-1 Explain the role of the World Trade Organization in facilitating global trade relations among nations.

3-2 Compare and contrast the four main categories of preferential trade agreements.

3-3 Explain the trade relationship dynamics among signatories of the North American Free Trade Agreement.

3-4 Identify the four main preferential trade agreements in Latin America and the key members of each.

3-5 Identify the main preferential trade agreements in the Asia-Pacific region.

3-6 Describe the various forms of economic integration in Europe. What is Brexit, and what are the implications for Great Britain’s relationship with Europe.

3-7 Describe the activities of the key regional organizations in the Middle East.

3-8 Identify the issues for global marketers wishing to expand in Africa.

3

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3-1 The World Trade Organization and Gatt The year 2017 marked 70 years since the enactment of the General Agreement on Tariffs and Trade (GATT), a treaty among nations whose governments agreed, at least in principle, to pro- mote trade among members. GATT was intended to be a multilateral, global initiative, and GATT

Since World War II, nations have had tremendous interest in furthering the cause of economic cooperation and integration. Such agreements can be bilateral in nature; that is, a trade deal can be negotiated between two nations. However, multilateral trade agreements also occur at the regional and global levels. The euro zone, and the larger, 28-nation EU to which 19 euro-zone countries also belong, exemplify regional economic integration. The “Brexit” vote in the United Kingdom, the world’s fifth-largest economy and the second-largest economy in the EU, represents a step backward from such integration.

Our survey of the world trade environment begins at the global level with the World Trade Organization (WTO) and its predecessor, the General Agreement on Tariffs and Trade (GATT). Next, the four main types of bilateral and regional preferen- tial trade agreements (PTAs) are identified and described. An introduction to individual countries in the world’s major mar- ket regions follows; each section also includes detailed discus- sion of the specific preferential trade agreements in which those countries participate. Important marketing issues in each region are also discussed. Several important emerging country markets were described in Chapter 2; in this chapter, special attention will be given to individual country markets that were not previously discussed.

firmly in the “Remain” camp. The Confederation of British Industry (CBI) was against leaving; the trade group produced a study suggesting that 1 million jobs and £100 billion in national income would be lost by 2020. Rolls-Royce Motor Cars and Air- bus have major manufacturing operations in the United King- dom; executives at both companies warned that a “Leave” vote would have negative consequences on employment and competitiveness.

Other companies shied away from the debate, no doubt for fear of alienating their customers on the European continent. One notable exception: Sir James Dyson, the industrialist best known for his vacuum cleaners, was a Leave supporter. In his view, British companies are being “bullied and dominated” by Germany.

For their part, “Euro-skeptics” and other members of the Leave movement were convinced that their country could thrive economically outside of the EU framework (see Exhibit 3-1). There was a shared sense among some in this group that “faceless bureaucrats” in Brussels were creating mountains of red tape that hampered U.K. business. Moreover, some people believed that Brit- ish politicians avoided making key policy decisions by deferring to the EU. As one jokester put it, “Nothing of use has come out of Brussels since the sprout!”

Exhibit 3-1 Opinions continue to be divided between those in favor of “Leave” and those in the “Remain” camp following the Brexit vote in June 2016. Source: Chris Ratcliffe/Bloomberg via Getty Images.

3-1 Explain the role of the World Trade Organization in facilitat- ing global trade relations among nations.

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74 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

negotiators did succeed in liberalizing world merchandise trade. GATT was also an organization that handled 300 trade disputes—many involving food—during its half-century of existence. GATT itself had no enforcement power (the losing party in a dispute was entitled to ignore the ruling), and the process of dealing with disputes sometimes stretched on for years. Little wonder, then, that some critics referred to GATT as the “General Agreement to Talk and Talk.”

The successor to GATT, the World Trade Organization (WTO), came into existence on Jan- uary 1, 1995. From its base in Geneva, Switzerland, the WTO provides a forum for trade-related negotiations among its 164 members. The WTO’s neutral trade experts also serve as mediators in global trade disputes (see Table 3-1). The WTO has a Dispute Settlement Body (DSB) that mediates complaints concerning unfair trade barriers and other issues among the WTO’s member countries. During a 60-day consultation period, parties to a complaint are expected to engage in good-faith negotiations and reach an amicable resolution.

If that fails, the complainant can ask the DSB to appoint a three-member panel of trade experts to hear the case behind closed doors. After convening, the panel has nine months to issue its ruling.1 The DSB is empowered to act on the panel’s recommendations.

The losing party has the option of turning to a seven-member Appellate Body. If, after due process, a country’s trade policies are found to violate WTO rules, the country is expected to change those policies. If changes are not forthcoming, the WTO can authorize trade sanctions against the loser. Final resolution of a dispute is not always swift, however: The European Union and the United States have spent more than a decade at the WTO trying to work out issues relat- ing to aerospace subsidies.

Trade ministers representing the WTO member nations meet on a biennial basis to work on improving world trade. In 2017, that meeting took place in Buenos Aires. It remains to be seen whether the WTO will live up to expectations when it comes to additional major policy initia- tives on such vexing issues as illegal fishing subsidies. Another issue is whether China should be classified as a market economy. The most recent round of WTO negotiations began in 2001; the talks collapsed in 2005, and attempts to revive them in the years since have not been successful. That is one reason why the focus of trade talks shifted to the Transatlantic Trade and Investment Partnership (TTIP) and Trans-Pacific Partnership (TPP; see Case 3-2). Following the election of U.S. President Donald Trump in 2016, the TTIP and TPP negotiations proceeded without the United States. Also, the Trump administration has blocked the process for filling vacancies on the WTO’s Appellate Body.

3-2 Preferential Trade Agreements The WTO promotes free trade on a global basis; however, countries in each of the world’s regions are seeking to liberalize trade within their own regions. A preferential trade agreement (PTA) is a mechanism that confers special treatment on select trading partners. By favoring certain countries, such agreements frequently discriminate against other countries. For that reason, it is customary for countries to notify the WTO when they enter into preferential trade agreements. In

TA B L E 3 - 1 Recent WTO Cases

Countries Involved in the Dispute Nature of the Dispute

United States versus China In 2016, the United States filed a complaint that Chinese export duties on a range of extractive commodities gave its own manufacturers access to key materials at market- distorting prices.

European Union versus United States In 2014, the EU filed a complaint that the government of Washington state violated international trade rules by extending tax incentives to Boeing for in-state manufacture of the 777x jetliner.

Antigua and Barbuda versus the United States

In 2003, Antigua filed suit charging that by prohibiting Internet gambling, the United States was violating global trade agreements. In 2004, the WTO ruled in favor of Antigua.

“For the WTO process to work, countries have to start liberalizing poli- cies in politically sensitive sectors.”2

Daniel Griswold, Center for Trade Policy Studies, Cato Institute

3-2 Compare and contrast the four main categories of preferen- tial trade agreements.

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CHAPTER 3 • THE GLOBAL TRADE ENVIRONMENT 75

recent years, the WTO has been notified of approximately 300 preferential trade agreements. Few fully conform to WTO requirements; none, however, has been disallowed.

Free Trade Area A free trade area (FTA) is formed when two or more countries agree to eliminate tariffs and other barriers that restrict trade. When trading partners successfully negotiate a free trade agreement (also abbreviated FTA), the ultimate goal of which is to have zero duties on goods that cross borders between the partners, it creates a free trade area. In some instances, duties are eliminated on the day the agreement takes effect; in other cases, duties are phased out over a set period of time. Countries that belong to an FTA can maintain independent trade policies with respect to third countries. Rules of origin discourage the importation of goods into the member country with the lowest external tariff for transshipment to one or more FTA members with higher external tariffs; customs inspectors police the borders between members.

For example, because Chile and Canada established an FTA in 1997, a Canadian-built Cater- pillar grader tractor imported into Chile would not be subject to duty. If the same piece of equip- ment was imported from a factory in the United States, the importer would pay about $13,000 in duties. Could Caterpillar send the U.S.-built tractor to Chile by way of Canada, thereby allowing the importer to avoid paying the duty? No, because the tractor would bear a “Made in the U.S.A.” certificate of origin indicating it was subject to the duty. Little wonder, then, that the U.S. govern- ment negotiated its own bilateral free trade agreement with Chile that entered into force in 2003.

According to the Business Roundtable, to date several hundred FTAs have been negotiated globally. Overall, more than 50 percent of global trade takes place among nations linked by FTAs, a figure that increases as more agreements are negotiated. Additional examples of FTAs include the European Economic Area, a free trade area that includes the EU plus Norway, Liechtenstein, and Iceland; the Group of Three (G-3), an FTA encompassing Colombia, Mexico, and Venezuela; and the Closer Economic Partnership Agreement, an FTA between China and Hong Kong.

In October 2011, the U.S. Congress finally ratified the United States’ long-delayed FTAs with South Korea, Panama, and Colombia. Also on tap: the Comprehensive Economic and Trade Agreement (CETA), which would eliminate most tariffs on the trade in goods between Canada and the European Union. As is often the case with such agreements, there has been considerable opposition to CETA in Europe (see Exhibit 3-2).

Exhibit 3-2 Activists opposed to the Comprehensive Economic and Trade Agreement staged a protest in Vienna in September 2016. Source: JOE KLAMAR/AFP/Getty Images.

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76 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

Customs Union A customs union represents the logical evolution of an FTA. In addition to eliminating internal barriers to trade, members of a customs union agree to the establishment of common external tariffs (CETs). In 1996, for example, the EU and Turkey initiated a customs union in a move that boosted two-way trade above the average annual level of $20 billion. The arrangement called for the elimination of tariffs averaging 14 percent, which added $1.5 billion each year to the cost of European goods imported by Turkey.

A customs union between Great Britain and the EU was one widely discussed scenario as Brexit negotiations commenced in 2017 (see Case 3-1). Such a deal would allow Britain to negoti- ate its own trade terms in the services and agriculture sectors; the EU would set any external tariffs on goods. This arrangement would be modeled on the existing customs union between Turkey and the EU. The downside for Great Britain would be the inability to independently negotiate tariff reductions with the United States and China, two important trading partners.

Other customs unions discussed in this chapter are the Andean Community, the Central American Integration System (SICA), the Common Market of the South (Mercosur), and the Caribbean Community and Common Market (CARICOM).

Common Market A common market is the next level of economic integration. In addition to the removal of internal barriers to trade and the establishment of common external tariffs, the common market allows for free movement of factors of production, including labor and capital. The Andean Community, SICA, and CARICOM, which currently function as customs unions, may ultimately evolve into true common markets.

Economic Union An economic union builds upon the elimination of internal tariff barriers, the establishment of common external barriers, and the free flow of factors. It seeks to coordinate and harmonize eco- nomic and social policies within the union to facilitate the free flow of capital, labor, and goods and services from country to country. An economic union is a common marketplace not only for goods but also for services and capital. For example, so that professionals can work anywhere in the EU, the members must harmonize their practice licensing so that a doctor or lawyer qualified in one country may practice in any other EU member country.3

The full evolution of an economic union would involve the creation of a unified central bank; the use of a single currency; and common policies on agriculture, social services, welfare, regional development, transport, taxation, competition, and mergers. A true economic union requires exten- sive political unity, which makes it similar to a nation. The next phase of integration for nations that were members of fully developed economic unions would be the formation of a central government that would bring together independent political states into a single political framework. The EU is approaching its target of completing most of the steps required to become a full economic union, with one notable setback: Despite the fact that 16 member na tions ratified a proposed European Constitution, the initiative was derailed after voters in France and the Netherlands voted against the measure. Table 3-2 and Figure 3-1 compare the various forms of regional economic integration.

TA B L E 3 - 2 Forms of Regional Economic Integration

Stage of Integration

Elimination of Tariffs and Quotas Among

Members

Common External Tariff (CET) and Quota

System

Elimination of Restrictions on Factor

Movements

Harmonization and Unification of

Economic and Social Policies and Institutions

Free trade area Yes No No No

Customs union Yes Yes No No

Common market Yes Yes Yes No

Economic union Yes Yes Yes Yes

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CHAPTER 3 • THE GLOBAL TRADE ENVIRONMENT 77

3-3 North America North America, which includes Canada, the United States, and Mexico, constitutes a distinctive regional market. The United States combines great wealth, a large population, vast geographical space, and plentiful natural resources in a single national economic and political environment and presents unique marketing characteristics. It is home to more global industry leaders than any other nation in the world; U.S. companies are the dominant producers in the computer, software, aerospace, entertainment, medical equipment, and jet engine industry sectors.

Although Canada has few major global manufacturers, train and plane maker Bombardier is one success story (see Exhibit 3-3). The company has high hopes for its newest corporate jet, the Global 7000. Blackberry (formerly known as Research in Motion), a one-time leader in cell- phones, is also based in Canada.

Mexico is gaining a reputation as a manufacturing center; for example, it is the world’s number 1 producer of flat-screen TV sets. Carlos Slim, head of telecommunications giant América Móvil, is one of the world’s richest men.

3-3 Explain the trade relationship dynamics among signatories of the North American Free Trade Agreement.

Exhibit 3-3 Bombardier, one of Canada’s premier companies, builds aircraft for both the business jet and commercial jet markets. In fact, Bombardier Aerospace is the world’s third-largest civil aircraft manufacturer. Another business unit, Bombardier Transportation, produces rail equipment. Source: Stefano Politi Markovina/Alamy.

Economic Union Abolish Tariffs + CET + Factor Movement + Economist and Political Harmonization

Common Market Abolish Tariffs + CET + Factor Movement

Customs Union Abolish Tariffs + CET

FTA Abolish Tariff Barriers

1

2

3

4

FIGURE 3-1 Hierarchy of Preferential Trade Agreements Source: Paul Button, based on data from The World Bank.

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78 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

In 1988, the United States and Canada signed a free-trade agreement (U.S.–Canada Free Trade Agreement [CFTA]), and the Canada–U.S. Free Trade Area formally came into exis- tence in 1989. More than $650 billion in goods and services now flow between Canada and the United States each year, in what is the biggest trading relationship between any two single nations in the world. Canada takes 20 percent of U.S. exports and the United States buys approximately 85 percent of Canada’s exports. Figure 3-2 illustrates the economic integration of North America: Canada is the United States’ number 1 trading partner, China is second, and Mexico ranks third.

American companies have more funds invested in Canada than in any other country. Many U.S. manufacturers, including General Electric (GE) and IBM, use their Canadian operations as major global suppliers for some product lines. By participating in the Canadian auto market, U.S. automakers gain greater economies of scale. The CFTA, which was fully implemented when all duties were eliminated effective January 1998, has created a true continental market for most products.

In 1992, representatives from the United States, Canada, and Mexico concluded negotiations for the North American Free Trade Agreement (NAFTA). The agreement was approved by both houses of the U.S. Congress and became effective on January 1, 1994. The result is a free

FIGURE 3-2 United States’ Top Import/Export Partners Source: Paul Button, based on data from The World Bank.

TOTAL U.S. 2016 GOODS AND SERVICES EXPORTS $2.2 TRILLION

TOTAL U.S. 2016 GOODS AND SERVICES IMPORTS $2.7 TRILLION

0 100 200 300 400 500

0 100 200 300 400 500

HONG KONG

FRANCE

BRAZIL

SOUTH KOREA

GERMANY

JAPAN

UNITED KINGDOM

CHINA

MEXICO

CANADA

ITALY

FRANCE

INDIA

S. KOREA

UK

GERMANY

JAPAN

CANADA

MEXICO

CHINA

$321 BILLION

262

170

121

108

81

64

54

51

46

$479 BILLION

325

313

165

148

107

81

72

63

57

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CHAPTER 3 • THE GLOBAL TRADE ENVIRONMENT 79

trade area with a combined population of more than 486 million people and a total gross domestic product (GDP) of more than $21 trillion (see Figure 3-3).

Why does NAFTA create a free trade area as opposed to a customs union or a common market? The governments of all three nations pledge to promote economic growth through tariff elimination and expanded trade and investment. At present, however, there are no common exter- nal tariffs among the NAFTA partners, nor have restrictions on labor and other factor movements been eliminated.

Annual two-way trade between the United States and Mexico has passed the $500 billion mark; more than $1 billion in goods crosses the border each day. The agreement does leave the door open for discretionary protectionism, however. An insufficient number of checkpoints means that cargo may sit for long periods on trucks at bottleneck points such as Tijuana, a key hub for manufacturing. For this reason, some companies choose not to manufacture their products in Mexico. It is estimated that every minute of delay at the border costs the United States $100 mil- lion and 500 lost jobs.4

Two key issues, illegal immigration and trade, came to the fore during Donald Trump’s U.S. presidential campaign. Candidate Trump promised to “build a wall” along the U.S.–Mexico bor- der and repeal NAFTA, which he famously denounced as “the worst trade deal ever.” Following his election, President Trump threatened to make good on his NAFTA pledge while pro-trade legislators tried to persuade him to negotiate a new, improved agreement. The president was targeting America’s $70 billion trade deficit with Mexico, much of it attributable to the auto industry.

To advance his agenda, the Trump administration put forth a series of “poison pill” proposals that some observers feared were designed to ensure NAFTA’s collapse. One demand was that the free-trade agreement “sunset” (i.e., automatically be ended and reopened to negotiation) every five years. Another was to guarantee that 50 percent of the content of duty-free auto production in North America would be sourced in the United States. A third proposal would scrap NAFTA’s

FIGURE 3-3 NAFTA Income and Population Source: Paul Button, based on data from The World Bank.

18,569,0 0 0 323,127

$

1,046,0 0 0 127,540

$

1,530,0 0 0 36,286

$

UNITED STATES

CANADA

ME XICO

GDP 2016 (in millions) POPUL ATION 2016 (in thousands)

$

NAFTA TOTAL $21,145,0 0 0 486,953$

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80 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

dispute resolution process, which is designed to ensure that contracts cannot be unilaterally terminated.

In fall 2018, the three countries agreed to replace NAFTA with a new trade pact known as the U.S. Mexico Canada Agreement. Winners included the U.S. automobile industry, which will continue to use complex supply chains linking the three countries. Canada prevailed in its efforts to retain use of an independent panel as a means of dispute resolution.

3-4 Latin America: Sica, Andean Community, Mercosur, and Caricom

Latin America includes the Caribbean and Central and South America (because of NAFTA, Mexico is grouped with North America). The allure of the Latin American market has been its considerable size and huge resource base. After an extended period of no growth, crippling infla- tion, increasing foreign debt, protectionism, and bloated government payrolls, the countries of Latin America have begun the process of economic transformation. Balanced budgets are a prior- ity in the region, and privatization is under way. Free markets, open economies, and deregulation have begun to replace the policies of the past. In many countries, tariffs that sometimes reached as high as 100 percent or more have been lowered to 10 to 20 percent.

With the exception of Cuba, most elected governments in Latin America are democratic. Nevertheless, widespread skepticism about the benefits of participating fully in the global economy is apparent in most Latin American countries. As left-leaning politicians who fol- low in the ideological footsteps of Venezuela’s late President Hugo Chávez become more popular, concern is growing that free market forces may lose momentum in the region. Global corporations are watching these developments closely. They are encouraged by import liber- alization, the prospects for lower tariffs within subregional trading groups, and the potential for establishing more efficient regional production. Many observers envision a free trade area throughout the hemisphere. The four most important preferential trading arrangements in Latin America are the Central American Integration System (SICA), the Andean Community, the Common Market of the South ( Mercosur), and the Caribbean Community and Common Market (CARICOM).

Central American Integration System Central America is trying to revive its common market, which was originally set up in the early 1960s. The five original members—El Salvador, Honduras, Guatemala, Nicaragua, and Costa Rica—decided in July 1991 to reestablish the Central American Common Market (CACM). Efforts to improve regional integration gained momentum with the granting of observer status to Panama. In 1997, with Panama as a member, the group’s name was changed to the Central American Integration System (Sistema de la Integración Centroamericana [SICA]; see Figure 3-4).

The Secretariat for Central American Economic Integration, headquartered in Guatemala City, helps to coordinate the progress toward a true Central American common market. Common rules of origin have been adopted by the partners, allowing for more free movement of goods among SICA countries. SICA countries agreed to conform to a common external tariff of 5 to 20 percent for most goods by the mid-1990s; many tariffs had previously exceeded 100 percent. Starting in 2000, import duties converged to a range of 0 to 15 percent.

In 2006 and 2007, implementation of the Central American Free Trade Agreement with the United States created a free trade area known as DR-CAFTA that includes five SICA members (El Salvador, Honduras, Guatemala, Nicaragua, and Costa Rica; Panama is excluded) plus the Dominican Republic. Implementation has been slow, but some changes have already taken effect. For example, 80 percent of U.S. goods and more than half of U.S. agricultural products can now be imported into Central America on a duty-free basis. Benefits to Central American companies include a streamlining of export paperwork and the adoption of an online application process. The region will attract more foreign investment as investors see reduced risk thanks to the clearer rules. In Costa Rica alone, foreign direct investment increased by 15 percent from 2012 to 2013.

3-4 Identify the four main preferential trade agreements in Latin America and the key members of each.

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CHAPTER 3 • THE GLOBAL TRADE ENVIRONMENT 81

For a long time, myriad Central American companies have operated in the “shadow econ- omy,” with many commercial transactions going unreported. In the mid-2000s, for example, undocumented economic activity in Guatemala and El Salvador amounted to roughly 50 percent of GDP. Government tax revenues should increase as companies join the formal economy to take advantage of CAFTA’s benefits.5

FIGURE 3-4 SICA Income and Population Source: Paul Button, based on data from The World Bank.

COSTA RICA

PANAMA

NICAR AGUA

HONDUR AS

EL SALVADOR

GUATEMAL A

$57,436 4,857

$

26,797 6,344

$

68,763 16,582

$

21,517 9,112

$

13,231 6,150

$

$55,188 4,034

$

GDP 2016 (in millions) POPUL ATION 2016 (in thousands)

$

SICA TOTAL $242,932 47,079$

Exhibit 3-4 The Panama Canal is one of the world’s most important shipping routes. Its enlargement means that the canal can accommodate a new genera- tion of huge cargo vessels. Source: Moises Castillo/ASSOCIATED PRESS.

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82 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

Critics of the agreement note that signatory countries are not obliged to comply with international labor standards such as those established by the International Labor Organiza- tion (ILO). The negative repercussions, these critics say, include low wages and poor working conditions.

One of the most exciting projects in the region is the enlargement of the Panama Canal, which celebrated its centennial in 2014. A new generation of mega-sized cargo freighters now passes through the canal. Port improvements are also under way on the east coast of the United States as Miami and other cities get ready to handle more and bigger ships (see Exhibit 3-4).

Despite some progress having been made, attempts to achieve integration in Central America remain uncoordinated, inefficient, and costly. Tariffs still exist on imports of products—sugar, coffee, and alcoholic beverages, for example—that are also produced in the importing country. As one Guatemalan analyst remarked more than a decade ago, “Only when I see Salvadoran beer on sale in Guatemala and Guatemalan beer on sale in El Salvador will I believe that trade liberaliza- tion and integration is a reality.”6

Andean Community The four-nation Andean Community (Comunidad Andina [CAN]; see Figure 3-5), which includes Bolivia, Colombia, Ecuador, and Peru, celebrates its 50th anniversary in 2019. Chile and Venezuela were once members as well; Chile withdrew in 1976, and Venezuela in 2006. Policymakers in the four remaining members have agreed to lower tariffs on intragroup trade and to work together to decide which products each country should produce. Common exter- nal tariffs have been established, marking the transition to a true customs union. At the same time, foreign goods and companies have been kept out as much as possible. One Bolivian described the unfortunate result of this lack of competition in the following way: “We had agreed, ‘You buy our overpriced goods and we’ll buy yours.’”7 Overall, the region’s rural residents and urban poor have become frustrated and impatient with the lack of economic progress. As one Andean scholar put it in the early 2000s, “After 10 or 15 years of operating with free-market policies, paradise hasn’t come. People start wondering if the gospel was as good as advertised.”8

Competing ideologies help explain why intraregional trade is not yielding more benefits. Notably, Peru and Colombia are pursuing growth via capitalism, whereas the governments in Ecuador and Bolivia have socialist leanings.

There are bright spots, however. Starting in the early 1990s, the Andean Trade Promotion and Drug Eradication Act allowed Andean Community members to export flowers to the United States on a duty-free basis. The U.S. Congress passed the act to encourage Latin American farm- ers to cultivate ornamental flowers rather than plants that are the basis of the illegal drug trade. However, the act expired at the end of 2013; for Peru and Colombia, the flower trade is covered by bilateral trade agreements. Although Ecuador’s duty-free status was extended, President Rafael Correa is opposed to free trade talks with the United States.

Meanwhile, blessed with a location near the equator and Andean elevations that receive plenty of sun, Ecuador’s cut-flower industry continues to generate hundreds of millions of dollars in export sales each year. Nevado Roses, Agrocoex, and other sustainability-minded producers have adopted fair-trade practices and policies; these companies, in turn, have been embraced by retailers and consumers seeking ethically sourced products. The majority of Ecuador’s flower harvest is exported to the United States, though significant quantities are exported to Italy, Russia, Germany, and Canada as well.

Peru is benefiting from surging demand and high prices for maca, a native vegetable root crop that grows at high altitudes and whose origins can be traced back to pre-Incan times (see Exhibit  3-5). Thanks to a centuries-old reputation based on its medicinal qualities—as an aph- rodisiac and, more recently, as a cancer-fighting agent—maca has become a hot commodity in China and Japan. In the United States, organic maca is marketed at Whole Foods stores as an “Incan superfood.” Anxious to retain control of this valuable agricultural export, officials at Peru’s National Commission Against Biopiracy have ramped up efforts to prevent maca seeds from being smuggled out of the country for cultivation elsewhere.9

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CHAPTER 3 • THE GLOBAL TRADE ENVIRONMENT 83

FIGURE 3-5 Mercosur and Andean Community Income and Population Source: Paul Button, based on data from The World Bank.

BR A ZIL

VENEZUEL A

URUGUAY

PAR AGUAY

CHILE

BOLIVIA

PERU

ECUADOR

COLOMBIA

ARGENTINA

438,30 0 31,568

$

282,463 48,653

$

97,802 16,385

$

192,094 31,774

$

33,806 10,888

$

247,028 17,910

$

1,796,0 0 0 207,653

$

27,441 6,725

$

52,420 3,444

$

545,866 43,847

$

GDP 2016 (in millions) POPUL ATION 2016 (in thousands)

$

MERCOSUR TOTAL $3,983,490 356,595$

ANDEAN TOTAL $606,165 101,70 0$

Exhibit 3-5 Peruvian maca has been cultivated high in the Andes for millennia. It is highly sought after in China, where it is viewed as a substitute for wild ginseng. Source: age fotostock/SuperStock.

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84 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

Common Market of the South (Mercosur) March 2016 marked the 25th anniversary of the signing of the Asunción Treaty, which signified the agreement by the governments of Argentina, Brazil, Paraguay, and Uruguay to form the Common Market of the South (Mercado Común del Sur, or Mercosur; see Figure 3-5). These four countries agreed to begin phasing in tariff reform on January 1, 1995. Internal tariffs were eliminated, and CETs of 20 percent or less were established. In theory, goods, services, and factors of production will ultimately move freely throughout the member countries; until this goal is achieved, however, Mercosur will actually operate as a customs union rather than as a true common market. Today, about 90 percent of goods are traded freely, but individual members of Mercosur can charge both internal and external tariffs when it suits the respective government.

Much depends on the successful outcome of this experiment in regional cooperation. The early signs were positive, as trade between the four full member nations grew dramatically during the 1990s. Nevertheless, the region has experienced a series of financial crises since Mercosur was established. For example, Brazil’s currency was devalued in 1995 and again in 1999.

Argentina provides a case study in how a country can emerge from an economic crisis as a stronger global competitor. Argentina’s economy minister responded to the financial crisis of 2001–2002 by implementing emergency measures that included a 29 percent currency devalua- tion for exports and capital transactions. Argentina was allowed to break from the CET and raise duties on consumer goods.

The crisis had a silver lining: Virtually overnight, Argentina’s wine exports to the United States were worth four times more when dollar revenues were converted into pesos. The currency devaluation also made Argentine vineyard property cheaper for foreign buyers. Low prices for land, inexpensive labor, and ideal growing conditions for the Malbec grape have combined to make Argentina’s wine industry a major player in world markets. As one winemaker noted, “You can make better wine here for less money than anywhere in the world.”

New challenges loom, however. For example, in the late 2000s, the dollar’s weakness relative to the euro meant that winemakers were paying 25 percent more for oak aging barrels imported from France.10 Argentina’s current president, Mauricio Macri, has laid out an ambitious program of economic reforms, which include a simplified corporate tax code and pension reform aimed at cutting the government’s budget deficit.

The trade agreement landscape in the region continues to evolve. In 1996, Chile became an associate member of Mercosur. Policymakers opted against full membership because Chile already had lower external tariffs than the rest of Mercosur; ironically, full membership would have required raising them. (In other words, Chile participates in the free trade area aspect of Mercosur, not the customs union.) Chile’s export-driven success makes it a role model for the rest of Latin America as well as for Central and Eastern Europe.

In 2004, Mercosur signed a cooperation agreement with the Andean Community; as a result, Bolivia, Colombia, Ecuador, and Peru have become associate members. The EU is Mercosur’s number 1 trading partner; Mercosur is negotiating with the EU to establish a free trade area. Jean-Claude Juncker, the president of the European Commission, is pushing to complete a deal to demonstrate that the EU is “open for business.” Notably, beef farmers in Ireland and France are opposed to this agreement on the grounds that low-cost exports from Brazil and Argentina will harm them; similar objections come from EU agricultural producers whose crops are used to produce ethanol.12

As noted earlier, Venezuela withdrew from the Andean Community in 2006; President Hugo Chávez declared the community “dead” after Peru and Colombia began negotiating FTAs with the United States. Although Venezuela was on track to become a full member of Mercosur, its membership was suspended for failure to adhere to the group’s economic and democratic principles.

For many years Venezuela reaped the rewards of booming demand and high prices for oil; in fact, oil revenues account for 75 percent of its exports. Its late president, Chávez, was a self-proclaimed revolutionary firebrand. After being elected in 1998, he proclaimed that his vision for Venezuela was “socialism for the twenty-first century.”

“The boom in the export of commodities to countries such as China and India has led to the emergence of Latin American countries with a large consumer demand. Agreements such as Mercosur facilitate trade within the region of products with higher levels of added value.”11

Mauricio Claveria, Abeceb Consultancy, Argentina

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CHAPTER 3 • THE GLOBAL TRADE ENVIRONMENT 85

A decade ago, Venezuela offered significant market opportunities for global companies such as Cargill, Chevron, ExxonMobil, Ford, Kellogg, 3M, and Toyota.13 As the country became mired in economic and political turmoil, however, the government led by President Nicolás Madura seized the General Motors plant in Valencia and nationalized a Cargill grain-processing facility. Today, food shortages are a fact of daily life in Venezuela, annual inflation is approaching 5,000 percent, and the government has been forced to restructure its $150 billion foreign debt to forestall default.14

Caribbean Community and Common Market (CARICOM) CARICOM was formed in 1973 as a movement toward unity in the Caribbean. It replaced the Caribbean Free Trade Association (CARIFTA), which had been founded in 1965. The members of this organization are Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grena- dines, Suriname, and Trinidad and Tobago. The population of the entire 15-member CARICOM is approximately 17 million (see Figure 3-6).

To date, CARICOM’s main objective has been to achieve a deepening of economic inte- gration by means of a Caribbean common market. However, CARICOM was largely stagnant during its first two decades of existence. At its annual meeting in July 1991, member countries agreed to speed integration; a customs union was established with common external tariffs. At the 1998 summit meeting, leaders from the 15 countries agreed to move quickly to establish an economic union with a common currency. A study of the issue suggested, however, that

FIGURE 3-6 CARICOM Income and Population Source: Paul Button, based on data from The World Bank.

GDP 2016 (in millions) POPUL ATION 2016 (in thousands)

$

21,0 0 0 1,365

$

4,588 285

$

1,449 101

$

N/A N/A

$

1,765 367

$

8,023 10,847

$

525 74

$

3,446 773

$

1,016 107

$

771 109

$

1,379 178

$

917 55

$

14,027 2,881

$

3,621 558

$

BELIZE

HAITI

GUYANA

JAMAICA

TRINIDAD AND TOBAGO

BARBADOS

ANTIGUA AND BARBUDA

ST. K IT TS AND NEVIS

MONTSERR AT

DOMINICA ST. LUCIA

ST. V IN. AND GREN.

GRENADA

SURINAME

9,047 391

$

BAHAMAS

CARICOM TOTAL

*Excludes Montserrat

$71,574* 18,091*$

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86 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

As the data in Figure 3-5 clearly show, Brazil is an economic powerhouse in South America. Brazil has the largest geographical territory and the larg- est population in the region. It has emerged on the world stage as a strong exporter, and its rapid economic growth has given Brazilian policymakers a greater presence on the global stage and more clout at global trade talks.

One symbol of Brazil’s new role in the global economy is Embraer, a jet aircraft manufacturer (see Exhibit 3-6). Specializing in regional jets that seat between 37 and 124 passengers, Embraer has won orders from a variety of carriers. A cornerstone of Embraer’s strategy is its management’s policy of sourcing the best components available anywhere in the world. This approach, known as reverse outsourcing, has proved its worth in the development of new models such as the E-170/175. In that program, more than one dozen partners, including GE and Honeywell, shared the development risks in exchange for a percentage of revenue from aircraft sales. To sell more regional jets to China, Embraer has also established a $50 million joint venture with China Aviation Industry Corporation.

In the United States alone, more than 850 Embraer jets are cur- rently in service. The reason is simple: It is a huge market. As Paulo Cesar Silva, Embraer’s top executive for Commercial Aviation, notes, “For us, North America is—and will continue to be—the most impor- tant market in terms of the potential to sell new products here. Aviation in North America is about 40 percent of aviation in the world.” Embraer is also aggressively pursuing the defense sector with its light attack aircraft, the Super Tucano. The U.S. military has expressed interest, and orders have come in from Colombia, Indonesia, and other nations.

Brazil’s agricultural sector is also a leading exporter. Brazil is the world’s number 1 exporter of beef, coffee, orange juice (check the label on your orange juice carton), and sugar. Annual coffee bean production totals 40 million 60-kilo bags—one-third of the world total. JBS is the world’s largest meat processor. Brazil is also rapidly gaining a reputation as a producer of sugar-based ethanol fuel. Says Ermor Zambello, man- ager of the Grupo Farias sugar mill, “Globalization has made us think more about foreign markets. Now, we have more of a global outlook, and we are concerned about global production.”

The central issue in the stalled Doha Round of WTO negotiations was agriculture. Brazil and India are taking the lead of the Group of Twenty developing nations calling for agricultural sector reform. For example, the

average tariff on Brazil’s exports to the 34 Organisation for the Economic Co-operation and Development (OECD) nations is 27 percent.

Government subsidies are also a key issue. In the EU, government spending accounts for approximately one-third of gross farm receipts; in the United States, the government provides about one-fourth of gross farm receipts. By contrast, Brazil farm support spending amounts to only 3 percent of farm receipts.

Moving forward, Brazil faces a number of other challenges. Reper- cussions are still being felt from Lava Jato (“Car Wash”), a massive corruption scandal that ensnared politicians and top officials at Brazil’s national oil company. Former president Luiz Inácio Lula da Silva was convicted on corruption charges and sentenced to prison. In the wake of the scandal, Brazil’s current president, Michel Temer, is privatizing a wide range of state-owned businesses.

Despite improvements made prior to the country’s hosting of the 2016 Summer Olympics, Brazil’s infrastructure remains woefully under- developed. Significant investment is required to improve highways, rail- roads, and ports. Businesspeople speak of “the Brazil cost,” a phrase that refers to delays related to excessive red tape.

Trade with China is presenting both opportunities and threats. In 2009, China surpassed the United States to become Brazil’s top trading partner and is investing tens of billions of dollars in the country. China’s explosive economic growth has created great demand for soybeans, iron ore, and other Brazilian commodity exports. However, Brazilian manufac- turers in light-industry sectors such as toys, eyeglasses, and footwear are facing increased competition from low-priced Chinese imports.

Sources: Joe Leahy, Andres Schipani, and Lucy Hornby, “‘Suddenly Everything Is for Sale,’” Financial Times (November 14, 2017), p. 9; Ben Mutzabaugh, “Brazil’s Embraer Jets Are Sized Just Right,” USA Today (July 6, 2012), pp. 1B, 2B; Joe Leahy, “In Search of More High-Flyers,” Financial Times (April 17, 2012), p. 10; Joe Leahy, “The Brazilian Economy: A High-Flyer Now Flags,” Financial Times (January 11, 2012), p. 7; Antonia Regalado, “Soccer, Samba, and Outsourcing?”, The Wall Street Journal (January 25, 2007), pp. B1, B8; David J. Lynch, “Brazil Hopes to Build on Its Ethanol Success,” USA Today (March 29, 2006), pp. 1B, 2B; David J. Lynch, “China’s Growing Pull Puts Brazil in a Bind,” USA Today (March 21, 2006), pp. 1B, 2B; David J. Lynch, “Comeback Kid Embraer Has Hot New Jet, and Fiery CEO to Match,” USA Today (March 7, 2006), pp. 1B, 2B; David J. Lynch, “Brazil’s Agricultural Exports Cast Long Shadow,” USA Today (March 10, 2006), pp. 1B, 2B.

EMERGING MARKETS BRIEFING BOOK

Brazil

Exhibit 3-6 Embraer is the world’s fourth-largest aircraft manufacturer, but is second only to Canada’s Bom- bardier in the regional aircraft sector. Source: Alexandre Meneghini/AP Images.

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CHAPTER 3 • THE GLOBAL TRADE ENVIRONMENT 87

the limited extent of intraregional trade would limit the potential gains from lower transaction costs.15

In the past few years, a trade dispute between the United States and Antigua and Barbuda has raised some eyebrows. Until recently, Antigua’s online gambling industry generated more than $3 billion annually. However, after Washington clamped down on Internet poker sites, Antigua’s revenues slumped. Believing that the United States was violating international law, Antigua appealed to the WTO. The trade body ruled in favor of Antigua, and gave it the right to sell various types of U.S. intellectual property, including software and DVDs, without compensating the trademark and copyright owners.16

The English-speaking CARICOM members in the eastern Caribbean are also concerned with defending their privileged trading position with the United States. That status dates to the Caribbean Basin Initiative (CBI) of 1984, which promoted export production of certain products by providing duty-free U.S. market access to 20 countries, including members of CARICOM. Recently, CBI members requested that the CBI be expanded. The Caribbean Basin Trade Partner- ship Act, which went into effect on October 1, 2000, exempts textile and apparel exports from the Caribbean to the United States from duties and tariffs.

3-5 Asia-Pacific: The Association of Southeast Asian Nations

The Association of Southeast Asian Nations (ASEAN) was established in 1967 as an organiza- tion for economic, political, social, and cultural cooperation among its member countries. Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand were the original six members. Vietnam became the first Communist nation in the group when it was admitted to ASEAN in July 1995. Cambodia and Laos were admitted at the organization’s 30th anniversary meeting in July 1997. Burma (known as Myanmar by the ruling military junta) joined in 1998, following delays related to the country’s internal politics and human rights record (see Figure 3-7). The original six members are sometimes referred to as ASEAN-6.

Both individually and collectively, ASEAN countries are active in regional and global trade. ASEAN’s top trading partners include Japan, the EU, China, and the United States. A few years ago, ASEAN officials realized that having broad common goals was not enough to keep the association alive. Although the ASEAN member countries are geographically close, they have historically been divided in many respects. One problem was the strict need for consensus among all members before proceeding with any form of cooperative effort. An ASEAN Free Trade Area (AFTA) has finally become a reality, thanks to recent progress at achieving intraregional tariff reductions among the six founding ASEAN members. ASEAN’s leaders are now working to establish a fully integrated, single-market ASEAN Economic Community by 2015.

Recently, Japan, China, and Korea were informally added to the member roster; some observers call this configuration ;ASEAN + 3.< When the roster expanded again to include Australia, New Zealand, and India, it was dubbed ;ASEAN + 6.< This group is now work- ing to establish an East Asian Community, with the first step being the establishment of an East Asian Free Trade Area.17 Although China’s participation has met with some opposition, China’s dynamic growth and increasing power in the region required a response. Collectively, ASEAN participants must seek new avenues for economic growth that are less dependent on exporting goods and services to the West. A central challenge is the fact that, despite generating roughly one-third of global GNP, the ASEAN countries are currently in widely varying stages of development.18

January 1, 2010, marked the formal establishment of a new China/ASEAN FTA. Encom- passing 1.9 billion people, the new FTA removes tariffs on 90 percent of traded goods among the partners. Overall, the FTA should benefit the region; Malaysia, for example, should experience an increase in commodity exports such as palm oil and rubber. Other ASEAN industry sectors stand to be hurt by a flood of low-cost Chinese imports. Thailand’s leaders were so concerned about the impact of this possibility on the country’s steel and textile industries that it asked for a delay in lifting tariffs.19

3-5 Identify the main preferential trade agreements in the Asia-Pacific region.

18,000 The number of islands that comprise Indonesia

1.2 million The number of bicycles that Cambodia exports to the EU duty free each year. Cambodia’s status falls under GSP ( Generalized System of Preferences).

$61/month Minimum wage in Cambodia

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88 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

Singapore represents a special case among the ASEAN nations. Once a British colony, it has become a vibrant, 240-square-mile industrial power. Singapore has an extremely efficient infrastructure—the Port of Singapore is the world’s second-largest container port (Hong Kong’s ranks first)—and a standard of living second in the region only to Japan’s. Singapore’s 5.4 million citizens have played a critical role in the country’s economic achievements by readily accepting the notion that “the country with the most knowledge will win” in global competition. Excellent training programs and a 95 percent literacy rate help explain why Singapore has more engineers per capita than the United States. Singapore’s Economic Development Board has also actively recruited businesses to operate in the country. The companies that have been attracted to Singa- pore read like a “Who’s Who” of global marketing and include General Motors, Hewlett-Packard, IBM, Koninklijke Philips, Procter & Gamble, and Apple; in all, more than 3,000 companies have operations or investments in Singapore.

Singapore alone accounts for more than one-third of U.S. trading activities with ASEAN countries; U.S. merchandise exports to Singapore in 2014 totaled $30.5 billion, while imports totaled $16.5 billion. Singapore is closely tied with its neighbors in terms of economic activity, with more than 32 percent of its imports ultimately being reexported to other Asian countries. At the same time, Singapore’s efforts to fashion a civil society have gained the country some noto- riety: Crime is nearly nonexistent, but only because of the severe treatment of criminals by the long-ruling People’s Action Party.

Marketing Issues in the Asia-Pacific Region The 10 ASEAN nations are slated to launch an economic bloc called the ASEAN Economic Com- munity (AEC). Although tariffs have been cut in the region, nontariff barriers—including cumber- some labor laws, lack of harmonization in product standards, and bureaucracy—are some of the

FIGURE 3-7 ASEAN Income and Population Source: Paul Button, based on data from The World Bank.

GDP 2016 (in millions) POPUL ATION 2016 (in thousands)

$

ASEAN TOTAL $2,521,790 638,621$

BRUNEI DARUSSAL AM

202,616 92,701

$

VIETNAM

CAMBODIA

20,017 15,762

$

PHILIPPINES

272,0 0 0 103,320

$

11,40 0 423

$

INDONESIA

L AOS

15,903 6,758

$

MYANMAR 67,430 52,885

$

THAIL AND 406,840

68,863 $

SINGAPORE 296,966

5,607 $

932,259 261,115

$

MAL AYSIA

296,359 31,187

$

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chapter 3 • the Global trade environment 89

Exhibit 3-7 At the 25nd annual APEC meeting in November 2017 in Da Nang, policymakers from 11 nations conducted negotiations on the Trans-Pacific Partnership without the participation of the United States. Source: APEC Summit Pool/Alamy Stock Photo.

issues that have yet to be resolved. ASEAN is not a customs union, so import/export activities are conducted with different procedures. As a result, goods can languish in ports for weeks while documents are reviewed and approved. Much work remains to be done before the AEC evolves into a customs union or common market.20

Another regional group is the Asia-Pacific Economic Cooperation (APEC), a forum that brings 19 leaders together each fall to discuss issues of mutual interest (see Exhibit 3-7). In 2017, APEC met in Da Nang; in a speech at a business conference, U.S. President Trump outlined his vision for free and open trade in what he termed the “Indo-Pacific region.”

3-6 Western, Central, and Eastern Europe The countries of Western Europe are among the most prosperous in the world. Despite the fact that there are significant differences in income between the north and the south and obvious differences in language and culture, the once-varied societies of Western Europe have grown remarkably alike. Even so, enough differences remain that many observers view Western Europe in terms of three tiers. Many Britons view themselves as somewhat apart from the rest of the continent; Euro-skepticism is widespread in that country, and the United Kingdom still has prob- lems finding common ground with historical rivals Germany and France. Meanwhile, across the English Channel, Greece, Italy, Portugal, and Spain have struggled mightily to overcome the stigma of being labeled “Club Med nations,” “peripheral economies,” and other derogatory descriptions by their northern neighbors. Indeed, as noted in Case 3-2, these Southern European countries have been at the center of the sovereign debt crisis.

The European Union The European Union (EU) is home to some of the world’s most famous consumer brands, includ- ing Heineken (Netherlands), H&M (Sweden), LEGO (Denmark), L’Oréal (France), Nutella (Italy), and Zara (Spain). Some EU nations, including France, Germany, Spain, and Sweden, rely heavily on exports of machinery, motor vehicles, and transportation equipment. Other coun- tries, including Greece, export relatively few manufactured goods and are heavily dependent on tourism.

The origins of the EU can be traced back to the 1958 Treaty of Rome. The six original members of the European Community (EC), as the group was called then, were Belgium, France, Holland, Italy, Luxembourg, and West Germany. In 1973, Great Britain, Denmark, and Ireland were admitted, followed by Greece in 1981 and Spain and Portugal in 1986. Beginning in 1987, the 12 countries that were EC members set about the difficult task of creating a genuine single

3-6 Describe the various forms of economic integration in Europe. What is Brexit, and what are the implications for Great Britain’s relationship with Europe.

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90 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

Exhibit 3-8 GNH (gross national happiness), rather than GNP (gross national product), guides policy in Bhutan. Some critics argue that promoting happiness in the Himalayan state has resulted in some negative consequences. For example, the emphasis on the Buddhist culture shared by the majority of the population has caused resentment among the Nepalese minority living in the south. Source: dpa picture alliance/Alamy Stock Photo.

When Britain’s Prince William visited Bhutan in 2016 with his wife Catherine, the Duchess of Cambridge, the world got a rare glimpse into a country that has been called the “forbidden kingdom.” Why “for- bidden?” For one thing, the country’s leaders limit tourism; only about 57,000 foreign visitors traveled to Bhutan in 2015. One hopes that the royal couple were able to glean some insights into their host country’s secret regarding happiness.

Bhutan is a kingdom of 754,000 people in the Himalaya Mountains (see Exhibit 3-8). Per capita GNI is approximately $2,330; using this fig- ure as a metric, Bhutan is included in the ranks of lower-middle-income nations. However, for the past several decades, Bhutan has relied on another measure besides economic growth to assess its success—namely, gross national happiness (GNH).

It has been argued that indicators such as GDP and GNI per capita are inadequate when explaining a nation’s well-being. For example, China’s GDP has doubled twice since 1990, yet ordinary Chinese citi- zens do not appear any happier today than they were when the coun- try’s leaders began transitioning to a free market economy. If increased income and consumption don’t correlate with happiness, then what does? According to some economists and policymakers, supplemental indicators that measure factors such as social progress, quality of life, and sustainability are needed.

The GNH Index includes both objective and subjective indicators: psychological well-being, time use, community vitality, culture, health, education, environmental diversity, living standards, and governance. As Lyonpo Jigmi Thinley, home minister of Bhutan, explained, “We have to think of human well-being in broader terms. Material well-being is only one component. That doesn’t ensure that you’re at peace with your envi- ronment and in harmony with each other.”

Not surprisingly, there is some disagreement among social scientists regarding the best way to define, track, and measure such intangibles as happiness and quality of life. In Britain, for example, officials have devel- oped a summary of “sustainable development indicators” that include measures of traffic, pollution, and crime. In another approach, survey

participants report the feelings they experience as they go about their daily routines, with these activities ranging from paying bills to participat- ing in sports activities. In France, former President Nicolas Sarkozy estab- lished the Commission on the Measurement of Economic Performance and Social Progress to address issues related to national well-being.

Meanwhile, officials in Bhutan have launched a number of initia- tives to promote happiness in the kingdom. For example, teachers are rotated between rural and urban areas to ensure all schoolchildren have access to a top-quality education. As Thakur S. Powdyel, an official at Bhutan’s Ministry of Education, puts it, “The goal of life should not be limited to production, consumption, more production, and more consumption. There is no necessary relationship between the level of possession and the level of well-being.”

With the global economic crisis as a backdrop, a first-ever Happi- ness Congress was held in Madrid in the fall of 2010. The Congress was sponsored by the Coca-Cola Company, which uses the tagline “Open Happiness” in its global advertising. The global beverage giant also established the Coca-Cola Institute of Happiness in Spain after research indicated that Spanish consumers associate Coke, more than any other brand, with happiness.

Minister Thinley from Bhutan was the keynote speaker at the Con- gress; his address was titled “Happiness in Difficult Times.” As Thin- ley told attendees, “Our economic models are greatly, deeply flawed. They are not sustainable.” The 7th International Congress was held in November 2017 in Thimphu, Bhutan.

Sources: Kai Schultz, “In Bhutan, Happiness Index as Gauge for Social Ills,” The New York Times (January 28, 2017), p. A6; “Forbidden Kingdom,” CBS Sunday Morning (April 17, 2016); Jody Rosen, “Higher State of Being,” New York Times Style Magazine: Travel (November 2, 2014), pp. 144–151; Richard Easterlin, “When Growth Outpaces Happiness,” The New York Times (September 28, 2012), p. A31; Tim Harford, “Happi- ness: A Measure of Cheer,” Financial Times (December 27, 2010), p. 5; Victor Mallet, “Bhutan and Coke Join Hands for Happiness,” Financial Times (October 23, 2010); Andrew C. Revkin, “A New Measure of Well-Being from a Happy Little Kingdom,” The New York Times (October 6, 2005).

THE CULTURAL CONTEXT

Bhutan and GNH (Gross National Happiness)

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CHAPTER 3 • THE GLOBAL TRADE ENVIRONMENT 91

market in goods, services, and capital. In other words, the goal was to create a true economic union. Adopting the Single European Act by the end of 1992 was a major EC achievement; the Council of Ministers adopted more than 200 pieces of legislation and regulations to make the single market a reality.

The objective of the European project, as it has been called, is to harmonize national laws and regulations so that goods, services, people, and money can flow freely across country boundar- ies. January 1, 1993, marked the dawn of the new economic era that turned 25 in 2018. Finland, Sweden, and Austria officially joined the EU on January 1, 1995. (In November 1994, voters in Norway rejected a membership proposal.) Evidence that this is more than a free trade area, customs union, or common market is the fact that citizens of member countries are now able to freely cross borders within the union. The EU is encouraging the development of a community-wide labor pool; it is also attempting to shake up Europe’s cartel mentality by handing down rules of competi- tion patterned after U.S. antitrust law. Improvements to highway and rail networks are now being coordinated as well.

For the past 15 years, EU enlargement was an important story in the region. Cyprus, the Czech Republic, Estonia, Hungary, Poland, Latvia, Lithuania, Malta, the Slovak Republic, and Slovenia became full EU members on May 1, 2004. Bulgaria and Romania joined in 2007; Croatia, the newest member, joined on July 1, 2013. As shown in Figure 3-8, the 28 nations of the EU are home to 500 million people and constitute the world’s largest economy, with

FIGURE 3-8 The 28-Nation EU: Income and Population (Pre-Brexit) Source: Paul Button, based on data from The World Bank.

GDP 2016 POPUL ATION 2016

5 19

12

3

23

21

17

8

6

16

13

24

15

4

25

1

11

7

10

26

22

2815

20

2

18

9 27

DENMARK

ESTONIA

FINL AND

FR ANCE

GERMANY

GREECE

HUNGARY

IREL AND

306,143

23,137

236,785

2,806,0 0 0

3,467,0 0 0

194,559

124,343

294,054

5,731

1,316

5,495

66,030

82,667

10,747

9,818

4,773

AUSTRIA

BELGIUM

BULGARIA

CROATIA

CYPRUS

CZECH REPUBLIC

COUNTRY# GDP 2016 (in millions)

POP. 2016 (in thousands)

$386,428

466,366

52,395

50,425

19,802

192,925

8,747

11,348

7,127

4,170

1,170

10,561

1

2

3

4

5

6

7

8

9

10

11

12

13

14

ITALY

L AT VIA

LITHUANIA

LUXEMBOURG

MALTA

NETHERL ANDS

POL AND

PORTUGAL

ROMANIA

SLOVAK REPUBLIC

SLOVENIA

SPAIN

SWEDEN

UNITED K INGDOM

$1,850,0 0 0

27,677

42,739

59,948

10,949

770,845

469,509

204,565

186,691

89,552

43,991

1,232,0 0 0

511,0 0 0

2,619,0 0 0

60,60 0

1,960

2,872

583

437

17,018

37,948

10,325

19,705

5,429

2,064

46,444

9,903

64,637

15

16

17

18

19

20

21

22

23

24

25

26

27

28

EU28 TOTAL 16,738,828 509,625

EU27 TOTAL (E XCLUDES UK )

14,119,828 444,988

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92 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

more than $16 trillion in combined GDP. As discussed in the chapter opening case, the EU28 will become the EU27 when Brexit is triggered in 2019 and Great Britain leaves the EU (see Exhibit 3-9).

The 1992 signing of the Maastricht (Netherlands) Treaty set the stage for the creation of the economic and monetary union that includes a European central bank and the euro, the single European currency. The treaty entered into force in November 1993; in May 1998, Austria, Belgium, Finland, Ireland, the Netherlands, France, Germany, Italy, Luxembourg, Portugal, and Spain were chosen as the 11 charter members of the euro zone. The United Kingdom was a notable holdout; it never joined the euro zone.

The single-currency era, which officially began on January 1, 1999, has brought many benefits to companies in the euro zone, such as eliminating costs associated with currency conversion and exchange rate uncertainty. The euro existed as a unit of account until January 1, 2002, when actual coins and paper money were issued and national currencies such as the French franc were with- drawn from circulation. Greece joined the euro zone in 2001; Slovenia became the 13th member on January 1, 2007. Today, 19 EU countries are also members of the euro zone including the following countries (see Exhibit 3-10):

Cyprus and Malta, 14th and 15th members, joined January 1, 2008

Slovakia, 16th member, joined January 1, 2009

Estonia, 17th member, joined January 1, 2011

Latvia, 18th member, January 1, 2014

Lithuania, 19th member, joined January 1, 2015

For several years following the global financial crisis, the future of the euro zone appeared to be in doubt. There was widespread concern of a possible “Grexit” (i.e., Greece leaving the euro zone). Thanks in part to a stimulus program by the European Central Bank and in part to structural reforms undertaken in several countries, economic output is now expanding across the euro zone. Disparities remain, such as stubborn double-digit unemployment in Spain, Italy, and Greece. In addition to boosting employment, many euro zone nations need to find ways to improve productivity.

Exhibit 3-9 In March 2017, protesters in Rome staged an anti-EU demonstra- tion as government leaders marked the 60th anniversary of the Treaty of Rome. Source: Allessandro Bianchi/Reuters Pictures.

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Marketing Issues in the EU The European Commission establishes directives and sets deadlines for their implementation by legislation in individual nations. The business environment in Europe has undergone considerable transformation since 1992, with significant implications for all elements of the marketing mix:21

Product: Harmonization, which means that content and other product standards that varied among nations have been brought into alignment. As a result, companies have an opportunity to reap the benefits of various economies by reducing the number of product adaptations.

Price: A more competitive environment. Transparency has been improved in the euro zone because the single currency makes it easier to compare prices for the same product in different countries.

Promotion: Common guidelines on TV broadcasting; uniform standards for TV commercials.

Distribution: Simplification of transit documents; elimination of customs formalities at border crossings.

Case Europe, for example, manufactures and markets farm machinery. When it introduced the Magnum tractor in Europe in 1988, it offered 17 different versions because of different countries’ regulations regarding placement of lights and brakes. Thanks to harmonization, Case offers the current model, the Magnum MX, in one version. However, because different types of implements and trailers are used in different countries, the MX is available with different kinds of hitches.22

The advent of the euro on January 1, 1999, brought about more changes. Customers’ ability to directly compare prices in the euro zone has forced many companies to review their pricing policies. The marketing challenge is to develop strategies to take advantage of opportunities in one of the largest, wealthiest, most stable markets in the world. Corporations must therefore assess the extent to which they can treat the region as one entity and consider how to change their organiza- tional policies and structures to adapt to and take advantage of a unified Europe.

The enlargement of the EU will further impact marketing strategies. For example, food safety laws in the EU are different from those in some Central European countries. As a result, Coca-Cola

Exhibit 3-10 Lithuania joined the euro zone on January 1, 2015. Source: Alfredas Pliadis/Xinhua/Alamy Stock Photo.

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94 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

had to delay launching its Powerade sports drink and other beverage products to deal with these disparities; specifically, Polish and EU food law require the use of different ingredients. In addition to the harmonization of laws, the very size of the expanded EU offers opportunities. For example, Procter & Gamble executives foresee that in the event of shortages in a particular country, they will be able to shift products from one market to another. A 28- (or 27-) nation EU also allows for more flexibility in the placement of factories.

At the same time, some challenges have emerged from the EU’s expansion. For example, South American banana growers now face 75 percent tariffs on exports to the new EU countries; previ- ously, tariffs on bananas were virtually nonexistent. Also, because tariffs and quotas protect sugar production in the EU, both consumers and food producers such as Kraft will face rising costs.23

Central and Eastern Europe Because they are in transition, the markets of Central and Eastern Europe present interesting opportunities and challenges. Global companies view the region as an important new source of growth, and the first company to penetrate a country market often emerges as the industry leader. Exporting has been favored as a market-entry mode, but direct investment in the region is on the rise. With wage rates much lower than those in Greece, Italy, Portugal, and Spain, this region offers attractive locations for low-cost manufacturing in light-industry sectors. For example, a shoe manufacturer in Italy might source some of its lower-cost lines in Slovenia.

January 1, 2015, marked the launch of the Eurasian Economic Union (EEU) integrating the economies of Russia, Belarus, and Kazakhstan. Kyrgyzstan and Armenia have also joined the EEU since then. Russian President Vladimir Putin views the EEU as a cornerstone of Russian economic growth. However, with the ruble’s collapse in the wake of falling oil prices, Belarus has reinstated some customs controls.

One study examined the approaches utilized by 3M International, McDonald’s, Koninklijke Philips, Henkel, Südzucker AG, and several other companies operating in Central Europe. Consumers and businesses in the region are eagerly embracing well-known global brands that were once available only to government elites and others in privileged positions. The study found a high degree of standardization of marketing program elements; in particular, the core product and brand elements were largely unchanged from those used in Western Europe. Consumer companies gener- ally target high-end segments of the market and focus on brand image and product quality; industrial marketers concentrate on opportunities to do business with the largest firms in a given country.24

3-7 The Middle East The Middle East includes 16 countries: Afghanistan, Bahrain, Cyprus, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syria, the United Arab Emirates (UAE, which include Abu Dhabi and Dubai), and Yemen. The majority of the population in this region is Arab, a large percentage is Persian, and a small percentage is Jewish. Persians and most Arabs share the same religion, beliefs, and Islamic traditions, making the population 95 percent Muslim and 5 percent Christian and Jewish.

Despite this apparent homogeneity, many differences exist. Middle Eastern countries are distributed across the Index of Economic Freedom discussed in Chapter 2; the United Arab Emirates ranks the highest in terms of freedom, at 8; next is Qatar (29), and then Israel (36). Bahrain is ranked at 44, while Saudi Arabia ranks 64th. By contrast, Iraq and Syria are not ranked, due to the ongoing conflict and economic disruption in both countries. Moreover, the Middle East does not have a single societal type with a typical belief, behavior, and tradition. Each capital and major city in the Middle East has a variety of social groups that can be differentiated on the basis of religion, social class, education, and degree of wealth.

The price of oil drives business in the Middle East. Seven of the countries have historically enjoyed high revenues from the sale of oil: Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, and Saudi Arabia hold significant world oil reserves. Oil revenues have widened the gap between poor and rich nations in the Middle East, and the disparities contribute to political and social instability in the area.

Saudi Arabia, a monarchy with 22 million people and 25 percent of the world’s known oil reserves, remains the most important market in this region. However, as the price of oil has dropped sharply on world markets, and with Iran ramping up oil production now that international

3-7 Describe the activities of the key regional organizations in the Middle East.

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CHAPTER 3 • THE GLOBAL TRADE ENVIRONMENT 95

sanctions against that country have been lifted, Saudi Arabia’s leaders must find new sources of revenue in a “post-oil economy.” Saudi Vision 2030 is the government’s plan for economic change.

One goal is to boost tourism. Oil revenues currently account for 39 percent of Saudi GDP, compared with less than 3 percent for tourism.25 In 2017, Crown Prince Mohammed bin Salman unveiled ambitious plans for a $500 billion economic zone on the Red Sea coast known as Neom, which is intended to attract foreign investment in key sectors such as robotics and renewable energy.

In 2011, the region was rocked by demonstrations and protests that have been described as “the Arab awakening” and “the Arab spring.” The governments of Tunisia and Egypt were overthrown, civil war broke out in Libya, and Syria’s regime cracked down on insurgent activists. Elsewhere in the region, leaders were forced to make economic and political concessions.

Prior to the uprisings, Syria had been a case study in the slow pace of change coming to the Middle East. Citing China’s success at opening its economy while maintaining social control, President Bashar al-Assad took steps to move Syria away from a rigid socialist economic model. Private banks opened for business, a stock market was established, and possessing foreign cur- rency became legal for Syrian citizens. Ties with the West began improving, too; U.S. President Barack Obama lifted some sanctions and named an ambassador to Syria. Entrepreneurs with ties to Syria began returning from Lebanon and the United States, a trend that helped spark a consumer culture. In Damascus, signs of economic rebirth included a Ford dealership, a KFC restaurant, and Benetton boutiques.26 Currently, however, Syria is embroiled in a civil war as rebel forces try to overthrow President al-Assad.

Cooperation Council for the Arab States of the Gulf The key regional organization in the Middle East, commonly referred to as the Gulf Cooperation Council (GCC), was established in 1981 by Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (see Figure 3-9 and Exhibit 3-11). These six countries hold about 45 percent of the world’s known oil reserves, but their production amounts to only 18 percent of world oil output. Ironically, Saudi Arabia and several other Middle Eastern countries post current account deficits, largely because they must import most of the goods and services that their citizens consume.

FIGURE 3-9 GCC Income and Population Source: Paul Button, based on data from The World Bank.

32,153 1,425

$

152,452 2,570

$

BAHR AIN

357,045 9,269

$

UNITED AR AB EMIR ATES

KUWAIT 110,90 0

4,052 $

Q ATAR

66,824 4,424

$

OMAN

644,936 32,275

$

SAUDI AR ABIA

GCC INCOME AND POPUL ATION

GDP 2016 (in millions) POPUL ATION 2016 (in thousands)

$

GCC TOTAL $1,364,310 54,015$

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96 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

In 2017, an unprecedented diplomatic crisis began to fold in the Middle East. In an effort spearheaded by Saudi Arabia and the UAE, the GCC accused Qatar of providing a refuge for terrorists. Qatar denies the allegations. Even so, Egypt joined GCC members Saudi Arabia, UAE, and Bahrain in closing their banking sectors to Qatar and restricting travel and trade with that country. Kuwait and Oman have opted to remain neutral. The boycott has resulted in a heightened state of economic uncertainty even as Qatar pours some $200 billion into infrastructure improve- ments in preparation for its hosting of the 2022 World Cup.

Historically, the GCC countries have been heavily dependent on oil revenues to pay for their imports; with the collapse of oil prices, efforts toward economic diversification and job cre- ation are gaining traction. As noted earlier, Saudi Arabia has launched Saudi Vision 2030, which calls for developing new businesses in the petrochemical, cement, and iron industries. Bahrain is expanding its banking and insurance sectors, and the United Arab Emirates is focusing on infor- mation technology, media, and telecommunications.

The GCC organization provides a means of realizing coordination, integration, and coopera- tion of its members in all economic, social, and cultural affairs. Persian Gulf finance ministers have drawn up an economic cooperation agreement covering investment, petroleum, the abolition of customs duties, harmonization of banking regulations, and financial and monetary coordina- tion. GCC committees coordinate trade development in the region, industrial strategy, agricultural policy, and uniform petroleum policies and prices. Current goals include establishing an Arab common market and increasing trade ties with Asia.

The GCC is one of three newer regional organizations in the Middle East. In 1989, two other organizations were established. Morocco, Algeria, Mauritania, Tunisia, and Libya banded together in the Arab Maghreb Union (AMU); Egypt, Iraq, Jordan, and North Yemen created the Arab Cooperation Council (ACC). Many Arabs see their new regional groups—the GCC, ACC, and AMU—as embryonic economic communities that will foster the development of inter-Arab trade and investment. The newer organizations are likely to lead more quickly to economic integration and reform than does the Arab League, which consists of 22 member states and has a constitution that requires unanimous decisions.

Marketing Issues in the Middle East Connection is a key word in conducting business in the Middle East. Those who take the time to develop relationships with key business and government figures are more likely to cut through red tape than those who do not. A predilection for bargaining is culturally ingrained, and the visiting businessperson must be prepared for some old-fashioned haggling. Establishing personal rapport, mutual trust, and mutual respect are essentially the most important factors leading to a successful

Exhibit 3-11 The six nations of the Gulf Cooperation Council, shown here meeting in Doha, Qatar, are striving to speak with one voice about the crises that have rocked the Middle East. For example, member nations are divided over the appropriate response to the political turmoil in Egypt, Libya, and Syria. Qatar supports the Muslim Brotherhood, while Saudi Arabia and the United Arab Emirates consider the group to be a threat to regional stability. Source: 506 collection/Alamy Stock Photo.

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CHAPTER 3 • THE GLOBAL TRADE ENVIRONMENT 97

business relationship. Decisions are usually not made by correspondence or telephone. The Arab businessperson does business with the individual, not with the company. Also, most social customs are based on the Arab male-dominated society. Thus, women are usually not part of the business or entertainment scene for traditional Muslim Arabs.

3-8 Africa The African continent is an enormous landmass with a territory of 11.7 million square miles; the United States would fit inside Africa about three and a half times. It is not really possible to treat Africa as a single economic unit. The 54 nations on the continent can be divided into three distinct areas: the Republic of South Africa; North Africa; and sub-Saharan, or Black, Africa, which is located between the Sahara in the north and the Zambezi River in the south. With 1.3 percent of the world’s wealth and 15 percent of its population, Africa is considered a developing region. Average per capita income ranges from $1,505 in the sub-Saharan countries to $7,800 in the North Africa/Middle East region. Many African nations are former European colonies, and the EU remains the continent’s most important trading partner.

The Arabs living in North Africa are differentiated politically and economically from the populace in the rest of Africa. The six northern nations are richer and more developed than those located in the sub-Saharan region, and several—notably Libya, Algeria, and Egypt—benefit from substantial oil reserves. The Middle East and North Africa are sometimes viewed as a regional entity known as “Mena”; when oil prices soared, the International Monetary Fund (IMF) encour- aged Mena policymakers to invest the petrodollar windfall in infrastructure improvements as a way of sustaining economic growth.27 With the collapse of oil prices, governments in the area are working to reduce their reliance on oil revenues and their public aid levels. The economies of non-oil-based, “emerging Mena” countries, which include Jordan, Lebanon, Morocco, and Tunisia, have also performed well in recent years.

Economic Community of West African States The Treaty of Lagos establishing the Economic Community of West African States (ECOWAS) was signed in May 1975 by 16 states with the object of promoting trade, cooperation, and self- reliance in West Africa. The original members were Benin, Burkina Faso, Cabo Verde, Côte d’Ivoire, the Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra Leone, and Togo; Mauritania left the group in 2002 (see Figure 3-10). In 1980, the member countries agreed to establish a free trade area for unprocessed agricultural products and handicrafts. Tariffs on industrial goods were also to be abolished, although implementation delays occurred on this front.

By January 1990, tariffs on numerous items manufactured in ECOWAS member states had been eliminated. The organization installed a computer system to process customs and trade statis- tics and to calculate the loss of revenue resulting from the liberalization of intercommunity trade. In June 1990, ECOWAS adopted measures to create a single monetary zone in the region by 1994.

Despite such achievements, economic development has occurred unevenly in the region. In recent years, Ghana has performed impressively, propelled by deals related to its oil, gas, and mineral sectors. China has signed deals with the region that are worth $15 billion.28 By contrast, Liberia and Sierra Leone are still experiencing political conflict and economic decline.

East African Community Kenya, Uganda, Tanzania, Rwanda, and Burundi are the five nations that make up the world’s newest common market (see Figure 3-10). The East African Community’s origins date back more than 40 years, but only since 1999 has substantial progress been made toward its integration and cooperation. Today’s East African Community has evolved through several of the stages listed in Table 3-2. In 2005, a customs union was implemented. The formation of the common market in 2010 resulted in the free movement of people, goods and services, and capital within the com- munity. Members also intend to move swiftly to establish an economic union. The first step will be creating a monetary union; the goal is to introduce a common currency within ten years. There is even talk about forming a single nation. As one observer noted, “The idea of a United States of East Africa is less far-fetched than it was before.”29

3-8 Identify the issues for global marketers wishing to expand in Africa.

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98 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

FIGURE 3-10 ECOWAS, SADC, and East African Community Income and Population Source: Paul Button, based on data from The World Bank.

405,083 185,990

$

7,509 20,673

$

12,115 18,646

$

NIGER MALI

14,045 17,995

$

CABO VERDE 1,617

539 $

SENEGAL 14,765 15,412

$

THE GAMBIA

964 2,038

$

GUINE A-BISSAU 1,126 1,816

$

SIERR A LEONE 3,669 7,396

$ GUINE A 6,299

12,396 $

BURKINA FASO

NIGERIA

8,583 10,872

$

BENIN

4,40 0 7,606

$

TOGOGHANA 42,690 28,206

$

CÔTE D’ IVOIRE 36,165 23,696

$

LIBERIA 2,101 4,614

$

GDP 2016 (in millions) POPUL ATION 2016 (in thousands)

$

ECOWAS TOTAL $561,131 357,895$

SEYCHELLES

MAL AWI

TANZ ANIA

1,427 94

$

5,442 18,091

$

47,431 55,572

$

DEMOCR ATIC REPUBLIC OF THE CONGO

34,999 78,736

$

MOZ AMBIQUE 11,015 28,829

$

ZIMBABWE 16,289 16,150

$

LESOTHO 2,20 0 2,204

$ SWA ZIL AND

3,727 1,343

$

MAURITIUS 12,164 1,263

$

SOUTH AFRICA 294,841

55,909 $

NAMIBIA 10,267

2,480 $

Z AMBIA 19,551 16,591

$

ANGOL A 89,633 28,813

$

BOTSWANA 15,275

2,250 $

GDP 2016 (in millions) POPUL ATION 2016 (in thousands)

$

SADC TOTAL $564,261 308,825$

Southern African Development Community In 1992, the Southern African Development Community (SADC) superseded the South African Development Coordination Council as a mechanism by which the region’s black-ruled states could promote trade, cooperation, and economic integration. The members of SADC are Angola, Botswana, Democratic Republic of Congo (formerly Zaire), Lesotho, Malawi, Mauritius, Mozambique, Namibia, South Africa, Seychelles, Swaziland, Tanzania, Zambia, and Zimbabwe (see Figure 3-10). South Africa joined the community in 1994; it represents about 75 percent of the income in the region and 86 percent of intraregional exports. The SADC’s ultimate goal is a fully developed customs union; in 2000, an 11-nation free trade area was finally established (Angola, the Democratic Republic of Congo, and Seychelles are not participants).

South Africa and the EU signed a Trade, Development, and Cooperation Agreement (TDCA) in 2000; two-way trade and foreign direct investment have increased substantially since then. Meanwhile, other SADC members are concerned that this arrangement provides European global companies with a base from which to dominate the continent.

South Africa, Botswana, Lesotho, Namibia, and Swaziland also belong to the Southern African Customs Union (SACU).

Marketing Issues in Africa In 2000, U.S. President George W. Bush signed the African Growth and Opportunities Act (AGOA) into law (see www.trade.gov/agoa/). Under the rubric of “trade, not aid,” the law is designed to support African nations that make significant progress toward economic liberalization. African companies will find it easier to gain access to financing from the U.S. Export–Import Bank; AGOA also represents a formal step toward a U.S.–Africa free trade area.30 One of the

KENYA

70,529 48,462

$

TANZ ANIA

47,431 55,572

$

UGANDA

25,528 41,488

$

RWANDA

8,376 11,918

$

BURUNDI

3,0 0 0 10,524

$

GDP 2016 (in millions) POPUL ATION 2016 (in thousands)

$

SADC TOTAL $154,864 167,964$

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act’s key provisions grants textile and apparel manufacturers in Kenya, Lesotho, and Mauritius free access to the U.S. market for as much as $3.5 billion in exports each year. As Benjamin Kipkorir, Kenya’s ambassador to the United States, observed a decade ago, “Every country that has industrialized, starting from England in the eighteenth century, began with textiles. We’d like to do the same thing.”

Under the Agreement on Textiles and Clothing negotiated during the Uruguay Round of GATT negotiations, global textile quotas were eliminated in 2005. Nevertheless, the textile pro- vision in AGOA is controversial. The United States imports nearly $100 billion in textiles and apparel each year. The largest share—more than 40 percent—originates in China, with the bal- ance coming from other parts of Asia plus Latin America and Africa. Wary U.S. legislators from textile-producing states fear job losses among their constituents.

Despite such initiatives, only about 3 percent of annual foreign direct investment goes to Africa. Even so, some Persian Gulf states now appear bent on creating closer ties with Africa, investing billions of dollars in key sectors such as infrastructure, agriculture, and telecommunica- tions. For example, Dubai World, a state-owned company, is negotiating a deal in Nigeria’s energy sector that could be valued at several billion dollars. Dubai also funded construction of a container terminal that opened recently in Djibouti. The largest terminal of its kind in sub-Saharan Africa, it will be managed by DP World, a subsidiary of Dubai World. Such investments are welcome at a time when investors in Europe, stung by economic losses in the developed world, are cutting their spending. In the words of Djibouti President Ismaïl Guelleh, “What the Arabs are doing for us is what colonialists should have done for Africa.”31

Discussion Questions 3-1. Explain the role of the World Trade Organization. Why has the Doha Round of trade

talks stalled? 3-2. Describe the similarities and differences among a free trade area, a customs union, a

common market, and an economic union. Give an example of each. 3-3. What are the criteria for joining the euro zone?

Summary This chapter examines the environment for world trade, focusing on the institutions and regional cooperation agreements that affect trade patterns. The multilateral World Trade Organization, created in 1995 as the successor to the General Agreement on Tariffs and Trade, provides a forum for settling disputes among member nations and tries to set policy for world trade. The world trade environment is also characterized by preferential trade agreements among smaller numbers of countries on regional and subregional bases. These agreements can be conceptualized on a continuum of increasing economic integration.

Free trade areas such as the one created by the North American Free Trade Agreement (NAFTA) represent the lowest level of economic integration. The purpose of a free trade agree- ment (FTA) is to eliminate tariffs and quotas. Rules of origin are used to verify the country from which goods are shipped. A customs union, such as Mercosur, represents a further degree of integration in the form of common external tariffs. In a common market, such as the Central American Integration System (SICA) and the East African Community, restrictions on the movement of labor and capital are eased in an effort to further increase integration. An economic union, such as the EU, the highest level of economic integration, is achieved by unification of economic policies and institutions. Harmonization, the coming together of varying standards and regulations, is a key characteristic of the EU.

Other important cooperation arrangements include the Association of Southeast Asian Nations (ASEAN) and the Gulf Cooperation Council (GCC). In Africa, the two main coopera- tion agreements are the Economic Community of West African States (ECOWAS) and the South African Development Community (SADC).

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100 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

3-4. Identify a regional economic organization or agreement in each of the following areas: Latin America, Asia-Pacific, Western Europe, Central Europe, the Middle East, and Africa.

3-5. Several key dates mentioned in the chapter are listed here. Can you identify the event associated with each? (The answers follow.)

January 1, 1994

January 1, 1995

January 1, 1999

January 1, 2002

May 1, 2004

January 1, 2007

January 1, 2009

January 1, 2011

July 1, 2013

January 1, 2014

January 1, 2015

Answers: January 1, 1994—NAFTA becomes effective; January 1, 1995—WTO becomes the successor to GATT; January 1, 1999—introduction of the euro as a unit of account; January 1, 2002—euro currency goes into circulation; May 1, 2004—EU enlargement to 25 members; January 1, 2007—Romania and Bulgaria join the EU; January 1, 2009—Slovakia becomes the 16th member of the euro zone; January 1, 2011—Estonia becomes the 17th member of the euro zone; July 1, 2013—Croatia joins the EU; January 1, 2014—Latvia joins the euro zone; January 1, 2015—Lithuania joins the euro zone.

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CHAPTER 3 • THE GLOBAL TRADE ENVIRONMENT 101

CASE 3-1 (Continued from page 73)

Breaking Up Is Hard to Do: Britons Contemplate “Brexit”

Having called the national referendum, Prime Minister Cameron ini-tiated negotiations with EU officials about the future of the United Kingdom’s continued participation in the regional bloc. His goal was to convince the EU to make certain concessions that would make the “Remain” option more appealing to voters. Among the reforms was a measure to restrict welfare benefits offered to certain EU nationals coming to the United Kingdom.

For the most part, politicians, diplomats, and institutions outside the United Kingdom were lending their voices to the “Remain” argu- ment. For example, U.S. President Barack Obama, plus the leaders of Canada, New Zealand, and Australia, all urged voters to cast “In” bal- lots. In fact, on a visit to London in April 2016, Obama disagreed with the view that an “Out” vote would allow Britain to play a bigger role in the global arena. In fact, the U.S. president said, being part of the EU actually amplified Britain’s voice around the world.

In lieu of EU membership, several alternative options would be available to the United Kingdom. First, the United Kingdom could retain privileged access to the EU’s single market by joining Iceland, Lichtenstein, and Norway in the European Economic Area (EEA). Sec- ond, the United Kingdom could enter into a bilateral free-trade agree- ment with the EU; Canada has a similar arrangement. As a third option, the United Kingdom could pursue trade with the EU under its current membership in the World Trade Organization.

Those in the “Remain” camp argued that any of these alternatives would result in substantial decrease in the United Kingdom’s GDP. The U.K. Treasury’s chief economist produced reports on the short-term and long-term impact of a “Leave” vote, factoring in the various alterna- tives. George Osborne, the Chancellor of the Exchequer (as the U.K. finance minister is called), said that in the worst-case “Leave” scenario, more than 800,000 jobs could be lost in the long term. In the short term—two years after leaving—520,000 jobs would be lost. The Trea- sury report estimated that, under the free-trade agreement option, annual economic output would fall 6.2 percent. Thus, by 2030, the average British households would be worse off by an estimated £4,300 ($6,665).

Despite these warnings, some politicians from Cameron’s own Conservative Party broke ranks with the prime minister and his cabi- net. Former London mayor Boris Johnson and justice minister Michael Gove, among others, both argued for “Out.”

Immigration, Terrorism, and the Migrant Crisis As the migrant crisis expanded in 2016, Michael Gove, the Conserva- tive politician, asserted that EU rules hindered the efforts of Britain’s security forces to keep terror suspects out of the country. Another concern: If Turkey joined the EU, some of its 76 million people would join the wave of migrants seeking new opportunities in Britain. While Germany, one of the strongest EU members, favors unconditional free movement of people, some policymakers emphasized the need for flexibility to impose conditions on immigration. Questions were raised about the impact on the United Kingdom outside of the EU framework.

Trade with Non-EU Countries If Vote Leave movement prevailed, the United Kingdom would be out- side the framework of the Transatlantic Trade and Investment Part- nership (TTIP; see Case 3-2). The country would then be forced to negotiate separate, bilateral trade deals with the United States and

other countries that currently have agreements with the EU. Likewise, the EU has signed free-trade agreements with Singapore, Vietnam, and South Korea. The FTA with South Korea was implemented in 2011; since then, U.K. exports to South Korea have increased 30 percent. “Remain” advocates noted that there are more advantages when the United Kingdom is part of a wider trade relationship.

Voter Demographics One thing was clear in the run-up to the June 23, 2016, referendum vote: There was a split along voters based on age. Voters age 18–24, who grew up in the EU era, were in favor of “Remain.” By contrast, many older voters, who were nostalgic for the pre-EU years, intended to vote “Leave.” Many members of this demographic, especially those with lower levels of formal education, viewed globalization as a threat rather than an opportunity. Brexit supporters were heartened by research showing that older voters were more likely to go to the polls than younger ones.

The Voters Spoke: Leave In the end, those voting “Leave” won the day. The immediate after- math of the referendum was a political shakeup. Prime Minster David Cameron, the man who had called for the referendum, announced that he would step down. Saying that his work was done, Nigel Farage resigned as leader of UKIP. After brief maneuvering by several potential candidates, including Boris Johnson, the former mayor of London, and Energy Minister Andrea Leadom, Theresa May emerged as the new leader of the Conservative Party.

As home secretary starting in 2010, May had proved to be a for- midable presence in a political arena traditionally dominated by men. Some observers compared her favorably with Margaret Thatcher, the “Iron Lady” who had served as prime minister in the 1980s. Others compared May’s no-nonsense, efficient political style to that of German Chancellor Angela Merkel. May vowed to “make Brexit a success,” but also pledged not to start the formal Brexit process until 2017.

Industry Impact In the late fall of 2016, Nissan announced that it would produce two new SUV models at its plant in Sunderland. The announcement came after Prime Minister May provided assurances to Nissan executives that the automaker would be protected from any negative Brexit consequences. The plant, located in northeast England, is very important to the nation’s economy. It is the United Kingdom’s largest auto manufacturing plant, employing 7,000 people and producing 500,000 vehicles annually. What is more, some 80 percent of the production is exported, meaning that access to the European market is a critical factor for Nissan’s success.

Theresa May in Number 10 Downing Street As prime minister, May advocated a “hard Brexit”; in her words, “No Brexit deal is better than a bad deal.” Hoping to bolster the Conserva- tive majority in Parliament, in April 2017 May called a “snap” election for the House of Commons. As it turned out, when voters went to the polls in June, they did not deliver the additional parliamentary seats that May had anticipated. This state of affairs forced May to back off on some of her plans for Brexit negotiations, which were to be completed

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102 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

Exhibit 3-12 Theresa May Prime Minster Source: Drop of Light/Shutterstock.

by March 2019. The “Queen’s Speech,” written by the Prime Minister but delivered by Queen Elizabeth II two weeks after the snap election, contained eight bills pertaining to a “softer” Brexit. In particular, May’s legislative program included a Great Repeal bill to convert EU legislation into U.K. law and bills to establish frameworks for customs and trade.

Questions for the Future Once the U.K. political landscape had settled, the focus shifted to the risks and opportunities facing the nation. Many questions loomed. Would London lose its status as a leading global banking center? How could the United Kingdom continue to benefit from workers entering from the EU while at the same time reducing immigration?

As Christmas 2017 approached, it appeared a breakthrough had been reached in the “divorce settlement.” Following the implemen- tation of Brexit in March 2019, there will be a two-year “transition period” that will allow all parties to adjust to the new realities. Prime Minister Theresa May agreed that the United Kingdom would pay the EU approximately €40 billion. This represented a shift: Previously, the United Kingdom had responded to the multibillion-euro payment demand by saying that the EU could “go whistle.” Agreement was also reached concerning the rights of EU citizens residing in the United Kingdom as well as U.K. citizens residing in the EU.

Looking ahead, the two sides began to address issues pertaining to trade. Would the United Kingdom leave the single market and the customs union? If so, how would trade be conducted? Also, which kind of border would be established between Northern Ireland (part of the United Kingdom) and the Republic of Ireland (part of the EU)?

Discussion Questions 3-6. If you had been eligible to vote in the referendum, would

you have voted “In” or “Out”? What is the basis for your answer?

3-7. What would it mean for the Unite Kingdom to remain in the “EU customs union”?

3-8. As this edition went to press, there was uncertainty about whether there would be a “hard exit,” a “soft exit,” or “no exit.” Where do things stand currently?

Sources: Lloyd Dorfman, “Brexit Would Damage Important Trade Links with Asia,” The Daily Telegraph (May 24, 2016), p. 2; Philip Stevens, “Brexit May Break Britain’s Tory Party,” Financial Times (April 22, 2016), p. 9; Chris Giles, “Economics That Lie Behind Treasury’s Dire Warning,” Financial Times (April 19, 2016), p. 2; Jason Douglas, “U.K. Exit’s Impact on Jobs Could Roil EU,” The Wall Street Journal (April 18, 2016), p. A2; Jenny Gross, “Cameron Defends Draft EU Deal,” The Wall Street Journal (February 4, 2016), p. A14; “Can the UK Economy Survive Brexit?”, Panel Discussion, Battle of Ideas (October 18, 2015), London. Source: Banx Cartoons.

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CHAPTER 3 • THE GLOBAL TRADE ENVIRONMENT 103

CASE 3-2

Can Global Trade Talks Survive in an Era of Populism and Protectionism?

As the second decade of the twenty-first century came to a close, optimism about global trade talks began to wane. The United States and several Asian countries had spent years working on the details of a trade framework known as the Trans-Pacific Partnership (TPP). The goal was an ambitious one: to create a free trade area that would lead to long-term economic growth. Meanwhile, the United States and the European Union (EU) were also in negotiations to create a separate free trade area. As with the TPP, the goal of the Transatlantic Trade and Investment Partnership (TTIP) was to kick-start economic growth among the member nations.

Transatlantic Trade and Investment Partnership The United States and the EU have the world’s largest trading relationship, with their two-way trade in goods and services amounting to more than $1 trillion annually. Nevertheless, the share of trade between the regions had been declining for years, as both sides have increasingly focused on trade in goods and services to China and other Asian countries.

In an effort to increase U.S.–EU economic integration, negotia- tors sought to forge a “transformative, 21st-century agreement” that would boost the volume of two-way U.S.–EU trade. The rationale was straightforward: A free trade agreement (FTA) that generated more trade would boost economies for all parties. In the United States, business leaders pressed then-President Barack Obama to pursue more trade deals. In Europe, German Chancellor Angela Merkel, former Brit- ish Prime Minister David Cameron, and other leaders were pushing for a new agreement that would create new avenues for job creation and economic growth across the region.

In 2016, two key events had a direct impact on the future of the TTIP. The first was the British vote for Brexit; the United Kingdom had been one of the strongest advocates of an expanded trade relationship with the United States (see Case 3-1). Shortly after the “Leave” vote prevailed, Prime Minister Cameron resigned. The second pivotal event was the election in November 2016 of Donald Trump as president

of the United States. During his campaign, Trump consistently spoke out against trade liberalization. Another presidential hopeful, Bernie Sanders, also included anti-trade rhetoric in his campaign.

As noted in Chapter 2, Europe desperately needs to find new sources of economic growth. What better way to do so than to sign an FTA with the United States? That is exactly what European leaders were asking as talks got under way between leaders on both sides of the Atlantic. Even though tariffs on goods imports and exports average only about 3 percent, the volume of the two-way trade between the United States and the EU is very large—some $500 billion in goods alone. If tariffs were eliminated, even a small increase in trade could yield substantial benefits. As an execu- tive at GE explained, “This could be the biggest, most valuable free-trade agreement by far, even if it produces only a marginal increase in trade.”

Complicating the trade talks was increasing friction between the two sides. Some European businesses complained that they had been hurt by Western trade sanctions imposed on Russia after President Vladimir Putin annexed Crimea and launched military operations in Ukraine. By contrast, it was noted, U.S. business interests had not been materially affected by this move. Meanwhile, the EU stepped up its actions against American tech giants. For example, Apple was ordered to pay €13 billion in back taxes, and Google was fined €2.4 billion for antitrust violations.

Major differences separate the two sides. One key sticking point is agriculture. For example, the EU restricts the import of most geneti- cally modified crops, which are common in the United States. Tariff reduction is another key issue. Although tariffs between the trading partners currently average between 2 and 3 percent, further reduction could result in significant savings.

A third issue concerns a variety of regulations that hamper cross- border investment and purchasing. Such regulations are sometimes called nontariff barriers, and many observers argue that they are harder to remove than tariff barriers. The various types of nontariff restrictions cre- ate bureaucratic obstacles that affect a variety of industries. For example, the EU would like an easing of restrictions on U.S. government purchases

Source: Jeremy Banx/Banx Cartoons.

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104 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

of European goods, but that matter is complicated because some of those buying decisions are made at the state level, and some states have passed “Buy American” laws. For its part, as noted earlier, Europe has blocked imports of genetically modified agricultural products such as corn and soy.

Another issue concerns product labeling. Some food companies that market dairy products in the United States use terms such as “Parmesan” on their labeling. According to EU law, the name “Parmesan” should apply only to a cow’s-milk cheese known as “Parmigiano–Reggiano” that is produced using traditional methods in the Parma/Reggio region of Italy. The Italian cheese bears symbols for protected geographical indica- tion (PGI) and protected designation of origin (PDO). The only ingredients besides milk in true Parmigiano–Reggiano are salt and an enzyme. By con- trast, Kraft 100% Grated Parmesan Cheese contains cellulose powder (for a smooth texture), potassium sorbate (a preservative), and other ingre- dients. Because of EU regulations, Kraft cannot sell its cheese in Europe.

Another contentious issue is a cultural one. In parts of Europe, some hold the view that American cultural exports—Hollywood mov- ies, for example—overwhelm the works of local film producers. This perspective prompted European policymakers to demand “carve- outs” that exempt certain industries from the trade pact. In France, for example, the motion picture industry receives state subsidies, and broadcasters are required to comply with quotas for the amount of programming that originates in Europe. Digital media would also be exempt. Not surprisingly, some critics have denounced the proposed carve-outs as blatant protectionism; in contrast, supporters suggest they are legitimate ways to preserve cultural diversity.

By 2017, with President Donald Trump pulling the United States out of the deal, it appeared that the TTIP negotiations would not be resumed. Instead, the EU was focusing on bilateral trade agreements with Japan, Australia, and New Zealand, as well as new deals with Mercosur and Canada.

The Trans-Pacific Partnership In 2005, Brunei, Chile, New Zealand, and Singapore signed an agree- ment pledging to eliminate all tariffs among the trade partners by 2015. A decade later, signatories to the proposed free trade pact, known as the Trans-Pacific Partnership, included Australia, Canada, Japan, Malaysia, Mexico, Peru, the United States, and Vietnam. According to the International Monetary Fund, goods exports by the 12 nations negotiating the TPP accounted for about 40 percent of the world total.

Impetus for U.S. involvement gained momentum under President George W. Bush. U.S. President Obama viewed the TPP as a means of increasing American exports. The president was also under pressure to cre- ate more jobs for U.S. workers. In 2015, Obama scored a legislative victory when Congress granted him “fast-track” authority to negotiate trade deals.

Despite the policymakers’ best intentions, today less than 10 per- cent of the U.S. workforce is engaged in manufacturing. Author Beth Macy’s best-selling book Factory Man chronicled the plight of the fur- niture industry in states such as North Carolina and Virginia where jobs have been lost to Chinese competition. Another recent book, Janesville: An American Story, won the 2017 Financial Times and McKinsey Busi- ness Book of the Year Award. In it, author Amy Goldstein tells how the local community was disrupted by General Motors’ decision to close its assembly plant in Janesville, Wisconsin.

In a painful twist, some evidence suggested that implementation of the TPP could result in a loss of manufacturing jobs. For example, New Bal- ance Athletics produces 7 million pairs of athletic shoes annually at its plant in Maine. It is the only major company that still manufactures athletic shoes in its headquarters country. Even so, the company must source more than 20 million pairs from factories in China, Indonesia, the United Kingdom, and Vietnam to meet the demand of its U.S. customers. As Matthew LeBretton, head of public affairs at New Balance, explained, from a purely

financial point of view, it is more profitable to source shoes in low-wage countries. However, management at New Balance believes that having some of its products “Made in America” is important to the company’s brand story. The venerable 990 line of running shoes is a case in point.

Another issue was China’s concern that TPP represented an American strategy of “containment”—that is, an attempt to neutral- ize China’s growing influence in the Asia-Pacific region. This concern increased after Japan joined the group. China responded by propos- ing an alternative trading bloc known as the Regional Comprehensive Economic Partnership (RCEP). The RCEP would deepen ties with the 10-nation ASEAN group as well as several other Pacific Rim nations. Chinese president Xi Jinping has also proposed a multilateral Free Trade Area of Asia Pacific (FTAAP) that would include the United States.

In January 2017, U.S. President Trump signed an executive order withdrawing the United States from the TPP. Candidate Trump, pledg- ing an “America First” administration, had criticized the proposed free- trade pact on the grounds that it created jobs in low-wage nations at the expense of the U.S. manufacturing sector. Some observers, such as the president of the United Steelworkers, praised the president’s move. By contrast, farm groups were disappointed that American agricultural producers would be missing out on new export market opportunities.

Policymakers in the remaining 11 TPP countries were committed to reviving the talks without the United States. Japanese Prime Minister Shinzo Abe referred to the group as “Ocean’s Eleven,” a reference to the 2001 Hollywood movie. At the 2017 APEC meeting in Da Nang, Vietnam, it was announced that a tentative agreement had been reached on a new version of the pact, which was now called the Com- prehensive and Progressive Agreement for Trans-Pacific Trade.

Meanwhile, it was apparent that, in the future, the U.S. president would give preference to negotiating new trade deals on a bilateral basis rather than along broader regional lines. President Trump’s protectionist stance also heralded a more confrontational approach to key trading partners and the prospect of renegotiating or even cancel- ing existing trade deals such as NAFTA.

Discussion Questions 3-9. Which critical-thinking issues are raised by this case? 3-10. Are you in favor of dropping U.S. tariffs on footwear, even if

it means some New Balance employees might lose their jobs? 3-11. Do you agree with President Trump’s decision to withdraw

the United States from TTIP and TPP? 3-12. Assess the prospects for regional integration in the

Asia-Pacific region.

Sources: Shawn Donnan, “Globalization Marches on without Trump,” Financial Times November 7, 2017), p. 11; Shawn Donnan, “Pacific Trade Deal a Hard Sell for Obama,” Financial Times (June 12, 2015), p. 3; Shawn Donnan, “Hard Sell,” Financial Times (June  9, 2014), p. 5; Brian Spegele and Thomas Catan, “China Suggests Shift on U.S.-Led Trade Pact,” The Wall Street Journal (June 1–2, 2013), p. A6; James Kanter, “European Parliament Approves Resolution Limiting the Scope of a Free-Trade Pact,” The New York Times (May 24, 2013), p. B7; David Dreier, “China Belongs in the Pacific Trade Talks,” The Wall Street Journal (April 12, 2013), p. A11; Yuka Hayashi, “‘Abenomics’ Plan for Growth in Japan: Free-Trade Talks,” The Wall Street Journal (March 15, 2013), p. A8; Hiroko Tabuchi, “Japan to Enter Talks on Pacific Trade,” The New York Times (March 16, 2013), p. B3; Philip Stephens, “Transatlantic Free Trade Promises a Bigger Prize,” Financial Times (February 15, 2013), p. 11; Stephen Fidler, “Trans-Atlantic Trading Partners Barter over Rules,” The Wall Street Journal (February 14, 2013), p. A11; Sudeep Reddy, “Broad Trade Deal on Table,” The Wall Street Journal (February 14, 2013), p. A1; Matthew Dalton and Stephen Fidler, “U.S. Considers Opening Ambitious Trade Talks with EU,” The Wall Street Journal (December 24, 2012), p. A7; Jack Ewing, “US, Europe trade deal may come to the forefront”, Business Standard (November 27, 2012); Larry Olmsted, “Most Parmesan Cheese in America Is Fake, Here’s Why,” Forbes (November 19, 2012); Eric Martin, “New Balance Wants Its Tariffs, Nike Doesn’t,” Bloomberg Businessweek (May 7, 2012), pp. 14–15; Yuka Hayashi and Tom Barkley, “Japan’s Bid to Join Asian Trade Pact Faces a Leery U.S.,” The Wall Street Journal (February 7, 2012), p. A9; John D. McKinnon, “Bush Pushes Trans-Pacific Free Trade,” The Wall Street Journal (January 24, 2008), p. A3.

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“Globalization is a force. It exists. The question is whether we want to use trade agree- ments to shape it, or whether we want to just sit and be shaped by it.”

Mike Froman, former U.S. trade representative

Notes 1Scott Miller, “Global Dogfight: Airplane Battle Spotlights Power of a Quirky Court,” The Wall Street Journal (June 1, 2005), pp. A1, A14. 2Scott Miller, “Trade Talks Twist in the Wind,” The Wall Street Journal ( November 8, 2005), p. A14. 3Gabriele Steinhauser, “A Rocky Road to Economic Union,” The Wall Street Journal (June 9–10, 2010), p. A9. 4John Paul Rathbone, “Bottleneck at Frontier Chokes Opportunities to Boost Trade,” Financial Times (June 28, 2013), p. 2. 5Adam Thomson, “Trade Deal Has Hidden Qualities,” Financial Times Special Report: Central America Finance & Investment (September 19, 2008), p. 3. 6Johanna Tuckman, “Central Americans Start to Act Together,” Financial Times (July 9, 1997), p. 4. 7“NAFTA Is Not Alone,” The Economist (June 18, 1994), pp. 47–48. 8Marc Lifsher, “The Andean Arc of Instability,” The Wall Street Journal ( February 24, 2003), p. A13. 9William Neuman, “Vegetable Spawns Larceny and Luxury in Peru,” The New York Times (December 7, 2014), pp. A9, A15. 10David J. Lynch, “Golden Days for Argentine Wine Could Turn a Bit Cloudy,” USA Today (November 16, 2007), pp. 1B, 2B. 11Viñcent Bevins, “A Dream Disrupted,” Financial Times—International Busi- ness Insight, Part Four: Latin America (November 23, 2010), p. 8. 12Jim Brunsden and Alan Beattie, “Farmers’ Resistance Tests EU Drive for South American Trade Deal,” Financial Times (November 3, 2017), p. 7. 13David J. Lynch, “Venezuelan Consumers Gobble Up U.S. Goods,” USA Today (March 28, 2007), pp. 1B, 2B. 14John Paul Rathbone and Robin Wigglesworth, “Caracas Plays Its Last Cards,” Financial Times—FT Big Read: Latin America (November 22, 2017), p. 9. 15Myrvin L. Anthony and Andrew Hughes Hallett, “Is the Case for Economic and Monetary Union in the Caribbean Realistic?” World Economy 23, no. 1 (January 2000), pp. 119–144. 16Bruce Einhorn, “A Caribbean Headache for Obama’s New Trade Rep,” Bloom- berg Businessweek (May 3, 2013), p. 13. 17Bernard Gordon, “The FTA Fetish,” The Wall Street Journal (November 17, 2005), p. A16.

18James Hookway, “Asian Nations Push Ideas for Trade,” The Wall Street Journal (October 26, 2009), p. A12. 19Liz Gooch, “In Southeast Asia, Unease over Free Trade Zone,” The New York Times (December 28, 2009), p. B1. 20Jeremy Grant, “Business Warns of Barriers for Trading Bloc,” Financial Times (February 20, 2015), p. 5. 21G. Guido, “Implementing a Pan-European Marketing Strategy,” Long Range Planning (Vol. 5, 1991), p. 32. 22George Russell, “Marketing in the ‘Old Country’: The Diversity of Europe Presents Unique Challenges,” Agri Marketing 37, no. 1 (January 1999), p. 38. 23Scott Miller, “Trading Partners Meet New EU,” The Wall Street Journal (May 4, 2004), p. A17. 24Arnold Shuh, “Global Standardization as a Success Formula for Marketing in Central Eastern Europe,” Journal of World Business 35, no. 2 (Summer 2000), pp. 133–148. 25Margherita Stancati, “A Jump in Saudi Tourism,” The Wall Street Journal (July 16-17, 2016), p. C3. 26Jay Solomon, “Syria Cracks Open Its Frail Economy,” The Wall Street Journal (September 1, 2009), pp. A1, A12. 27Victoria Robson, “Window of Opportunity,” Middle East Economic Digest 49, no. 18 (May 6, 2005), p. 6. 28Will Connors, “China Extends Africa Push with Loans, Deal in Ghana,” The Wall Street Journal (September 24, 2010), p. A15. 29Josh Kron, “African Countries Form a Common Market,” The New York Times (July 2, 2010), p. B2. See also William Wallis, “Enthusiasm for EAC Not Matched by Results,” Financial Times Special Report: Doing Business in Kenya (November 26, 2010), p. 1. 30Andrew England, “Producers Pin Hope on AGOA Trade Pact to Drive Exports,” Financial Times (August 6, 2014), p. 3. 31Margaret Coker, “Persian Gulf States Bet on Africa Despite Downturn,” The Wall Street Journal (February 24, 2009), p. A9.

Exhibit 3-13 Trade ministers and dele- gates from the remaining 11 members of the Trans-Pacific Partnership at the TPP ministerial meeting that was held during the 2017 Asia-Pacific Economic Cooperation (APEC) leaders summit in Danang, Vietnam. Source: Na Son Nguyen/ASSOCIATED PRESS.

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Coffee beans are the second-most widely traded commodity in the world (Can you guess what is number 1?). According to legend, the bean’s stimulant properties were discovered hundreds of years ago by a goat herder in Kaffa, a highland region of Ethiopia. Beans and plants were eventually transported across the Red Sea to the Arabian Peninsula. By the end of the fifteenth century, coffee cultivation had taken root in Yemen, and a hot beverage brewed using roasted beans quickly became part of Islamic cultural life.

The growth and evolution of the global coffee trade from the early 1600s through today is docu- mented in many sources, including John Keay’s history of the British East India Company. In the fertile val- leys of Yemen, Captain John Jourdain found groves of plantings that he called “cohoo.” Jourdain wrote:

The seeds of this cohoo is a great marchandise [sic] for it is carried to Grand Cairo and all other places of Turkey and the Indias.1

As Keay notes, traders had indeed brought coffea Arabica from Africa to the Middle East for cul- tivation. “Kahwa” was the word used in the Arab world. The crop was cultivated only in this region, and, at the time, no market for coffee existed in Europe.

By the 1660s, coffee had become the staple export of the Red Sea ports. Gradually, coffee made its way to Europe. London’s first coffee house opened in 1652; diarist Samuel Pepys was a regular patron. Venetian traders imported coffee from Egypt and sold it to wealthy citizens of the Venetian Republic; Italy’s first coffee café was opened in the early 1680s.

Social and Cultural Environments

CASE 4-1

Strange Brew: Coffee Culture Around the World

L E A R N I N G O B J E C T I V E S

4-1 Define culture and identify the various expressions and manifestations of culture that can impact global marketing strategies.

4-2 Compare and contrast the key aspects of high- and low-context cultures.

4-3 Identify and briefly explain the major dimensions of Hofstede’s social values typology.

4-4 Explain how the self-reference criterion can affect decision making at global companies, and provide a step- by-step example of a company adapt- ing to conditions in a global market.

4-5 Analyze the components of diffusion theory and its applicability to global marketing.

4-6 Explain the marketing implications of different social and cultural environ- ments around the globe.

4

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marketing opportunities and dynamics around the globe. This chapter focuses on the forces that shape and affect individual, group, and corporate behavior in the marketplace.

We start with a general discussion of the basic aspects of culture and society and the emergence of a twenty-first-century global con- sumer culture. Next, several useful conceptual frameworks for under- standing culture are presented, including Hall’s concept of high- and low-context cultures, Maslow’s hierarchy of needs, Hofstede’s cul- tural typology, the self-reference criterion, and diffusion theory. The chapter also cites specific examples of the impact of culture and society on the marketing of both consumer and industrial products.

Clearly, coffee’s popularity is on the rise around the world. It remains to be seen, however, how rising levels of consumption can be balanced with increased production in Ethiopia and other emerging markets. You will have the opportunity to explore the issue in the continuation of this case at the end of the chapter. The discussion questions at the end of the case will give you a chance to reflect further on “lessons learned.”

Although the British East India Company dominated the export trade at the Yemeni port of Mocha, by the end of the seventeenth century the rival Dutch East India Company (Verenigde Oostindische Copagnie) had established coffee plantations in Indonesia on the island of Java. Other European nations followed suit, introducing the crop in their far-flung networks of colonies. Coffee had gone global!

Today, coffee culture continues to spread around the globe. The brew is even becoming popular in countries such as India and China, where tea has traditionally been the hot beverage of choice (see Exhibit 4-1). Meanwhile, in Ethiopia, where coffee was first discovered, conflict is brewing between government budget needs and consumer aspirations: The government wants to generate more revenues by boosting exports of premium coffee beans, while con- sumers want to drink more coffee made from those same beans.

The conflicting priorities of commerce and consumption in Ethiopia, the broader acceptance of coffee worldwide, and the rapid growth of coffee-centric brands such as Starbucks illus- trate the ways that the social and cultural environments impact

Exhibit 4-1 Starbucks recently opened a Reserve Roastery in Shanghai. Source: AFP/Getty Images.

4-1 Define culture and identify the various expressions and manifestations of culture that can impact global marketing strategies.

4-1 Society, Culture, and Global Consumer Culture Both differences and similarities characterize the world’s cultures, meaning that the task of the global marketer is twofold. First, marketers must study and understand the cultures of the countries in which they will be doing business. Second, they must incorporate this understand- ing into the marketing planning process. In some instances, strategies and marketing programs will have to be adapted to the local culture; however, marketers should also take advantage of shared cultural characteristics and avoid unneeded and costly adaptations of the marketing mix.

Any systematic study of a new geographic market requires a combination of tough-mindedness and open-mindedness. While marketers should be secure in their own convictions and traditions, an open mind is required to appreciate the integrity and value of other ways of life and points of view.

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Put simply, people must overcome the prejudices that are a natural result of the human tendency toward ethnocentricity. Although “culture shock” is a normal human reaction to the new and unknown, successful global marketers strive to comprehend human experience from the local point of view. One reason cultural factors challenge global marketers is that many of these fac- tors are hidden from view. Because culture is a learned behavior passed on from generation to generation, it can be difficult for outsiders to fathom. However, as they endeavor to understand cultural factors, outsiders gradually become insiders and develop cultural empathy. There are many different paths to the same goals in life: The global marketer understands this and revels in life’s rich diversity.

Anthropologists and sociologists have offered scores of different definitions of culture. As a starting point, culture can be understood as “ways of living, built up by a group of human beings, that are transmitted from one generation to another.” A culture acts out its ways of living in the context of social institutions, including family, educational, religious, governmental, and business institutions. Those institutions, in turn, function to reinforce cultural norms. Culture also includes both conscious and unconscious values, ideas, attitudes, and symbols that shape human behavior and that are transmitted from one generation to the next. Organizational anthropologist Geert Hofstede defines culture as “the collective programming of the mind that distinguishes the members of one category of people from those of another.”2 A particular “category of people” may constitute a nation, an ethnic group, a gender group, an organization, a family, or some other unit.

Some anthropologists and sociologists divide cultural elements into two broad categories: material culture and nonmaterial culture. The former is sometimes referred to as the physical component or physical culture; it includes physical objects and artifacts created by humans such as clothing and tools. Nonmaterial culture (also known as subjective or abstract culture) includes intangibles such as religion, perceptions, attitudes, beliefs, and values. It is generally agreed that the material and nonmaterial elements of culture are interrelated and interactive. Cultural anthropologist George P. Murdock studied material and nonmaterial culture and identified dozens of “cultural universals,” including athletic sports, body adornment, cooking, courtship, danc- ing, decorative art, education, ethics, etiquette, family feasting, food taboos, language, marriage, mealtime, medicine, mourning, music, property rights, religious rituals, residence rules, status differentiation, and trade.3

It is against this background of traditional definitions that global marketers should understand a key worldwide sociocultural phenomenon of the early twenty-first century:4 Consumption has become the hallmark of postmodern society. As cultural information and imagery flow freely across borders via satellite TV, the Internet, and other communication channels, new global con- sumer cultures are emerging. Persons who identify with these cultures share meaningful sets of consumption-related symbols. Some of these cultures are associated with specific product catego- ries; marketers speak of “coffee culture,” “credit-card culture,” “fast-food culture,” “pub culture,” “soccer/football culture,” and so on. This cosmopolitan culture, which is composed of various segments, owes its existence in large part to a wired world in which there is increasing intercon- nectedness of various local cultures. It can be exploited by global consumer culture positioning (GCCP), a marketing tool that will be explained in more detail in Chapter 7. In particular, market- ers can use advertising to communicate the notion that people everywhere consume a particular brand or to appeal to human universals.

Attitudes, Beliefs, and Values If we accept Hofstede’s notion of culture as “the collective programming of the mind,” then it makes sense to learn about culture by studying the attitudes, beliefs, and values shared by a spe- cific group of people. An attitude is a learned tendency to respond in a consistent way to a given object or entity. Attitudes are clusters of interrelated beliefs. A belief is an organized pattern of knowledge that an individual holds to be true about the world. Attitudes and beliefs, in turn, are closely related to values. A value can be defined as an enduring belief or feeling that a specific mode of conduct is personally or socially preferable to another mode of conduct.5 In the view of Hofstede and others, values represent the deepest level of a culture and are present in the majority of the members of that particular culture.

Some specific examples will allow us to illustrate these definitions by comparing and con- trasting attitudes, beliefs, and values. The Japanese, for example, strive to achieve cooperation, consensus, self-denial, and harmony. Because these all represent feelings about modes of conduct,

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they are values. Japan’s monocultural society reflects the belief among the Japanese that they are unique in the world. Many Japanese, especially young people, also believe that the West is the source of important fashion trends. As a result, many Japanese share a favorable attitude toward American brands. Within any large, dominant cultural group, there are likely to be subcultures— that is, smaller groups of people with their own shared subset of attitudes, beliefs, and values. Values, attitudes, and beliefs can also be surveyed at the level of any “category of people” that is embedded within a broad culture. For example, if you are a vegetarian, then eating meat represents a mode of conduct that you and others who share your views avoid. Subcultures often represent attractive niche marketing opportunities.

Religion Religion is an important source of a society’s beliefs, attitudes, and values. The world’s major religions include Buddhism, Hinduism, Islam, Judaism, and Christianity; the last includes Roman Catholicism and numerous Protestant denominations. Examples abound of religious tenets, prac- tices, holidays, and histories directly impacting the way people of different faiths react to global marketing activities. For example, Hindus do not eat beef, which means that McDonald’s does not serve hamburgers in India (see Case 1-2). In Muslim countries, Yum! Brands successfully promotes KFC in conjunction with religious observances. In the Islamic world, Ramadan is a time of fasting that begins in the ninth month of the Islamic calendar. In Indonesia, home to the world’s largest Muslim population, KFC uses Ramadan-themed outdoor advertising to encourage Indonesians to come to the restaurants at buka puasa, the end of each day’s fast. Business at KFC Indonesia’s 500 units increases as much as 20 percent during Ramadan.

When followers of a particular religion believe they have been offended, the response can sometimes be tragic (see Exhibit 4-2). In the aftermath of the September 2001 terrorist attacks in New York and Washington, D.C., and the subsequent U.S. military actions in the Middle East and Afghanistan, some Muslims have tapped into anti-American sentiment by urging a boycott of American brands. One entrepreneur, Tunisian-born Tawfik Mathlouthi, launched a soft drink brand, Mecca-Cola, as an alternative to Coca-Cola for Muslims living in the United Kingdom and France. The brand’s name is both an intentional reference to the holy city of Islam and an ironic swipe at Coca-Cola, which Mathlouthi calls “the Mecca of capitalism.” London’s Sunday Times called Mecca-Cola “the drink now seen as politically preferable to Pepsi or Coke.”6 In 2003, Qibla Cola (the name comes from an Arabic word for “direction”) was launched in the United Kingdom. Founder Zahida Parveen hoped to reach a broader market than Mecca-Cola by positioning the brand “for any consumer with a conscience, irrespective of ethnicity or religion.”7

Exhibit 4-2 In 2014, jihadist gun- men opened fire at the Paris office of Charlie Hebdo, a satirical weekly that had published cartoon images of the Prophet Muhammed. Seventeen people were killed in the attack. Source: Richard Milnes/Alamy.

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Aesthetics Within every culture, there is an overall sense of what is beautiful and what is not beautiful, what represents good taste as opposed to tastelessness or even obscenity, and so on. Such considerations are matters of aesthetics. Global marketers must understand the importance of visual aesthetics embodied in the color or shape of a product, label, or package. Likewise, different parts of the world perceive aesthetic styles—various degrees of complexity, for example—differently. Aes- thetic elements that are attractive, appealing, and in good taste in one country may be perceived in an entirely different way in another country.

In some cases, a standardized color can be used in all countries; examples include Caterpil- lar Yellow, the trademark of the earthmoving equipment company and its licensed outdoor gear. Likewise, Cadbury has trademarked the color purple for its chocolate confectionary packaging. In surveys about color preferences, 50 percent of respondents indicate blue is their favorite—and it is favored by a wide margin over the next-preferred color. The use of blue dates back millennia; artisans in ancient Egypt, China, and Mayan civilizations all worked with the color after the advent of mining led to the extraction of minerals containing blue pigment. Because it was rare and expensive, blue came to be associated with royalty and divinity.8 Today, Tiffany Blue is a trade- marked color that the luxury goods marketer uses on its gift bags and boxes. When Prince William and his family visit other European royalty, blue is a frequent wardrobe choice (see Exhibit 4-3).

Because color perceptions can vary among cultures, adaptation to local preferences may be required. Such perceptions should be taken into account when making decisions about product packaging and other brand-related communications. In highly competitive markets, inappropriate or unattractive product packaging may put a company or brand at a distinct disadvantage. New color schemes may also be needed because of a changing competitive environment.

There is nothing inherently “good” or “bad” about any color of the spectrum; all associations and perceptions regarding color arise from culture. Red is a popular color in most parts of the world: Besides being the color of blood, in many countries red is tied to centuries-old traditions of viticulture and winemaking. One eight-country study of color perceptions found that red is associated with perceptions such as “active,” “hot,” and “vibrant”; in most countries studied, it also conveys meanings such as “emotional” and “sharp.”9 As such, red has positive connotations in many societies. In contrast, in Korea, it is taboo to write a person's name in red ink. Why? Because traditionally, red was used to record the names of the deceased. Blue, because of its associations with sky and water, has an elemental connotation with undertones of dependability, constancy,

Exhibit 4-3 Members of the British royal family make diplomatic tours during which their wardrobe choices often reflect cultural awareness. When the Duke and Duchess of Cambridge arrived in Germany in 2017, the duch- ess wore Prussian blue; Prince William wore a matching tie. Source: KAY NIETFELD/AFP/Getty Images.

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and eternity. White connotes purity and cleanliness in the West, but is often associated with death, mourning, and funerals in China and other parts of Asia. Attitudes are changing quickly among the younger generation, however; today, many Chinese women rent white wedding gowns and pose for photos with their friends to commemorate graduating from university!10

Another research team concluded that gray connotes inexpensive in China and Japan, whereas it is associated with high quality and high cost in the United States. The researchers also found that the Chinese associate brown with soft drink labels and perceive the color as connoting a beverage that tastes good; in contrast, South Korean and Japanese consumers associate yellow with soft drinks that “taste good.” For Americans, the color red has those associations.11

Music is an aesthetic component of all cultures and is accepted as a form of artistic expression and a source of entertainment. In one sense, music represents a “transculture” that is not identi- fied with any particular nation. For example, rhythm, or movement through time, is a universal aspect of music. But music is also characterized by considerable stylistic variation with regional or country-specific associations. For example, bossa nova rhythms are associated with Argen- tina; samba with Brazil; salsa with Cuba; reggae with Jamaica; merengue with the Dominican Republic; and blues, driving rock rhythms, hip-hop, and rap with the United States. Sociologists have noted that national identity derives in part from a country’s indigenous or popular music; a unique music style can “represent the uniqueness of the cultural entity and of the community.”12

Music provides an interesting example of the “think globally, act locally” theme of this book. Musicians in different countries draw from, absorb, adapt, and synthesize transcultural music influences, as well as country-specific ones, as they create hybrid styles such as Polish reggae or Italian hip-hop. Motti Regev describes this paradox as follows:

Producers of and listeners to these types of music feel, at one and the same time, participants in a specific contemporary, global-universal form of expression and innovators of local, national, ethnic, and other identities. A cultural form associated with American culture and with the pow- erful commercial interests of the international music industry is being used in order to construct a sense of local difference and authenticity.13

Because music plays an important role in advertising, marketers must understand which style is appropriate to use in their campaigns in a given national market. Although background music can be used effectively in broadcast commercials, the type of music appropriate for a commercial in one part of the world may not be acceptable or effective in another part. Government restrictions must also be taken into account. In China, authorities have the power to dictate which songs can be marketed and performed, as the Rolling Stones can attest. Rock music journalism must also conform to state mandates, as the publisher of Rolling Stone magazine learned (see Exhibit 4-4).

Dietary Preferences Cultural influences are also quite apparent in food preparation and consumption patterns and habits. Need proof? Consider the following examples:

d Domino’s Pizza, the world’s largest pizza-delivery company, pulled out of Italy because Italians perceived its product to be “too American.” In particular, the tomato sauce was too bold and the toppings were too heavy. Domino’s had better luck in India, where it localized its recipes with offerings that include pizza keema do pyaaza, peppy paneer, and five peppers.14 Today, Domino’s is the largest foreign fast-food chain in India, with more than 700 stores.

d When Dunkin’ Donuts opened its first Indian outlets in 2012, morning business was slow because most Indians eat breakfast at home. Success finally came after the company intro- duced a new menu item: Original Tough Guy Chicken Burgers.15

These examples underscore the fact that a solid understanding of food-related cultural pref- erences is important for any company that seeks to market food or beverage products globally. Titoo Ahluwalia, chairman of a market research firm in Mumbai, has pointed out that local com- panies can also leverage superior cultural understanding to compete effectively with large foreign firms: “Indian companies have an advantage when they are drawing from tradition. When it comes to food, drink, and medicine, you have to be culturally sensitive.”16 Companies that lack such

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Exhibit 4-4 The March 2006 inaugural issue of Rolling Stone’s Chinese edition featured local rocker Cui Jian on the cover. Global superstars U2 were also profiled. Source: Frederic J. Brown/AFP/Getty Images.

sensitivity are bound to make marketing mistakes. To avoid this kind of problem, when Subway expanded into India, the company chose two U.S.-educated Indian brothers to help open stores and supervise operations.

Although some food preferences remain deeply embedded in culture, plenty of evidence suggests that global dietary preferences are converging. Over the past half century, the fast-food culture has gained increased acceptance around the world. Heads of families in many countries are pressed for time and are disinclined to prepare home-cooked meals. Millennials, who are open to different cultures and lifestyles, are experimenting with different foods. In addition, the global tourism boom has exposed travelers to pizza, pasta, and other ethnic foods. Shorter lunch hours and tighter budgets are forcing workers to find a place to grab a quick, cheap bite before returning to work. As food-related cultural differences become less relevant, such convenience products are likely to be purchased wherever consumers’ disposable incomes are high enough to afford them (see Exhibit 4-5).

As we have seen, such processes can also provoke a nationalist backlash. To counteract the exposure of its young citizens to le Big Mac and other American-style fast foods, the French National Council of Culinary Arts designed a course on French cuisine and “good taste” for elementary school students. The director of the council is Alexandre Lazareff. In his book The French Culinary Exception, Lazareff warned that France’s tradition of haute cuisine is under attack by the globalization of taste. More generally, Lazareff spoke out against perceived challenges to France’s culinary identity and way of life. His concerns are not unjustified: While McDonald’s continues to open new restaurants in France (today there are more than 1,100 outlets), the number of traditional bistros and cafés has declined steadily for years. Despite McDonald’s success, the French have coined a new buzzword, le fooding, to express the notion that the nation’s passion for food goes beyond mere gastronomy:

To eat with feeling in France is to eat with your head and your spirit, with your nose, your eyes, and your ears, not simply your palate. Le fooding seeks to give witness to the modernity and new reality of drinking and eating in the twenty-first century. . . . Everything is fooding so long as audacity, sense, and the senses mix.17

Language and Communication The diversity of cultures around the world is also reflected in language. A person can learn a great deal about another culture without leaving home by studying its language and literature; such study is the next-best thing to actually living in another country. Linguists have divided

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the study of spoken or verbal language into four main areas: syntax (rules of sentence forma- tion), semantics (system of meaning), phonology (system of sound patterns), and morphology (word formation). Unspoken or nonverbal communication includes gestures, touching, and other forms of body language that supplement spoken communication. (Nonverbal commu- nication is sometimes called the silent language.) Both the spoken and unspoken aspects of language are included in the broader linguistic field of semiotics, which is the study of signs and their meanings.

In global marketing, language is a crucial tool for communicating with customers, suppliers, channel intermediaries, and others. The marketing literature is full of cringe-worthy anecdotes about blunders such as embarrassing pronunciations of product names and inept translations of advertising copy. As you can see from Figure 4-1, pronunciation subtleties associated with certain Chinese characters can trip up well-meaning gift giving in China. For example, it would be a bad sign to give an umbrella to a business acquaintance because it would be the equivalent of hoping that his or her business fails.

In China, Dell had to find a meaningful interpretation of “direct sales,” the phrase that describes the company’s powerful business model. A literal translation results in zhi xiao, which is the Chinese term for “illegal pyramid marketing schemes.” To counteract the negative connotation, Dell’s sales representatives began using the phrase zhi xiao ding gou, which translates as “direct orders.”18 Similarly, a team of translators was tasked with compiling a dictionary to help fans of American football in China understand the game (see Figure 4-2).

When the British/American retail-development firm BAA McArthurGlen sought approval for a U.S.-style factory outlet mall in Austria, local officials wanted to know, “Where’s the factory?” To win approval for the project, McArthurGlen was forced to call its development a “designer outlet center.” Another linguistic issue: The American making the marketing pitch incorrectly ren- dered the name “Nike”—a prospective anchor tenant at the proposed outlet center—when speak- ing to French audiences. Summoning his rudimentary language skills, the American assumed that the shoemaker’s name would be pronounced “NEEK” in French. Imagine his dismay when a sym- pathetic colleague took him aside and told him that the correct pronunciation was “NIk” (rhymes with “bike”). It turns out that “NEEK” is not just the “F-word” in French; it is the “F-word” in the sense of “fornicating with animals”!19

Exhibit 4-5 SPAM, the iconic brand of canned ham, is a reliable, if unglamor- ous, pantry staple in American house- holds. SPAM is so deeply embedded in American food culture that there is even a SPAM Museum in Austin, Minnesota, home to parent company Hormel Foods Corporation.

In South Korea, SPAM is regarded as a delicacy, often packaged in gift sets for holiday giving. It turns out that SPAM is a favorite of Chloe Kim, the American gold medalist in snowboard- ing at the 2018 Winter Olympics in PyeongChang, South Korea. Source: Jodi Cobb/National Geographic Image Collection/Alamy.

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Why would a small troupe of actors and a handful of stage manag- ers take it upon themselves to produce an English-language version of Hamlet in every country on the planet over the course of two years? “I’ll tell you why . . . ,” says Hamlet in Act 2, Scene 2 of Shakespeare’s play. Former Globe Theatre Artistic Director Dominic Dromgoole offers this concise explanation: “Hamlet is of benefit to everyone.”

The Globe to Globe world tour began in April 2014, the 450th anniversary of the Bard’s birth, and wrapped up on London’s South Bank in 2016, the 500th anniversary of his death. Convinced that everyone, everywhere, has a right to see Shakespeare’s play, Drom- goole characterizes his goal of providing a unique cultural exchange alternatively as both “mad” and “utterly affirming.”

How can a centuries-old play be relevant to today’s audiences? Despite the obstacles presented by the play’s early modern English vocabulary, the dialogue draws people in. At the original Globe The- atre in London, many members of the audience stood (“groundlings”) and there was no cover over the stage. Bathed in natural light, actors looked out at audience members and addressed them directly. The same was true in the modern staging. “That’s what Shakespeare is all about,” says Dromgoole. “When Hamlet asks questions, you know you are being spoken to.”

In addition, the architecture of the play translates well to many cul- tures. The opening scene with two nervous soldiers on the battlements at Elsinore castle is a good example. “People everywhere understand it,” Dromgoole says. Then, of course, there is the appearance of a ghost—also universally recognized.

As another example, Dromgoole points to the scene in which a young man who is seething with rage confronts Claudius, a smooth- talking, practiced politician. Audiences lock into the scene literally and directly, even if the nuances of language are lost. As Naeem Hayat, one of the actors who portrayed Hamlet, says, “Direct communication opens up Hamlet’s humanity.”

In a textbook example of “markets are global, markets are local,” the show changed from country to country according to the dictates of different venues. In Spain, for example, the play was presented in an opera house. In Djibouti, the performance took place in front of the Red Sea.

Hamlet’s meaning also took on a local resonance that varied from one country to another. For example, when the play was staged in Phnom Penh, Cambodia, Dromgoole saw a connection between Claudius and the notorious Khmer Rouge revolutionary Pol Pot. At the United Nations in New York City, Dromgoole linked Ophelia’s father Polonius to the functionaries who go about their tasks of diplomacy with modest virtue. In a Middle Eastern country, some audience mem- bers interpreted the play as an indictment of a monarchy beset by corruption. The company also performed in refugee camps harboring migrants from war-torn countries such as Syria (see Exhibit 4-6).

Sources: Dominic Dromgoole, Hamlet, Globe to Globe: Taking Shakespeare to Every Country in the World (London, UK: Canongate, 2017); “Alas Poor Dominic,” Presenta- tion by Dominic Dromgoole and Naeem Hayat, Financial Times Weekend Festival, Lon- don (September 2, 2017); Steven Greenblatt, “Their Hours upon the Stage,” The New York Times Sunday Book Review (April 23, 2017), p. BR 1; Harriet Fitch Little, “Home and Away: The Globe to Globe Hamlet Project,” Financial Times (April 22, 2016).

THE CULTURAL CONTEXT

Globe to Globe: Shakespeare Around the World

Exhibit 4-6 One performance took place at Calais Jungle, a camp for displaced migrants who hoped to enter the United Kingdom via the Eurotunnel. Source: Anthony Devlin/PA Wire URN:25420563/Associated Press.

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Anheuser-Busch and Miller Brewing both experienced market failures in the United Kingdom because of their use of the phrase “light beer” in their marketing campaigns; this phrase was understood as meaning “reduced alcohol levels” rather than “fewer calories.” Now Miller Lite is marketed in Europe as “Miller Pilsner.”20

Phonology and morphology can also come into play. Colgate discovered that in Spanish, colgate is a verb form that means “go hang yourself.” IKEA is known for product names based on Scandinavian cities and children’s names. However, in Thailand, the furniture giant had to hire linguists and native speakers to help render product names in Thai. The reason? The names for products such as the Redalen bed and Jättebra (a flower pot) had sexual connotations when pronounced in Thai. The solution: The team of native speakers proposed vowel and consonant changes to certain names so they would not sound offensive.21

Whirlpool spent considerable sums of money on brand advertising in Europe, only to discover that consumers in Italy, France, and Germany had trouble pronouncing the company’s name.22 Conversely, Renzo Rosso deliberately chose “Diesel” for a new jeans brand because, as he once noted, “It’s one of the few words pronounced the same in every language.” Rosso has built Diesel into a successful global youth brand and one of Italy’s top fashion success stories; the company’s annual sales revenues exceed $1.2 billion.23

Technology is providing interesting new opportunities for exploiting linguistics in the name of marketing. For example, young people throughout the world are using cell phones to send text messages; it turns out that certain number combinations have meanings in particular languages. For example, in Korean the phonetic pronunciation of the numerical sequence 8282, “Pal Yi Pal Yi,” means “hurry up,” while 7179 (“Chil Han Chil Gu”) sounds like “close friend.” Also, as many digital-savvy young teens in Korea can attest, 4 5683 968 can be interpreted as “I love you.”24 Korean marketers are using these and other numerical sequences in their advertising.

One impact of globalization on culture is the diffusion of the English language around the globe. Today, more people speak English as a second language than there are people whose native language is English. Nearly 85 percent of the teenagers in the EU are studying English. Despite the fact that Sony is headquartered in Japan, the company makes it clear to job applicants

FIGURE 4-1 In China, it is bad luck to give a book, an umbrella, or a clock as a gift. Why? The character for “book” is pronounced shu, which sounds like “I hope you lose (have bad luck).” “Umbrella” (san) sounds like “to break into pieces or fall apart.” “Clock” (zhong) sounds like “death” or “the end.”

book umbrella clock

FIGURE 4-2 Thanks to a team of academics who compiled an ency- clopedia of American football terms, Chinese sports fans should have a better understanding of NFL games. For example, the Chinese translation for blitz is “lightning war against the quarterback.” Onside kick is rendered as “gambling kickoff” or “short kick,” while punt is “give up and kick it back.” The authors of The American Football Encyclopedia also interpreted sack as “capture and kill” or “cap- ture the quarterback”; play action is “pass after fake run.” Hail Mary pass translates as “miracle long pass,” and touchdown is “hold the ball and touch the ground.”

capture and kill

successfully capture the quarterback

touchdown

blitz

Hail Mary pass

gambling kickoff

short kick

punt

play action

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in any part of the world that it does not consider English to be a “foreign language.” The same is true for Finland’s Nokia. Matsushita introduced a policy that requires all managers to pass an English-language-competency test before being considered for promotion. This move came after top management at Matsushita concluded that a staid, exclusively Japanese corporate culture was eroding the company’s competitiveness in the global market. The English-language requirement is a potent symbol that this Japanese company is focusing on globalizing its operations.25

The challenges presented by nonverbal communication are perhaps even more formidable. For example, Westerners doing business in the Middle East must be careful not to reveal the soles of their shoes to hosts or pass documents with the left hand. In Japan, bowing is an important form of nonverbal communication that has many nuances. People who grow up in the West tend to be verbal; those from Asia exhibit behavior that places more weight on nonverbal aspects of interpersonal communication. In the East, it is expected that people will pick up on nonver- bal cues and intuitively understand meanings without being told.26 Westerners must pay close attention not only to what they hear but also to what they see when conducting business in such cultures.

Deep cultural understanding that is based in language can be an important source of competitive advantage for global companies. The aggressive expansion of Spain’s Telefónica in Latin America provides a case in point. As Juan Villalonga, former chairman of Telefónica, noted, “It is not just speaking a common language. It is sharing a culture and understanding friendships in the same way.”27

Several important communication issues related to culture may arise. One is sequencing, which concerns whether the discussion goes directly from point A to point B or seems to go off on tangents. Another is phasing, which pertains to whether certain important agenda items are discussed immediately or after the parties have taken some time to establish rapport. According to two experts on international negotiations, several distinctly American tactics are frequently employed during negotiations that may be effective with other Americans, but require modifica- tion when dealing with people from other cultural backgrounds. In any communication situation, speakers offer a variety of cues that can help astute observers understand the speaker’s mind-set and mental programming. Here are some examples:28

Americans typically want to “go it alone.” As a result, they may be outnumbered in a nego- tiation situation.

Many Americans like to “lay their cards on the table.” However, in some contexts, it is important to build rapport and not “get to the point” immediately.

Americans tend to talk too much and to talk when they should be listening and observing. In some cultures, long silences are valued. Nonverbal communication cues can be just as important as words.

Such “unwritten rules” of communication are found in other cultures as well. In the United Kingdom, for example, sociologist Kate Fox has identified the “polite procrastination rule” governing workplace encounters and meetings. Rather than getting down to business right away, meetings often begin with small talk about mundane topics such as traffic and weather. Fox recounts interviewing a Canadian businessman on assignment in Great Britain who noted the following:

I wish someone had warned me about this earlier. I had a meeting the other day and they’d all been dithering and talking about the weather and making jokes about the M25 for what seemed like half an hour, so I suggested maybe we could get started on the contract and they all looked at me like I’d farted or something! Like, how could I be so crass?29

It turns out that the English predilection for “weather-speak” is characterized by several unwrit- ten “grammar” rules. For example, native speakers of British English intuitively comply with, and demonstrate competence with, the “reciprocity rule” (i.e., when someone comments on the weather, one must reply) and the “agreement rule” (i.e., if someone says “Oooh, it’s cold,” one must concur), among others. This observation, Fox points out, “tells us quite a lot about Englishness.”

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Marketing’s Impact on Culture Universal aspects of the cultural environment represent opportunities for global marketers to standardize some or all elements of a marketing program. The astute global marketer often dis- covers that much of the apparent cultural diversity in the world turns out to be different ways of accomplishing the same thing. Shared preferences for convenience foods, disposable products, popular music, and movies in North America, Europe, Latin America, and Asia suggest that many consumer products have broad—even universal—appeal.

In recent times, increasing travel and improving communications have contributed to a con- vergence of tastes and preferences in a number of product categories. The greater opportunities for cultural exchange and the globalization of culture have been seized upon, and even significantly accelerated, by companies that have seized opportunities to find customers around the world. Nevertheless, the impact of marketing and, more generally, of global capitalism on culture can be controversial. For example, sociologist George Ritzer and others lament the “McDonaldization of culture,” which, they say, occurs when global companies break down cultural barriers while expanding into new markets with their products. As Ritzer noted:

Eating is at the heart of most cultures and for many it is something on which much time, atten- tion and money are lavished. In attempting to alter the way people eat, McDonaldization poses a profound threat to the entire cultural complex of many societies.30

Fabien Ouaki is living proof that persons outside of academe and government have also joined the battle against McDonaldization. Ouaki is the former managing director of Tati, a legendary French discount retailer with a flagship store in Paris. In the late 1990s, Ouaki opened new stores in select countries, including the United States. Ouaki, the son of the company founder, once claimed that “personal revenge” was one motivation for entering the U.S. market. “As a Frenchman, it makes me sick to see kids crying to go see ‘Titanic,’ eat at McDonald’s, or drink Coke. I want to see New Yorkers crying to have a Tati wedding dress,” he said.32

Similarly, the international Slow Food movement boasts tens of thousands of members world- wide. Slow Food grew out of a 1986 protest over the opening of a McDonald’s on a popular plaza in Rome; every two years, Slow Food stages a Salone del Gusto in Italy that showcases traditional food preparation. As a spokesperson said, “Slow Food is about the idea that things should not taste the same everywhere.”33 In 2016, in celebration of the 30th anniversary of the Slow Food movement, the Terra Madre Salone del Gusto gastronomy exposition was spread across various locations in Torino (see Exhibit 4-7).

“A great cook tells his story, not that of his neighbor or what he has seen on televi- sion. The future is ‘glocal’ cooking, both global and local.”31

Alain Ducasse, Louis XV restaurant, Monaco

Exhibit 4-7 According to event orga- nizers, the challenge of Terra Madre Salone del Gusto 2016 was political, cultural, and social: To assert that good, clean and fair food is a human right. Attendees sampled artisanal meats, cheeses, breads, and much more. Source: Marco Imazio/Alamy Stock Photo.

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4-2 High- and Low-Context Cultures Edward T. Hall has suggested the concept of high and low context as a way of understanding different cultural orientations.34 In a low-context culture, messages are explicit and specific; words carry most of the communication power. In a high-context culture, less information is contained in the verbal part of a message, while much more information resides in the context of communication, including the background, associations, and basic values of the communicators. In general, high-context cultures function with much less legal paperwork than is deemed essential in low-context cultures. Japan, Saudi Arabia, and other high-context cultures place a great deal of emphasis on a person’s values and position or place in society. In such cultures, the granting of a business loan is more likely to be based on “who you are” than on formal analysis of pro forma financial documents.

In a low-context culture, such as the United States, Switzerland, or Germany, deals are made with much less information about the character, background, and values of the participants. Much more reliance is placed on the words and numbers in the loan application. By contrast, Japanese companies, such as Sony, traditionally paid a great deal of attention to the university background of a new hire; preference would be given to graduates of Tokyo University. Specific elements on a résumé, by comparison, were less important.

In a high-context culture, a person’s word is his or her bond. Because such as culture empha- sizes obligations and trust as important values, there is less need to anticipate contingencies and provide for external legal sanctions. Shared feelings of obligation and honor take the place of impersonal legal sanctions—which helps explain the importance of long and protracted negotia- tions that never seem to get to the point. Part of the purpose of negotiating, for a person from a high-context culture, is to get to know the potential partner.

For example, insisting on competitive bidding can cause complications in low-context cultures. In a high-context culture, the job is given to the person who will do the best work and whom one can trust and control. In a low-context culture, one tries to make the specifications so precise that the threat of legal sanction forces a builder, for example, to do a good job. As Hall has noted, a builder in Japan is likely to say, “What has that piece of paper got to do with the situation? If we can’t trust each other enough to go ahead without it, why bother?”

Although countries can be classified as high or low context in terms of their overall tendency, exceptions do arise with regard to specific subcultures. Consider the United States, a low-context culture with subcultures that operate in the high-context mode. The world of the central banker, for example, is a “gentleman’s” world—that is, a high-context culture. Even during the most hectic day of trading in the foreign exchange markets, a central banker’s word is sufficient for him or her to borrow millions of dollars. In a high-context culture, there is trust, a sense of fair play, and a widespread acceptance of the rules of the game as it is played. Table 4-1 summarizes some of the ways in which high- and low-context cultures differ.

TA B L E 4 - 1 High- and Low-Context Cultures

Factors or dimensions High context Low context

Lawyers Less important Very important

A person’s word Is his or her bond Is not to be relied upon; “get it in writing”

Responsibility for organizational error Taken by highest level Pushed to lowest level

Space People breathe on each other People maintain a bubble of private space and resent intrusions

Time Polychronic—everything in life must be dealt with in terms of its own time

Monochronic—time is money; linear—one thing at a time

Negotiations Are lengthy—a major purpose is to allow the parties to get to know each other

Proceed quickly

Competitive bidding Infrequent Common

Country or regional examples Japan, Middle East United States, Northern Europe

4-2 Compare and contrast the key aspects of high- and low-context cultures.

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4-3 Hofstede’s Cultural Typology Organizational anthropologist Geert Hofstede was introduced earlier in this chapter in a discus- sion of his widely quoted definition of culture. Hofstede is also well known for research studies of social values that suggest the cultures of different nations can be compared in terms of five dimensions (see Table 4-2).35 Hofstede notes that three of the dimensions refer to expected social behavior, the fourth dimension is concerned with “man’s search for Truth,” and the fifth reflects the importance of time (for more information, visit www.geert-hofstede.com).

The first dimension is a reflection of the degree to which individuals in a society are inte- grated into groups. In individualistic cultures, each member of society is primarily concerned with his or her own interests and those of his or her immediate family. In contrast, in collectivistic cultures, all of society’s members are integrated into cohesive in-groups. High individualism is a general aspect of culture in the United States and Europe; low individualism is characteristic of Japanese and other Asian cultural patterns.

The second dimension, power distance, is the extent to which the less powerful members of a society accept—even expect—power to be distributed unequally. Hong Kong and France are both high-power-distance cultures; low power distance characterizes Germany, Austria, the Netherlands, and Scandinavia.

Uncertainty avoidance, the third dimension in Hofstede’s model, is the extent to which the members of a society are uncomfortable with unclear, ambiguous, or unstructured situa- tions. Members of uncertainty-avoiding cultures may resort to aggressive, emotional, intolerant behavior; they are characterized by a belief in absolute truth. Members of uncertainty-accepting cultures (e.g., Denmark, Sweden, Ireland, and the United States) are more tolerant of persons whose opinions differ from their own.

4-3 Identify and briefly explain the major dimensions of Hofst- ede’s social values typology.

TA B L E 4 - 2 Hofstede’s Five Dimensions of National Culture

1. Individualistic—People look after their own and family interests

Collectivistic—People expect the group to look after and protect them

Individualistic Collectivistic

United States, Canada, Australia Mexico, Thailand

2. High power distance—Accepts wide differences in power; great deal of respect for those in authority

Low power distance—Plays down inequalities; employees are not afraid to approach nor are they in awe of the boss

High power distance Low power distance

Mexico, Singapore, France United States, Sweden

3. High uncertainty avoidance—Threatened with ambiguity and experience high levels of anxiety

Low uncertainty avoidance—Comfortable with risks; tolerant of different behavior and opinions

High uncertainty avoidance Low uncertainty avoidance

Italy, Mexico, France Canada, United States, Singapore

4. Achievement—Values such as assertiveness, acquiring money and goods, and competition prevail

Nurturing—Values such as relationships and concern for others prevail

Achievement Nurturing

United States, Japan, Mexico France, Sweden

5. Long-term orientation—People look to the future and value thrift and persistence

Short-term orientation—People value tradition and the past

Long-term orientation Short-term orientation

China, Taiwan, Japan Germany, Australia, United States, Canada

Source: Stephen P. Robbins and Mary Coulter, Management, 12th ed. (Upper Saddle River, NJ: Pearson Education, 2014), 87.

Japan

Italy, Japan

United Kingdom

Canada, Greece

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Achievement, the fourth dimension, describes a society in which men are expected to be assertive, competitive, and concerned with material success and women fulfill the role of nurturer and are concerned with issues such as the welfare of children. Nurturing, by contrast, describes a society in which the social roles of men and women overlap, with neither gender exhibiting overly ambitious or competitive behavior. Japan and Austria rank highest in masculinity; Spain, Taiwan, the Netherlands, and the Scandinavian countries have some of the lowest ratings on this dimension.

Hofstede’s research convinced him that, although these four dimensions yield interesting and useful interpretations, they do not provide sufficient insight into possible cultural bases for economic growth. Hofstede was also disturbed by the fact that Western social scientists had developed the surveys used in the research. Because many economists had failed to predict the explosive economic development of Japan and the “Asian tigers” (i.e., South Korea, Taiwan, Hong Kong, and Singapore), Hofstede surmised that some cultural dimensions in Asia were eluding the researchers. This methodological problem was remedied by a Chinese Value Survey (CVS) developed by Chinese social scientists in Hong Kong and Taiwan.

The CVS data supported the first three “social behavior” dimensions of culture: power distance, individualism/collectivism, and achievement/nurturing. Uncertainty avoidance, however, did not show up in the survey results. Instead, the CVS revealed a dimension, long-term orientation (LTO) versus short-term orientation, that had eluded Western researchers.36 Hofstede interpreted this dimension as concerning “a society’s search for virtue,” rather than truth. The dimension assesses the sense of immediacy within a culture—that is, whether gratification should be immediate or deferred. Long-term values include persistence (perseverance), defined as a general tenacity in the pursuit of a goal. Ordering relationships by status reflects the presence of societal hierarchies, and observing this order indicates the acceptance of complementary relations. Thrift manifests itself in high savings rates. Finally, a sense of shame leads to sensitivity in social contacts.

By studying Hofstede’s work, marketers can gain insights to guide them in a range of activities, including developing products, interacting with business partners, and conducting sales meetings. For example, understanding the time orientation of one’s native culture compared to that of others is crucial (see Table 4-1). In Brazil, India, Japan, and Mexico, building a relationship with a potential business partner takes precedence over transacting the deal. As they say in Latin America, “Uno no vive para trabajar . . . Uno trabaja para vivir!” (“One doesn’t live to work . . . one works to live!”). Conducting business in this region of the world should never come at the expense of enjoying life. People from cultures that emphasize the short term must adapt to the slower pace of business in some countries with a longer-term orientation.

Similarly, the Japanese notion of gaman (“persistence”) provides insight into the willingness of Japanese corporations to pursue research and development (R&D) projects for which the odds of short-term success appear low. When Sony licensed the newly invented transistor from Bell Laboratories in the mid-1950s, for example, the limited high-frequency yield (sound output) of the device suggested to American engineers that the most appropriate application would be for a hearing aid. However, gaman meant that Sony engineers were not deterred by the slow progress of their efforts to increase the yield from their investment. As Sony cofounder Masaru Ibuka recalled, “To challenge the yield is a very interesting point for us. At that time no one recognized the importance of it.” Sony’s persistence was rewarded when company engineers eventually made the yield breakthrough that resulted in a wildly successful global product—the pocket-sized transistor radio.37

The power distance dimension reflects the degree of trust among members of society. The higher the power distance index (PDI), the lower the level of trust. Organizationally, high PDI finds expression in tall, hierarchical designs; a preference for centralization; and relatively more supervisory personnel. In cultures where respect for hierarchy is high, subordinates may have to navigate through several layers of assistants to get to the boss. In such cultures, superiors may easily intimidate lower-level employees. Research has suggested that, when evaluating alternatives for entering global markets, companies in high-PDI cultures prefer sole ownership of subsidiaries because it provides them with more control. Conversely, companies in low-PDI cultures are more apt to use joint ventures.38

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J. Byrne Murphy learned about power distance and the differences between U.S.-style individualism and the French style when he was negotiating to build the first American-style designer outlet mall in France. As he recounts in his book Le Deal:

In France, there always seemed to be more glory for those who pursued solo endeavors. . . . Indi- vidualism seemed always to be loudly proclaimed, while the praise for team effort seemed to me to be distinctly muted.

I saw this national trait play itself out regularly in our weekly managers meetings. I’d always end each meeting with my exhortation to coordinate all efforts between departments to ensure that there would be no time lost, no surprises.

But there were always surprises.

Each week I’d leave the team meeting full of optimism that this time we were all in the same boat, all coordinated, all members of one disciplined crew team, all pulling our oars together, all moving rapidly forward in a straight line. And the next week I’d realize I was not only full of optimism but also of naiveté. Because I’d discover we weren’t in the same boat. We weren’t in any boat. A more accurate analogy was that they were running in a footrace, each in separate lanes. Marketing in Lane 1, Sales in Lane 2, Finance in Lane 3, and so on. And as each runner sprinted through the week, they didn’t look left or right, or even acknowledge there were other runners. . . . 

“Why,” I continued to ask myself, “do they all think so differently? Why can’t they coordi- nate their own actions before problems arise?”

Ultimately, Murphy realized that he would have to change his own behavior patterns. He resolved to explain to his managers the American concept of teamwork within the French context; after he did, the project moved forward more smoothly.39

Steelcase, a U.S. company that makes office furniture, also uses data about national cultures. Its 11-nation study was used as input to the design process for global customers. Among its findings:40

Short term versus long term: Enduring relationships are more valued in India and China than in the United States.

Cooperative (feminine) behaviors versus competitive (masculine) behaviors: Flexible work arrangements such as telecommuting are becoming more common in the Netherlands. By contrast, in India, professionals rarely work from home.

Collectivistic versus individualistic: Expressing the strength of a corporate institution is important in Southern Europe, so lobbies in office buildings tend to be grandiose.

4-4 The Self-Reference Criterion and Perception As described earlier in this chapter, a person’s perception of market needs is framed by his or her own cultural experience. A framework for systematically reducing perceptual blockage and distortion was developed by James Lee and published in the Harvard Business Review in 1966. Lee termed the unconscious reference to one’s own cultural values the self-reference criterion (SRC). To address this problem and eliminate or reduce cultural myopia, he proposed a systematic, four-step framework:

1. Define the problem or goal in terms of home-country cultural traits, habits, and norms. 2. Define the problem or goal in terms of host-country cultural traits, habits, and norms. Make

no value judgments. 3. Isolate the SRC influence and examine it carefully to see how it complicates the problem. 4. Redefine the problem without the SRC influence and solve for the host-country market

situation.41

4-4 Explain how the self-reference criterion can affect decision making at global companies, and provide a step-by-step example of a company adapting to conditions in a global market.

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The Walt Disney Company’s decision to build a theme park in France provides an excellent vehicle for understanding SRC. While planning their entry into the French market, how might Disney executives have done things differently by using the steps of SRC? Let’s start at step 1 and examine Disney’s home-country norms; then we will proceed with the remaining steps to see which cultural adapt ations should have been made.

Step 1 Disney executives believe there is virtually unlimited demand for American cultural exports around the world. Evidence includes the success of McDonald’s, Coca-Cola, Hollywood movies, and American rock music. Disney has a stellar track record in exporting its American management system and business style (see Exhibit 4-8). Tokyo Disneyland, a virtual carbon copy of the park in Anaheim, California, has been a runaway success. Disney policies prohibit sale or consumption of alcohol inside its theme parks.

Step 2 Europeans in general, and the French in particular, are sensitive about American cultural imperialism. Consuming wine with the midday meal is a long- established custom. Europeans have their own real castles, and many popular Disney characters come from European folk tales.

Step 3 The significant differences revealed by comparing the findings in steps 1 and 2 suggest strongly that the needs upon which the American and Japanese Disney theme parks were based do not exist in France. A modification of this design is needed for European success.

Step 4 This would require the design of a theme park that is more in keeping with French and European cultural norms—that is, allowing the French to put their own identity on the park.

The lesson that the SRC teaches is that a vital, critical skill of the global marketer is unbiased perception—that is, the ability to see what is so in a culture. Although this skill is as valuable at home as it is abroad, it is critical to the global marketer because of the widespread tendency toward ethnocentrism and the use of the SRC. The SRC can be a powerful negative force in global business, and forgetting to check for it can lead to misunderstanding and failure. While planning Euro Disney, former Disney Chairman Michael Eisner and other company executives were blinded by a potent combination of their own prior success and ethnocentrism. Clearly, this approach was not the best one. Today, the park is known as Disneyland Paris; a second venue, Walt Disney Studios Park, was launched in 2002 to encourage multi-day visits. Although it is a top tourist destination, the venture has experienced financial losses in all but a handful of years. Avoiding the SRC requires a person to suspend assumptions based on prior experience and success and to be prepared to acquire new knowledge about human behavior and motivation.

Exhibit 4-8 Disneyland Shanghai opened its doors on June 6, 2016. The specific date—6/16/2016—was chosen for a reason: “Six” sounds like the word liu in Chinese, and means “smooth.” Source: Ng Han Guan/Associated Press.

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cHAPTER 4 • SOcIAL ANd cuLTuRAL ENVIRONMENTS 123

Brian Chesky and Joe Gebbia are entrepreneurs. They developed an innovative product, created a brand, and started a company to market it. By applying the basic tools and principles of global marketing, the duo has achieved remarkable success.

As is true with many entrepreneurs, Chesky and Gebbia’s idea was based on their own needs and wants. In 2007, Chesky was work- ing in San Francisco as an industrial designer and sharing an apart- ment with Gebbia. Both had previously studied at the Rhode Island School of Design. The pair were living in an apartment that they could barely afford, so they purchased some extra mattresses and rented them out during a design conference. The rental price also included breakfast.

The following year, Chesky and Gebbia set up a Web site, Airbnb. com, that allowed people to rent out spare rooms in their homes or apartments. The idea caught on quickly, boosted in part by the growth of “sharing-economy” startups such as ride-sharing services Uber and Lyft and collaborative office company WeWork.

Changes in cultural patterns are also contributing to this trend. Sociologists use the term “distributed trust” to describe a situation in which people put their trust in a community. The app-powered digital revolution is the latest manifestation of this concept. Thus, group oversight at Airbnb and other sharing-economy startups has become a source of social glue and a new pattern of trust. Indeed, to overcome the long-held perception that “strangers equal dan- ger,” the Airbnb Web site includes host profiles, peer ratings, and a feedback system.

In Airbnb’s first decade of existence, more than 200 million travel- ers used its listings in more than 190 countries. The company’s logo, which it calls “Bélo,” is intended to communicate universal belonging. Its design incorporates several distinct elements: the letter “A”; a heart shape; and the symbol for “pinning” a location on Google Maps (see Exhibit 4-9). Today, Airbnb is valued at more than $30 billion, and its listings run the gamut from a few dollars a night for a couch to sleep on to $10,000 or more for a chateau in France or a luxury yacht.

Paris, New York, London, and Rio are Airbnb’s top countries in terms of number of listings. The company’s Rio bookings got a boost in 2014 when the World Cup was held in Brazil; the same thing hap- pened in 2016 during the Summer Olympics. Airbnb was also an official partner of the 2016 games. In London, Airbnb will miss out on hundreds of millions of dollars in revenues because it has limited rentals to 90 days per year to comply with local laws.

Chesky and Gebbia also moved quickly after former U.S. President Barack Obama loosened restrictions on travel between the United States and Cuba in December 2014. Knowing that Cuba would be an idiosyncratic, unique place to do business where regulations can change quickly, Airbnb sought local advice. In addition, because most Cuban citizens lack easy access to the Internet, Airbnb had to be nimble to adapt.

Finding an easy way to remit payments to hosts also posed a chal- lenge. Fortunately, a preexisting legal framework governed the coun- try’s casas particulares home-rental network. In a country where the average monthly income is approximately $25, Airbnb’s $250 average Cuban booking fits the Cuban government’s priority of finding a rem- edy for the country’s economic situation.

Despite—or perhaps because of—Airbnb’s popularity, its business model has attracted the attention of housing authorities and the hotel industry. For example, New York’s attorney general declared that most of Airbnb’s listings in the Big Apple are illegal. Some permanent resi- dents in key cities also claim that prices for affordable housing have gone up as owners opt to rent their properties on a short-term basis to tourists rather than on a long-term basis to locals.

Sources: Gillian Tett, “In Our Fellow App Users We Trust,” FT Weekend Magazine (November 25–26, 2017), p. 62; Jonathan Openshaw, “Airbnb Cofounder Opens up His Own Home,” Financial Times (September 20, 2017), p. 11; Will Connors, “Deal Raises Airbnb’s Game in Rio,” The Wall Street Journal (May 27, 2016), pp. B1, B5; Alexandra Wolfe, “Weekend Confidential: Brian Chesky,” The Wall Street Journal (May 28–29, 2016), p. C17; Erin Griffith, “Airbnb’s Coup in Cuba,” Fortune (May 1, 2016), p. 35.

ENTREPRENEURIAL LEADERSHIP, CREATIVE THINKING, AND THE GLOBAL STARTUP

Brian Chesky and Joe Gebbia, Airbnb

Exhibit 4-9 Airbnb’s logo is designed to communicate the brand’s essence of “universal belonging.” Source: Pe3k/Shutterstock.

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124 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

4-5 Diffusion Theory42

Hundreds of studies have described the process by which an individual adopts a new idea. Sociolo- gist Everett Rogers reviewed these studies and discovered a pattern of remarkably similar findings. Rogers then distilled the research into three concepts that are extremely useful to global marketers: the adoption process, characteristics of innovations, and adopter categories. Taken together, these concepts constitute Rogers’s diffusion of innovation framework.

An innovation is something new. When applied to a product, “new” can mean different things. In an absolute sense, once a product has been introduced anywhere in the world, it is no longer an innovation, because it is no longer new to the world. Relatively speaking, however, a product already introduced in one market may be an innovation elsewhere because it is new and different for the targeted market. Global marketing often entails just such product introductions. Managers find themselves marketing products that may be, simultaneously, innovations in some markets and mature or even declining products in others.

The Adoption Process One of the basic elements of Rogers’s diffusion theory is the concept of an adoption process—the mental stages through which an individual passes from the time of his or her first knowledge of an innovation to the time of product adoption or purchase. Rogers suggests that an individual passes through five different stages in proceeding from first knowledge of a product to the final adoption or purchase of that product: awareness, interest, evaluation, trial, and adoption.

1. Awareness: In the first stage, the customer becomes aware for the first time of the product or innovation. Studies have shown that at this stage, impersonal sources of information such as mass-media advertising are most important. An important early communication objec- tive in global marketing is to create awareness of a new product through general exposure to advertising messages.

2. Interest: During this stage, the customer is interested enough to learn more. The customer has focused his or her attention on communications relating to the product and will engage in research activities and seek out additional information.

3. Evaluation: In this stage the individual mentally assesses the product’s benefits in relation to present and anticipated future needs and, based on this judgment, decides whether to try it.

4. Trial: Most customers will not purchase expensive products without the “hands-on” experience marketers call a “trial.” A good example of a product trial that does not involve purchase is the automobile test drive. For health care products and other inexpensive consumer packaged goods, a trial often involves actual purchase. Marketers frequently induce a trial by distributing free samples. For inexpensive products, an initial single purchase is defined as a trial.

5. Adoption: At this point, the individual either makes an initial purchase (in the case of the more expensive product) or continues to purchase—adopts and exhibits brand loyalty to— the less expensive product.

Studies show that as a person moves from evaluation through a trial to adoption, personal sources of information are more important than impersonal sources. It is during these stages that sales representatives and word of mouth become major persuasive forces affecting the decision to buy.

Characteristics of Innovations In addition to describing the product adoption process, Rogers identified five major characteristics of innovations. These factors, which affect the rate at which innovations are adopted, are relative advantage, compatibility, complexity, divisibility, and communicability.

1. Relative advantage: How a new product compares with existing products or methods in the eyes of customers. The perceived relative advantage of a new product versus existing products is a major influence on the rate of adoption. If a product has a substantial relative advantage vis-à-vis the competition, it is likely to gain quick acceptance. When compact disc players were first introduced in the early 1980s, industry observers predicted that only audio- philes would care enough about digital sound—and have enough money—to purchase them.

4-5 Analyze the components of diffusion theory and its applicabil- ity to global marketing.

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In reality, the sonic advantages of CDs compared to LPs were obvious to the mass market; as prices for CD players plummeted, the 12-inch black vinyl LP was rendered virtually extinct in less than a decade. (But vinyl is making a comeback!)

2. Compatibility: The extent to which a product is consistent with existing values and past experiences of adopters. The history of innovations in international marketing is replete with failures caused by the lack of compatibility of new products in the target market. For example, the first consumer VCR, the Sony Betamax, ultimately failed because it could record for only 1 hour. Most buyers wanted to record movies and sports events; thus they shunned the Betamax in favor of VHS-format VCRs, which could record 4 hours of programming.

3. Complexity: The degree to which an innovation or new product is difficult to understand and use. Product complexity is a factor that can slow down the rate of adoption, particularly in developing country markets with low rates of literacy. In the 1990s, dozens of global companies developed new, interactive, multimedia consumer electronics products. Com- plexity was a key design issue; it was a standing joke that in most households, VCR clocks flashed “12:00” because users didn’t know how to set them. To achieve mass success, new products have to be as simple to use as, for example, slipping a prerecorded DVD into a DVD player.

4. Divisibility: The ability of a product to be tried and used on a limited basis without great expense. Wide discrepancies in income levels around the globe result in major differences in preferred purchase quantities, serving sizes, and product portions. For example, CPC Inter- national’s Hellmann’s mayonnaise was simply not selling in U.S.-size jars in Latin America, but sales took off after the company placed the mayonnaise in small plastic packets. The plastic packets were within the food budgets of local consumers, and they required no refrig- eration—another plus.

5. Communicability: The degree to which the benefits of an innovation or the value of a prod- uct may be communicated to a potential market. A new digital cassette recorder from Philips was a market failure, in part because advertisements did not clearly communicate the fact that the product could make CD-quality recordings using new cassette technology while still playing older, analog tapes.

Adopter Categories Adopter categories are classifications of individuals within a market on the basis of innovative- ness. Hundreds of studies of the diffusion of innovation demonstrate that, at least in the Western world, adoption is a social phenomenon that is characterized by a normal distribution curve (see Figure 4-3).

Five categories have been assigned to the segments of this normal distribution. The first 2.5 percent of people to purchase a product are defined as innovators; the next 13.5 percent are early adopters; the next 34 percent are the early majority; the next 34 percent are the late majority; and the final 16 percent are laggards. Studies show that innovators tend to be venturesome, more

FIGURE 4-3 Adopter Categories Early majority Late majority

LaggardsEarly adopters

Life Cycle

Innovators 2.5%

Introduction Growth

13.5% 34% 34% 16%

Maturity Decline

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cosmopolitan in their social relationships, and wealthier than those who adopt products later. Early adopters are the most influential people in their communities, even more so than the innovators. Thus, the early adopters are a critical group in the adoption process, and they have great influence on the early and late majorities, who account for the bulk of the adopters of any product. Several characteristics of early adopters stand out: They tend to be younger, with higher social status, and in a more favorable financial position than later adopters. They must be responsive to mass-media information sources and must learn about innovations from these sources, because they cannot simply copy the behavior of innovators.

One of the major reasons for the normal distribution of adopter categories is the interaction effect—that is, the process through which individuals who have adopted an innovation influence others. Adoption of a new idea or product is the result of human interaction in a social system. If the first adopter of an innovation or new product discusses it with two other people, and each of those two adopters passes the new idea along to two other people, and so on, the resulting distribution yields a normal bell shape when plotted.43

Diffusion of Innovations in Pacific Rim Countries Based on a cross-national comparison of the United States, Japan, South Korea, and Taiwan, Takada and Jain presented evidence that different country characteristics—in particular, culture and communication patterns—affect diffusion processes for room air conditioners, washing machines, and calculators. Proceeding from the observation that Japan, South Korea, and Taiwan are high-context cultures with relatively homogeneous populations, whereas the United States is a low-context, heterogeneous culture, Takada and Jain surmised that Asia would show faster rates of diffusion than the United States (see Figure 4-4).

A second hypothesis supported by the research was that adoption would proceed more quickly in markets where innovations were introduced relatively late. Presumably, the lag time would give potential consumers more opportunity to assess the relative advantages, compatibility, and other product attributes. Takada and Jain’s research has important marketing implications. These authors noted: “If a marketing manager plans to enter the newly industrializing countries (NICs) or other Asia markets with a product that has proved to be successful in the home market, the product’s diffusion processes are likely to be much faster than in the home market.”44

4-6 Marketing Implications of Social and Cultural Environments

The various cultural factors described earlier can exert important influences on marketing of consumer and industrial products around the globe; thus, they must be recognized and incorpo- rated into a global marketing plan. Environmental sensitivity reflects the extent to which prod- ucts must be adapted to the culture-specific needs of different national markets. A useful approach

FIGURE 4-4 Asian Hierarchy for Diffu- sion of Innovation

Early majority Late majority

LaggardsEarly adopters

Life Cycle

Innovators

Introduction Growth Maturity Decline

4-6 Explain the marketing implications of different social and cultural environments around the globe.

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is to view products as being located on a continuum of environmental sensitivity. At one end of the continuum are environmentally insensitive products that do not require significant adaptation to the environments of various world markets. At the other end of the continuum are products that are highly sensitive to different environmental factors. A company with environmentally insensi- tive products will spend relatively less time determining the specific and unique conditions of local markets because the product is basically universal. The greater a product’s environmental sensitivity, the greater the need for managers to address country-specific economic, regulatory, technological, social, and cultural environmental conditions.

The sensitivity of products can be represented on a two-dimensional scale, as shown in Figure 4-5. The horizontal axis shows environmental sensitivity, and the vertical axis the degree for product adaptation needed. Any product exhibiting low levels of environmental sensitivity— integrated circuits, for example—belongs in the lower left of the figure. Intel has sold more than 100 million microprocessors because a chip is a chip anywhere around the world. Moving to the right on the horizontal axis, the level of sensitivity increases, as does the amount of adaptation needed. Computers exhibit moderate levels of environmental sensitivity; for example, variations in country voltage requirements require some adaptation. In addition, the computer’s software documentation should be in the local language.

At the upper right of Figure 4-5 are products with high environmental sensitivity. Food sometimes falls into this category because it is sensitive to climate and culture. As we saw in the McDonald’s case at the end of Chapter 1, this fast-food giant has achieved great success outside the United States by adapting its menu items to local tastes. General Electric’s turbine equipment may also appear on the high-sensitivity end of the continuum; in many countries, local equipment manufacturers receive preferential treatment when bidding on national projects.

Research studies show that, independent of social class and income, culture is a significant influence on consumption behavior and durable goods ownership.45 Consumer products are probably more sensitive to cultural differences than are industrial products. Abraham Maslow, a psychologist who studied human motivation, developed a hierarchy of needs ranging from the most basic needs to the more abstract. Hunger is a basic physiological need in Maslow’s hierarchy; humans share a biological imperative to obtain a meal, but what we want to eat can be strongly influenced by culture. Evidence from the front lines of the marketing wars suggests that food is probably the most sensitive category of consumer products. The ongoing controversy about genetically modified organisms (GMOs) in the food supply is a case in point. American consumers are generally accepting of foods containing GMO ingredients; Europeans are much less accepting.

Thirst, like hunger, shows how needs differ from wants. Humans all have a biological impera- tive to secure hydration to sustain life (see Exhibit 4-10). As is the case with food and cooking,

FIGURE 4-5 Environmental Sensitivity Versus Product Adaptation

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however, the particular liquids people want to drink can be strongly influenced by culture. Coffee is a beverage category that illustrates the point. As noted in Case 4-1, coffee has been consumed for centuries on the European continent. By contrast, Britain has historically been a nation of tea drinkers, a legacy of the East India Company’s exploits in India and China. Britons from all walks of life ascribe a variety of medicinal properties to “a nice cup of tea,” and the custom of taking afternoon tea is firmly entrenched in British culture.46 In the 1970s, tea outsold coffee by a ratio of 4 to 1.

Brits who did drink coffee tended to buy it in instant form, because the preparation of instant coffee is similar to that of tea. By the 1990s, however, Britain was experiencing an economic boom and an explosion of new nightclubs and restaurants. Trendy Londoners looking for a nonpub “third place” found it in the form of Seattle Coffee Company cafés. An instant success after the first store was opened by coffee-starved Americans in 1995, by 1998 Seattle Coffee had 65 stores around London. Starbucks bought the business from Seattle Coffee’s founders for $84  million. Today, Starbucks has overcome the challenge of high real estate prices and has more than 345  company-operated cafés in the United Kingdom.47 One of the newest Starbucks cafés is a Star Reserve store near London’s famous Covent Garden (see Case 4-1).

Summary Culture, a society’s “programming of the mind,” has both a pervasive and a changing influence on each national market environment. Global marketers must recognize the influence of culture and be prepared to either respond to it or change it. Human behavior is a function of a person’s own unique personality and that person’s interaction with the collective forces of the particular society and culture in which he or she has lived. In particular, attitudes, values, and beliefs can vary significantly from country to country. Also, differences pertaining to religion, aesthetics, dietary customs, and language and communication can affect local reaction to a company’s brands or products as well as the ability of company personnel to function effectively in different cultures. A number of concepts and theoretical frameworks provide insights into these and other cultural issues.

Cultures can be classified as high or low context; communication and negotiation styles can, in turn, differ from country to country. Hofstede’s social values typology helps marketers understand culture in terms of power distance, individualism versus collectivism, achievement versus nurturing, uncertainty avoidance, and long-term versus short-term orientation. By understanding the self-reference criterion, global marketers can overcome people’s unconscious tendency for perceptual blockage and distortion.

Exhibit 4-10 In countries where water from the tap or well may be contami- nated, bottled water is a convenient alternative. The fastest growth in the industry is occurring in developing countries; in the past five years, bottled water consumption has tripled in India and more than doubled in China. Many consumers also choose bottled water as an alternative to other bever- age choices. However, the Earth Policy Institute and other groups view bottled water as an overpriced, wasteful extravagance. The International Bottled Water Association disagrees with that view. A spokesman said, “We’re an on- the-go society demanding convenient packaging and consistent quality, and that’s what bottled water provides.” Source: Gurinder Osan/AP Images.

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Rogers’s classic study on the diffusion of innovation helps explain how products are adopted over time by different adopter categories. The adoption process that consumers go through can be divided into a multistage hierarchy of effects. Rogers’s findings concerning the characteris- tics of innovations can also help marketers successfully launch new products in global markets. Research has suggested that Asian adopter categories differ from those found in the Western model. An awareness of environmental sensitivity can help marketers determine whether con- sumer and industry products must be adapted to the needs of different markets.

Discussion Questions 4-1. What are some of the elements that make up culture? How do these find expression in

your native culture? 4-2. What is the difference between a low-context culture and a high-context culture? Name

a country that is an example of each type and offer evidence for your answer. 4-3. How can Hofstede’s cultural typologies help Western marketers better understand Asian

culture? 4-4. Briefly explain the social research of Everett Rogers on the topics of diffusion of

innovation, characteristics of innovations, and adopter categories. How does the adoption process in Asia differ from the traditional Western model?

CASE 4-1 Continued (refer to page 107)

Coffee Culture Around the World

Coffee’s Global Supply Chain Coffee has become a key export commodity for developing nations located along the equator. The two top coffee-growing countries, Brazil and Vietnam, produce about half of the world’s supply of beans. Rounding out the top five producers are Colombia, Indone- sia, and Ethiopia.

Ethiopia is Africa’s biggest coffee producer and coffee is its number 1 export; domestic demand for this beverage is also strong. Uganda is another important producer, but Uganda is a nation of tea drinkers, so most of its coffee is exported. Governments in Uganda, Ethiopia, and other Africa nations impose strict penalties on farmers who ignore guidelines for producing quality beans.

There are approximately 100 different species of coffee trees. Cof- fee is somewhat unique in that large-scale industrial farm production is not possible. Coffee trees grow best on mountains at low altitudes with exposure to full sun as well as shade. The trees begin flowering following seasonal rainfall. Each flower, in turn, yields a fruit known as a “cherry” that turns red when it is ripe; each cherry contains two seeds. Picking is a highly labor-intensive activity. “Green coffee” is the term for coffee seeds that have been extracted from the cherry but not yet roasted.

The two most important coffee bean varieties are Arabica and robusta. Coffee made from Arabica beans has a sweeter, less bitter taste. By contrast, the robusta bean yields coffee that is less aromatic but higher in caffeine. Vietnam is the leading exporter of robusta coffee.

Green, unroasted coffee beans are commodities traded on the London and New York futures markets; Volcafe Group ( Switzerland), Olam International (Singapore), and Neumann Kaffee Gruppe (Ger- many) are large trading houses that buy a significant amount of the world’s coffee bean crop. Kraft, J. M. Smucker, Nestlé, JAB, and other

consumer-goods giants also buy and roast beans. Some roasters are key suppliers to the grocery industry, where consumers purchase the greatest percentage of coffee.

Until recently, specialty coffees such as those marketed by Starbucks were regarded as niche products; they accounted for only a small percentage of the world’s supply of coffee beans. However, in the last few years, global demand for specialty coffee has risen dramati- cally as more consumers have become willing and able to splurge on their daily caffeine fix. In the United States, today specialty coffee now accounts for 50 percent of the country’s total coffee consumption.

Many coffee aficionados find coffee’s diverse and exotic geographic roots to be intriguing. Fans of the bean are also attracted by the notion that discerning palates can identify specific flavor nuances and aromas—for example, caramel, cinnamon, citrus, or cocoa—that distinguish beans cultivated in the varied soils and microclimates of different growing regions. Narratives about a particular coffee’s origin lend an element of authenticity that is appealing to many coffee drink- ers. In short, the coffee industry’s global supply chain can be an impor- tant marketing tool—providing it is ethical.

Fair Treatment for Producers Two important issues in the industry are equitable compensation for the small-hold farmers who grow coffee beans and sustainable agricultural practices. In the developed world, specialty coffee drinks made from beans grown at higher altitudes can sell for the equivalent of several dollars per cup; discerning consumers often pay $15 or more for a pound of whole beans to grind at home. And yet, little of the value that is added to the final product—be it a pound of whole beans or a specialty drink—finds its way back to the farmers. In fact, economist Jeffrey Sachs has calculated that, for every $3 to $4 cup coffee sold in

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a metropolitan area such as London or New York, the farmer receives only about $.05. For these reasons, many small-scale farmers live in poverty and struggle to support their families.

The fair-trade coffee movement is gaining momentum among socially conscious consumers. It has been spearheaded by organizations such as the Rainforest Alliance, which works with big corporations to monitor environmental and working conditions in developing countries. The Rainforest Alliance was a pioneer in certifying lumber sourced from forests in the tropics, and it now certifies billions of dollars’ worth of coffee beans each year.

Fairtrade International (FLO; www.fairtrade.net), a certification authority based in Bonn, Germany, represents more than 1 million farmers and workers. FLO licenses its trademark to organizations such as the United Kingdom’s Fairtrade Foundation (www.fairtrade.org.uk). The Fairtrade label on a bag or can of coffee indicates that growers were paid a fair price for their crops. Fair Trade USA is a fair-trade certification organization in the United States (www.fairtradeusa.org).

Celebrities are also taking up the fair-trade cause. For example, actor Hugh Jackman recently appeared in a documentary film, Dukale’s Dream, that highlighted the plight of small coffee farmers in Ethiopia and explained the benefits of fair-trade coffee. South Sudan, Africa’s newest country, is another case in point. Although their homeland was ravaged by war, coffee producers in this country were able to export beans to France in 2015.

Coffee as Daily Cultural Ritual: Italy As noted at the beginning of the chapter, the coffee culture in Italy dates back centuries. It’s been said that for Italians, drinking coffee is as routine as breathing. Generations of Italians have started their day by ordering un caffè (or cappuccino, caffé latte, or latte macchiato) at their local espresso bar. Often consumed while standing, each small cup typically contains a shot of potent brew to which patrons frequently add a packet of sugar (or two).

At home, Italians can brew their daily fix in a stovetop espresso maker that was invented in 1933 by Alfonso Bialetti. Called a moka, the gadget creates a vacuum that pulls hot water over coffee grounds. The moka is just one cultural artifact from Italy’s long, proud tradition of innovations in the coffee industry.

For example, in 1884, an Italian entrepreneur named Angelo Moriondo received a patent for “steam machinery” that could be used for the “instantaneous” production of coffee-based beverages. By the early twentieth century, other inventors had improved on Moriondo’s technology, and production of espresso machines began in Milan.

In the late 1940s another entrepreneur, Achille Gaggia, developed a lever-operated, steamless commercial espresso maker that forced boiling water through coffee grounds at high pressure. The resulting brew was less bitter and had a foamy “crema” that is now synonymous with espresso.

Italy’s number 1 coffee brand is Lavazza; its annual sales are approximately $1.5 billon. Luigi Lavazza S.p.A. was founded in 1895 and today is run by fourth-generation family members. Emilio Lavazza, known as the “King of Coffee,” developed vacuum-sealed bags that allowed for export of his company’s coffee.

Illycafé is another top Italian coffee roaster that is still family owned and operated. This company is based in Trieste, the port city on the Adriatic Sea that was coffee’s first point of entry into Europe. Founder Francesco Illy perfected a process for vacuum sealing roasted beans in a steel can to preserve freshness and flavor; this innovation helped create the market for roasted beans.

Francesco Illy also is credited with inventing the first automatic espresso maker. His machine, dubbed the Illetta, used compressed air

instead of steam to force water over the grounds. This process allowed for a water temperature below the boiling point; the result was a less- bitter brew. In fact, Illy’s description of espresso shows what makes this method of preparing coffee unique:

A jet of hot water at 88°–93°C (190°–200°F) passes under a pressure of nine or more atmospheres through a seven-gram (.25 oz) cake-like layer of ground and tamped coffee. Done right, the result is a concentrate of not more than 30 ml (one oz) of pure sensorial pleasure.

Attention to aesthetics is integral to the Illy’s brand’s DNA. Each can features the company logo, which was created by American pop artist James Rosenquist. The company also took a page from the Swatch playbook by commissioning artists, designers, and filmmakers to cre- ate the colorful designs that adorn Illy’s white porcelain espresso cups. And, to ensure that Illy coffee is prepared properly, the company has established multiple branches of its Università del Caffè to help educate producers and members of the hospitality industry.

In Italy, deeply embedded traditions change slowly, if at all. Many Italians scoff at “American-style coffee,” which is typically brewed by dripping hot water through a paper filter containing coffee grounds (hence the term “filtered coffee”). Flavored coffee is frowned on. In addition, most Italians disapprove of the idea of walking down the street holding a hot-beverage cup emblazoned with a company logo. As a marketing manager for Nescafé in Italy said recently, “‘On-the-go’ is just not in the culture of this country.” Another competitor singled out Starbucks for repackaging Italian café culture and focusing more on image than the coffee itself.

Despite such perceptions, in 2016, Starbucks announced plans to open its first Italian shop. Its flagship store is just a short walk from the Duomo, one of Milan’s most famous landmarks (see Exhibit 4-11). Although proprietors of local cafés worry about competing with the global giant, many Italians are looking forward to Starbucks’ arrival. What’s the appeal? For one thing, Frappuccino! Italians love their gelato, but Starbucks is famous for its “ice cream that you can drink.”

Meanwhile, local entrepreneurs have identified an opportunity related to the coffee culture. Amidst the economic turndown as well as complaints that quality in traditional cafés is slipping, new coffee shops such as Arnold Coffee and 12Oz. have opened in Milan and other Italian cities. To the dismay of some purists, the newcomers sell sweetened and flavored coffee drinks. Paper cups are available for take-out.

Coffee’s “Two Waves” in America Compared to the rest of the world, America’s love affair with coffee is a relatively recent phenomenon. Even so, by the nineteenth century, coffee had become a mass-consumption consumer staple in the United States. Some observers have termed this coffee’s “first wave.”

In the mid-twentieth century, in coffee’s “second wave,” coffee shops appeared and later became integral to the plot lines of popular American TV shows such as Seinfeld. These trends led to a general rec- ognition of coffee’s role as a facilitator of social bonding as well as some- thing comforting to savor in solitude. Edward Hopper’s 1942 famous oil painting Nighthawk captures the era perfectly. Meanwhile, supermarket sales of popular brands of ground coffee such as Hill’s Brothers, Folgers, and Maxwell House were supported by heavy television advertising, catchy slogans such as “Good to the last drop” and “The best part of waking up is Folgers in your cup,” and extensive couponing.

The second wave crested toward the end of the twentieth cen- tury, when Seattle, Washington–based Starbucks emerged on the

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scene. From its humble origins in the Pacific Northwest, Starbucks has extended its empire of cafés around the world and become the leading global premium coffee brand. In many countries, Starbucks competes with McCafé stores operated by global fast-food giant McDonald’s. Increasingly, however, competitors include local coffee shop chains such as Phuc Long in Vietnam and Coffee Toffee in Indonesia.

The Coffee Capsule Revolution One of the biggest industry trends in recent years has been the grow- ing popularity of single-serving coffee capsules. Nestlé, long the global leader in instant coffee with its Nescafé brand, pioneered the single serving or “pre-portioned” category with Nespresso-brand coffee mak- ers and pods. Today, thanks in part to actor George Clooney’s role as brand ambassador, Nestlé claims an approximately 13 percent share of the $13 billion global market for coffee pods. Nestlé is the industry leader in Europe, where its machines and capsules are sold via the Internet and at dedicated Nespresso stores (see Exhibit 4-12).

Created with the help of the Rainforest Alliance, Nespresso’s Triple A sustainability program ensures that some 75,000 farmers in South Sudan, Ethiopia, and Kenya are paid a significant premium above benchmark prices for growing high-quality beans. Nespresso also works with another nonprofit organization, Technoserve, to provide education and training for tens of thousands of small-scale coffee bean producers.

In 2016, Nespresso became the first brand to start exporting cof- fee produced in Cuba to the United States following a 59-year trade embargo. The announcement came after the U.S. State Department added coffee grown by Cuban entrepreneurs to a list of products that could be legally sent to the United States. Because Cuba produces only a small quantity of beans—100,000 sixty-kilogram bags in 2015— Cuban Nespresso Grand Cru and Cafecita de Cuba will be marketed as limited-edition production lots.

Meanwhile, Nestlé’s coffee business faces competition from JAB Holding Company. The German firm has spent tens of billions of dollars in recent years to acquire a variety of coffee-related businesses, includ- ing the Keurig Green Mountain brand and the Krispy Kreme doughnut and coffeehouse chain. Recently, JAB’s Peet’s Coffee and Tea subsidiary

Exhibit 4-11 Starbucks' first Italian location is a Reserve Roastery in Milan's historic Palazzo Delle Poste (Post Office). Source: Brandi/Fotogramma/Ropi/ZUMA Press/Newscom.

bought Stumptown Coffee and Intelligentsia Coffee, two U.S.-based specialty roasters. In the United States, where roughly one-third of adults drink specialty coffee, Keurig dominates the pre-portioned mar- ket. Its K-Cup machines and capsules are widely distributed by a variety of retailers.

The “Third Wave”: Coffee Culture Moves Upmarket The second decade of the twenty-first century ushered in coffee’s “third wave,” as consumers began to view coffee as an artisanal prod- uct that could be studied and appreciated like fine wine. Spotting an opportunity, new companies such as Blue Bottle Coffee started taking specialty coffee even farther up the premium scale than Starbucks had done. Industry observers are offering a variety of analogies to describe the trend; for example, it’s been said that artisanal brands such as Blue Bottle are to Starbucks as Shake Shack (the premium hamburger chain) is to McDonald’s.

One point of difference for Blue Bottle: The beans used in its cof- fee drinks are roasted only 48 hours or less before being ground and brewed. By contrast, most coffee shops—including Starbucks—use beans that have been roasted weeks earlier and shipped in vacuum- packed bags. Another difference: One of the growth drivers for pre- mium brands such as Stumptown is the wholesale market. Put simply, some of Stumptown’s coffee is purchased by other cafés that use it in their brews and also act as retail distribution channels for beans. James Freeman, Blue Bottle’s founder, has opted instead to focus on beverage quality in the company’s own stores.

Blue Bottle attracted the attention of Nestlé; the Swiss food giant is the leader in the in-home coffee segment, but lacked a presence in the fast-growing out-of-home market. In 2017, Nestlé spent $700 million to acquire a majority stake in Blue Bottle.

Important coffee-growing regions are also participating in coffee’s third wave. Guatemala has typically been ranked as one of the world’s top-ranked coffee producers, with coffee from the Huehuetenango region being especially prized by connoisseurs. Until recently, most of Guatemala’s coffee was exported. A growing number of cafés in that country are now specializing in coffee, and the baristas who work there are spearheading coffee’s third wave. Raúl Rodas, the 2012 world barista

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Exhibit 4-12 Nespresso boutiques are designed to convey a sense of premium quality, as well as the brand's commitment to customer service and sustainability through the recycling of empty coffee capsules. Source: Jpstock/Shutterstock.

champion, is a distributor and café owner in Guatemala City. He has embarked on a personal mission to convince more Guatemalans to join the third wave. He says, “How do you convince somebody who has always bought coffee in a supermarket to join the ranks of specialty coffee con- sumers? The more we spread the culture, the larger the market will be.”

Starbucks Extends the Brand Not to be outdone, Starbucks is also preparing to ride coffee’s third wave with a new venture called Starbucks Reserve and Starbucks Reserve Roastery and Tasting Room. Growth in mass-market coffee consumption in the United States has been slowing, a sign that it is entering the mature phase of the product life cycle.

For several years, Starbucks had been selling limited quantities of seasonal Reserve beans that were much more expensive than the com- pany’s regular offerings. Why does, say, a pound of Aged Sumatra beans cost $29.95 while “regular” Sumatra costs $12.95? Known as “single- origin coffees,” the Reserve beans typically are sourced from small farms with limited production capacity. Some produce as few as 60 bags of green coffee beans each year. To ensure a reliable source of Reserve beans, Starbucks is cultivating relationships with small-scale farmers. The company even bought Hacienda Alsacia, a coffee producer in Costa Rica.

Starbucks founder and former CEO Howard Schultz is determined to appeal to the upscale segment of coffee aficionados. These are people who geek out over geographic and agricultural details, who can appreciate the nuances of such so-called microlots, and who are willing to pay $7 or more for a freshly brewed cup.

To drive the company toward this goal, Schultz bought a 15,000-square-foot building near the first Starbucks in Seattle and trans- formed it into a “theater of coffee.” Liz Muller, creative vice president for global design at Starbucks, says the goal of the Reserve Roastery and Tasting Room is to “create a space to reinvent retail for the 21st cen- tury.” Patrons can choose from a variety of brewing methods, including Melitta pour over, siphon, and French press. Beans are roasted on site.

A variation on the Reserve Roastery is Starbucks Reserve, another new store concept staffed by some of Starbucks’ most skilled baristas. The first Starbucks Reserve store in Europe opened in 2015 in London’s West End. The comfortable leather seats and array of brewing equip- ment—including a $10,000 technological marvel known as the Clover that is used to brew a single cup—prompted The Guardian newspaper

to call the store “a cross between a private club and a chemistry lab.” Beans are roasted elsewhere and shipped in.

In December 2017, Starbucks opened its second Reserve Roast- ery and Tasting Room, this time in Shanghai. Billed as “the world’s largest Starbucks,” the new café joins the other 600 Starbucks stores in Shanghai—the most in any major city anywhere. Visitors can use their smartphones to enjoy an augmented reality (AR) tour and unlock badges. And, in a nod to local preferences, tea curators in the Teavana Bar will serve specialty tea drinks.

Discussion Questions 4-5. Based on the reporting in the case and your own experience,

how does “coffee culture” vary around the world? 4-6. Do you think Starbucks will succeed in Italy? 4-7. Why do entrepreneurs in many parts of the world open

coffee shops? 4-8. What accounts for the popularity of coffee pods and

capsules marketed by Nestlé, Keurig, and other companies? 4-9. If you are a coffee drinker, are you participating in coffee’s

“third wave”? Why or why not?

Sources: Tom Hancock, “Starbucks Opts for Super-Sized in China,” Financial Times (December 6, 2017), p. 14; Mark Riddaway, “Edible Histories: Coffee” Market Life 34 (Fall 2017), pp. 28–29; Arash Massoudi, “Nestlé Aims to Bottle Appeal of Artisan Coffee,” Financial Times (September 30–October 1, 2017), p. 17; Elisabeth Malkin, “Hot New Thing in Land of Coffee? It’s Coffee,” The New York Times (July 26, 2017), p. A4; Stephanie Strom, “Coffee from California (Yes, Really),” The New York Times (May 27, 2017), pp. B1, B2; Emiko Terazono, “Coffee Trade Goes into Battle Mode,” Financial Times (October 22–23, 2016), p. 13; Alexandra Wexler, “The World’s Most Dangerous Cup of Coffee,” The Wall Street Journal (October 15–16, 2016), pp. A1, A8; Nicholas Bariyo and Katherine Dunn, “Uganda Cracks down on Coffee,” The Wall Street Journal (July 11, 2016), p. C3; Gavin Bowring, “Local Chains Take on Coffee Giants,” Financial Times FT Reports—Tomorrow’s Global Business, Part Two: Emerging Economies (June 21, 2016), p. 4; Avantika Chilkoti, “Indonesia’s Aspiring Coffee Kings,” Financial Times (June 7, 2016), p. 7; Katherine Dunn, “Ethiopians, Government in Coffee Tug of War,” The Wall Street Journal (May 6, 2016), p. C3; Alexandra Wexler, “Starbucks Opens First Africa Store,” The Wall Street Journal (April 22, 2016), p. B6; Manuela Mesco, “Espresso Shot: Italians Warm to U.S.-Style Coffee,” The Wall Street Journal (March 6, 2016), pp. A1, A10; Patrick Ryan, “Q&A: Jackman Launches ‘Dream’ Coffee Brand,” USA Today (June 5, 2015), p. 1B; Stephanie Strom, “With Market Saturated, Starbucks Looks Upscale,” The New York Times (December 5, 2014), pp. B1, B4; Nicole LaPorte, “Coffee’s Economics, Rewritten by Farmers,” The New York Times (March 17, 2013), pp. B1, B3; Robin Kwong, “Taiwan’s Coffee Chain Challenger,” Financial Times (August 31, 2011), p. 10.

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CASE 4-2

Is Tourism the Savior or the Scourge of Venice?

Venice is unique among the cities of the world. Located on the Adriatic Sea in northern Italy’s Veneto region, Venice consists of more than 100 islands linked by a system of canals. Historically, the lagoon provided Venetians with a safe haven from Germanic and Hun invaders. In fact, the word “lagoon” itself originated in the local Venetian dialect. “Ghetto,” “casino,” “marzipan,” “quarantine,” and “scampi” are some other words that Venice has contributed to the English language.

Over the centuries, Venice became a vital commercial center for international trade, linking Europe with the Far East. Venetian prowess in manufacturing and commerce is legendary, and includes glassmak- ing and shipbuilding. In addition, Venice was an important artistic and cultural center during the Renaissance Era.

Today, the Germanic hordes are no longer a threat. Instead, Venice is threatened by more modern invaders: Venice is tied with Barcelona as top cruise destination in the Mediterranean. Despite the recent economic downturn, giant cruise ships arrive each week. They slowly navigate down the Guidecca Canal before disgorging passengers eager to visit such famous landmarks as the Realto Bridge, Piazza San Marco, Palazzo Ducale, and the Grand Canal (see Exhibit 4-13). Locals com- plain that the ships cause the windows of the palazzos that line the canal to rattle and shake. In 1999, only about 100,000 visitors arrived by boat. Now, more than 1,000 cruise ships and ferries dock at Venice’s main passenger terminal each year. As a result, the number of visitors who come for short-term stays can swell as high as 100,000 people per day.

Tourists also arrive by air, rail, and car; Marco Polo airport is less than 20 kilometers from Venice. In terms of nationality, Americans con- stitute the largest group of foreign tourists. Overall, tourism is the lead- ing source of income in Venice, with approximately 15 million visitors

arriving each year. By comparison, the year-round resident population of Venice is only about 59,000 people; that number has been steadily declining for years. Tourism gets a boost because Venice hosts impor- tant cultural events such as the International Film Festival and the Bien- nale International Art Exposition. Venice also hosted the America’s Cup World Series in 2012.

Concern is growing among the locals about the potentially detrimental effects of the cruise ships—specifically, air, water, and noise pollution—and possible damage to the submerged foundations that support Venice’s famed architectural treasures. Not surprisingly, the benefits and drawbacks of tourism is a divisive issue. Says one bar owner, “Everyone in Venice works with the cruise passengers, from taxis to bars to suppliers. The ships bring people, and the cruises can save a season.” Even so, Europe’s recent economic crisis hit Italy particularly hard. Case in point: Harry’s Bar, an iconic Venice fixture since the 1930s, has fallen on hard times and may close.

For those not in favor of the cruise ships, the potential benefits of tourist money flowing into the Venice economy do not offset the detrimental effects. As one resident complains, “Some days you have 10 ships coming in. It just isn’t safe.” There is even a sense among some locals that many visitors care less about Venice’s cultural life and more about shopping for souvenirs. “And even if they did spend millions, is it worth the risk of destroying the city?” the resident asks.

Cruise ships are not the only marketing-related issue that has ruffled some feathers in Venice and resulted in public debate. Venice’s unique setting results in severe seasonal flooding; in the winter, tide surges known as acqua alta (“high water”) cause severe structural damage to buildings and make it hard for pedestrians to navigate the city’s narrow streets. Water damage is one reason that several of the city’s landmarks are in need of repair, but Italy’s Ministry of Culture

Exhibit 4-13 A cruise ship docks in Venice, Italy. Venice is a popular port of call for passengers on ships oper- ated by MSC, Norwegian, and other carriers. Although Venice’s economy is heavily dependent on free-spending visitors from around the globe, envi- ronmentalists and local residents worry that mass tourism is a threat to both the city and the surrounding lagoon. Source: Manuel Silvestri/Reuters.

“The beauty of Italian towns is not only the archi- tecture, it’s also the actual activity of the place, the stores, the workshops. We need to save Venice’s identity.”

Dario Franceshcini, Culture Minister

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allocates roughly $47 million each year for historic renovation in the entire country. With only about $1.8 million earmarked for the entire Veneto region, Venice itself receives less than $200,000 in renovation funds. Needless to say, this is far less than the amount needed for upkeep and repair.

In other parts of the country, water damage from flooding is not a problem. Even so, many ancient artifacts are crumbling. In the face of public budget shortfalls, owners of some of Italy’s most famous fashion brands are footing the bill for historic renovations. For example, Diego Della Valle, the CEO of Tod’s, is contributing about $34 million to the restoration of the Colosseum in Rome. At Tod’s, “Made in Italy” is a core value, and Della Valle believes that he has a responsibility to step up and help preserve a monument that represents Italy in the world. Similarly, Brunello Cucinelli, the “King of Cashmere,” is helping defray the cost of restoring the Arch of Augustus. This Etruscan artifact, which dates to the third century b.c., is located in Perugia, the capital of the Umbrian region.

To make up for the shortfall in Venice, corporate sponsors such as Coca-Cola and Bulgari are allowed to erect large billboards near tourist attractions; the city uses the advertising revenue to fund renovations (see Exhibit 4-14). For example, Coca-Cola billboards were recently put up near the Piazza San Marco. Renata Cordello, the official at the Ministry of Culture responsible for renovations, explains, “We’re just not in a position to say ‘no’ to money, not for aesthetic reasons. I can’t turn down the image of a bottle when there are pieces of the Palazzo Ducale falling to the ground.”

Exhibit 4-14 Bulgari and other well- known luxury brands are funding the restoration, renovation, and mainte- nance of famous Venetian landmarks. In exchange for financial support, companies are allowed to place bill- board advertising on buildings that are popular tourist destinations. Although the Venice Foundation considers such funding sources to be crucial, critics say that Renaissance landmarks should not be used for commercial purposes. Source: Marco Secchi/Getty Images.

As noted earlier, tourism in Venice has been the subject of consid- erable debate. Among the questions being raised are the following: Is Venice dying from too much tourism? Should tourism be limited? Should some kind of action be taken to attract a “different kind of tourist” and a “different kind of tourism” than the typical “daytripper” on a package tour? Or, does Venice need every dollar (or euro, yuan, or ruble) it can get?

A sign of the times, literally and figuratively, is the billboards that have been erected on popular tourist landmarks undergoing renova- tion. Vicenzo Casali is a native of Venice and an architect who spe- cializes in urban design projects. As Casali wryly observes, one recent billboard in Piazza San Marco promoted a designer shopping mall located outside the city; in essence, the billboard’s message was that people who come to Venice should do an about face and leave Venice to do some shopping! Is it possible, Casali wonders, that such advertis- ers actually have no interest in restoration per se, but rather are using Venice for a different purpose—a purely commercial one?

Nathalie Salas, a marketing consultant living in Italy, believes that “passive tourism” poses a threat to the sustainability of Venice’s tourist industry. But, rather than place the blame on the tourists themselves, Salas believes the problem arises in part from the way Venice is being positioned. The paradox of Venice, says Salas, is that while it is the most unique city in the world, it is also gradually becoming standard- ized. Like other cities, Venice offers branded entertainment such as the Hard Rock Café (featuring “mouth-watering American classics”) and

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global hotel chains. What does this lead to? Standardized tourists and standardized products, Salas says.

Salas proposes a shift from a style of tourism that focuses on tan- gible resources—for example, landmarks such as the Rialto Bridge and Piazza San Marco—to one that emphasizes intangible resources such as lifestyle and image. Instead of the stereotypical sightseeing holiday, Salas suggests offering visitors a chance to experience everyday Vene- tian life with itineraries that are “off the beaten path” and that will allow visitors to interact with the city in a more sustainable way. She also believes tourism’s outreach should be oriented less toward first- time customers and more toward repeat visitors. In short, Salas believes that an emphasis on quality instead of quantity is one way to address the tourism issue in Venice.

Jane da Mosto is a longtime Venice resident and an advisor to the Venice in Peril Fund, a British nongovernmental organization (NGO). On the issue of whether tourism is killing or saving Venice, she poses the following questions: What is the “real” Venice? And, what do we want it to be? Is it a unified city and lagoon whose symbiosis dates back 1,500 years? Or, is it simply a collection of monuments and landmarks in the middle of the city? As for those who complain about Venice being overrun with tourists, da Mosto reminds them that a virtuous cycle may be at work: Venice’s cultural riches provide the energy and resources for socioeconomic development that attracts creative people. They, in turn, contribute to further socioeconomic development and economic prosperity that results in a revitalization of the existing culture.

Dominic Standish is the author of a recent book in which he explores the problem of Venetian cultural conservation and economic development. Overall, Standish views tourism in Venice as more of an opportunity than a threat. While acknowledging some of the problems associated with tourism, Standish believes the root of the problem lies in city management and public policy. In his book, he argues for both modernization and development, and outlines a multipoint plan that addresses various pressing needs in these areas.

For example, there is a need to modernize accommodations for residents as well as develop new facilities to serve the needs of students and visitors. Speaking about local opposition to building new hotels on the mainland, Standish notes that such opposition increases the likeli- hood that global chains will purchase historic palaces in Venice and con- vert them into hotels. Standish is opposed to such conversions. He does support plans to develop a new maritime passenger services facility that will allow cruise ships to dock farther away from residential areas. Tessera City, a new mixed-use development near Marco Polo airport, should also relieve some of the tourism pressure on Venice. Standish supports plans to develop a subway system connecting the airport to Venice. In addition, he notes, Venice’s sewage system badly needs upgrading, despite estimates that the cost could total €250 million.

Meanwhile, a massive effort dubbed the MOSE Project is under way to prevent flooding. The name was chosen deliberately because of the biblical account of Moses parting the Red Sea. Underwater

flood barriers are being installed in the lagoon; consisting of huge steel sheets, these barriers can be raised to prevent flooding and then lowered back to the seabed when not needed. Environmentalists are concerned about the impact the barriers will have on the lagoon’s fragile ecosystem. The system was scheduled to become operational in mid-2015, but construction delays have pushed that date out to 2022 at the earliest.

Venice is not the only city struggling to balance commercial inter- ests with the concerns of conservationists and preservationists. In the United States, the proposed development of a new $35 million cruise ship terminal in Charleston, South Carolina, has many locals up in arms. Opponents are concerned about the new facility’s impact on the historic district where the port is located. The mayor of Charleston thinks the plan’s critics have it all wrong. He points out that some 1,700 vessels use the port each year but only 85 of them—5 percent—are cruise ships. “This is not a theme park,” he said. “One of the authentic parts of Charleston is that we are an international port.”

Discussion Questions 4-10. Which critical-thinking issues are raised in the case? 4-11. The case presents various points of view on the issue of tour-

ism in Venice. Whose perspective(s), if any, do you agree with?

4-12. Should companies that contribute to historic renovation proj- ects be allowed to place advertising on the buildings?

4-13. In June 2011, city officials in Venice approved a tax on tour- ists staying in the city. Do you think this is a fair and effective way to generate revenue and limit the number of tourists?

4-14. Do you think that Venice’s tourist officials should use market- ing communications to provide information that would direct visitors to areas of the city that are “less touristy”?

Sources: Dominic Standish, Venice in Environmental Peril? Myth and Reality (Lanham, MD: University Press of America, 2012); Katherine Q. Seelye, “Cruise Ships Made Town a Destination. But Did They Ruin It?” The New York Times (January 1, 2018), p. A11; Jason Horowitz, “Too Big to Sail? A Plan for Venice’s Cruise-Ship Armada,” The New York Times (November 9, 2017), p. A9; Jason Horowitz, “‘Eat and Flee’ Tourism Rises, Threatening a City’s Identity,” The New York Times (August 2, 2017), p. A7; Nick Squires, “Venetians Deliver Blunt Message to Tourists: ‘You Are Ruin- ing Our City,’” The Telegraph (August 19, 2016), p. 3; Giovanni Legorano, “Venice Fights to Keep Its Finances Afloat,” The Wall Street Journal (January 2, 2016), p. A22; Stephanie Kirchgaessner, “Cruise Ship Access to Venice at Stake in Mayor Election,” The Guardian (June 11, 2015), p. 7; Jad Mouawad, “Too Big to Sail?” The New York Times (October 28, 2013), pp. B1, B4; “Saving Venice with Fellini Flicks,” The Wall Street Journal (March 20, 2013), p. A21; Kim Severson, “This Charleston Harbor Battle Is Over Cruise Ships”, The New York Times (February 19, 2013). Giovanni Legorano and Deborah Ball, “The Trouble with Harry’s: Venice Bar Fights Last Call,” The Wall Street Journal (December 17, 2012), p. B1; “Tod’s Founder to Restore Roman Colosseum,” Associated Press (January 21, 2011); Elisabetta Povoledo, Venice Tries to Balance Effects of Visits by Big Ships”, The New York Times (May 12, 2011). Elisabetta Povoledo, “Walls of Ads Test Venice’s Patience”, The New York Times (September 13, 2010).

MyLab Marketing Go to the Assignments section of your MyLab to complete these writing exercises.

4-15. Discuss the contrast between the United States and Japan in terms of traditions and organizational behavior and norms.

4-16. Explain the self-reference criterion (SRC) and its significance to global marketers. Conduct exploratory research and find examples of product failures that might have been avoided through the application of the SRC.

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1John Keay, The Honourable Company: A History of the East India Company (New York, NY: Macmillan, 1991), p. 81. 2Geert Hofstede and Michael Harris Bond, “The Confucius Connection: From Cultural Roots to Economic Growth,” Organizational Dynamics (Spring 1988), p. 5. 3George P. Murdock, “The Common Denominator of Culture,” in The Science of Man in the World Crisis, Ralph Linton, ed. (New York, NY: Columbia University Press, 1945), p. 145. 4The following discussion is adapted from Dana L. Alden, Jan-Benedict Steen- kamp, and Rajeev Batra, “Brand Positioning through Advertising in Asia, North America, and Europe: The Role of Global Consumer Culture,” Journal of Mar- keting 63, no. 1 (January 1999), pp. 75–87. 5Milton Rokeach, Beliefs, Attitudes, and Values (San Francisco, CA: Jossey-Bass, 1968), p. 160. 6Bill Britt, “Upstart Cola Taps Anti-War Vibe,” Advertising Age (February 24, 2003), p. 1. See also Digby Lidstone, “Pop Idols,” Middle East Economic Digest (August 22, 2003), p. 4. 7Meg Carter, “New Colas Wage Battle for Hearts and Minds,” Financial Times (January 8, 2004), p. 9. 8Natalie Angier, “True Blue Stands out in an Earthy Crowd,” The New York Times (October 23, 2012), pp. D1, D3. See also Natalie Angier, “Blue through the Cen- turies: Sacred and Sought After,” The New York Times (October 23, 2012), p. D3. 9Thomas J. Madden, Kelly Hewett, and Martin S. Roth, “Managing Images in Different Cultures: A Cross-National Study of Color Meanings and Preferences,” Journal of International Marketing 8, no. 4 (2000), p. 98. 10Te-Ping Chen, “In China, Women Graduates Are Married to Gowns, Not Caps,” The Wall Street Journal (July 2, 2014), pp. A1, A12. 11Laurence E. Jacobs, Charles Keown, Reginald Worthley, and Kyung-I Ghymn, “Cross-Cultural Colour Comparisons: Global Marketers Beware!” International Marketing Review 8, no. 3 (1991), pp. 21–30. 12Martin Stokes, Ethnicity, Identity, and Music: The Musical Construction of Place (Oxford, UK: Berg, 1994). 13Motti Regev, “Rock Aesthetics and Musics of the World,” Theory, Culture & Society 14, no. 3 (August 1997), pp. 125–142. 14Amy Kamzin, “Domino’s Deadline to Deliver,” Financial Times (January 18, 2013), p. 10. 15Preetika Rana, “In India, Forget Doughnuts, It’s Time to Make the Tough Guy Chicken Burger,” The Wall Street Journal (November 29–30, 2014), p. A1. 16Fara Warner, “Savvy Indian Marketers Hold Their Ground,” The Wall Street Journal Asia (December 1, 1997), p. 8. 17Jacqueline Friedrich, “All the Rage in Paris? Le Fooding,” The Wall Street Jour- nal (February 9, 2001), p. W11. 18Evan Ramstad and Gary McWilliams, “Computer Savvy: For Dell, Success in China Tells Tale of Maturing Market,” The Wall Street Journal (July 5, 2005), pp. A1, A8. 19Recounted in J. Byrne Murphy, Le Deal (New York, NY: St. Martins, 2008), pp. 60–61. 20Dan Bilefsky and Christopher Lawton, “In Europe, Marketing Beer as ‘ American’ May Not Be a Plus,” The Wall Street Journal (July 21, 2004), p. B1. 21James Hookway, “IKEA’s Products Make Shoppers Blush in Thailand,” The Wall Street Journal (June 5, 2012), pp. A1, A16. 22Greg Steinmetz and Carl Quintanilla, “Tough Target: Whirlpool Expected Easy Going in Europe, and It Got a Big Shock,” The Wall Street Journal (April 10, 1998), pp. A1, A6. 23Renzo Rosso / Alice Rawsthorn, “A Hipster on Jean Therapy,” Financial Times (August 20, 1998), p. 8.

24Meeyoung Song, “How to Sell in Korea? Marketers Count the Ways,” The Wall Street Journal (August 24, 2001), p. A6. 25Kevin Voigt, “At Matsushita, It’s a New Word Order,” Asian Wall Street Journal Weekly (June 18–24, 2001), p. 1. 26See Anthony C. Di Benedetto, Miriko Tamate, and Rajan Chandran, “Devel- oping Strategy for the Japanese Marketplace,” Journal of Advertising Research (January–February 1992), pp. 39–48. 27Tom Burns, “Spanish Telecoms Visionary Beholds a Brave New World,” Financial Times (May 2, 1998), p. 24. 28John L. Graham and Roy A. Heberger, Jr., “Negotiators Abroad—Don’t Shoot from the Hip,” Harvard Business Review 61, no. 4 (July–August 1983), pp. 160–168. 29Kate Fox, Watching the English: The Hidden Rules of English Behavior ( Boston. MA: Nicholas Brealey Publishing, 2014), p. 287. 30George Ritzer, The McDonaldization Thesis (London, UK: Sage Publications, 1998), p. 8. 31Rosa Jackson, “Michelin Men,” Financial Times (November 24/25, 2012), p. R8. 32Amy Barrett, “French Discounter Takes Cheap Chic World-Wide,” The Wall Street Journal (May 27, 1998), p. B8. 33Christine Muhlke, “A Slow Food Festival Reaches out to the Uncommit- ted,” The New York Times (September 3, 2008), p. D12. See also Alexander Stille, “Slow Food’s Pleasure Principles,” The Utne Reader (May/June 2002), pp. 56–58. 34Edward T. Hall, “How Cultures Collide,” Psychology Today (July 1976), pp. 66–97. 35Geert Hofstede and Michael Harris Bond, “The Confucius Connection: From Cultural Roots to Economic Growth,” Organizational Dynamics (Spring 1988), p. 5. 36In some articles, Hofstede refers to this dimension as “Confucian dynamism” because it is highest in Japan, Hong Kong, and Taiwan. 37Masaru Ibuka / James Lardner, Fast Forward: Hollywood, the Japanese, and the VCR Wars (New York, NY: NAL Penguin, 1987), p. 45. 38Scott A. Shane, “The Effect of Cultural Differences in Perceptions of Trans- action Costs on National Differences in the Preference for International Joint Ventures,” Asia Pacific Journal of Management 10, no. 1 (1993), pp. 57–69. 39J. Byrne Murphy, Le Deal (New York, NY: St. Martin’s Press, 2008), p. 109. 40Christina Larson, “Office Cultures: A Global Guide,” Bloomberg Businessweek (June 17, 2013), p. 15. 41James A. Lee, “Cultural Analysis in Overseas Operations,” Harvard Business Review (March–April 1966), pp. 106–114. 42This section draws from Everett M. Rogers, Diffusion of Innovations (New York, NY: Free Press, 1962). 43For an excellent application and discussion of adopter categories, see Malcolm Gladwell, The Tipping Point (New York, NY: Little, Brown, 2000), Chapter 6. 44Hirokazu Takada and Dipak Jain, “Cross-National Analysis of Diffusion of Consumer Durable Goods in Pacific Rim Countries,” Journal of Marketing 55 (April 1991), pp. 48–53. 45Charles M. Schaninger, Jacques C. Bourgeois, and Christian W. Buss, “French– English Canadian Subcultural Consumption Differences,” Journal of Marketing 49 (Spring 1985), pp. 82–92. 46Kate Fox, Watching the English: The Hidden Rules of English Behavior ( Boston, MA: Nicholas Brealey Publishing, 2014), p. 437. 47Deborah Ball, “Lattes Lure Brits to Coffee,” The Wall Street Journal ( October 20, 2005), pp. B1, B6. See also Marco R. della Cava, “Brewing a British Coup,” USA Today (September 16, 1998), pp. D1, D2.

Notes

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5 The Political, Legal, and Regulatory Environments L E A R N I N G O B J E C T I V E S

5-1 Understand the elements of a coun- try’s political environment that can impact global marketing activities.

5-2 Define international law and describe the main types of legal systems found in different parts of the world.

5-3 Understand the most important busi- ness issues that can lead to legal problems for global marketers.

5-4 Describe the available alternatives for conflict resolution and dispute settle- ment when doing business outside the home country.

5-5 In general terms, outline the regulatory environment in the Euro- pean Union.

CASE 5-1

Travis Kalanick and Uber

Travis Kalanick is an entrepreneur who has achieved a level of success and notoriety rarely matched in the modern era. Kalanick is cofounder of Uber Technologies, the parent company of the wildly popular Uber ride-sharing service.

Kalanick, along with friend and cofounder Garrett Camp, launched the Uber service in San Fran- cisco in 2010. By now, most people are familiar with the way Uber works: Customers download the Uber app to a smartphone and set up an account that includes mobile payment information. Then, when the customer needs a ride, he or she opens the app and types in a destination. The app’s GPS identifies the customer’s current location and calculates an estimated fare, distance, and trip time to the destination. If the fare is acceptable, the customer then requests a car and driver.

By the end of 2014, Uber had raised venture capital that valued the company at nearly $40 bil- lion! The service was available in more than 250 cities worldwide, and some industry observers hailed the company as a prime example of digital technology disrupting an established industry. Uber’s rapid growth was another example that the “sharing economy,” also known as “collaborative consump- tion,” was gaining traction, as evidenced by the success of Lyft (an Uber competitor), room rental service Airbnb, and others.

However, Uber has encountered resistance as its popularity has grown. In London and other major cities, drivers have staged demonstrations and mass protests against what they claim is unfair competition from unregulated drivers. Several cities, including Brussels, Miami, and Las Vegas, have banned Uber. In Brussels, a court fines drivers who use the service. Uber has been paying the fines and providing legal support. Regulators in Germany succeeded in obtaining a temporary injunction banning the service; after a series of appeals and counter-appeals, the injunction was lifted.

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The European Commission, the executive arm of the EU, conducted an inquiry to determine whether Uber was an “infor- mation-society service company,” as Uber maintained, or the equivalent of a taxi service, as the French government alleged (see Exhibit 5-1).

Kalanick’s company provides a case study of the impact that the political, legal, and regulatory environments can have on international trade and global marketing activities. Each of the world’s national governments regulates trade and commerce with other countries and attempts to control the access outside enterprises have to their country’s national resources. Every coun- try has its own unique legal and regulatory system that affects the operations and activities of the global enterprise, including the global marketer’s ability to address market opportunities and threats. Laws and regulations constrain the cross-border

movement of products, services, people, money, and know-how. The global marketer must attempt to comply with each set of national—and, in some instances, regional—constraints. The fact that laws and regulations are frequently ambiguous and continu- ally changing hampers these efforts. And, in the case of Uber, new technologies are evolving at a faster pace than laws and regulations can follow.

In this chapter, we consider the basic elements of the political, legal, and regulatory environments of global marketing, including the most pressing current issues, and offer some suggestions for dealing with those issues. Some specific topics—such as rules for exporting and importing industrial and consumer products; stan- dards for health and safety; and regulations regarding packaging, labeling, advertising, and promotion—are examined in later chap- ters devoted to individual marketing mix elements.

5-1 The Political Environment Global marketing activities take place within the political environment of governmental institu- tions, political parties, and organizations through which a country’s people and rulers exercise power. As we saw in Chapter 4, each nation has a unique culture that reflects its society. Each nation also has a political culture that reflects the relative importance of the government and legal system and provides a context within which individuals and corporations understand their relationship to the political system. Any company doing business outside its home country

5-1 Understand the elements of a country’s political environment that can impact global marketing activities.

Exhibit 5-1 Protests against Uber have been staged in Spain, France, the United Kingdom, and other countries. Source: Lora Grigorova/NEWZULU/ CrowdSpark/Alamy Stock Photo.

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should carefully study the political culture in the target country and analyze salient issues aris- ing from the political environment. These issues include the governing party’s attitude toward sovereignty, present and future levels of political risk, tax policies, the threat of equity dilution, and the risk of expropriation.

Nation-States and Sovereignty Sovereignty can be defined as supreme and independent political authority. A century ago, U.S. Supreme Court Chief Justice Melville Fuller said, “Every sovereign state is bound to respect the independence of every other sovereign state, and the courts in one country will not sit in judgment on the acts of government of another done within its territory.” The late Richard Stanley, founder and former president of the Stanley Foundation, offered the following concise description:

A sovereign state was considered free and independent. It regulated trade, managed the flow of people into and out of its boundaries, and exercised undivided jurisdiction over all persons and property within its territory. It had the right, authority, and ability to conduct its domestic affairs without outside interference and to use its international power and influence with full discretion.1

Government actions taken in the name of sovereignty occur in the context of two important criteria: a country’s stage of development, and the political and economic systems in place in the country.

As outlined in Chapter 2, the economies of individual nations may be classified as industrial- ized, newly industrializing, or developing. Many governments in developing countries exercise control over their nations’ economic development by passing protectionist laws and regulations. Their primary objective is to encourage economic development by protecting emerging or strategic industries in the home country, but government leaders can also engage in cronyism and provide favors for family members or “good friends.”

Conversely, when many nations reach advanced stages of economic development, their gov- ernments declare that (in theory, at least) any practice or policy that restrains free trade is illegal. Antitrust laws and regulations are established to promote fair competition. Advanced-country laws often define and preserve a nation’s social order; these laws may extend to political, cultural, and even intellectual activities and social conduct.

In France, for example, laws forbid the use of foreign words such as le weekend or le market- ing in official documents. Also, a French law that went into effect in 1994 required that at least 40 percent of the songs played by popular radio stations be in the French language. The rationale? To protect against an “Anglo-Saxon cultural invasion.” In 2016, the quota was reduced to 35 percent, as Daft Punk and other French recording artists released music with English-language lyrics to appeal to a global audience. Companies that may be affected positively or negatively by legislative acts sometimes use advertising as a vehicle for expressing their positions on issues (see Exhibit 5-2).

We also noted in Chapter 2 that most of the world’s economies combine elements of mar- ket and nonmarket systems. The sovereign political power of a government in a predominantly nonmarket economy reaches quite far into the economic life of a country. Cuba is a case in point. By contrast, in a capitalist, market-oriented democracy, that power tends to be much more constrained. A current global phenomenon in both nonmarket and market structures is the trend toward privatization, which reduces direct governmental involvement as a supplier of goods and services in the country’s economy. In essence, each act of privatization moves a nation’s economy further in the free market direction.

This trend can be traced to the late Margaret Thatcher’s economic policies in the 1980s when she was British prime minister. British Airways, British Petroleum, British Steel, and Rolls-Royce were some of the companies that were privatized under so-called Thatcherite economics. The policy was highly controversial: Some pilloried the prime minister for visiting misery on Great Britain, while others hailed her for taking bold steps to spur the economy. More recently, the economic crisis in the EU prompted Italy’s government to sell 5.7 percent of its stake in Enel,

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the country’s largest power utility. The Italian government is also considering selling part of its stake in Eni, an energy company. Italy’s debt totals more than $2 trillion, and the government is seeking ways to raise millions of euros.

Some observers believe global market integration is eroding national economic sover- eignty. Economic consultant Neal Soss noted, “The ultimate resource of a government is power, and we’ve seen repeatedly that the willpower of governments can be overcome by persistent attacks from the marketplace.”2 Is this a disturbing trend? If the issue is framed in terms of marketing, the concept of exchange comes to the fore: Nations may be willing to give up sovereignty in return for something of value. If countries can increase their share of world trade and increase national income, perhaps they will be willing to cede some sovereignty.

In Europe, individual EU countries gave up the right to have their own currencies, ceded the right to set their own product standards, and have made other sacrifices in exchange for improved market access. The Brexit issue can be viewed as a mandate by Britons to regain some of what their nation lost to the “collective sovereignty” of the EU28.

Separatist and secessionist movements are also undercutting the traditional sovereignty of the nation-state. Within Italy, for example, voters in the Lombardy and Veneto regions in the wealthy north are increasingly reluctant to provide the tax base for subsidizing the poorer south.4 Such intra-country regionalism is also seen Spain, where Catalonia has sought greater economic independence and the right to become a sovereign state. Meanwhile, in Scotland, calls for inde- pendence from the United Kingdom continue to be heard.

Exhibit 5-2 Many global companies use corporate advertising to advocate their official position on trade-related issues. In the mid-1990s, Mobil mounted an advocacy campaign that addressed a number of topics of public interest, including trade issues, clean air, alternative fuels, and health care reform. This op-ed urged the U.S. Congress to approve GATT. Source: Courtesy of Exxon Mobil Corporation.

“The country may lag behind in some respects, but it has a 1,000 year his- tory, and Russia will not trade its sovereignty for anything.”3

Russian President Vladimir Putin

“What we will no longer do is enter into large trade agreements that tie our hands, surrender our sover- eignty, and make meaning- ful enforcement practically impossible.”

“Trump Pitches ‘America First’ Trade Policy at Asia-Pacific Gathering”, The New York Times Company (November 10, 2017)

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Political Risk Political risk is the possibility of a change in a country’s political environment or government policy that would adversely affect a company’s ability to operate effectively and profitably. As Ethan Kapstein, a professor at INSEAD, has noted:

Perhaps the greatest threats to the operations of global corporations, and those that are most difficult to manage, arise out of the political environment in which they conduct their busi- ness. One day, a foreign company is a welcome member of the local community; the next day, opportunistic politicians vilify it.5

Political risk can deter a company from investing abroad. Put another way, when a high level of uncertainty characterizes a country’s political environment, the country may have difficulty attracting foreign investment.

As Professor Kapstein has pointed out, executives often fail to conceptualize political risk because they have not studied political science—which means they have not been exposed to the issues that students of politics ask about the activities of global companies. (A strong argument for a liberal arts education!) The modern corporation is coming under increasing scrutiny from business and government leaders as well as the general public; the same is true of free-market capitalism in general. This trend can be viewed as contributing to political risk.

Without a doubt, current events must be part of the corporate information agenda; for exam- ple, business managers need to stay apprised of the formation and evolution of political parties as well as the public’s perception of political institutions. The emergence of far-right parties such as the Alternative for Germany (AfD), whose success in the 2017 national elections has been described as a “political earthquake,” is a case in point.6 Other potential disruptors of continental Europe’s established political order include Austria’s Freedom Party, France’s National Front, and the Party for Freedom in the Netherlands.

Valuable sources of current-events information include the Financial Times, The Economist, and other daily and weekly business periodicals. The Economist Intelligence Unit (EIU; www.eiu. com), the Geneva-based Business Environment Risk Intelligence (BERI; www.beri.com), and the PRS Group (www.prsgroup.com) publish up-to-date political risk reports on individual country markets. Note that these commercial sources vary somewhat in the criteria they consider to con- stitute political risk. For example, BERI focuses on societal and system attributes, whereas the PRS Group focuses more directly on government actions and economic functions (see Table 5-1).

“If you want to be in grow- ing markets you have to assume and expect some volatility. You can’t be in growth markets without presuming there will be risks.”7

Jørgen Buhl Rasmussen, CEO, Carlsberg

TA B L E 5 - 1 Categories of Political Risk

EIu BERI PRS Group

War Fractionalization of the political spectrum Political turmoil probability

Social unrest Fractionalization by language, ethnic, and/or religious groups Equity restrictions

Orderly political transfer Restrictive/coercive measures required to retain power Local operations restrictions

Politically motivated violence Mentality (xenophobia, nationalism, corruption, nepotism) Taxation discrimination

International disputes Social conditions (including population density and wealth distribution) Repatriation restrictions

Change in government/pro-business orientation

Organization and strength of forces for a radical government Exchange controls

Institutional effectiveness Dependence on and/or importance to a major hostile power Tariff barriers

Bureaucracy Negative influences of regional political forces Other barriers

Transparency or fairness Societal conflict involving demonstrations, strikes, and street violence Payment delays

Corruption Instability as perceived by assassinations and guerilla war Fiscal or monetary expansion

Crime Labor costs

Foreign debt

Source: Adapted from Llewellyn D. Howell, The Handbook of Country and Political Risk Analysis, 2nd ed. (East Syracuse, NY: The PRS Group, 1998). Reprinted by permission.

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As noted in Case 5-2, the political maneuverings of the Russian government create a high level of political risk for companies that seek to do business in that country. During his first two terms as Russia’s president (2000–2008), Vladimir Putin implemented reforms in an effort to pave the way for Russia’s membership in the World Trade Organization (WTO) and to attract for- eign investment. He also created an environment of uncertainty for foreign companies. In 2010, Paul Melling, a partner at the law firm of Baker & McKenzie, explained, “Many multinationals are thinking long and hard about how big their company in Russia ought to be—the bigger the company, the bigger the risk.”8 In 2018, Putin was elected to a fourth term as president, and the level of political risk remains elevated owing to tense relations between the White House and the Kremlin.

Meanwhile, the current political climate in the rest of Central and Eastern Europe is still characterized by varying degrees of uncertainty. In the Economic Intelligence Unit’s Political Instability Index rankings, Hungary, Albania, and Latvia are identified as having moderate levels of risk. Hungary and Latvia have already achieved upper-middle-income status. Now that Latvia has joined the euro zone, it is expected that lower interest rates will promote further economic growth. Moreover, political winds continue to shift in in the region: Poland and Hungary are two examples of countries that have recently elected populist governments. Common themes include opposition to adopting the euro, concern about welcoming migrants, and resistance to deeper integration with the EU.

Albania’s progress in transitioning to a market economy has attracted investment from abroad. Moreover, products that are labeled “Made in Albania” are finding acceptance in global markets. The evidence can be seen in the success of DoniAnna, a shoe manufacturer that was founded by Albanian entrepreneur Donika Mici.9 Diligent attention to risk assessment throughout the region should be ongoing to determine when the risk has decreased to levels acceptable to management.

Companies can purchase insurance to offset potential risks arising from the political envi- ronment. In Japan, Germany, France, Britain, the United States, and other industrialized nations, various agencies offer investment insurance to corporations doing business abroad. The Overseas Private Investment Corporation (OPIC; www.opic.gov) provides various types of political risk insurance to U.S. companies; in Canada, the Export Development Corporation performs a similar function.

Taxes Governments rely on tax revenues to fund social services, to support their military forces, and to cover other expenditures. Unfortunately, government taxation policies on the sale of goods and services frequently motivate companies and individuals to profit by not paying taxes. For example, in China, import duties have dropped since the country joined the WTO. Even so, many goods are still subject to double-digit duties plus a 17 percent value-added tax (VAT). As a result, signifi- cant quantities of oil, cigarettes, photographic film, personal computers, and other products are smuggled into China. In some instances, customs documents are falsified to undercount goods in a shipment; the Chinese military has allegedly escorted goods into the country as well.

Ironically, global companies can still profit from the practice; it has been estimated, for example, that 90 percent of the foreign cigarettes sold in China are smuggled in. For Philip Mor- ris, this means annual sales of $100 million to distributors in Hong Kong, which then smuggle the smokes across the border.10 High excise and VAT taxes can also encourage legal cross-border shopping as consumers go abroad in search of good values. In Great Britain, for example, the Wine and Spirit Association estimates that, on average, cars returning from France are loaded with 80 bottles of wine.

The diverse geographical activity of the global corporation also requires that special attention be given to tax laws. The issue is especially acute in the tech sector; many companies make efforts to minimize their tax liability by shifting the location in which they declare income. Facebook, Amazon, Google, and Apple are some of the companies that have shifted profits earned from intellectual property to low-tax jurisdictions such as Ireland and Luxembourg. In addition, tax minimization by foreign companies doing business in the United States costs the U.S. government billions of dollars each year in lost revenue. After the 2016 U.S. presidential election, companies looked to the Trump administration for broad-based tax reform. They were rewarded with a major tax cut that was passed in December 2017.

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As Benjamin Franklin famously said, “In this world nothing can be said to be certain, except death and taxes.” For global companies, the taxation issue is complicated by the fact that corporate tax rates vary widely around the world. Until recently, the United States had one of the world’s highest corporate taxes: 35 percent. When combined with state and local taxes, the rate for businesses rose to 39.1 percent. By contrast, Ireland’s corporate tax rate is only 12.5 percent.

Corporate tax reform was just one item on the agenda of U.S. President Donald Trump. Authorities have been stepping up their efforts to collect taxes from a range of global companies, includ- ing Amazon, Apple, Fiat Chrysler Automotive (FCA), and Starbucks. Members of the Organisation for Economic Co-operation and Devel- opment (OECD) and the Group of Twenty (G-20) are also working to reform tax rules.

In fall 2017, Margrethe Vestager, the EU’s competition commis- sioner, announced that Amazon would have to pay €250 million in back taxes after the European Commission ruled that the online giant’s Luxembourg operations had benefited from illegal state aid over a 10-year period. In 2004, Amazon had shifted certain intellec- tual property (IP) into a non-taxable holding company in Luxembourg that collected IP royalties from operations in Europe and then paid the parent company. The Brussels-based Commission alleged that the arrangement allowed Amazon to shift as much as three-fourths of its European profits into the holding company, thereby reducing its tax bill. As Vestager explained, under EU law, individual EU states cannot selectively grant tax benefits to some global companies but not others. Not surprisingly, Amazon denied any wrongdoing.

The previous year, in 2016, the Commission ruled that Ireland had granted Apple illegal tax advantages, and ordered the country to recover €13 billion in back taxes. Both Apple and Ireland disagreed with the Commission’s findings; Apple CEO Tim Cook called the investiga- tion and the resulting ruling “total political crap.” After Apple refused to pay, the Commission referred the case to the European Court of Justice (ECJ; see Table 5-5).

In the United Kingdom, where the corporate tax rate is 19 percent, legislation passed in 2015 was aimed at cracking down on transfer pricing—that is, intra-corporate transfers among different units of the same company. One of the first targets was Google, which had been investigated for diverting profits to its European headquarters in Ire- land. The United Kingdom is the tech giant’s second-largest market (the United States is number 1), and Google was found to have paid only £20.5 million in taxes on 2013 revenues of £5.6 billion. Although Google was not accused of tax evasion, the company was ordered to pay £130 million in back taxes. Even so, George Osborne, the author- ity who crafted the deal that became known as the “Google tax,” faced considerable backlash from critics who felt Google had gotten off lightly (see Exhibit 5-3).

With corporate tax structures and policies becoming high-profile political issues on both sides of the Atlantic, Netflix and eBay also got caught up in the controversy. For example, eBay was found to have reported one set of 2016 revenue figures to U.K. tax authorities, while

recording different figures in its U.S. filings. As for Netflix, €22 million in fees from its 6.5 million U.K. subscribers were posted as 2016 revenue to parent company Netflix International BV in the Netherlands. Accord- ing to an outside analysis, the streaming giant’s 2016 U.K. revenues actually amounted to more than $500 million.

In fall 2017, data compiled by Her Majesty’s Revenue & Customs (HMRC) were made public; they indicated that global companies had avoided 2016 tax obligations of as much as £5.8 billion. That amount was 50 percent higher than had previously been assumed.

Meanwhile, the U.S. Congress was hard at work hammering out a tax reform bill for President Donald Trump to sign before the end of the year. One of the measures would impose an excise tax of 20 percent on transfer payments, referring to cross-border purchases by a U.S. company from any of its foreign subsidiaries. Transactions with subsidiaries in the United States would not be subject to the levy; the measure reflected Trump’s pronouncements about putting “America First.” Several European finance minis- ters denounced the proposed tax as discriminatory and a potential violation of WTO rules.

Sources: Madison Marriage, “Tax Lost to Multinationals Shifting Profits Overseas Climbs to £5.8bn,” Financial Times (October 25, 2017), p. 1; Rochelle Toplensky, “Tech Giants Hit by EU Tax Crackdown,” Financial Times (October 5, 2017), p. 17; Tom Fairless and Shayndi Raice, “Firms Drawn to U.K. for Tax Deals,” The Wall Street Journal (July 29, 2014), p. C3; Kiuz Hoffman and Hester Plumridge, “Race to Cut Taxes Fuels Urge to Merge,” The Wall Street Journal (July 14, 2014), pp. A1, A2; Hester Plumridge, “EU Tax Inquiry Adds to Deals Buzz,” The Wall Street Journal (June 16, 2014), p. B8; Michelle Hanlon, “The Lose–Lose Tax Policy Driving Away U.S. Business,” The Wall Street Journal (June 12, 2014), p. A15; Vanessa Houlder and Vincent Boland, “The Irish Inversion,” Financial Times (April 30, 2014), p. 9.

THE CULTURAL CONTEXT

EU to Global Companies: “Pay Your Taxes!”

Exhibit 5-3 Europeans have responded negatively to some of the policies of tech firms such as Uber and Airbnb. Protests have also erupted over allega- tions that Apple and other firms have not paid their fair share of taxes. Source: Anthony DEPERRAZ/NEWZULU/CrowdSpark/Alamy Stock Photo.

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Seizure of Assets The ultimate threat that a government can impose on a company is seizing its assets. Expropriation refers to governmental action to dispossess a foreign company or investor. Compensation is gener- ally provided, albeit often not in the “prompt, effective, and adequate” manner provided for by international standards. If no compensation is provided, the action is referred to as confiscation.11 International law is generally interpreted as prohibiting any act by a government to take foreign property without compensation. Nationalization is generally broader in scope than expropria- tion; it occurs when the government takes control of some or all of the enterprises in a particu- lar industry. International law recognizes nationalization as a legitimate exercise of government power, as long as the act satisfies a “public purpose” and is accompanied by “adequate payment” (i.e., payment that reflects fair market value of the property).

In 1959, for example, the newly empowered Castro government nationalized property belong- ing to American sugar producers in retaliation for new American import quotas on sugar. Castro offered compensation in the form of Cuban government bonds, which was adequate under Cuban law. Because Cuban-owned sugar producers were not nationalized, the U.S. State Department viewed this particular act as discriminatory and the compensation offered as inadequate.12 More recently, the late Venezuelan President Hugo Chávez nationalized Electricidad de Caracas, a utility company, and CANTV, a telecommunications provider. The Venezuelan government paid AES Corporation $739.3 million for Electricidad de Caracas; Verizon Communications received $572 million for its stake in CANTV.13

Short of outright expropriation or nationalization, the phrase creeping expropriation has been applied to limitations on economic activities of foreign firms in particular countries. These limi- tations have involved repatriation of profits, dividends, royalties, and technical assistance fees from local investments or technology arrangements. Other issues include increased local content requirements, quotas for hiring local nationals, price controls, and other restrictions affecting return on investment. Global companies have also suffered discriminatory tariffs and nontariff barriers that limit market entry of certain industrial and consumer goods, as well as discriminatory laws on patents and trademarks. Intellectual property restrictions have had the practical effect of eliminating or drastically reducing protection of pharmaceutical products.

In the mid-1970s, Johnson & Johnson (J&J) and other foreign investors in India had to submit to a host of government regulations to retain majority equity positions in companies they had already established. Many of these rules were later copied in whole or in part by Malaysia, Indonesia, the Philippines, Nigeria, and Brazil. By the late 1980s, after a “lost decade” in Latin America characterized by debt crises and low gross national product (GNP) growth, lawmakers reversed many of these restrictive and discriminatory laws. The goal was to again attract foreign direct investment and badly needed Western technology. The end of the Cold War and the restruc- turing of political allegiances contributed significantly to these changes.

When governments expropriate foreign property, a number of impediments can limit actions to reclaim that property. For example, according to the U.S. Act of State Doctrine, if the govern- ment of a foreign state is involved in a specific act, the U.S. courts will not get involved. Instead, representatives of expropriated companies may seek recourse through arbitration at the World Bank’s International Centre for Settlement of Investment Disputes (ICSID). It is also possible to buy expropriation insurance from either a private company or a government agency such as OPIC.

The expropriation of copper companies operating in Chile in the early 1970s shows the effect that companies can have on their own fate. Companies that strenuously resisted government efforts to introduce home-country nationals into the company management were expropriated outright; those companies that made genuine efforts to follow Chilean guidelines were allowed to remain under joint Chilean–U.S. management.

5-2 International Law International law may be defined as the rules and principles that nation-states consider binding upon themselves. International law pertains to property, trade, immigration, and other areas that have traditionally been under the jurisdiction of individual nations. International law applies only to the extent that countries are willing to assume all rights and obligations in these areas.

5-2 Define international law and describe the main types of legal systems found in different parts of the world.

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The roots of modern international law can be traced back to the seventeenth-century Peace of Westphalia. Early international law was concerned with waging war, establishing peace, and handling other political issues such as diplomatic recognition of new national entities and governments.

Although elaborate international rules gradually emerged—covering, for example, the status of neutral nations—the creation of laws governing commerce proceeded on a state-by-state basis in the nineteenth century. International law still has the function of upholding order, although in a broader sense than laws dealing with problems arising from war. At first, international law was essentially an amalgam of treaties, covenants, codes, and agreements. As trade grew among nations, order in commercial affairs assumed increasing importance. The law had originally dealt only with nations as entities, but a growing body of law rejected the idea that only nations could be subject to international law.

Paralleling the expanding body of international case law in the twentieth and twenty-first cen- turies, new international judiciary organizations have contributed to the creation of an established rule of international law: the Permanent Court of International Justice (1920–1945); the Interna- tional Court of Justice (ICJ; www.icj-cij.org), which is the judicial arm of the United Nations and was founded in 1946; and the International Law Commission, established by the United States in 1947 (see Exhibit 5-4). Disputes arising between nations are issues of public international law, and they may be taken before the ICJ (also known as the World Court), located in The Hague. As described in the supplemental documents to the United Nations Charter, Article 38 of the ICJ Statute concerns international law:

The Court, whose function is to decide in accordance with international law such disputes as are submitted to it, shall apply:

a. international conventions, whether general or particular, establishing rules expressly recog- nized by the contesting states;

b. international custom, as evidence of a general practice accepted as law;

c. the general principles of law recognized by civilized nations;

d. subject to the provisions of Article 59, judicial decisions and the teachings of the most highly qualified publicists of the various nations, as subsidiary means for the determination of rules of law.

Exhibit 5-4 Located in The Hague, the International Court of Justice (ICJ) is the judicial arm of the United Nations. The court’s 15 judges are elected to 9-year terms. The primary function of the ICJ is to settle disputes among different countries according to inter- national law. The ICJ also offers advice on legal issues submitted by various international agencies. Source: Ankor Light/Shutterstock.

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Other sources of modern international law include treaties, international customs, judicial case decisions in the courts of law of various nations, and scholarly writings. What happens if a nation allows a case against it to be brought before the ICJ and then refuses to accept a judgment against it? The plaintiff nation can seek recourse through the United Nations Security Council, which can use its full range of powers to enforce the judgment.

Common Law versus Civil Law Private international law is the body of law that applies to disputes arising from commercial transactions between companies based in different nations. As noted, the laws governing com- merce emerged gradually, leading to a major split in legal systems among various countries.14 The story of law in the Western world can be traced to two sources: Rome, from which the con- tinental European civil-law tradition originated, and English common law, from which the U.S. legal system originated.

A civil-law country is one in which the legal system reflects the structural concepts and principles of the Roman Empire in the sixth century.

For complex historical reasons, Roman law was received differently and at vastly different times in various regions of Europe, and in the nineteenth century each European country made a new start and adopted its own set of national private-law codes, for which the Code Napoleon of 1804 was the prototype. But the new national codes drew largely on Roman law in conceptual structure and substantive content. In civil-law countries, the codes in which private law is cast are formulated in broad general terms and are thought of as completely comprehensive, that is, as the all-inclusive source of authority by reference to which every disputed case must be referred for decision.15

In a common-law country, many disputes are decided by reliance on the authority of past judicial decisions (cases). A common-law legal system is based on the concept of precedent, sometimes called stare decisis. Precedent is the notion that past judicial decisions on a particular issue are binding on a court when that same issue is presented later. This description is somewhat cryptic, because it is easier to observe the operation of precedent than to define it. Neverthe- less, precedent and stare decisis represent the fundamental principles of common-law decision making.

In its origins, the legal system of the United States was substantially influenced by English law. The English and American systems are common law in nature; that is, the law is pronounced by courts when there are no statutes to follow. Common-law systems are distinguishable from the civil-law systems found in much of Europe. Although much of contemporary American and English law is legislative in origin, the law inferred from past judicial decisions is equal in impor- tance to the law set down in codes. Common-law countries often rely on codification in certain areas—the U.S. Uniform Commercial Code (UCC) is one example—but these codes are not the all-inclusive, systematic statements found in civil-law countries.

The UCC, which has been fully adopted by 49 U.S. states, codifies a body of specifically designed rules covering commercial conduct. (Louisiana has adopted parts of the UCC, but its laws are still heavily influenced by the French civil code.) The host country’s legal system—that is, common or civil law—directly affects the form a legal business entity will take. In common- law countries, companies are legally incorporated by state authority. In civil-law countries, a contract between two or more parties who are fully liable for the actions of the company forms a company.

The United States, 9 of Canada’s 10 provinces, and other former colonies with an Anglo- Saxon history founded their systems on common law. Historically, much of continental Europe was influenced by Roman law and, later, the Napoleonic Code (see Exhibit 5-5). Asian countries are split on this issue: India, Pakistan, Malaysia, Singapore, and Hong Kong are common-law jurisdictions, whereas Japan, Korea, Thailand, Indochina, Taiwan, Indonesia, and China are civil- law jurisdictions. The legal systems in Scandinavia are mixed, displaying some civil-law attributes and some common-law attributes. Today, the majority of countries have legal systems based on civil-law traditions.

“To understand stare deci- sis, you have to understand English common law. To understand English com- mon law, you have to understand where England came from—the Norman Conquest, the Vikings, the Romans . . . “16

U.S. Supreme Court Justice Clar- ence Thomas

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As various countries in Eastern and Central Europe have wrestled with establishing legal systems in the post-Communist era, a struggle of sorts has broken out, with consultants represent- ing both common-law and civil-law countries trying to influence the process. In much of Central Europe, including Poland, Hungary, and the Czech Republic, the German civil-law tradition pre- vails. As a result, banks not only take deposits and make loans, but also engage in the buying and selling of securities.

In contrast, in Eastern Europe, and particularly in Russia, the U.S. system has had greater influence. Germany has accused the United States of promoting a system so complex that it requires legions of lawyers to interpret it. The U.S. response: The German system is outdated.17 In any event, the constant stream of laws and decrees issued by the Russian government creates an unpredictable, evolving legal environment. Specialized publications such as Anatoly Zhuplev’s Doing Business in Russia: A Concise Guide are important resources for anyone doing business in Russia or in the 11 other nations that comprise the Commonwealth of Independent States.

Islamic Law The legal system in many Middle Eastern countries is identified with the laws of Islam, which are associated with “the one and only one God, the Almighty.”18 In Islamic law, the sharia is a comprehensive code governing Muslim conduct in all areas of life, including business. The code is derived from two sources. First is the Koran, the Holy Book written in Arabic that is a record of the revelations made to the Prophet Mohammed by Allah. The second source is the Hadith, which is based on the life, sayings, and practices of Muhammad. In particular, the Hadith spells out the products and practices that are haram (forbidden). The orders and instructions found in the Koran are analogous to code laws; the guidelines of the Hadith correspond to common law. Any Westerner doing business in Malaysia or the Middle East should have, at minimum, a rudimentary understanding of Islamic law and its implications for commercial activities. Brewers, for example, must refrain from advertising beer on billboards or in local-language newspapers.

5-3 Sidestepping Legal Problems: Important Business Issues

Clearly, the global legal environment is very dynamic and complex, so the best course to follow is to get expert legal help. Nevertheless, the astute, proactive marketer can do a great deal to pre- vent conflicts from arising in the first place, especially concerning issues such as establishment,

5-3 Understand the most impor- tant business issues that can lead to legal problems for global marketers.

Exhibit 5-5 Civil-law systems rely more heavily on statutes and codes, such as the Napoleonic Code of 1804, in deciding cases. From these code provisions, abstract principles are rec- ognized and then applied in specific cases. By contrast, common-law courts find abstract principles in particular cases and then generalize what the law is from those principles. Source: L F File/Shutterstock.

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jurisdiction, patents and trademarks, antitrust, licensing and trade secrets, bribery, and advertising and other promotion tools. Chapter 13 and Chapter 14 discuss regulation of specific promotion activities.

Jurisdiction Company personnel working abroad should understand the extent to which they are subject to the jurisdiction of host-country courts. Jurisdiction pertains to global marketing insofar as it concerns a court’s authority to rule on particular types of issues arising outside of a nation’s borders or to exercise power over individuals or entities from different countries. Employees of foreign companies working in the United States must understand that U.S. courts have juris- diction to the extent that the company can be demonstrated to be doing business in the state in which the court sits. The court may examine whether the foreign company maintains an office, solicits business, maintains bank accounts or other property, or has agents or other employees in the state in question.

One trade-related dispute in which jurisdiction played an important role pitted Volkswagen AG against General Motors. After Volkswagen hired GM’s worldwide head of purchasing, José Ignacio López de Arriortúa, in 1992, his former employer accused him of taking trade secrets to his new company. Volkswagen accepted U.S. court jurisdiction in the dispute, although the company’s lawyers requested that the U.S. District Court in Detroit transfer the case to Germany.

Intellectual Property: Patents, Trademarks, and Copyrights Patents and trademarks that are protected in one country are not necessarily protected in another, so global marketers must ensure that all forms of intellectual property are registered in each country where business is conducted. A patent is a formal legal document that gives an inventor the exclusive right to make, use, and sell an invention for a specified period of time. Typically, the invention represents an “inventive leap” that is “novel” or “nonobvious.” A trademark is defined as a distinctive mark, motto, device, or emblem that a manufacturer affixes to a particular product or package to distinguish it from goods produced by other manufacturers (see Exhibit 5-6 and Exhibit 5-7). A copyright establishes ownership of a written, recorded, performed, or filmed creative work.

The Champagne region in France is world famous for producing sparkling wines. In some countries, including the United States, the use of the word “Champagne” is permitted on labels of sparkling wines that are not produced in the region. Due to international trade agreements, consumer rights laws, and legal precedents, more than 110 countries require wines labeled “Cham- pagne” to come exclusively from Champagne. Such protection assures consumers about the origin and authenticity of the products they buy; in other words, a wine labeled “Champagne” would only come from Champagne, France.

In 2005, representatives from several wine regions in the United States and the EU signed a Joint Declaration to Protect Wine Place & Origin. The organization now has members from more than nine countries spanning North America, Europe, and Australia. A 2006 Wine Accord signed by the United States and EU bans the misuse of 16 region names, including Champagne, by wine producers that request the use of these names on labels after March 2006 for wines that do not originate in those places. Wine producers that misused these region names prior to that date are still permitted to do so.

Infringement of intellectual property can take a variety of forms. Counterfeiting is the unau- thorized copying and production of a product. An associative counterfeit, or imitation, uses a product name that differs slightly from a well-known brand but is close enough that consumers will mistake it for the genuine product (see Exhibit 5-8). Another type of counterfeiting is piracy, the unauthorized publication or reproduction of copyrighted work. Counterfeiting and piracy are particularly important in industries such as motion pictures, recorded music, computer software, and textbook publishing. Companies in these industries produce products that can be easily dupli- cated and distributed on a mass basis.

The United States, in particular, has a vested interest in intellectual property protection around the globe, because it is home to many companies in the industries just mentioned.

“We have confidence in international law. When you invent something, it is necessary immediately to defend your creativity with intellectual patents. Italy has one of the poor- est records in Europe with regard to patents. We need to educate businessmen about this.”19

Mario Moretti Polegato, chair- man, Geox (Italy’s biggest shoe company)

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Exhibit 5-6 Kimberly-Clark Corpora- tion markets Kleenex brand tissues and is the registered trademark owner. Trademarks and other forms of intellec- tual property are valuable assets; this ad, which appeared in Advertising Age magazine, serves notice that Kimberly- Clark is protecting its investment in the Kleenex brand name. Companies take this type of action to prevent brand names from becoming generic terms. Source: Courtesy, Kimberly-Clark Corp. All Rights Reserved.

However, the United States faces significant challenges in countries such as China. As one expert has noted:

Current attempts to establish intellectual property law, particularly on the Chinese mainland, have been deeply flawed in their failure to address the difficulties of reconciling legal values, institutions, and forms generated in the West with the legacy of China’s past and the constraints imposed by its present circumstances.20

In the United States, where patents and trademarks are registered with the federal Patent and Trademark Office, the patent holder retains all rights for the life of the patent even if the product is not produced or sold. The Trademark Act of 1946, also known as the Lanham Act, covers trade- marks in the United States. President Ronald Reagan signed the Trademark Law Revision Act into law in November 1988; this act makes it easier for companies to register new trademarks. Patent and trademark protection in the United States is very good, and U.S. law relies on the precedent of previously decided court cases for guidance.

To register a patent in Europe, a company has the option of filing on a country-by-country basis or applying to the European Patent Office in Munich for patent registration in a specific number

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Exhibit 5-7 The Champagne region in France is world famous for producing sparkling wines. Learn more at www.champagne.com. Source: Champagne, USA.

Exhibit 5-8 Many counterfeit prod- ucts produced in China have garbled English names, such as clothing from “Hugo Bsos,” a “Haiyatt Hotel,” and “Spoony,” a misspelling of the popular Peanuts character. Source: Greg Baker/AP Images.

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of countries. A third option will soon be available: The Community Patent Convention will make it possible for an inventor to file for a patent that is effective in the 27 signatory nations. Currently, patent procedures in Europe are quite expensive, in part because of the cost of translating technical documents into all the languages of the EU countries; as of mid-2004, the translation issue remained unresolved.21 In July 1997, in response to complaints, the European Patent Office instituted a 19 percent reduction in the average cost of an eight-country patent registration.

The United States recently joined the World Intellectual Property Organization (WIPO). Governed by the Madrid agreement of 1891 and the more flexible 1996 Madrid Protocol, the WIPO system allows trademark owners to seek protection in as many as 74 countries with a single application and fee (see Exhibit 5-9).

Companies sometimes find ways to exploit loopholes or other unique opportunities offered by patent and trademark laws in individual nations. Sometimes, individuals register trademarks in local country markets before the actual corporate entity files for trademark protection. For example, Starbucks filed for trademark protection in 1997 in Russia but did not open any cafés there. Sergei Zuykov, an attorney in Moscow, filed a petition in court in 2002 to cancel Starbucks’ claim to the brand name because it had not been used in commerce. Technically, Zuykov was merely taking advantage of provisions in Russia’s civil code; even though he has been denounced as a “trademark squatter,” he was not violating the law. Zuykov then offered to sell Seattle-based Starbucks its name back for $600,000!22

The U.S. Patent and Trademark Office recently granted the Cuban government a trademark for Havana Club rum. This has resulted in a legal dispute between two global distilled-spirits mar- keting giants (see Exhibit 5-10). Bacardi Ltd., which is based in the Bahamas, was once a Cuban company. Bacardi sells its own Havana Club liquor in the U.S. market; this rum is produced in Puerto Rico. Bacardi acquired the rights to the brand from the Arechabala family, who fled Cuba in 1960 with the original recipe after Fidel Castro nationalized their company.

Since 1993, France’s Pernod Ricard has operated a 50-50 joint venture with the Cuban gov- ernment to produce Havana Club in Cuba, from Cuban sugar cane, for sale outside the United States. Pernod Ricard argues that its brand is authentic because it is a product of climate and growing conditions unique to Cuba, where the Havana Club logo is found in a variety of non- alcoholic products, including drinking glasses, T-shirts, and souvenirs. The new ruling opens the

Exhibit 5-9 Headquartered in Geneva, Switzerland, the World Intellectual Property Organization (WIPO) is one of 16 specialized subunits of the United Nations. WIPO’s mission is to promote and protect intellectual property throughout the world. WIPO views intellectual property as a critical element in economic development; it has created illustrated booklets that explain trademarks, copyright, and other intellectual property issues in a straightforward, easy-to-understand manner. Local agencies can access and print the booklets directly from WIPO’s Internet site. Source: Trademarks Comic Book (2004). World Intellectual Property Organization.

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way for Cuban-made Havana Club rum, which ranks number 1 in global rum consumption, to be marketed in the United States.23

International concern about intellectual property issues in the nineteenth century resulted in two important agreements. The first is the International Convention for the Protection of Industrial Property. Also known as the Paris Union or Paris Convention, the convention dates to 1883 and is now honored by nearly 100 countries. This treaty facilitates multicountry patent registrations by ensuring that once a company files in a signatory country, the company will be afforded a “right of priority” in other countries for 1 year from the date of the original filing. A U.S. company wishing to obtain foreign patent rights must apply to the Paris Union within 1 year of filing in the United States or risk a permanent loss of patent rights abroad.24

In 1886, the International Union for the Protection of Literary and Artistic Property was formed. Also known as the Berne Convention, this landmark agreement focuses on copyright protection. References to the convention pop up in some unexpected places. For example, sharp- eyed fans of The Ellen DeGeneres Show on the CBS television network will see the following message appear as the final credits roll:

Country of publication United States of America. WAD Productions, Inc. is the author of this film/motion picture for purposes of Article 15 (2) of the Berne Convention and all national laws giving in effect thereto.

Two other treaties deserve mention. The Patent Cooperation Treaty (PCT) has more than 100 contracting states, including Australia, Brazil, France, Germany, Japan, North Korea, South Korea, the Netherlands, Switzerland, the Russian Federation and other former Soviet republics, and the United States. The members constitute a union that provides certain technical services and cooperates in the filing, searching, and examination of patent applications in all member countries.

The European Patent Office administers applications for the European Patent Convention, which is effective in the EU and Switzerland. An applicant can file a single patent application covering all the convention states; the advantage is that the application will be subject to only one procedure of grant. Although national patent laws remain effective under this system, approved patents are effective in all member countries for a period of 20 years from the filing date.

In recent years, the U.S. government has devoted considerable diplomatic effort to improv- ing the worldwide environment for intellectual property protection. For example, China agreed to accede to the Berne Convention in 1992; on January 1, 1994, China became an official signa- tory of the PCT. Now, more than two decades later, Chinese companies are aggressively building their own patent portfolios. In 2015, two of the top three companies filing applications under the PCT were Chinese (see Table 5-2). Significant numbers of patents often signal that a company is a leader in innovation: As illustrated in Exhibit 5-11, DuPont has more than 7 million patents.

Effective June 7, 1995, in accordance with the General Agreement on Tariffs and Trade (GATT), new U.S. patents are granted for a period of 20 years from the filing date. Previously,

Exhibit 5-10 Americans may soon be able to buy “Made in Cuba” Havana Club rum following a ruling by the U.S. Patent and Trademark Office. An ongoing legal dispute pits Bacardi Ltd. against Pernod Ricard; both claim rights to the Havana Club brand. Source: ADALBERTO ROQUE/AFP/Getty Images.

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patents were valid for a 17-year term that began after they were granted. Thus, U.S. patent laws are now harmonized with those in the EU as well as Japan. Even with the changes, however, patents in Japan are narrower than those in the United States. As a result, companies such as Caterpillar have been unable to protect critical innovations in Japan because products very similar to those made by U.S. companies can be patented without fear of infringement.25

Another key issue is global patent protection for software. Although copyright law protects the computer code, it does not apply to the idea embodied in the software. Beginning in 1981, the U.S. Patent and Trademark Office extended patent protection to software. In the United States alone, Microsoft has tens of thousands of patents, of which the majority are software related. In Europe, software patents were not allowed under the Munich Convention; in June 1997, however, the EU indicated it was ready to revise patent laws so they would cover software.26

Exhibit 5-11 New products and inno- vations are the lifeblood of DuPont. Source: Courtesy of DuPont.

TA B L E 5 - 2 Companies Filing the Most International Patent Applications under PCT, 2015

company country Number of Patent Applications Filed

1. Huawei Technologies China 3,898

2. Qualcomm United States 2,442

3. ZTE China 2,155

4. Samsung Electronics South Korea 1,683

5. Mitsubishi Electric Japan 1,593

6. Telefonaktiebolaget LM Ericsson Sweden 1,481

7. LG Electronics South Korea 1,457

8. Sony Japan 1,381

9. Koninklijke Philips Netherlands 1,378

10. Hewlett-Packard Development United States 1,310

Source: World Intellectual Property Organization.

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In 2011, the U.S. government overhauled the patent system once again with the passage of the American Innovation Act. This act addressed the problem of so-called patent trolls who file multiple patent applications with the intent of getting large tech companies such as Facebook, Apple, and Google to pay large sums to settle patent claims. A new entity, the Patent Trial and Appeal Board, was created to expedite the process of resolving patent infringement cases. Some observers have noted that the push-back on patent protection has led to a decline of U.S. invest- ment in life sciences and software.27

Antitrust Antitrust laws in the United States and other countries are designed to combat restrictive busi- ness practices and to encourage competition. Agencies such as the U.S. Federal Trade Commis- sion, Japan’s Fair Trade Commission (FTC), and the European Commission enforce antitrust laws (see Exhibit 5-12). Some legal experts believe that the pressures of global competition have resulted in an increased incidence of price-fixing and collusion among companies. As then FTC Chairman Robert Pitofsky said, “For years, tariffs and trade barriers blocked global trade. Now those are falling, and we are forced to confront the private anticompetitive behavior that often remains.”28

A recent rash of antitrust actions brought in the United States against foreign companies has raised concerns that the United States is violating international law as well as the sovereignty of other nations. The U.S. antitrust laws are a legacy of the nineteenth-century trust-busting era and are intended to maintain free competition by limiting the concentration of economic power. The Sherman Act of 1890 prohibits certain restrictive business practices, including fixing prices, limit- ing production, allocating markets, and engaging in any other scheme designed to limit or avoid competition. The law applies to the activities of U.S. companies outside U.S. boundaries as well as to foreign companies conducting business in the United States.

In a precedent-setting case, a U.S. court found Nippon Paper Industries guilty of conspiring with other Japanese companies to increase fax paper prices in the United States. The Japanese government denounced the U.S. indictment of Nippon Paper in December 1995 as a violation of international law and Japan’s sovereignty. The meetings at which pricing strategies were allegedly discussed took place outside the United States; a U.S. federal judge struck down the indictment, ruling that the Sherman Act does not apply to foreign conduct. However, a federal appeals court in Boston reversed the decision. In his opinion, U.S. Circuit Judge Bruce Selya wrote, “We live in an age of international commerce, where decisions reached in one corner of the world can reverberate around the globe.”29

For the past four decades, the competition authority of the European Commission has had the power to prohibit agreements and practices that prevent, restrict, and distort competition. The Brussels-based Commission has jurisdiction over European-based companies as well as non- European-based ones that generate significant revenues in Europe, such as Google and Microsoft. For example, the Commission can block a proposed merger or joint venture, approve it with only minor modifications, or demand substantial concessions before granting approval. The Commis- sion begins with a preliminary study of a proposed deal; serious concerns can lead to an in-depth investigation lasting several months.

Since the mid-1990s, when Mario Monti became Europe’s antitrust chief, the Commis- sion has taken an increasingly activist approach (Monti’s nickname was “Super Mario”). In 2009, for example, Intel was fined $1.2 billion for antitrust violations. In 2017, following a seven-year investigation, competition commissioner Margrethe Vestager fined Alphabet Inc.’s Google unit €2.42 billion ($2.72 billion) for abusing its dominance in search (see Exhibit 5-13). Specifically, the Commission accused the tech giant of stifling competition by promoting its own Google Shopping comparison-shopping service over alternative services offered by rivals such as Foundem.co.uk.30 Meanwhile, the Commission has two other antitrust cases pending against Google.

There have also been calls on both sides of the Atlantic for regulators to challenge the domi- nance of online retailing giant Amazon. For example, during the 2016 U.S. presidential cam- paign, candidate Donald Trump singled out the company for criticism, complaining, “Amazon is controlling so much.” Amazon’s admirers point out that, despite—or perhaps because of—its size, Amazon is a “consumer first” company that offers low prices on some 400 million differ- ent products. The broader question is whether existing antitrust laws and regulations need to be

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Exhibit 5-12 Advanced Micro Devices (AMD) is the world’s second-largest supplier of microprocessors for PCs and servers and is recognized as a technol- ogy innovation leader. The dominant market leader, Intel, has held a con- stant market share, in the 80–90 per- cent range, over the years. AMD filed a lawsuit against Intel in U.S. Federal Court, claiming Intel uses its dominant market power to stifle or exclude com- petition and engage in anticompetitive behavior around the globe. Full-page ads were deployed to describe Intel’s conduct. Source: Advanced Micro Devices (AMD).

revised to reflect the Internet age. Some observers want companies such as Facebook and Google to be regulated as public utilities!

Table 5-3 summarizes some recent joint ventures, mergers, and other global business deals that have been subject to review by antitrust authorities in various regions of the world.

Because the interstate-trade clause of the Treaty of Rome applies to trade with third coun- tries, a company must be aware of the conduct of its affiliates. The European Commission also exempts certain cartels from Articles 85 and 86 of the treaty in an effort to encourage the growth of important businesses. The intent is to allow European companies to compete on an equal footing

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with Japan and the United States. In some instances, individual country laws in Europe apply to specific marketing mix elements. For example, some countries permit selective or exclusive product distribution. However, European Community law can take precedence.

In one case, Consten, a French company, had exclusive French rights to import and distrib- ute consumer electronics products from the German company Grundig AG. Consten sued another French firm, charging the latter with bringing “parallel imports” into France illegally; that is, Consten charged that the competitor had bought Grundig products from various foreign suppliers without Consten’s knowledge and was selling them in France. Although Consten’s complaint was upheld by two French courts, the Paris Court of Appeals suspended the judgment, pending a ruling by the European Commission on whether the Grundig–Consten arrangement violated Articles 85 and 86 of the Treaty of Rome. The Commission eventually ruled against Consten on the grounds that “ter- ritorial protection proved to be particularly damaging to the realization of the Common Market.”31

In some instances, companies or entire industries have been able to secure exemption from antitrust rules. In the airline industry, for example, OneWorld and Star Alliance are separate alli- ances in which competing airlines can share computer codes and set prices jointly. Similarly, the European Commission permitted United International Pictures (UIP), a joint venture between Paramount, Universal, and MGM/UA, to cut costs by collaborating on motion picture distribution

Exhibit 5-13 Margrethe Vestager is the European Commissioner for Com- petition. Summing up her core beliefs, she says, “Politics should give all people opportunities and enable them to make free choices.” Source: Alexandros Michailidis/Shutterstock.

TA B L E 5 - 3 Antitrust Rulings

companies Involved Global Antitrust Review Antitrust Review in the united States

Acquisition of SABMiller by InBev (Belgium/ Brazil), 2016, $101 billion

Acquisition of Anheuser-Busch (United States) by InBev (Belgium/Brazil), 2008, $52 billion

Deal was approved in China but SABMiller must sell its stake in Snow

Deal was approved in China but the company is prohib- ited from pursuing Huaran Snow or Beijing Yanjing

Approved; InBev required to sell MillerCoors

Approved; InBev required to sell Labatt USA

Acquisition of Honeywell (United States) by GE (United States), 2001, $40 billion

Deal was vetoed on grounds that the merged firm would be stronger than competitors in aviation equipment

Deal was on track for approval, subject to conditions

Joint venture between music businesses of EMI Group PLC (Great Britain) and Time Warner (United States), 2000, $20 billion

EU regulators expressed concern that the new EMI–Time Warner would dominate the growing market for digital music distribution

Deal was scrapped in October 2000 before regulatory review began.

Source: Compiled by the authors.

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Sir James Dyson is a British entrepreneur (see Exhibit 5-14). He has developed a wide range of innovative products, started a company to manufacture and market them, and built a global brand. By applying the basic tools and principles of modern marketing, Dyson has achieved remarkable success. In fact, he was knighted in 2006!

As is true with many entrepreneurs, Dyson’s original idea was based on his recognition of a problem that needed to be solved and his own needs and wants. Simply put, he was frustrated with the way traditional vacuum cleaners functioned: As disposable bags filled with dust, the units lost suction. He said to himself, “There has to be a better way.”

With this point in mind, Dyson developed a bagless vacuum; the first model, called the G-Force, was priced at $2,000. After the vacuum was awarded the 1991 International Design Fair Prize in Japan, Dyson was in business.

Fast-forward to today, and Dyson employs 9,000 people and gen- erates nearly $3 billion in revenue each year. Over the last quarter century the company has launched a steady stream of premium-priced new products, including hair dryers, the AirBlade line of electric hand dryers, and variations on the original bagless vacuum cleaner.

The road has not always been smooth; some new product launches have not panned out. For example, the company stopped manufactur- ing its CR01 Contrarotator washing machines due to high production costs. According to Dyson, there is no stigma attached to failure: “As long as you are learning something,” he says. One thing he learned from the washing machine experience: Charge higher prices!

In 2011, Dyson’s company introduced a handheld, bagless, cord- less vacuum, even though market research did not show a need for such a product. The technology involved required nearly 200,000 hours to develop and resulted in more than 100 patents. Dyson says, “You can’t ask your customers to tell you what to do next. They don’t know. That’s our job.” Armed with that insight, the company now offers a whole range of handheld vacuums, including the V6 Mattress

vacuum (“removes allergens and bacteria”) and the 360 Eye robot vacuum.

Although the United States is Dyson’s top market, Asia accounts for more than half of the company’s profits. Japan is Dyson’s number 2 market, and China is showing rapid growth. The market opportunity in the latter case is due in part to the aspirations and spending habits of China’s growing middle class. Also, ownership of domestic appli- ances in China is currently in the low single digits. Because Asian homes typically have hard floors rather than carpet, Dyson developed the V6 Fluffy cordless vacuum with a rotating fabric head for the market. In true “Think local, act global” fashion, the Fluffy is now a best-seller in the West as well.

Thanks to Dyson’s core competencies in high-speed motors and batteries, the company recently announced that it will develop an elec- tric vehicle (EV). The estimated cost? About £1 billion to develop the battery technology, and another £1 billion to develop the car, including the chassis.

Industry observers expect that Dyson will eventually leverage its battery expertise to use solid-state batteries in its EV program. Com- pared to lithium ion batteries, the advantages of using this technol- ogy include faster charging and longer driving range. Even so, it is anticipated that the first vehicle, which has a planned product launch in 2020 or 2021, will be powered by lithium batteries. A manufacturing site in the United Kingdom is under consideration, as are sites in China, Malaysia, and Singapore.

Sources: Alexandra Wolfe, “Weekend Confidential: James Dyson,” The Wall Street Journal (December 9–10, 2017), p. C11; Michael Pooler and Peter Campbell, “Dyson Makes Dust Fly with Electric Vehicle Plans,” Financial Times (September 30–October 1, 2017), p. 19; Michael Pooler and Peter Campbell, “Dyson Looks to Extend Midas Touch to Tomorrow’s Vehicles,” Financial Times (September 28, 2017), p. 18; Tom Hancock, “Dyson Aims to Build on Sales with R&D Center in China,” Financial Times (May 26, 2017), p. 17; John Gapper and Tanya Powley, “‘All Inventors Are Maniacs,’” Financial Times (April 11–12, 2015), pp. 17–18.

ENTREPRENEURIAL LEADERSHIP, CREATIVE THINKING, AND THE GLOBAL STARTUP

James Dyson, Dyson

Exhibit 5-14 James Dyson. One of Dyson’s newest products is the Airwrap, a curling iron with a detach- able head that can be swapped out with attach- ments for curling, drying or smoothing. Source: The Asahi Shimbun/ Getty Images.

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in Europe. However, in 1998, the commission reversed itself and notified the three studios that they had to distribute their films independently in Europe.32

A cartel is a group of individual companies that collectively set prices, control output, or take other actions to maximize profits. For example, the group of oil-producing countries known as Orga- nization of the Petroleum Exporting Countries (OPEC) is a cartel. In the United States, most cartels are illegal. One notable exception, however, has a direct impact on global marketing: A number of the world’s major shipping lines, including the U.S.-based Sea-Land Service and Denmark’s A. P. Moller/Maersk line, have enjoyed exemptions from antitrust laws since the passage of the Shipping Act of 1916. This law was originally enacted to ensure reliability; today, it has been estimated that the cartel results in shipping prices that are 18 percent higher than they would be if shippers set prices independently. Attempts in recent years to change the law have been unsuccessful.33

Licensing and Trade Secrets Licensing is a contractual agreement in which a licensor allows a licensee to use patents, trade- marks, trade secrets, technology, or other intangible assets in return for royalty payments or other forms of compensation. U.S. laws do not regulate the licensing process per se as do technology- transfer laws in the EU, Australia, Japan, and many developing countries. The duration of the licensing agreement and the amount of royalties a company can receive are considered a matter of commercial negotiation between licensor and licensee, and there are no government restrictions on remittances of royalties abroad. Important considerations in licensing include which assets a firm may offer for license, how to price the assets, and whether to grant only the right to “make” the product or the rights to “use” and to “sell” the product as well. The right to sublicense is another important issue. As with distribution agreements, decisions must also be made regarding exclusive or nonexclusive arrangements and the size of the licensee’s territory.

To prevent the licensee from using the licensed technology to compete directly with the licensor, the latter may try to limit the licensee to selling only in its home country. The licen- sor may also seek to contractually bind the licensee to discontinue use of the technology after the contract has expired. In practice, host-government laws and even U.S. antitrust laws may make such agreements impossible to obtain. Licensing is thus a potentially dangerous action: It may be instrumental in creating a competitor. For this reason, licensors should be careful to ensure that their own competitive positions remain advantageous—which requires constant innovation.

As noted, licensing agreements can come under antitrust scrutiny. In one case, Bayer AG granted an exclusive patent license for a new household insecticide to S. C. Johnson & Sons. The German firm’s decision to license was based in part on the time required for obtaining approval for the insec- ticide from the U.S. Environmental Protection Agency (EPA), which had stretched to 3 years. Bayer decided it made better business sense to let the U.S. firm deal with regulatory authorities in return for a 5 percent royalty on sales. However, a class-action suit filed against the companies alleged that the licensing deal would allow Johnson to monopolize the $450 million home insecticide market.

At this point, the U.S. Justice Department stepped in, calling the licensing agreement anti- competitive. In a statement, Anne Bingaman, then head of the Justice Department’s antitrust unit, said, “The cozy arrangement that Bayer and Johnson maintained is unacceptable in a highly con- centrated market.” Bayer agreed to offer licenses to any interested company on better terms than the original contract with Johnson. Johnson agreed to notify the U.S. government of any future pending exclusive licensing agreements for household insecticides. Further, if Bayer was party to any such agreements, Bayer agreed that the Justice Department had the right to veto them. The reaction from the legal community was negative. One Washington lawyer who specializes in intel- lectual property law noted that the case “really attacks traditional licensing practices.” As Melvin Jager, president of the Licensing Executives Society, explained, “An exclusive license is a very valuable tool to promote intellectual property and get it out into the marketplace.”34

What happens if a licensee gains knowledge of the licensor’s trade secrets? Trade secrets are confidential information or knowledge that has commercial value and is not in the public domain and for which steps have been taken to keep it secret. Trade secrets may include manufacturing processes, formulas, designs, and customer lists. To prevent disclosure, the licensing of unpatented trade secrets should be linked to confidentiality contracts with each employee who has access to the protected information. In the United States, trade secrets are protected by state law rather than federal statute; most states have adopted the Uniform Trade Secrets Act (UTSA). The U.S. law

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provides trade secret liability against third parties that obtain confidential information through an intermediary. Remedies include damages and other forms of relief.

The 1990s saw widespread improvements in laws pertaining to trade secrets. Several countries adopted trade secret statutes for the first time. Mexico’s first statute protecting trade secrets became effective on June 28, 1991; China’s first trade secret law took effect on December 1, 1993. In both countries, the new laws were part of broader revisions of intellectual property laws. Japan and South Korea have also amended their intellectual property laws to include trade secrets. In addition, many countries in Central and Eastern Europe enacted laws to protect trade secrets.

When the North American Free Trade Agreement (NAFTA) became effective on January 1, 1994, it marked the first international trade agreement with provisions for protecting trade secrets. This milestone was quickly followed by the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs), which resulted from the Uruguay Round of GATT negotiations. The TRIPs agreement requires signatory countries to protect against acquisition, disclosure, or use of trade secrets “in a manner contrary to honest commercial practices.”35 Despite these formal legal developments, in practice, enforcement is the key issue. Companies transferring trade secrets across borders should seek information about not only the existence of legal protection but also the risks associated with lax enforcement.

Bribery and Corruption: Legal and Ethical Issues History does not record a burst of international outrage when Charles M. Schwab, head of Beth- lehem Steel at the beginning of the twentieth century, presented a $200,000 diamond and pearl necklace to the mistress of Czar Alexander III’s nephew.36 In return for that consideration, Beth- lehem Steel won the contract to supply the rails for the Trans-Siberian railroad. Today, in the post-Soviet era, emerging opportunities in Central and Eastern Europe are again luring global companies. However, in Poland, Hungary, and elsewhere, nationalist governments are increas- ingly hostile to foreign companies. When awarding state contracts, for example, politicians in the region sometimes favor powerful local businesspeople with close ties to the government. Which kind of ties? In some cases, bribery may be involved.

Bribery is the corrupt business practice of demanding or offering some type of consider- ation—typically in the form of cash payments—when negotiating business deals. While most countries have anticorruption laws that prohibit bribery, enforcement is often lax. That is not the case in the United States. Employees of U.S. companies in particular are constrained by U.S. government policies of the post-Watergate age. Transparency International (www.transparency. org) compiles an annual report ranking countries in terms of a Corruption Perceptions Index (CPI), where the “cleanest” score is 100. The 2016 ranking of countries with the highest and lowest CPI scores is shown in Table 5-4.

TA B L E 5 - 4 2016 Corruption Rankings

Rank/country 2016 cPI Score Rank/country 2016 cPI Score

1. Denmark 90 166. Venezuela 17

1. New Zealand 90 168. Guinea-Bissau 16

3. Finland 89 169. Afghanistan 15

4. Sweden 88 170. Libya 14

5. Switzerland 86 170. Sudan 14

6. Norway 85 170. Yemen 14

7. Singapore 84 173. Syria 13

8. Netherlands 83 174. North Korea 12

9. Canada 82 175. South Sudan 11

10. Germany 81 176. Somalia 10

Note: Transparency International’s Corruption Perceptions Index (CPI) scores countries on their perceived lev- els of public-sector corruption on a scale from 0 (highly corrupt) to 100 (very clean). Source: Adapted from 2016 Corruption Rankings. Copyright 2016 Transparency International: the global coalition against corruption. Used with permission. For more information, visit www.transparency.org.

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In the United States, the Foreign Corrupt Practices Act (FCPA) is a legacy of the Watergate scandal during Richard Nixon’s presidency. In the course of his investigation, the Watergate spe- cial prosecutor discovered that hundreds of American companies had made undisclosed payments to foreign officials, totaling hundreds of millions of dollars. Congress unanimously passed the act, which President Jimmy Carter signed into law in 1977.

Administered by the Department of Justice (DOJ) and the Securities and Exchange Com- mission (SEC), the FCPA is concerned with disclosure and prohibition. Regarding disclosure, the act requires publicly held companies to institute internal accounting controls. The prohibi- tion part makes it a crime for U.S. corporations to bribe an official of a foreign government or political party to obtain or retain business. Payments to third parties are also prohibited when the company has reason to believe that part or all of the money will be channeled to foreign officials.

The U.S. business community immediately began lobbying for changes to the FCPA, com- plaining that the statute was too vague and so broad in scope that it threatened to severely curtail U.S. business activities abroad. President Ronald Reagan signed amendments to the statute into law in 1988 as part of the Omnibus Trade and Competitiveness Act. Among the changes were exclusions for “grease” payments to low-level officials to cut red tape and expedite “routine governmental actions” such as clearing shipments through customs, securing permits, or getting airport passport clearance to leave a country.

Convictions for FCPA violations carry severe jail sentences and substantial fines. The law is worded quite broadly and has plenty of gray areas; even so, in 2009 and 2010 the U.S. Justice Department collected $2 billion in fines and penalties.37 A company cannot pay or reimburse fines incurred by “rogue” employees; the rationale is that individuals commit such crimes. As noted on the Justice Department’s Web site:

The following criminal penalties may be imposed for violations of the FCPA’s anti-bribery provi- sions: corporations and other business entities are subject to a fine of up to $2,000,000; officers, directors, stockholders, employees, and agents are subject to a fine of up to $100,000 and imprisonment for up to five years. Moreover, under the Alternative Fines Act, these fines may be actually quite higher—the actual fine may be up to twice the benefit that the defendant sought to obtain by making the corrupt payment. You should also be aware that fines imposed on individuals may not be paid by their employer or principal.38

In addition, this law does not let a person do indirectly (e.g., through an agent, joint venture partner, or other third party) what it prohibits directly.

Rolls-Royce (the aircraft engine manufacturer, not the luxury car brand) is one well-known company that has run afoul of antibribery laws in the United States and elsewhere. The U.K.-based firm has businesses in a variety of sectors, including civil aviation. Its energy business was sold to Germany’s Siemens in 2014, but prior to the sale, there was evidence of multiple offenses that occurred in Brazil, Kazakhstan, Nigeria, and Russia. Rolls-Royce agreed to pay a £671 million ($919 million) fine to the United Kingdom, the United States, and Brazil. In exchange, the com- pany was not prosecuted on criminal charges. However, several former Rolls-Royce employees charged by the U.S. Department of Justice with conspiring to violate the FCPA ultimately pleaded guilty.39

Some critics of the FCPA decry it as a regrettable display of moral imperialism. At issue is the extraterritorial sovereignty of U.S. law. It is wrong, according to these critics, to impose U.S. laws, standards, values, and mores on American companies and citizens worldwide. As one legal expert pointed out, this criticism has one fundamental flaw: There is no nation in which the letter of the law condones bribery of government officials. Thus, the standard set by the FCPA is shared, in principle at least, by other nations.40

Another criticism of the FCPA is that it puts U.S. companies in a difficult position relative to foreign competitors, especially those in Japan and Europe. Several opinion polls and surveys of the business community have revealed the widespread perception that the act adversely affects U.S. businesses overseas. In contrast, some academic researchers have concluded that the FCPA has not negatively affected the export performance of U.S. industry. However, a U.S. Commerce Department report prepared with the help of U.S. intelligence services indicated that in 1994 alone, bribes offered by non-U.S. companies were a factor in 100 business deals valued at $45 bil- lion. Foreign companies prevailed in 80 percent of those deals.42 Although accurate statistics are

“Corruption is probably the most immediate threat and difficulty that any business faces in Russia—and the trend is increasing.”41

Carlo Gallo, business risk consultant

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hard to come by, the rankings shown in Table 5-4 highlight some areas of the world where bribery is still rampant.

The existence of bribery as a fact of life in world markets will not change just because the U.S. Congress condemns it. Bribery payments are considered a deductible business expense in many European countries. According to one estimate, the annual price tag for illegal payments by German firms alone is more than $5 billion. Still, increasing numbers of global companies are adopting codes of conduct designed to reduce illegal activities. Moreover, in May 1997, the OECD adopted a formal standard against bribery by drafting a binding international convention that makes it a crime for a company bidding on a contract to bribe foreign officials. The OECD’s antibribery convention (officially known as the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions) went into effect in 1999. The OECD is also working on a smaller scale to create so-called islands of integrity. The goal is to achieve transparency at the level of an individual deal, with all the players pledging not to bribe.43

Investigative reporters often file stories regarding bribery or other forms of malfeasance. In emerging countries, journalists may themselves become targets if they criticize the rich or powerful (see Case 5-2). When companies operate abroad in the absence of home-country legal constraints, they face a continuum of choices concerning company ethics. At one extreme, they can maintain home-country ethics worldwide with absolutely no adjustment or adaptation to local practice. At the other extreme, they can abandon any attempt to maintain company ethics and adapt entirely to local conditions and circumstances as company managers perceive them in each local environment. Between these extremes, one approach that companies may select is to utilize varying degrees of an extension of home-country ethics. Alternatively, they may adapt in varying degrees to local customs and practices.

What should a U.S. company do if competitors are willing to offer a bribe? Two alternative courses of action are possible. One is to ignore the expectation for bribery and act as if it does not exist. The other is to recognize the existence of bribery and evaluate its effect on customers’ purchase decisions as if it were just another element of the marketing mix. The overall value of a company’s offer must be as good as, or better than, the competitor’s overall offering, bribe included. It may be possible to offer a lower price, a better product, better distribution, or better advertising to offset the value added by the bribe. The best line of defense is to have a product that is clearly superior to that of the competition. In such a case, a bribe should not sway the purchase decision. Alternatively, clear superiority in service and in local representation may tip the scales in the company’s desired direction.

5-4 Conflict Resolution, Dispute Settlement, and Litigation

The degree of legal cooperation and harmony in the EU is unique and stems, in part, from the existence of code law as a common bond. Other regional organizations have made far less progress toward harmonization. As a result, countries vary in their approach toward conflict resolution. The United States has more lawyers than any other country in the world and is arguably the most litigious nation on earth. In part, this is a reflection of the low-context nature of American culture and the spirit of confrontational competitiveness. Other factors can contribute to differing attitudes toward litigation. For example, in many European nations, class-action lawsuits are not allowed. Also, European lawyers cannot undertake cases on a contingency fee basis. Change is now in the air, though, as Europe experiences a broad political shift away from its traditional embrace of “the welfare state.”44

Conflicts inevitably arise in business everywhere, but they are especially likely when differ- ent cultures come together to buy, sell, establish joint ventures, compete, and cooperate in global markets. For American companies, the dispute with a foreign party is frequently in the home- country jurisdiction. Such an issue can be litigated in the United States, where the company and its attorneys might be said to enjoy “home-court” advantage. Litigation in foreign courts is a vastly more complex undertaking, partly because of differences in language, legal systems, currencies, and traditional business customs and patterns.

In addition, problems may arise from differences in procedures relating to discovery. In essence, discovery is the process of obtaining evidence to prove claims and determining which

5-4 Describe the available alter- natives for conflict resolution and dispute settlement when doing business outside the home country.

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evidence may be admissible in which countries under which conditions. A further complication is the fact that judgments handed down in courts in another country may not be enforceable in the home country. For all these reasons, many companies prefer to pursue arbitration before proceed- ing to litigation.

Alternatives to Litigation for Dispute Settlement In 1995, the Cuban government abruptly canceled contracts with Endesa, a Spanish utility com- pany. Rather than seek restitution in a Cuban court, Endesa turned to the International Arbitration Tribunal in Paris, seeking damages of $12 million. Endesa’s actions illustrate how alternative dispute resolution (ADR) methods allow parties to resolve international commercial disputes without resorting to the court system. Formal arbitration is one means of settling international business disputes outside the courtroom. Arbitration is a negotiation process that the two parties have, by prior agreement, committed themselves to using. It is a fair process in the sense that the parties using it have created it themselves. Generally, arbitration involves a hearing of the parties before a three-member panel; each party selects one panel member, and those two panel members in turn select the third member. The panel renders a judgment that the parties agree in advance to abide by.

The most important treaty regarding international arbitration is the 1958 New York Con- vention on the Recognition and Enforcement of Foreign Arbitral Awards. Also known as the New York Convention, the treaty currently has 157 signatory countries, including China. The framework created by the New York Convention is important for several reasons. First, when parties enter into agreements that provide for international arbitration, the signatory countries can hold the parties to their pledge to use arbitration. Second, after arbitration has taken place and the arbitrators have made an award, the signatories recognize and can enforce the judgment. Third, the signatories agree that there are limited grounds for challenging arbitration decisions. The grounds that are recognized are different from the typical appeals that are permitted in a court of law.

Some firms and lawyers inexperienced in the practice of international commercial arbitration approach the arbitration clauses in a contract as “just another clause.” However, the terms of every contract are different and, therefore, no two arbitration clauses should be the same. Consider, for example, the case of a contract between an American firm and a Japanese one. If the parties resort to arbitration, where will it take place? The American side will be reluctant to go to Japan; con- versely, the Japanese side will not want to arbitrate in the United States. An alternative, “neutral” location—Singapore or London, for example—must be considered and specified in the arbitration clause. In which language will the proceedings be conducted? If no language is specified in the arbitration clause, the arbitrators themselves will choose.

In addition to location and language, other issues must be addressed in relation to the arbitra- tion process. For example, if the parties to a patent-licensing arrangement agree in the arbitration clause that the validity of the patent cannot be contested, such a provision may not be enforceable in some countries. Which country’s laws will be used as the standard for invalidity? Pursuing such an issue on a country-by-country basis would be inordinately time-consuming. In addition, there is the issue of acceptance: By law, U.S. courts must accept an arbitrator’s decision in patent disputes; in other countries, there is no general rule of acceptance.

To reduce delays owing to disputed issues, one expert suggests drafting arbitration clauses with as much specificity as possible. To the extent possible, for example, patent policies in various countries should be addressed; arbitration clauses may also include a provision that all foreign patent issues will be judged according to the standard of home-country law. Another provision could forbid the parties from commencing separate legal actions in other countries. The goal is to help the arbitration tribunal zero in on the express intentions of the parties.45

For decades, business arbitration has also been promoted through the International Court of Arbitration at the Paris-based International Chamber of Commerce (ICC; www.iccwbo.org). The ICC recently modernized some of its older rules. However, because it is such a well-known organization, it has an extensive backlog of cases. Overall, the ICC has gained a reputation for being slower, more expensive, and more cumbersome than some arbitration alternatives. As U.S. involvement in global commerce grew dramatically during the post–World War II period, the American Arbitration Association (AAA) also became recognized as an effective institution within which to resolve disputes. In 1992, the AAA signed a cooperation agreement with China’s Beijing Conciliation Center.

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Another agency for settling disputes is the Swedish Arbitration Institute of the Stockholm Chamber of Commerce. This agency frequently handles disputes between Western and Eastern European countries and has gained credibility for its evenhanded administration. However, a favorable ruling from the arbitration tribunal is one thing; an enforced ruling is another. For example, Canada’s IMP Group took its case against a Russian hotel development partner to Stock- holm and was awarded $9.4 million. When payment was not forthcoming, IMP’s representatives took matters into their own hands: They commandeered an Aeroflot jet in Canada and released it only after the Russians paid up!46

Other arbitration alternatives have proliferated in recent years. In addition to those already mentioned, active centers for arbitration exist in Vancouver, Hong Kong, Cairo, Kuala Lumpur, Singapore, Buenos Aires, Bogotá, and Mexico City. A World Arbitration Institute was established in New York; in the United Kingdom, the Advisory, Conciliation and Arbitration Service (ACAS) has achieved great success in handling industrial disputes. An International Council for Commercial Arbitration (ICCA) was established to coordinate the far-flung activities of arbitration organizations; it meets in different locations around the world every four years.

The United Nations Commission on International Trade Law (UNCITRAL; www.uncitral. org) has also been a significant force in the area of arbitration. Its rules have become more or less standards, as many of the organizations just named have adopted them with some modifica- tions. Many developing countries, for example, long held prejudices against the ICC, AAA, and other developed-country organizations. Representatives of developing nations assumed that such organizations would be biased in favor of multinational corporations. For this reason, developing nations insisted on settlement of disputes in national courts, which was unacceptable to many multinational firms. This was especially true in Latin America, where the Calvo Doctrine required disputes arising with foreign investors to be resolved in national courts under national laws. The growing influence of the ICCA and UNCITRAL rules, coupled with the proliferation of regional arbitration centers, has contributed to changing attitudes in developing countries and resulted in the increased use of arbitration around the world.

5-5 The Regulatory Environment The regulatory environment of global marketing consists of a variety of governmental and nongovernmental agencies that enforce laws or set guidelines for conducting business. These regulatory agencies address a wide range of marketing issues, including price control, valuation of imports and exports, trade practices, labeling, food and drug regulations, employment condi- tions, collective bargaining, advertising content, and competitive practices. As noted in The Wall Street Journal:

Each nation’s regulations reflect and reinforce its brand of capitalism—predatory in the U.S., paternal in Germany, and protected in Japan—and its social values. It’s easier to open a business in the U.S. than in Germany because Germans value social consensus above risk-taking, but it’s harder to hire people because Americans worry more about discrimination lawsuits. It’s easier to import children’s clothes in the U.S. than [in] Japan because Japanese bureaucrats defend a jumble of import restrictions, but it’s harder to open bank branches across the U.S. because Americans strongly defend state prerogatives.47

In most countries, the influence of regulatory agencies is pervasive, and an understanding of how they operate is essential to protect business interests and advance new programs. Executives at many global companies are realizing they need to hire lobbyists to represent their interests and to influence the direction of the regulatory process. For example, in the early 1990s, McDon- ald’s, Nike, and Toyota didn’t have a single representative in Brussels—but today these and other companies have several people representing their interests to the European Commission. U.S. law firms and consulting firms also have sharply increased their presence in Brussels; in an effort to gain insight into EU politics and access to its policymakers, some have hired EU officials. In all, there are currently approximately 15,000 lobbyists in Brussels representing some 1,400 companies and nonprofit organizations from around the world.48

5-5 In general terms, outline the regulatory environment in the European Union.

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Regional Economic Organizations: The EU Example The overall importance of regional organizations such as the WTO and the EU was discussed in Chapter 3. The legal dimensions are important, however, and will be briefly mentioned here. The Treaty of Rome established the European Community (EC), the precursor to the EU. This treaty created an institutional framework in which a council (the Council of Ministers) serves as the main decision-making body, with each country member having direct representation. The other three main institutions of the community are the European Commission, the EU’s executive arm; the European Parliament, the legislative body; and the European Court of Justice.

The 1987 Single European Act amended the Treaty of Rome and provided strong impetus for the creation of a single market beginning January 1, 1993. Although technically the target was not completely met, approximately 85 percent of the newer recommendations were implemented into national law by most member states by the target date, resulting in substantial harmoniza- tion. A relatively new body known as the European Council (a distinct entity from the Council of Ministers) was formally incorporated into the EC institutional structure by Article 2 of the 1987 act. Composed of heads of member states plus the president of the European Commission, the European Council’s role is to define general political guidelines for the union and provide direction on integration-related issues such as monetary union.49 Governments in Central and Eastern European countries that hope to join the EU are currently getting their laws in line with those of the EU.

The Treaty of Rome contains hundreds of articles, several of which are directly applicable to global companies and global marketers. Articles 30 through 36 establish the general policy referred to as “Free Flow of Goods, People, Capital and Technology” among the member states. Articles 85 through 86 contain competition rules, as amended by various directives of the 20-mem- ber EU Commission. The Commission is the administrative arm of the EU; from its base in Brussels, it proposes laws and policies, monitors the observance of EU laws, administers and implements EU legislation, and represents the EU to international organizations.50 Commission members represent the union rather than their respective nations.

The laws, regulations, directives, and policies that originate in the EU Commission must be submitted to the European Parliament for an opinion and then passed along to the European Council for a final decision. Once the Council approves a prospective law, it becomes union law, which is somewhat analogous to U.S. federal law. Regulations automatically become law throughout the EU; directives include a time frame for implementation by legislation in each member state. For example, in 1994 the Commission issued a directive regarding use of trade- marks in comparative advertising. Individual member nations of the EU worked to implement the directive; in the United Kingdom, the 1994 Trade Marks Act gave companies the right to apply for trademark protection of smells, sounds, and images and also provided improved protection against trademark counterfeiting.

With the rise of the single market, many industries are facing new regulatory environments. The European Court of Justice (ECJ) is the EU’s highest legal authority (see Exhibit 5-15). As the sole arbiter of EU law, it is responsible for ensuring that EU laws and treaties are interpreted uniformly throughout the union. Based in Luxembourg, it consists of two separate tribunals. The senior body is known as the Court of Justice; a separate entity, the Court of First Instance, hears cases involving commerce and competition (see Table 5-5).

Although the European Court of Justice plays a role similar to that of the U.S. Supreme Court, there are important differences. The European court cannot decide which cases it will hear, and it does not issue dissenting opinions. The court exercises jurisdiction over a range of civil matters involving trade, individual rights, and environmental law. For example, the ECJ can assess dam- ages against countries that fail to introduce directives by the date set. The court also hears disputes that arise among the EU’s 28 member nations on trade issues such as mergers, monopolies, trade barriers and regulations, and exports. In addition, the ECJ is empowered to resolve conflicts between national law and EU law. In most cases, EU law supersedes national laws of individual European countries.

Marketers must be aware, however, that national laws should always be consulted. National laws may be stricter than EU law, especially in such areas as competition and antitrust. To the extent possible, EU law is intended to harmonize national laws to promote the purposes defined in Articles 30 through 36. The goal is to bring the lax laws of some member states up to desig- nated minimum standards, but more restrictive positions may still exist in some national laws.

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For example, Italy recently introduced the Reguzzoni-Versace Law, which is intended to regulate trade in textiles, leather, and footwear. It states that if at least two stages of production—there are four stages altogether—occur in Italy, a garment can be labeled “Made in Italy.” In addition, the country or countries in which the remaining production stages take place must be identified. Reguzzoni-Versace was supposed to enter into force October 1, 2010, but Brussels objected on the grounds that the law conflicts with Article 34, which prohibits national measures providing restrictions to trade in the EU. In the view of EU regulators, the Reguzzoni-Versace Law is “protectionist” and more stringent than EU law, which requires only that one main production stage take place in Europe.55

Another recent case in Italy involved the University of Florence, which was sued by a lecturer from Belgium on grounds of discrimination. The Italian court was required to determine whether the facts of the case indicated that Italian law had been applied equally to both Italian and foreign academics. If the court found national law had, in fact, been applied equally, the case would end there. If not, the case would go on to the ECJ, which would make a ruling based on EU laws prohibiting discrimination on the basis of nationality.

Exhibit 5-15 The European Court of Justice (ECJ) is one of three courts that make up the Court of Justice of the European Union (CJEU). Source: EQRoy/Shutterstock.

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Summary The political environment of global marketing is the set of governmental institutions, political par- ties, and organizations that are the expression of the people in the nations of the world. In particu- lar, anyone engaged in global marketing should have an overall understanding of the importance of sovereignty to national governments. The political environment varies from country to country, and political risk assessment is crucial. It is also important to understand a particular government’s actions with respect to taxes and seizures of assets. Historically, the latter have taken the form of expropriation, confiscation, and nationalization.

The legal environment consists of laws, courts, attorneys, legal customs, and practices. International law comprises the rules and principles that nation-states consider binding upon themselves. The countries of the world can be broadly categorized as having either common- law legal systems or civil-law legal systems. The United States and Canada and many former British colonies are common-law countries; most other countries are civil-law countries. A third system, Islamic law, predominates in the Middle East. Some of the most important legal issues pertain to jurisdiction, antitrust, and licensing. In addition, bribery is pervasive in many parts of the world; the Foreign Corrupt Practices Act (FCPA) applies to American companies operating abroad. Intellectual property protection is another critical legal issue. Counterfeiting is a major problem in global marketing; it often involves infringement of a company’s copyright, patent, or trademark ownership. When legal conflicts arise, companies can pursue the matter in court or use arbitration.

The regulatory environment consists of agencies, both governmental and nongovernmental, that enforce laws or set guidelines for conducting business. Global marketing activities can be affected by a number of international or regional economic organizations; in Europe, for example, the EU makes laws governing member states. The WTO will have a broad impact on global marketing activities in the years to come.

Although all three environments—political, legal, and regulatory—are complex, astute marketers plan ahead to avoid situations that might result in conflict, misunderstanding, or outright violation of national laws.

Discussion Questions 5-1. Describe some of the sources of political risk. Specifically, which forms can political risk

take? 5-2. Global marketers can avoid legal conflicts by understanding the reasons conflicts arise in

the first place. Identify and describe several legal issues that relate to global commerce.

TA B L E 5 - 5 Recent Cases before the European Court of Justice/General Court of the European Union51

country/Plaintiffs Involved Issue

Taxi drivers (Spain)/Uber (United States)

The Court ruled that Uber is a transportation company. Uber had sought to be classified as a tech company.

Parfümerie Akzente (Germany)/ Coty (United States)

The Court upheld the decision by American beauty products company to prohibit its authorized German distributor from selling Coty’s brands on Amazon.de.52

EU/Ireland EU Competition Minister Margrethe Vestiger sought to force Ireland to collect €13 billion in back taxes from Apple.

Facebook (Ireland)/privacy advocate Max Schrems

In 2015, the Court struck down the Safe Harbor Act following publication of documents leaked by Edward Snowden about surveillance by the U.S. National Security Agency.

Chocoladefabriken Lindt & Sprüngli AG (Switzerland)/Franz Hauswirth GmbH (Austria)

Lindt markets gold-foil–wrapped chocolate Easter bunnies (Goldhase), for which it owns a trademark. Lindt sued Hauswirth for trademark infringement after the Austrian company began marketing its own foil- wrapped bunny. The Austrian Supreme Court asked the ECJ to rule on “bad faith” in trademark matters.53

L’Oréal (France)/Bellure (France) Perfume marketer L’Oréal sued rival Bellure for marketing “knockoff” perfume that mimicked the bottles, packaging, and fragrances of L’Oréal’s brands. The ECJ ruled in favor of L’Oréal on the grounds that the similarity of Bellure’s products to L’Oréal’s constituted an unfair advantage. The Court of Appeal later upheld the ECJ’s decision.54

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John’s view, the campaign, dubbed “Rolling with the Champion” and featuring ESPN SportsCenter co-anchor Cari Champion, positioned the Uber brand as “the official ride of pop culture.”

A New Leader Steps In In June 2017, founder Travis Kalanick stepped down as Uber’s CEO. A 14-person executive team, including Professor Frei, ran the company until a new boss could be recruited. The new CEO, Dara Khosrowshahi, came on board in September 2017. He immediately set about the task of rebuilding trust in the brand among the general public as well as with government authorities. Khosrowshahi acknowledged that the company’s notoriety had damaged its reputation and came at a cost. In an open letter, he wrote, “On behalf of everyone at Uber globally, I apologize for the mistakes we’ve made.”

Transport for London Cracks Down After just a few weeks on the job, Khosrowshahi was confronted by a new challenge: In fall 2017, Transport for London (TfL), the British regulatory authority, announced that it would not renew Uber’s license. The agency had issued Uber its first permit to operate in London in 2012; the city quickly became one of Uber’s most important markets. In 2013, Uber launched UberX, a lower-cost ride-hailing service, which TfL classified as a minicab service that used “private-hire vehicles.” Thus, in London, Uber was competing with the city’s iconic black cabs as well as swelling the numbers of minicabs.

The TfL revoked Uber’s permit on the grounds that the company was not “fit and proper” to operate in London. In doing so, the regula- tory authority identified four concerns relating to corporate responsibil- ity and governance. One focused on passenger safety; the TfL faulted Uber for lax reporting of crimes committed by drivers. The TfL also alleged that Uber did not follow the correct procedures for obtaining medical certificates for drivers and for conducting criminal background checks. Finally, the agency raised the issue of use of the Greyball soft- ware. Uber responded to all four issues. It noted, for example, that it was the TfL’s responsibility to ensure that background checks had been performed before it issued licenses to drivers.

In November 2017, Uber suffered another setback. A judge at an employment tribunal in London ruled that Uber’s 50,000 U.K. driv- ers were, in fact, employees rather than independent contractors. If the ruling stands, it will have far-reaching implications for a variety of technology apps that are integral to the so-called gig economy. In Uber’s case, it would lead to higher costs by requiring the company to pay drivers the minimum wage as well as make provisions for holiday pay, national insurance contributions, and additional taxes.

Trade Secrets and Data Breaches Meanwhile, back in the United States, Uber faced a trial to defend itself against charges of stealing trade secrets. The suit had been brought

CASE 5-1 (Continued from page 139)

Travis Kalanick and Uber

One dramatic incident occurred in India, where Uber was banned in the Delhi region after a driver was accused of sexually assaulting a female passenger. Uber issued a statement expressing sympathy for the victim; Kalanick vowed to work more closely with the Indian government to improve procedures for conducting background checks of prospective drivers. Even so, it turned out that company executives had allegedly mishandled some of the victim’s medical records.

From the start, Kalanick seemed to relish locking horns with law- makers. As he told The Wall Street Journal in 2013, “We don’t have to beg for forgiveness because we are legal. But there’s been so much corruption and so much cronyism in the taxi industry and so much reg- ulatory capture that if you ask permission for something that’s already legal, you’ll never get it. There’s no upside to them.”

By 2017, Uber was valued at $68 billion—but the company’s rapid growth had been accompanied by considerable negative publicity. These included the company’s use of so-called Greyball software that allowed drivers to deny rides to passengers who worked for legal authorities. A number of top executives left the company. In addition, during a taxi strike at New York’s John F. Kennedy airport, the company’s surge pricing kicked in, and unhappy customers launched a #DeleteUber social media firestorm against the ride-sharing pioneer for price gouging.

Perhaps most troubling were allegations of sexism and sexual harassment at the company. These revelations came to light in Febru- ary 2017 when a software engineer named Susan Fowler published a blog post in which she described the sexual harassment that she had endured at Uber. By the end of 2017, the #MeToo social media campaign by silence breakers had gained considerable momentum and ended the careers of several powerful figures from politics, media, and the entertainment industry.

More broadly, Ms. Fowler’s act of speaking out was just one facet of growing public and government concern over the power of Big Tech companies such as Amazon and Google. Some observers noted that the “fourteen values” that guided the Uber organization—for example, “let builders build,” “always be hustling,” and “principled confronta- tion”—had created a toxic corporate culture.

To help address these issues at Uber, the company hired Frances Frei, a professor of service management at the Harvard Business School. Her title: Senior Vice President for Leadership and Strategy. Frei was tasked with overhauling Uber’s corporate culture. To do so, she began teaching management skills that she says had been lacking as the company pursued ambitious growth goals. In her view, one of Uber’s problems was that it underinvested in its people.

Another key figure is Chief Brand Officer Bozoma Saint John (see Exhibit 5-16). Hired by Kalanick in the summer of 2017, Saint John had an outstanding track record as a marketer at Pepsi, Beats Audio, and Apple Music. At Uber, she moved quickly to create local advertising tie-ins with the National Football League featuring Uber drivers who are sports fans driving friends to the stadium on game day. A second tie-in, with the National Basketball League, launched nationally. In Saint

5-3. You are an American traveling on business in the Middle East. As you are leaving country X, the passport control officer at the airport tells you there will be a passport “processing” delay of 12 hours. You explain that your plane leaves in 30 minutes, and the official suggests that a contribution of $50 would probably speed things up. If you comply with the suggestion, have you violated U.S. law? Explain.

5-4. “See you in court” is one way to respond when legal issues arise. Why can that approach backfire when the issue concerns global marketing?

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the necessary controls in place to ensure good corporate gover- nance and enable it to avoid the type of pitfalls Uber created for itself.

Even as Lyft’s driver-friendly corporate culture enabled it to take market share from Uber in the United States, it was targeting key cit- ies for international expansion. For example, Lyft launched operations in Toronto, and top management held a series of meetings with TfL regulators concerning expanding in London.

Discussion Questions 5-5. Despite the negative publicity surrounding Uber, con-

sumers continue to utilize the company’s services. Is this surprising?

5-6. Is ride-hailing likely to become a commodity service? If so, how will companies such as Lyft and Uber differentiate them- selves in the market?

5-7. Do you think either Uber or Lyft will emerge as the leading global ride-hailing brand? Or will the sector be character- ized by local and regional brands such as China’s Didi or India’s Ola?

Sources: Sarah O’Conner, Aliya Ram, and Leslie Hook, “Uber ‘Workers’ Ruling Deals Blow to Gig Economy,” Financial Times (November 11–12, 2017), p. 18; Leslie Hook, “Fixing Uber: The Professor Dismantling a Rotten Culture,” Financial Times (September 11, 2017), p. 12; Newly Purnell, “Uber Hits Resistance as It Expands in Asia,” The Wall Street Journal (December 4, 2014), p. B7; Julie Weed, “In Turnabout, Some Companies Are Rating Their Customers,” The New York Times (December 2, 2014), p. B7; John Aglioby and Sally Davies, “Taxis Protest against Hailing Apps,” Financial Times (June 12, 2014), p. 4; L. Gordon Crovitz, “Uber Shocks the Regulators,” The Wall Street Journal (June 16, 2014), p. A13; Kara Swisher, “Man and Uber Man,” Vanity Fair (December 2014), pp. 146, 148, 150; Andy Kessler, “Travis Kalanick: The Transportation Trustbuster,” The Wall Street Journal (January 26, 2013), p. A13.

by Waymo, the autonomous vehicle unit of Google parent Alphabet. Lawyers for Waymo alleged that a former employee, Anthony Levan- dowski, downloaded thousands of confidential documents prior to leaving to start Otto, a self-driving truck venture.

Some of the documents included details about Waymo’s propri- etary work on LiDAR, a laser-based sensor technology that is integral to autonomous mobility. In August 2016, Uber acquired Otto. The suit was settled in early 2018, with Uber agreeing to give Waymo stock worth $245 million. Uber also agreed to use only its own technology in its autonomous vehicles program.

Another revelation during the trade secrets trial concerned a shadowy “marketplace analytics team” at Uber whose role was to gather information, including trade secrets, about foreign competitors. According to the evidence presented at the trial, the team had used self-deleting messages to avoid creating a paper trail.

There was still more bad news to come. Near the end of November 2017, Khosrowshahi announced that one year previously Uber had suf- fered a data breach in which hackers stole the names, e-mail addresses, and telephone numbers of 50 million Uber passengers and 7 million drivers. At the time, the company did not report the breach to authori- ties, opting instead to pay the hackers $100,000 on the condition that they delete the stolen data. Data privacy authorities in the United States and elsewhere launched investigations into Uber’s handling of the situation. Critics noted that Uber’s response to the cyber hack was yet another example of the company’s self-defeating corporate culture.

Lyft Gets a Lift The turmoil surrounding Uber has provided an opportunity for Lyft, the rival U.S.-based ride-sharing company. Cofounders John Zimmer and Logan Green are confident that their company has

Exhibit 5-16 Bozoma Saint John. Source: Steve Jennings/Stringer/Getty Images.

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CASE 5-2

Putin’s Russia versus the West: Cold War 2.0?

On November 7, 2017, people in Russia and around the world paused to observe the 100th anniversary of the Bolshevik revolu- tion and the creation of the Soviet Union. Following Vladimir Lenin’s death in the early 1920s, Josef Stalin seized the levers of power and engineered his country’s economic transformation from a nation of impoverished peasants into a modern industrial power. In doing so, Stalin created a totalitarian police state. Soviet industrialization helped the Allies defeat Nazi Germany in World War II, after which Stalin embarked on expansionist policies that laid the groundwork for a Cold War with the West.

Nikita Khrushchev became the new leader upon Stalin’s death in 1953. In 1956, he famously pounded a shoe on a podium at the United Nations and warned the West, “We will bury you!” The following year, the Soviet Union launched a dog into orbit aboard the Sputnik 2 space- craft, heating up the space race with the United States.

Despite such achievements, by the mid-1970s the country’s leader- ship was dominated by an aging Politburo, and the Soviet Union had slipped into a state of stagnation and decay. After Ronald Reagan won the 1980 U.S. presidential election, he was determined to win the Cold War. When the Kremlin tried to achieve parity with the United States on defense spending, the Soviet Union was soon bankrupt.

The Cold War effectively ended in 1991, after Mikhail Gorbachev’s reform-oriented policies of glasnost and perestroika led to the dissolu- tion of the Soviet Union. In the twenty-first century, Russia continues to be transformed by political and economic change. In 2000, Vladimir Putin was elected president. When President Putin hosted the Group of Eight Summit in St. Petersburg in 2006, the moment marked Russia’s arrival on the world stage. Putin took advantage of the opportunity to present his country in a positive light. The public relations effort included a two-hour television broadcast during which Putin answered questions submitted from around the world via the Internet. Putin was also Time magazine’s 2007 “Man of the Year.”

In 2006, flush with dollars from oil exports, the Russian govern- ment lifted all currency controls and made the ruble freely convertible in world markets. Although per capita gross national income (GNI) in Russia is only $9,720, Russian shoppers spend billions each year on luxury goods, tourism, and foreign real estate. Today, affluent Russians can shop at boutiques that offer Versace, Burberry, Bulgari, and other exclusive brands.

Despite the positive publicity, the phrases managed democracy and state capitalism have been used to describe the arbitrary exercise of state power in Russia. The Kremlin limits foreign investment in stra- tegic industries such as oil; the term renationalization has been applied to the process by which state-owned enterprises (SOEs) acquire their rivals. Terms such as crony capitalism and kleptocracy refer to the ram- pant corruption and bribery prevalent among Putin loyalists.

In May 2012, Putin was elected to a third term as Russia’s presi- dent. Soon, he found himself at the center of several controversies that unsettled the international community. First, the government arrested and jailed members of an all-female art collective after they sang an anti-Putin rock song in an Orthodox cathedral. Members of the feminist punk rock band Pussy Riot were arrested following a brief performance at the Christ the Savior cathedral in Moscow (see Exhibit 5-17). The band was known for its anti-Putin stance and provocative lyrics; one of the band’s songs is titled “Holy Mary, Blessed Virgin, Drive Putin Away.” Three of the band’s members—Maria Alyokhina, Yekaterina Samutsevich, and Nadezhda Tolokonnikova—were charged

with “hooliganism motivated by religious hatred.” After a lengthy legal process, Alyokhina and Tolokonnikova were sentenced to two-year prison terms in a remote part of Siberia; Samutsevich was acquitted. In December 2013, in the run-up to the Winter Olympics in Sochi, Presi- dent Putin pardoned the women and they were released from prison.

Also in 2012, after Ukraine began negotiating a trade deal with the European Union, Putin threatened to impose sanctions. In March 2014, Putin angered the West by annexing Crimea, a region that had been considered part of Ukraine. A few months later, after pro- Russian separatists launched a military campaign in Ukraine, the West turned the tables and threatened Russia with sanctions. Tragically, in July, a separatist missile downed a Malaysian airliner over Ukrainian air- space, killing everyone on board. Then, as 2014 came to an end, the global price of oil dropped below $60 per barrel and the Russian ruble plunged in value.

Faced with a financial crisis and a test of his political will, Putin blamed the West for Russia’s problems. Then-U.S. President Barack Obama responded by observing that Russia’s problem is that it doesn’t produce any products that people want to buy. Despite—or perhaps because of—such rhetoric, Putin remains extremely popular with the Russian people. Indeed, many Russians agreed when Putin asserted that the collapse of the Soviet Union was “one of the greatest geopolitical catastrophes of the twentieth century for Russia and Russians.” Some observers have suggested that a new Cold War era is dawning.

The Economic and Political Environments in Russia There is other evidence that the political environment in Russia is pre- carious. Anna Politkovskaya, a reporter for Russia’s Novaya Gazeta (“New Paper”), often filed stories critical of President Vladimir Putin. On October 7, 2006, assailants gunned down Politkovskaya as she returned from a shopping trip. Since 2000, more than a dozen journal- ists have been murdered in Russia. Observers note that Russia’s inde- pendent press suffered as the Kremlin tightened control in anticipation of the 2008 presidential election.

Revenues from the fuel and energy sectors translate into gov- ernment spending that consumes a whopping 40 percent of GDP. A related problem is the fact that Russia’s energy industry is dominated by a handful of huge conglomerates. The men who run these companies are known as oligarchs; at one time, Yukos Oil’s Mikhail Khodorkovsky, Sibneft’s Roman Abramovich, and their peers were among Russia’s ultra-rich elite. However, there was widespread resentment among the Russian citizenry about the manner in which the oligarchs had gained control of their respective companies. In 2003, the Putin government sent a message to the oligarchs by arresting Khodorkovsky and several of his peers. In 2010, after having spent 7 years in prison, Khodor- kovsky was sentenced to another 13.5 years of incarceration after a Moscow court found him guilty of money laundering and embezzle- ment. Many observers viewed the verdict as evidence of the Russian government’s desire to maintain an iron grip on the economy.

Russia faces other problems as well. Its entrenched bureaucracy is a barrier to increased economic freedom. Further, the banking system remains fragile and is in need of reform. Yevgeny Yasin, a former econ- omy minister and an advocate of liberal reforms, noted recently, “The Russian economy is constrained by bureaucratic shackles. If the economy is to grow, these chains must be dropped. If we can overcome this feudal system of using power, we will create a stimulus for strong and sustain- able economic growth and improve the standards of living.”

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cHAPTER 5 • THE POLITIcAL, LEGAL, ANd REGuLATORy ENVIRONMENTS 171

Exhibit 5-17 Disguised in bright balaclavas, the all-female art collec- tive known as Pussy Riot appears on Red Square in Moscow. In 2012, after attempting to perform an anti-Kremlin song in an Orthodox cathedral, three of the activists were arrested and convicted of “anti-religious hooligan- ism.” Two of the women were sent to prison; the third was released. The group’s members maintain that their work is intended to transform Russian society for the better. President Putin pardoned the prisoners prior to the 2014 Winter Olympics in Sochi. Source: Denis Sinyakov/Reuters.

Management investment firm. When Magnitsky went public with his allegations in 2008, he was arrested. He died in jail under suspicious circumstances in November 2009. The law calls for the U.S. govern- ment to identify by name Russian officials believed to be complicit in Magnitsky’s death; those persons will not be allowed to enter the United States and any assets held in the United States have been frozen.

A Tough Environment: The One–Two Punch of Plunging Oil Prices and Sanctions The Kremlin was steadfast in asserting its right to annex Crimea and in denying that it was supporting the separatists. Even so, the European Union, the United States, Australia, Canada, and Norway moved to impose sanctions on a variety of Russia’s industry sectors. Russia responded by banning imports of Western food products (see Exhibit 5-18).

As the ruble’s value fell through most of 2014, European firms began to feel the effects. Carlsberg, the Danish brewer, generates most of its revenues in Russia. France’s Danone, which has two-dozen Rus- sian dairy plants and 13,000 employees, experienced reduced demand for milk. As 2014 came to an end, IKEA announced price increases. After raising the price of the iPhone 6 by 25 percent, Apple temporarily halted online sales of the hot-selling device. Russian consumers rushed to change rubles to dollars and euros and to buy big-ticket items such as big-screen TVs and luxury cars.

Election Meddling and Lobbying to Overturn the Magnitsky Law Following the election of Donald Trump to the U.S. presidency in November 2016, Washington’s relationship with Moscow took a bizarre turn. As it turned out, prior to the election, members of the Trump family had met with Russian officials who claimed to have infor- mation that would negatively impact the election chances of Democrat presidential candidate Hillary Clinton.

Throughout his campaign, Trump asserted that he would be able to, in his words, “get along” with President Vladimir Putin and reset America’s relationship with Russia. Despite these assurances, the Krem- lin’s support for Syria’s President Bashar al-Assad was a constant source

The Marketing Opportunity: Do the Rewards Out- weigh the Risks? Despite the political risk, a number of global companies have been seeking to capitalize on Russia’s improved economic climate. Pep- siCo, whose operations date back to the Soviet era, has a cumulative investment of more than $4 billion in the country. As noted in Case 1-2, McDonald’s has opened hundreds of restaurants since 1990. BP, Carlsberg, Coca-Cola, Danone SA, General Motors, IKEA, Salvatore Ferragamo, and Yum!Brands are some of the other companies with footholds in Russia.

IKEA, the global furniture retailer, has opened dozens of new stores across Russia. However, after Russian bureaucrats allegedly sought bribes, the company had to lease diesel generators to ensure a stable supply of electricity. In 2010, IKEA announced that it was halting con- struction of a $1 billion mall and would focus on its existing stores. France’s Auchan and German retail chains Rewe and Metro are target- ing the grocery market. By contrast, Carrefour and U.K.-based Tesco do not yet have a market presence due to the perceived risks. Walmart recently closed its Moscow office.

Moscow’s Strained Relationship with Washington Even before the crisis in Ukraine, Washington’s relationship with Mos- cow had been growing more strained. In December 2012, President Obama signed the Russia and Moldova Jackson-Vanik Repeal and Ser- gei Magnitsky Rule of Law Accountability Act. The first part of the law normalized trade relations with Russia and Moldova by repealing Jackson-Vanik, a law dating to the mid-1970s. At that time, the Soviet Union was a “non-market economy” that restricted the right of its citizens to emigrate abroad; Jackson-Vanik denied most-favored-nation trading status to any country that blocked emigration rights. After the Soviet Union broke apart in 1991, Russia transitioned to a market economy, and today its citizens are free to travel abroad and emigrate. Moreover, Russia joined the WTO in 2012. For these reasons, Jackson- Vanik is no longer relevant.

The second part of the law is concerned with civil rights issues in Russia at the present time. Sergei Magnitsky was a Russian law- yer who uncovered evidence that Russian government officials had stolen $230 million in tax payments made by the Heritage Capital

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172 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

Exhibit 5-18 A Russian ban on Euro- pean imports has resulted in excess supplies of milk, apples, and other agricultural products. Source: JANEK SKARZYNSKI/AFP/Getty Images.

As Richard Shaw, an investment advisor, noted, BICIS (“BEE-chees”) “is catchy—kind of like an Italian purse.”

Discussion Questions 5-8. Discuss why the Putin government decided to pursue legal

action against the members of Pussy Riot. 5-9. What impact will the Magnitsky law have on the political and

legal environment in Russia? 5-10. Russia hosted the 2018 World Cup, with matches held in St.

Petersburg, Kaliningrad, and other cities. Did the event gen- erate favorable publicity that enhanced Russia’s standing on the world stage? Or was the press coverage negative?

5-11. As the chief marketing officer of a global company, would you recommend establishing operations in Russia?

Sources: Henry Foy, “Sanctions Spur Growth in Russian Agriculture,” Financial Times (September 4, 2017), p. 17; Courtney Weaver, “Freedom Fighter,” Financial Times Life & Arts (December 15–16, 2012), p. 23; Melena Ryzik, “Carefully Calibrated for Protest,” The New York Times (August 26, 2012), p. AR1; John Thornhill and Geoff Dyer, “Death of a Lawyer,” Financial Times Life & Arts (July 28–29, 2012), pp. 2–3; Anatol Lieven, “How the Rule of Law May Come Eventually to Russia,” Financial Times (December 6, 2010), p. 11; Roben Farzad, “The BRIC Debate: Drop Russia, Add Indonesia?” Busi- nessWeek (November 18, 2010); Neil Buckley, “From Shock Therapy to Retail Therapy: Russia’s Middle Class Starts Spending,” Financial Times (October 31, 2006), p. 13; David Lynch, “Russia Brings Revitalized Economy to the Table,” USA Today (July 13, 2006), pp. 1B, 2B; Guy Chazan, “Kremlin Capitalism: Russian Car Maker Comes under Sway of Old Pal of Putin,” The Wall Street Journal (May 19, 2006), pp. A1, A7; Greg Hitt and Gregory L. White, “Hurdles Grow as Russia, U.S. Near Trade Deal,” The Wall Street Journal (April 12, 2006), p. A4.

of tension between the United States and Russia. At a G-20 conference in 2016, Trump had a private meeting with Putin without any of his U.S. staff members present. Some observers were concerned that in such an encounter Putin, a former intelligence official, might find a way to set a trap for Trump.

As it turns out, the sanctions have been a boon for Russia’s agricul- tural sector. In many instances, Russian consumers have little choice but to “buy local.” As a result, Russian Aquaculture, a producer of farmed salmon, has expanded to keep up with booming demand. In addition to winning domestic market share, Russian agricultural producers are increasing their exports. For example, grain production has reached record levels. In 2016, Russian wheat exports surpassed those of the United States, and Russia was on track to pass the EU as the world’s number 1 grain exporter in 2017.

Conclusion Today, even as relations between the West and Russia are at their lowest point in decades, Russia’s dependence on a single commod- ity for the bulk of its export earnings is easing. Repercussions—both negative and positive—from the sanctions imposed after the crisis in Ukraine and the 2016 U.S. election continue to reverberate. Despite upbeat talk of creating a Silicon Valley–type development in suburban Moscow, some observers have begun asking whether it is time to take the “R” out of “BRICS.”

Which emerging market should take its place? Indonesia is the top choice. The new acronym could be BIIC; an alternative would be BICI.

MyLab Marketing Go to the Assignments section of your MyLab to complete these writing exercises.

5-12. What is sovereignty? Discuss your thoughts on what is an important consideration in the political environment of global marketing.

5-13. Discuss some of the differences between the legal environments of countries that embrace common law and those of countries that observe civil law.

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cHAPTER 5 • THE POLITIcAL, LEGAL, ANd REGuLATORy ENVIRONMENTS 173

29John R. Wilke, “U.S. Court Rules Antitrust Laws Apply to Foreigners,” The Wall Street Journal (March 19, 1997), p. B5. 30Kim Hjelmgaard, “Google Fined Record-Setting $2.72 Billion over EU Rules,” USA Today (June 28, 2017), p. 3B. 31Detlev Vagts, Transnational Business Problems (Mineola, NY: Foundation Press, 1986), pp. 285–291. 32Alice Rawsthorn and Emma Tucker, “Movie Studios May Have to Scrap Joint Distributor,” Financial Times (February 6, 1998), p. 1. 33Anna Wilde Mathews, “Making Waves: As U.S. Trade Grows, Shipping Cartels Get a Bit More Scrutiny,” The Wall Street Journal (October 7, 1997), pp. A1, A8. 34Brigid McMenamin, “Eroding Patent Rights,” Forbes (October 24, 1994), p. 92. 35Salem M. Katsh and Michael P. Dierks, “Globally, Trade Secrets Laws Are All over the Map,” National Law Journal 17, no. 36 (May 8, 1995), p. C12. 36Much of the material in this section is adapted from Daniel Pines, “Amending the Foreign Corrupt Practices Act to Include a Private Right of Action,” Califor- nia Law Review (January 1994), pp. 185–229. 37John Bussey, “The Rule of Law Finds Its Way Abroad—However Painfully,” The Wall Street Journal (June 24, 2011), p. B1. 38www.justice.gov/criminal/fraud/fcpa/docs/lay-persons-guide.pdf. Accessed June 1, 2011. 39Peggy Hollinger, “Charges Revealed over Rolls-Royce Bribery Scheme,” Financial Times (November 9, 2017), p. 18. 40Daniel Pines, “Amending the Foreign Corrupt Practices Act to Include a Private Right of Action,” California Law Review (January 1994), p. 205. 41Rebecca Bream and Neil Buckley, “Investors Still Drawn to Russia Despite Pitfalls,” Financial Times (December 1, 2006), p. 21. 42Amy Borrus, “Inside the World of Greased Palms,” BusinessWeek (November 6, 1995), pp. 36–38. 43José Ángel Gurría, “Rich Must Set the Example of Bribery,” Financial Times (September 13, 2006), p. 5. 44Charles Fleming, “Europe Learns Litigious Ways,” The Wall Street Journal (February 24, 2004), p. A17. 45Bruce Londa, “An Agreement to Arbitrate Disputes Isn’t the Same in Every Language,” Brandweek (September 26, 1994), p. 18. See also John M. Allen, Jr., and Bruce G. Merritt, “Drafters of Arbitration Clauses Face a Variety of Unfore- seen Perils,” National Law Journal 17, no. 33 (April 17, 1995), pp. C6–C7. 46Dorothee J. Feils and Florin M. Sabac, “The Impact of Political Risk on the Foreign Direct Investment Decision: A Capital Budgeting Analysis,” Engineering 45, no. 2 (2000), p. 129. 47Bob Davis, “Red-Tape Traumas: To All U.S. Managers Upset by Regulations: Try Germany or Japan,” The Wall Street Journal (December 14, 1995), p. A1. 48Raphael Minder, “The Lobbyists Take Brussels by Storm,” Financial Times (January 26, 2006), p. 7. See also Brandon Mitchener, “Standard Bearers: Increasingly, Rules of Global Economy Are Set in Brussels,” The Wall Street Journal (April 23, 2002), p. A1. 49Klaus-Dieter Borchardt, European Integration: The Origins and Growth of the European Union (Luxembourg: Office for Official Publications of the European Communities, 1995), p. 30. 50Klaus-Dieter Borchardt, The ABC of Community Law (Luxembourg: Office for Official Publications of the European Communities, 1994), p. 25. 51Formerly known as the Court of First Instance. 52Rochelle Toplensky, “Upmarket Brands Win Online Sales Ban,” Financial Times (December 7, 2017), p. 16. 53Charles Forelle, “Europe’s High Court Tries on a Bunny Suit Made of Choco- late,” The Wall Street Journal (June 11, 2009), p. A1. 54Michael Peel, “L’Oréal in Legal Victory over Rival,” Financial Times (June 18, 2009), p. 3. 55David Segal, “Is Italy Too Italian?” The New York Times (July 31, 2010), p. B1.

1Richard Stanley, Changing Concepts of Sovereignty: Can the United Nations Keep Pace? (Muscatine, IA: Stanley Foundation, 1992), p. 7. 2Karen Pennar, “Is the Nation-State Obsolete in a Global Economy?” BusinessWeek (July 17, 1995), p. 80. 3Kathrin Hille, “Putin Sidesteps Celebration of Bolshevik Revolution,” Financial Times (October 26, 2017), p. 4. 4Rachel Sanderson, “Italy’s Richest Regions Back Call for Greater Autonomy,” Financial Times (October 24, 2017), p. 4. 5Ethan Kapstein, “Avoiding Unrest in a Volatile Environment,” Financial Times— Mastering Uncertainty, Pt I (March 17, 2006), p. 5. 6Guy Chazan, “‘Left Behind’ Voters Propel AfD in East Germany,” Financial Times (September 27, 2017), p. 8. 7Richard Milne, “Carlsberg Takes a Sobering Look at Russia,” Financial Times (August 12, 2014), p. 14. 8Courtney Weaver, “The Price of a Presence in Russia,” Financial Times (July 26, 2010), p. 2B. 9Dan Bilefsky, “Intrepid Shoe Executive Casts Lot with Albania,” The New York Times (October 8, 2009), p. B6. 10Craig S. Smith and Wayne Arnold, “China’s Antismuggling Drive to Hurt U.S. Exporters That Support Crackdown,” The Wall Street Journal (August 5, 1998), p. A12. 11Franklin R. Root, Entry Strategies for International Markets (New York, NY: Lexington Books, 1994), p. 154. 12William R. Slomanson, Fundamental Perspectives on International Law (St. Paul, MN: West Publishing, 1990), p. 356. 13David J. Lynch, “Venezuelan Consumers Gobble up U.S. Goods Despite Politi- cal Tension,” USA Today (March 28, 2007). 14Much of the material in this section is adapted from Randall Kelso and Charles D. Kelso, Studying Law: An Introduction (St. Paul, MN: West Publish- ing, 1984). 15Harry Jones, “Our Uncommon Common Law,” Tennessee Law Review 30 (1975), p. 447. 16Gregory Maggs, “Conversation with Clarence Thomas,” C-SPAN (February 15, 2018). 17Mark M. Nelson, “Two Styles of Business Vie in East Europe,” The Wall Street Journal (April 3, 1995), p. A14. 18Adapted from Mushtaq Luqmani, Ugur Yavas, and Zahir Quraeshi, “Advertising in Saudi Arabia: Content and Regulation,” International Marketing Review 6, no. 1 (1989), pp. 61–63. MCB UP Limited 1989. 19Tony Barber, “‘Patents Are Key’ to Taking on China,” Financial Times (July 25, 2006), p. 2. 20William P. Alford, To Steal a Book Is an Elegant Offense: Intellectual Property Law in Chinese Civilization (Stanford, CA: Stanford University Press, 1995), p. 2. 21Frances Williams, “Call for Stronger EU Patent Laws,” Financial Times (May 22, 1997), p. 3. 22Andrew Kramer, “He Doesn’t Make Coffee, But He Controls ‘Starbucks’ in Russia,” The New York Times (October 12, 2005), pp. C1, C4. 23Tripp Mickel, “U.S. Move Reignites Cuba Rum Fight,” The Wall Street Journal (January 15, 2016), p. B1. 24Franklin R. Root, Entry Strategies for International Markets (New York, NY: Lexington Books, 1994), p. 113. 25John Carey, “Inching toward a Borderless Patent,” BusinessWeek (September 5, 1994), p. 35. 26Richard Pynder, “Intellectual Property in Need of Protection,” Financial Times (July 7, 1998), p. 22. 27Rana Foroohar, “A Better Patent System Will Spur Innovation,” Financial Times (September 4, 2017), p. 11. 28John R. Wilke, “Hunting Cartels: U.S. Trust-Busters Increasingly Target Inter- national Business,” The Wall Street Journal (February 5, 1997), p. A10.

Notes

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The global recorded music industry is in transition, as decades-old business models have been upended by the digital revolution. Disruptive technologies permit peer-to-peer sharing of digital music files on Pirate Bay and similar sites, and sales of physical CDs have been falling steadily for years. Revenue from legal paid downloads during the heyday of Apple’s iTunes store—often single songs rather than full albums—was not sufficient to offset the resulting losses.

Now, however, the music business is showing new signs of life. Music lovers have embraced a new generation of streaming services, and music ownership has given way to music “renting.” The number of worldwide paid streaming music subscriptions now exceeds the 100 million mark. The trend has been boosted by the popularity of streaming playlists featuring a new generation of artists such as Cardi B, whose “Bodak Yellow” was the first song by a solo female rap artist to reach Number 1 on the Billboard Hot 100 chart in more than two decades (see Exhibit 6-1).

Spotify is the global streaming leader, with more than 43 million subscribers; Apple Music, with more than 30 million subscribers, ranks second. By early 2018, though, Apple was on track to take the lead in U.S. paid subscriptions. Other streaming services include Amazon Music, Google Play Music, Deezer, and Tidal. Most services pay about three-fourths of the revenues they generate to record companies, music publishers, and songwriters.

Global Information Systems and Market Research

CASE 6-1

Big Data: “Number One with a Bullet” in the Music Industry

L E A R N I N G O B J E C T I V E S

6-1 Discuss the roles of information technology, management informa- tion systems, and big data in a global company’s decision-making processes.

6-2 Describe the various sources of market information, including direct perception.

6-3 Identify the individual steps in the traditional market research process,

and explain some of the ways global marketers adapt them.

6-4 Compare the way a multinational firm organizes the marketing research effort with the way a global or transnational firm approaches the organizing issue.

6-5 Explain how information’s role as a strategic asset affects the structure of global corporations.

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Even so, many recording artists are struggling to adapt to the new music economy. A common complaint is that they don’t see significant financial returns even after a song is streamed millions of times. Indeed, superstar Taylor Swift made headlines in 2014 when she removed her music from Spotify to protest against low artist royalties. When Swift released her sixth album, Reputation, in fall 2017, only four songs were available to stream. However, fans (“Swifties”) snapped up 2 million physical albums and digital downloads in the first week alone!

Of course, the majority of recording artists do not come close to achieving the same level of global success as Swift, Adele, Cardi B, Ed Sheeran, or Jay-Z. To supplement their incomes, many artists have opted to tour constantly, hoping to generate income from ticket and merchandise sales. As global social media usage has grown, musicians have sought to interact with and engage fans via Facebook, Instagram, Twitter, and other online platforms. For example, Chance the Rapper uploads his music to SoundCloud, where it is available at no charge, and he posts thousands of tweets to his millions of Twitter followers.

Now, artists and the major record labels—including Universal Music Group, Warner Music Group, and Sony Music Entertain- ment—are leveraging data from music sales, media buzz, and online airplay to gain insights that will help them make better marketing decisions—and make more money. In short, the music industry has embraced information science and big data.

Big data allows record executives and band managers to find patterns and discern market trends and fan preferences, often in real time. For example, data analytics permits record company executives to overlay information about, say, an artist’s appearance

Exhibit 6-1 Ad Age magazine included Cardi B in its 2017 Creativity 50 list of “the year’s most influential creative figures.” At the 60th Annual Grammy Awards telecast in New York City, she sat with Takeoff, Quavo, and Offset of hip-hop trio Migos.

Source: JANEK SKARZYNSKI/AFP/Getty Images.

on The Tonight Show with Jimmy Fallon or The Grammys and cor- responding concert appearances in New York City or Los Angeles with social media posts. Big data allows executives to see which factors “move the needle” across a variety of metrics. To learn more about the way the music industry uses big data to stay ahead of trends in this fast-moving industry, turn to the continuation of Case 6-1 at the end of the chapter.

The music industry’s use of big data shows how information about buyer behavior and the overall business environment is vital to effective managerial decision making. When researching a mar- ket, seeking a solution to any problem, or trying to answer key questions, marketers must know where to go to obtain informa- tion. They must also know which subject areas to investigate and which information to look for, which ways they can acquire infor- mation, and how the various types of analyses will yield important insights and understanding.

It is the marketer’s good fortune that a veritable cornucopia of market information is available on the Internet. A few key- strokes can yield literally hundreds of articles, research findings, and Web sites that offer a wealth of information about market- ing-related issues. Even so, marketers must do their homework if they are to make the most of modern information technol- ogy. First, they need to understand the importance of informa- tion technology and marketing information systems as strategic assets. Second, they should have a general understanding of the formal market research process. Finally, they should know how to manage the marketing information collection system and the marketing research effort. These topics are the focus of this chapter.

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6-1 Information Technology, Management Information Systems, and Big Data for Global Marketing

Information technology (IT) refers to an organization’s processes for creating, storing, exchanging, using, and managing information. A management information system (MIS) provides managers and other decision makers with a continuous flow of information about company operations. MIS is a broad term that can be used to refer to a system of hardware and software that a company uses to manage information. An MIS should provide a means for gathering, analyzing, classifying, storing, retrieving, and reporting relevant data. The term big data refers to extremely large data sets that can be subjected to computational analysis to reveal patterns and trends (see Exhibit 6-2).

Big data and big data analytics have long been the province of astronomers, meteorologists, and other members of the scientific community. Only recently have big data collection and analy- sis been applied to business situations. In particular, the exploding popularity of Facebook and other social media platforms has resulted in a wealth of big data. Of course, much of that data may be redundant or irrelevant, for a simple reason: The cost of data collection has dropped so dramatically that a company can amass scads of data irrespective of a particular question, problem, or purpose that its marketers might have.

A case in point is video-streaming pioneer Netflix, which has collected more than 10 bil- lion movie ratings from subscribers. Netflix also gathers demographic data about all its sub- scribers, including age, gender, and place of residence. Netflix knows, for example, that some 20-something males have viewing habits that many people would associate with 70-year-old females, and vice versa. Netflix managers must determine how to use the ratings in conjunction with demographic information and viewership data so that new subscribers enjoy a better content- discovery experience.

As the Netflix example illustrates, gathering data is not an end in itself, but rather a means to an end. Confronted with mountains of data that include user-generated content, often from a variety of sources, marketers must be able to determine what matters and what doesn’t. Metaphori- cally speaking, this calls for separating the wheat from the chaff, or, as a data scientist might put it, separating the signal from the noise. A company’s trove of data, which includes a great deal of “noise,” must be converted into information (“signal”) by eliminating statistical redundancy and

6-1 Discuss the roles of informa- tion technology, management information systems, and big data in a global company’s decision- making processes.

Exhibit 6-2 Coca-Cola’s Freestyle vending machines utilize “micro- dosing technology” that allows for 170 possible drink combinations. User data generated by the units prompted Coca-Cola to develop a new flavor: Cherry Sprite.

Source: Roberto Machado Noa/LightRocket via Getty Images.

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corruption. Finally, by applying data analytics to the problem that needs to be solved or the ques- tion that needs to be answered, marketers can arrive at insights that are interpretable and relevant. Those insights can be used to improve decision making (see Figure 6-1).

One component of a firm’s MIS is a business intelligence (BI) network that helps managers make decisions. The major objective of the BI network is

to enable interactive access to data, enable manipulation of these data, and to provide managers and analysts with the ability to conduct appropriate analysis. By analyzing historical and current data, situations, and performances, decision makers get valuable insights upon which they can base more informed and better decisions.2

Global competition, together with the advent of the big data era, intensifies the need for effec- tive MIS and business intelligence that are accessible throughout the company. As Jean-Pierre Corniou, former chief information officer (CIO) at Renault, noted:

My vision is to design, build, sell, and maintain cars. Everything I do is directly linked to this, to the urgent need to increase turnover, margins, and brand image. Every single investment and expense in the IT field has to be driven by this vision of the automotive business.3

Many companies with global operations have made significant investments in their IT infra- structure in recent years. Such investments are typically directed at upgrading a company’s legacy computer hardware and software. Amazon Web Services (AWS), Microsoft, SAP, Oracle, and IBM are some of the beneficiaries of this trend. All of these companies are global enterprises,

“We are positioning our- selves as a data company. We have half a billion customers with us with shopping intentions and a method to pay. We know who they are, what they want, what they hate.”1

Daniel Zhang, CEO, Alibaba

FIGURE 6-1 Relationship Between Data, Information, and Insight.

noise data

information

insight

relevant to my brand

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and many of their customers are global as well. Vendors of complex software systems can find it difficult to achieve 100 percent customer satisfaction. Thomas Siebel, founder of Siebel Systems, explains how his company met this challenge:

Siebel Systems is a global company, not a multinational company. I believe the notion of the multinational company—where a division is free to follow its own set of business rules—is obsolete, though there are still plenty around. Our customers—global companies like IBM, Zurich Financial Services, and Citicorp—expect the same high level of service and quality, and the same licensing policies, no matter where we do business with them around the world. Our human resources and legal departments help us create policies that respect local cultures and requirements worldwide, while at the same time maintaining the highest standards. We have one brand, one image, one set of corporate colors, one set of messages, across every place on the planet.4

Unlike the public Internet, an intranet is a private network that allows authorized company personnel or outsiders to share information electronically in a secure fashion without generat- ing mountains of paper. Intranets, in conjunction with a state-of-the-art IT system, can serve as a 24-hour nerve center. Through their use, Amazon, FedEx, Google, Netflix, Spotify, Walmart, and other companies can operate as real-time enterprises (RTEs). The RTE model is growing in popularity as more executives and managers realize leveraging big data via advanced analytics can be a source of competitive advantage.

An electronic data interchange (EDI) system allows a company’s business units to submit orders, issue invoices, and conduct business electronically with other company units as well as with outside companies. One of the key features of EDI is that its transaction formats are universal, which enables computer systems at different companies to “speak the same language.” Walmart is legendary for its sophisticated EDI system. For years, vendors had received orders from the giant retailer on personal computers using dial-up modems connected to third-party transmission networks. In 2002, Walmart informed vendors that it was switching to an Internet-based EDI system. The switch has saved both time and money; the modem-based system was susceptible to transmission interruptions, and the cost was between $0.10 and $0.20 per thousand characters transmitted. Any vendor that now wishes to do business with Walmart must purchase and install the necessary computer software.5

Poor operating results can often be traced to insufficient data and information about events both inside and outside a company. For example, when a new management team took over the U.S. unit of Adidas AG, the German athletic shoemaker, the team discovered that data were not avail- able on normal inventory turnover rates. A new reporting system revealed that archrivals Reebok and Nike turned their inventories five times a year, compared with only twice a year at Adidas. This information was used to tighten the company’s marketing focus on the best-selling Adidas products. In Japan, 7-Eleven’s computerized distribution system provides it with a competitive advantage in the convenience store industry. Every 7-Eleven store is linked with every other store and with distribution centers. As one retail analyst noted:

With the system they have established, whatever time you go, the shelves are never empty. If people come in at 4 A.M. and the stores don’t have what they want, that will have a big impact on what people think of the store.6

Globalization puts increased pressure on companies to achieve as many economies as pos- sible. Toward this end, IT provides a number of helpful tools. As noted previously, EDI links with vendors enable retailers to improve inventory management and restock hot-selling products in a timely, cost-effective manner. In addition to EDI, retailers are increasingly using a technique known as efficient consumer response (ECR) in an effort to work more closely with vendors on stock replenishment. ECR can be defined as a joint initiative of members of a supply chain working together to improve and optimize aspects of the supply chain to benefit customers. ECR systems utilize electronic point of sale (EPOS) data gathered by checkout scanners to help retail- ers identify product sales patterns and determine how consumer preferences vary with geography. Although currently more popular in the United States, the ECR system is gaining traction in

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Europe. Companies such as Carrefour, Metro, Coca-Cola, and Henkel have all embraced ECR. Supply-chain innovations such as radio frequency identification tags (RFID) are likely to provide increased momentum for the use of ECR.

EPOS, ECR, and other IT tools are also helping businesses improve their ability to target consumers and increase loyalty. The trend among retailers is to develop customer-focused strategies that will personalize and differentiate the business. In addition to point-of-sale (POS) scanner data, loyalty programs such as Tesco’s Clubcard, which use electronic smartcards, provide retailers with important information about shopping habits. Customer relationship management (CRM) is an important business tool that helps companies leverage the data they collect through such systems.

Although industry experts offer varying descriptions and definitions of CRM, the prevailing view is that CRM is a philosophy that values two-way communication between the company and the customer. Every point of contact (“touchpoint” in CRM-speak) that a company has with a con- sumer or business customer—via a Web site, a warranty card, a sweepstakes entry, a payment on a credit card account, or an inquiry to a call center—offers an opportunity to collect data. Likewise, every time a Spotify user clicks “play,” a data point is generated. CRM tools allow companies to determine which customers are most valuable and to react in a timely manner with customized product and service offerings that closely match customer needs. If implemented correctly, CRM can make employees more productive and enhance corporate profitability; it also benefits custom- ers by providing value-added products and services.

A company’s use of CRM can manifest itself in various ways. In the hotel industry, for example, CRM can take the form of front-desk staff who monitor, respond to, and anticipate the needs of repeat customers. A visitor to Amazon.com who buys the latest Taylor Swift CD encoun- ters CRM when he or she gets the message “Frequently Bought with the Item You Added: Ed Sheeran’s X and Sam Smith’s In the Lonely Hour.” CRM can also be based on the click path that a Web site visitor follows. In this case, however, Internet users may be unaware that a company is tracking their behaviors and interests.

One challenge of using CRM is integrating data into a complete picture of the customer and his or her relationship to the company and its products or services—a perspective sometimes referred to as a “360-degree view of the customer.” This challenge is compounded for global mar- keters. Their subsidiaries in different parts of the world may use different customer data formats, and commercial CRM products may not support all the target languages. In view of such issues, industry experts recommend implementing global CRM programs in phases.

The first phase could focus on a specific task such as sales force automation (SFA); this term refers to a software system that automates routine aspects of sales and marketing functions such as lead assignment, contact follow-up, and opportunity reporting. While Salesforce.com is a key player in this space, Microsoft Dynamics CRM and Oracle Siebel CRM on Demand are among the other vendors offering SFA. An SFA system can also analyze the cost of sales and the effectiveness of marketing campaigns. Some SFA software can assist with quote preparation and management of other aspects of a sales campaign, such as mass mailings and conference or convention attendee follow-up.

For example, an important first step in implementing a CRM system could be to utilize SFA software from a company such as Oracle. The objective at this stage of the CRM effort would be to provide sales representatives in all country locations with access via an Internet portal to sales activities throughout the organization. To simplify the implementation, the company could require that all sales activities be recorded in English. Subsequently, marketing, customer service, and other functions could be added to the system.7

Privacy issues related to data collection and use vary widely from country to country. In the EU, for example, a Directive on Data Collection has been in effect since 1998. Companies that use CRM to collect data about individual consumers must satisfy the regulations in each of the EU’s 28 member countries. There are also restrictions about sharing such information across national borders. In 2000, the U.S. Department of Commerce and the EU concluded a Safe Harbor agree- ment that established principles for privacy protection for companies that wish to transfer data to the United States from Europe.

However, in 2013, following revelations by Edward Snowden about U.S. intelligence activi- ties, an Austrian activist named Max Schrems brought suit in the European Court of Justice (ECJ)

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As the number 1 supermarket chain in the United Kingdom, Tesco is “the one to beat.” Tesco’s management team faces the constant challenge of staying ahead of fast-growing competitors. These include local chains such as Sainsbury as well as Asda, which is owned by retail giant Walmart.

One of the keys to Tesco’s success is a loyalty program tied to its Clubcard. Signing up for the program is easy: Shoppers fill out applica- tions (either at the store or online) that include questions regarding family demographics and dietary preferences. The 15 million house- holds with Clubcards represent 80 percent of Tesco’s customer base. Shoppers present their cards at checkout and are awarded two points for every £1 spent (see Exhibit 6-3).

For every 100 points accumulated, shoppers receive a £1 voucher that can be redeemed for future grocery purchases or used with airline frequent-flyer programs. Tesco also partners with other retailers such as Pizza Express, where vouchers are worth four times their face value. Need- less to say, the Clubcard is a hit with university students! Tesco also offers different incentives to different segments; for example, high spenders are offered vouchers that are worth triple points when redeemed on certain categories of merchandise.

The Clubcard program actually does more than allow Tesco to reward its customers: It provides Tesco’s IT team with a clear picture of what is selling, what isn’t selling, and where the gaps are in its product assortment. The Clubcard program is managed by Dunnhumby, an independent consultancy located near London. Each product in the database is scored on price and dozens of other dimensions. As an example of the value of the Clubcard program, Dunnhumby cofounder Clive Humby points to wine sales:

In the wine department, we could see that people were trading up to stuff Tesco didn’t stock. At Christmas, people wanted to buy “posh” wine; those who usually bought cheap wine went from spending £2.99 a bottle to £5.99 a bottle—

but where were the people who should have been trading up from £5.99 to £7.99? They were at [specialty wine store] Oddbins because Tesco didn’t have a full-enough range.

Dunnhumby groups Tesco customers into various clusters based on the similarity of the contents of their shopping carts. For example, analysts have dubbed one segment “Finer Foods”; it comprises time- deprived, affluent customers who choose upscale products. When the data indicated that these shoppers weren’t buying fine wine or cheese at Tesco, the company upgraded its offerings and introduced a house brand bearing the “Tesco’s Finest” label. By contrast, traditional shoppers are “Makers” who buy ingredients to prepare home-cooked meals. They gravitate toward Tesco’s lower-priced “Tesco Value” prod- ucts such as beer, baked beans, canned tomatoes, and noodles.

By combining household information with weekly purchase behav- ior data, Tesco is able to tailor promotions to specific customer seg- ments. Did a shopper buy diapers for the first time? Tesco sends that household coupons for baby wipes and beer. Why beer? New dads who are staying home with the baby can’t get out to the local pub as often as they once did, so they stock up on beer to consume at home.

Clubcard also gives Tesco a tactical advantage over Walmart’s Asda stores. Walmart’s value proposition is very clear: low prices. To prevent the most value-conscious shoppers from defecting, Tesco mined its data- base to identify Clubcard users who bought the lowest-priced grocery items. Managers identified several hundred items that the value hunters bought regularly; prices on those items were then lowered. The result: The shoppers stayed with Tesco instead of switching to Asda. Tesco cur- rently leads Asda in share of U.K. grocery sales by a margin of two to one.

Sources: Elizabeth Rigby, “Fresh Horizons Uneasily Scanned,” Financial Times ( September 19, 2010), p. 8; Andrea Felsted, “Tesco Takes Clubcard Route to Buoyant Sales,” Financial Times (January 12, 2010), p. 13; Andrea Felsted, “Tesco Experiments with Clubcard,” Financial Times (September 8, 2010), p. 10; Cecilie Rohwedder, “Stores of Knowledge: No. 1 Retailer in Britain Uses “Clubcard” to Thwart Wal-Mart,” The Wall Street Journal (June 6, 2006), pp. A1, A16.

THE CULTURAL CONTEXT

Tesco’s Clubcard

Exhibit 6-3 Tesco’s Clubcard is a loyalty program that the U.K.-based grocery store chain uses to reward customers; shoppers receive points based on purchase amounts. Points are converted to vouchers that can be redeemed for merchandise. Tesco also uses Clubcard to collect data on shopping preferences and patterns. Clubcard has been rolled out in many of Tesco’s international locations, including Poland. Source: Leon Neal/AFP/Getty Images.

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arguing that Facebook lacked adequate safeguards to protect user information from U.S. intel- ligence services. The result: The collapse of the U.S.–EU Safe Harbor agreement. Regulators in the EU, increasingly frustrated by their inability to enforce data protection laws, decided to take aim at Facebook and other U.S. “Big Tech” companies that control much of the data being gener- ated worldwide. A new law, the General Data Protection Regulation (GDPR), entered into force in 2016 and became enforceable against U.S. and other non-EU companies on May 25, 2018. The GDPR covers a variety of privacy-related issues, including protection of personal data, data subjects, and data processing.8

Databases called data warehouses are frequently an integral part of a company’s CRM system. Data warehouses can serve other purposes as well. For example, they can help retailers with multiple store locations fine-tune their product assortments at specific venues. Company personnel, including persons who are not computer specialists, can access data warehouses via standard Web browsers. Teradata, Oracle, IBM, and SAP are among the leading data warehouse vendors.

These examples show just some of the ways that IT and big data are affecting global market- ing. However, EDI, ECR, EPOS, SFA, CRM, and other aspects of IT do not simply represent mar- keting issues; rather, they are organizational imperatives. The tasks of designing, organizing, and implementing systems for business intelligence and information gathering must be coordinated in a coherent manner that contributes to the organization’s overall strategic direction. Modern IT tools provide the means for a company’s marketing information system and research functions to provide relevant information in a timely, cost-efficient, and actionable manner.

Overall, then, the global organization has the following needs:

d An efficient, effective system that will scan and digest published sources and technical journals in the headquarters country as well as in all countries in which the company has operations or customers.

d Daily scanning, translating, digesting, abstracting, and electronic inputting of informa- tion into a market intelligence system. Today, thanks to advances in IT, full-text versions of many sources are available online as PDF files. Print documents can easily be scanned, digitized, and added to a company’s information system.

d Expanding information coverage in other regions of the world.

6-2 Sources of Market Information Although environmental scanning is a vital source of information, research has shown that executives at the headquarters of global companies obtain as much as two-thirds of the infor- mation they need from personal sources. A great deal of external information comes from executives based abroad in company subsidiaries, affiliates, and branches. These executives are likely to have established communication with distributors, consumers, customers, suppliers, and government officials. A striking feature of the global corporation—and a major source of its competitive strength—is the role that executives abroad play in acquiring and disseminating information about the world environment. Headquarters-based executives generally acknowl- edge that company executives overseas are the people who know best what is going on in their areas.

The information issue exposes one of the key weaknesses of a domestic company: Although more attractive opportunities may be present outside existing areas of operation, they are likely to go unnoticed by inside sources in a domestic company because the scanning horizon tends to end at the home-country border. Similarly, a company with limited geographical operations may be at risk because internal sources abroad tend to scan only the information about their own countries or regions.

Direct sensory perception provides a vital background for the information that comes from human and documentary sources. Direct perception gets all the senses involved. It means seeing, feeling, hearing, smelling, or tasting for oneself to find out what is going on in a particular country, rather than getting secondhand information by hearing or reading about a particular issue. Some information is easily available from other sources, but sensory experience of it is needed for it to

6-2 Describe the various sources of market information, including direct perception.

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sink in. Often, the background information or context one gets from observing a situation can help fill in the big picture. For example, Walmart’s first stores in China stocked a number of products— extension ladders and giant bottles of soy sauce, for example—that were inappropriate for local customers. Joe Hatfield, Walmart’s top executive for Asia, began roaming the streets of Shenzhen in search of ideas. His observations paid off: When Walmart’s giant store in Dalian opened in April 2000, a million shoppers passed through its doors in the first week (see Exhibit 6-4). They snapped up products ranging from lunch boxes to pizza topped with corn and pineapple.9 When Jim Stengel was chief marketing officer at Procter & Gamble, he moved his managers away from a preoccupation with research data to a wider view based on direct perception. As Stengel noted:

We often find consumers can’t articulate it. That’s why we need to have a culture where we are understanding. There can’t be detachment. You can’t just live away from the consumer and the brand and hope to gain your insights from data or reading or talking to academics. You have to be experiential. And some of our best ideas are coming from people getting out there and experiencing and listening.10

Direct perception can also be important when a global player dominates a company’s domestic market. Such was the case with Microsoft and its Xbox video game system, which was launched in a market dominated by Sony. Cindy Spodek-Dickey, Microsoft’s group manager for national consumer promotions and sponsorships, took Xbox “on the road” with various promotional part- ners such as the Association of Volleyball Professionals (AVP). At AVP tournaments in different cities, spectators (and potential customers) had the opportunity to visit the Xbox hospitality tent to try out the new system. At one tournament event, Spodek-Dickey explained the importance of informal market research:

What are the other sponsors doing? What’s the crowd into? What brands are they wearing? How are they interacting with our property? I’ll stop them as they come out of the tent and say: “What do you think? What do you like about Xbox? What do you think of your PlaySta- tion?” It’s mother-in-law research. I wouldn’t want to stake a $10 million ad campaign on it, but I think it keeps you credible and real. When you start to hear the same feedback, three, four, five times, you’d better be paying attention. . . . I believe it is part of any good marketer’s job to be in touch with their audience and their product. There’s no substitute for face-to-face, eye-to-eye, hand-to-hand.12

Exhibit 6-4 Judith McKenna became President and CEO of Walmart Iin February 2018. Despite Walmart’s enormous size, McKenna focuses on “TNTs” - “tiny, noticeable things.”

Source: Julio Cortez/Associated Press.

“Case studies from the footwear industry show the importance of direct percep- tion in identifying market opportunities. Diego Della Valle is CEO of Tod’s; Mario Moretti Polegato heads Geox; and Blake Mycoskie founded TOMS. What they have in common is that all three were traveling abroad, viewing and expe- riencing the world, when inspiration struck.”11

Mark C. Green, Professor of Mar- keting, Simpson College

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6-3 Formal Market Research Information is a critical ingredient in formulating and implementing a successful marketing strat- egy. As described earlier, a marketing information system should produce a continuous flow of information. Market research, by contrast, is the project-specific, systematic gathering of data. The American Marketing Association defines marketing research as “the activity that links the consumer, customer, and public to the marketer through information.”13 In global market research, this activity is carried out on a global scale. The challenge of global market research is to recognize and respond to the important national differences that influence the way information can be obtained. These include cultural, linguistic, economic, political, religious, historical, and market differences.

Michael Czinkota and Ilkka Ronkainen note that the objectives of international market research are the same as the objectives of domestic research. However, they have identified four specific environmental factors that may require international research efforts to be conducted dif- ferently than domestic research. First, researchers must be prepared for new parameters of doing business. Not only will there be different requirements, but the ways in which rules are applied may differ as well. Second, “cultural megashock” may occur as company personnel come to grips with a new set of culture-based assumptions about conducting business. Third, a company entering more than one new geographic market faces a burgeoning network of interacting factors; research may help prevent psychological overload. Fourth, company researchers may have to broaden their definition of competitors in international markets to include competitive pressures that would not be present in the domestic market.15

Market research can be conducted in two different ways. First, a company may design and implement a study with in-house staff. Alternatively, it may use an outside firm special- izing in market research. In global marketing, a combination of in-house and outside research efforts is often advisable. Many outside firms have considerable international expertise; some specialize in particular industry segments. According to the American Marketing Association, global market research revenues for the top 25 research companies totaled $22.5 billion in 2015.16 The Nielsen Company is the world’s largest market research organization; it is the source of the well-known Nielsen TV ratings for the U.S. market. Nielsen Media Research International also provides media measurement services in more than 40 global markets. Other research specialists are the Kantar Group (brand awareness and media analysis), IMS Health (pharmaceutical and health care industries), and Germany’s GfK SE (custom research and consumer tracking).

The process of collecting data and converting it into useful information can be quite detailed, as shown in Figure 6-2. In the discussion that follows, we will focus on eight basic steps: infor- mation requirements, problem definition, choosing the unit of analysis, examining data avail- ability, assessing the value of research, research design, data analysis, and interpretation and presentation.

Step 1: Information Requirements The late Thomas Bata was a self-described “shoe salesman” who built the Bata Shoe Organiza- tion into a global empire that is now based in Switzerland. Legend has it that the Czech-born, Swiss-educated Bata once fired a salesman who, upon returning from Africa, reported that there was no opportunity to sell shoes there because everyone walked around barefoot. According to this story, Bata hired another salesman who understood that, in fact, Africa represented a huge untapped market for shoes. This anecdote underscores the fact that direct observation must be linked to unbiased perception and insight. However, as many marketers will acknowledge, it can be difficult to alter entrenched consumer behavior patterns.

Formal research often is undertaken after a problem or opportunity has been identified. A company may need to supplement direct perception with additional information to determine whether a particular country or regional market does, in fact, offer good growth potential. What proportion of potential customers can be converted into actual customers? Is a competitor making inroads in one or more important markets around the world? Is research on local taste preferences required to determine whether a food product must be adapted? A truism of market research is that a problem well defined is a problem half-solved. Thus, regardless of the particular situation

6-3 Identify the individual steps in the traditional market research process, and explain some of the ways global marketers adapt them.

“Traditional research con- centrated on the ‘what.’ Now we are trying to estab- lish the ‘why.’ We are not asking what consumers think about products and ideas but focusing on what makes them tick.”14

Simon Stewart, marketing director, Britvic

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that sets the research effort in motion, the first two questions a marketer should ask are “What information do I need?” and “Why do I need this information?” Table 6-1 lists various subject categories that may require research.

Step 2: Problem Definition As noted in Chapter 4, when a person’s home-country values and beliefs influence the assessment of a foreign culture or country, the self-reference criterion (SRC) is at work. The SRC tendency underscores the importance of understanding the cultural environments of global markets, as the following examples illustrate:

d When Mattel first introduced Barbie in Japan, managers assumed that Japanese girls would find the doll’s design just as appealing as American girls did. They didn’t.

FIGURE 6-2 Market Research Process Source: Adapted from V. Kumar, Interna- tional Marketing Research, 1st edition, © 2000. Reprinted by permission of Pearson Education, Inc., Upper Saddle River, NJ.

FIRM OBJECTIVE

INFORMATION REQUIREMENT Firm’s Needs

Market Orientation Strategic Orientation Problem Orientation

PROBLEM DEFINITION Self-Reference Criterion

CHOOSE UNIT OF ANALYSIS Country Region Global Subgroup/Segments within Countries

EXAMINE DATA AVAILABILITY Can Secondary Data Be Used?

Advantages and disadvantages of secondary research Sources of secondary data Types of problems that can be solved using secondary data

DATA ANALYSIS Factor Analysis Cluster Analysis Multidimensional Scaling Conjoint Analysis

RESEARCH DESIGN Instrument Design Scale Development

INTERPRETATION AND PRESENTATION

ASSESS VALUE OF RESEARCH Cost-Benefit Analysis

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d When the Walt Disney Company opened Disneyland Paris, park employees were expected to comply with a detailed written code regarding personal appearance. The goal was to ensure that guests received the kind of experience associated with the Disney name. The French workers, however, considered the code to be an insult to French culture, individual- ism, and privacy.

As these examples show, managers sometimes make decisions based on home-country mar- keting success that can turn out to be wrong when applied globally. Marketers might also assume that a marketing program that is successful in one country market can be applied to other country markets in the region. Consider again the case of Disney’s theme park business. Although Dis- neyland Japan was a huge success from opening day, the $3.2 billion Hong Kong Disneyland that opened in 2005 was less successful. This was due, in part, to the fact that visitors from mainland China had limited familiarity with traditional Disney “face characters” such as Snow White. As Jay Rasulo, president of Disney’s park and resort division, noted, “People from the mainland don’t show up with the embedded ‘Disney software’ like at other parks.”17

When approaching global markets, it is best to have “eyes wide open.” In other words, mar- keters must be aware of the impact that SRC and other cross-cultural assumptions can have. Such awareness can have several positive effects. First, it can enhance management’s willingness to conduct market research in the first place. Second, an awareness of SRC can help ensure that the research effort is designed with minimal home-country or second-country bias. Third, it can enhance management’s receptiveness to research findings—even if they contradict “tried-and- true” marketing experience in other markets.

Step 3: Choosing the Unit of Analysis The next step involves the need to identify in which part(s) of the world the company should be doing business and to find out as much as possible about the business environment in the area(s) identified. These issues are reflected in the subject agenda categories in Table 6-1. The unit of analysis may be a single country, or it may be a region such as Europe or South America. In some instances, the marketer is interested in a segment that is global. Countrywide data are not required for all market-entry decisions; in some cases, a specific city, state, or province may be the relevant unit of analysis. For example, a company that is considering entering China may focus initially on Shanghai. Located in the Jiangsu province, Shanghai is China’s largest city and main seaport. Because Shanghai is a manufacturing center, has a well-developed infrastructure, and is home to a population with a relatively high per capita income, it would be the logical focus of a market research effort.

Step 4: Examining Data Availability The first task at this stage is to answer several questions regarding the availability of data. Which type of data should be gathered? Can secondary data—for example, data available in company files, the library, industry or trade journals, or online databases—be used? When does manage- ment need the information to make a decision regarding market entry? Marketers must address these issues before proceeding to the next step of the research process. Using data that are readily available saves both money and time: A formal market study can cost hundreds of thousands of dollars and take many months to complete.

TA B L E 6 - 1 Subject Agenda Categories for a Global Marketing Information System

Category Coverage

1. Market potential Demand estimates, consumer behavior, review of products, channels, communication media

2. Competitor information Corporate, business, and functional strategies; resources and intentions; capabilities

3. Foreign exchange Balance of payments, interest rates, attractiveness of country currency, expectations of analysts

4. Prescriptive information Laws, regulations, rulings concerning taxes, earnings, dividends in both host and home countries

5. Resource information Availability of human, financial, physical, and information resources

6. General conditions Overall review of sociocultural, political, and technological environments

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A low-cost approach to market research and data collection begins with desk research. In other words, “The key to creating a cost-effective way of surveying foreign markets is to climb on the shoulders of those who have gone before.”18 Suppose a marketer wants to assess the basic market potential for a particular product. To make this determination, secondary sources are a good place to start. Clipping services, company or public libraries, online databases, government census records, and trade associations are just a few of the data sources that can be tapped with minimal effort and cost. Data from these sources already exist. Such data are known as secondary data because they were not gathered for the specific project at hand. Statistical Abstract of the United States is just one of the annual publications issued by the U.S. government that contains myriad facts about international markets.

The U.S. government’s most comprehensive source of world trade data is the National Trade Data Base (NTDB), an online resource from the Department of Commerce. The Bureau of Eco- nomic Analysis (www.bea.gov) and the Census Bureau (www.census.gov) are excellent online resources for foreign trade, economic indicators, and other current and historical data. Trade data for the European Union are available from Eurostat (epp.eurostat.ec.europa.eu). Most countries compile estimates of gross national product (GNP), gross domestic product (GDP), consumption, investment, government expenditures, and price levels. Demographic data indicating the population size, distribution of population by age category, and rates of population growth are also readily avail- able. Market information from export census documents compiled by the Department of Commerce on the basis of shippers’ export declarations is available as well. Formerly known as “ex-decs” or SEDs, these Electronic Export Information (EEI) forms must be filled out for any export valued at $2,500 or more. Another important source of market data is the Foreign Commercial Service.

Many countries have set up Web sites to help small firms find opportunities in world markets. For example, the Canadian Trade Commissioner Service (www.tradecommissioner.gc.ca) is a ser- vice supported by Foreign Affairs, Trade and Development Canada. Its Web site offers information about international markets and provides export assistance.

These suggestions do not exhaust the types of data available, however. A single source, The Statistical Yearbook of the United Nations, contains global data on agriculture, mining, manu- facturing, construction, energy production and consumption, internal and external trade, railroad and air transport, wages and prices, health, housing, education, communication infrastructure, and availability of mass communication media. The U.S. Central Intelligence Agency publishes The World Factbook, which is revised yearly. Other important sources of data are the World Bank, the International Monetary Fund, and Japan’s Ministry of International Trade and Industry (MITI). The Economist and the Financial Times regularly compile comprehensive surveys of regional and country markets and include them in their publications. Data from these sources are generally available in both print and electronic form.

How can such data be useful? Take industrial growth patterns as one example. Because they generally reveal consumption patterns, production patterns are helpful in assessing market oppor- tunities. Additionally, trends in manufacturing production indicate potential markets for compa- nies that supply manufacturing inputs. At the early stages of growth in a country, when per capita incomes are low, manufacturing centers on such necessities as food and beverages, textiles, and other forms of light industry. As incomes rise, the relative importance of these industries declines as heavy industry begins to develop.

A word of caution is in order at this point: Remember that data are compiled from various sources, some of which may not be reputable. Even when the sources are reputable, there is likely to be some variability from source to source. Anyone using data should be clear on exactly what the data are measuring. For example, studying income data requires understanding whether one is working with GNP or GDP figures. Also, anyone using the Internet as an information source should evaluate the credibility of the person(s) responsible for the Web site. Moreover, as Czinkota and Ronkainen note,19 secondary data may support the decision to pursue a market opportunity outside the home country, but such data are unlikely to shed light on specific questions: What is the market potential for our furniture in Indonesia? How much does the typical Nigerian consumer spend on soft drinks? Now that German law no longer requires that the “Der Grûne Punkt” trade- mark appear on product packaging, what effect, if any, will dropping the logo have on consumer purchasing behavior in Germany?

Syndicated studies published by private research companies are another source of secondary data and information (the word syndicated comes from the newspaper and television industries

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and refers to the practice of selling articles, cartoons, or guest columns, or programming to a number of different organizations). For example, MarketResearch.com (www.marketresearch. com) sells reports on a wide range of global business sectors, including consumer goods, food and beverages, and life sciences. The company partners with hundreds of research firms to offer a comprehensive set of reports. Although a single report can cost thousands of dollars, a company may be able to get the market information it needs without incurring the greater costs associated with conducting primary research.

Step 5: Assessing the Value of Research When data are not available through published statistics or studies, management may wish to conduct further study of the individual country market, region, or global segment. However, col- lecting information costs money. Thus, the marketing research plan should also spell out what this information is worth to the company in dollars (or euros, or yen, or some other currency) compared with what it would cost to collect it. What will the company gain by collecting these data? What would be the cost of not getting the data that could be converted into useful informa- tion? Research requires an investment of both money and managerial time, and it is necessary to perform a cost–benefit analysis before proceeding further. In some instances, a company will pursue the same course of action no matter what the research reveals. Even when more information is needed to ensure a high-quality decision, a realistic cost estimate of a formal study may reveal that the cost to perform research is simply too high.

The many small markets around the world pose a special problem for the researcher. The relatively low profit potential in smaller markets justifies only modest expenditures for marketing research, so the global researcher must devise techniques and methods that keep expenditures in line with the market’s profit potential. The researcher is often pressured to discover economic and demographic relationships that can lead to estimates of demand based on a minimum of informa- tion. It may also be necessary to use inexpensive survey research that sacrifices some elegance or statistical rigor to achieve results within the constraints of the smaller market research budget.

Step 6: Research Design As indicated in Figure 6-2, if secondary data can be used, the researcher can go directly to the data analysis step. Suppose, however, that data are not available through published statistics or stud- ies; in addition, suppose that the cost–benefit analysis indicated in step 5 has been performed and that the decision has been made to carry on with the research effort. Primary data are gathered through original research pertaining to the particular problem identified in step 1. At this point, it is time to establish a research design.

Global marketing guru David Arnold offers the following guidelines regarding data gathering:20

d Use multiple indicators rather than a single measure. This approach will decrease the level of uncertainty for decision makers. As the saying goes, “There are three sides to every story: your side, my side, and the truth.” A land surveyor can pinpoint the location of a third object given the known location of two objects. This technique, known as triangula- tion, is equally useful in global market research.

d Individual companies should develop customized indicators specific to the industry, prod- uct market, or business model. Such indicators should leverage a company’s previous expe- rience in global markets. For example, in some developing markets, Mary Kay Cosmetics uses the average wage of a female secretary as a basis for estimating income potential for its beauty consultants.

d Always conduct comparative assessments in multiple markets; do not assess a particular market in isolation. Comparative assessment enables management to develop a “portfolio” approach in which alternative priorities and scenarios can be developed. For example, to better understand Czech consumers in general, a company might also conduct research in nearby Poland and Hungary. By contrast, if a brewing company wished to learn more about beer consumption patterns in the Czech Republic, it might also conduct research in Ireland and Germany, where per capita beer consumption is high.

d Observations of purchasing patterns and other behavior should be weighted more heavily than reports or opinions regarding purchase intention or price sensitivity. Particularly in developing markets, it is difficult to accurately survey consumer perceptions.

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With these guidelines in mind, the marketer must address a new set of questions and issues in primary data collection. Should the research effort be geared toward quantitative, numerical data that can be subjected to statistical analysis, or should qualitative techniques be used? In global market research, it is advisable for the plan to call for a mix of techniques. For consumer products, qualitative research is especially well suited to accomplish the following tasks:21

d To provide consumer understanding; to “get close” to the consumer d To describe the social and cultural contexts of consumer behavior, including cultural, reli-

gious, and political factors that impact decision making d To identify core-brand equity and “get under the skin” of brands d To “mine” the consumer and identify what people really feel

ISSUES IN DATA COLLECTION The research problem may be more narrowly focused on market- ing issues, such as the need to adapt products and other mix elements to local tastes and to assess demand and profit potential. Demand and profit potential, in turn, depend in part on whether the market being studied can be classified as existing or potential. Existing markets are those in which customer needs are already being served by one or more companies. In many countries, data about the size of existing markets—in terms of dollar volume and unit sales—are readily available. In some countries, however, formal market research is a relatively new phenomenon and data are scarce.

In recent years, McKinsey & Company, Gartner Group Asia, and Grey China Advertising have been very active in China. For example, using focus groups and other techniques, Grey China gathers a wealth of information about attitudes and buying patterns that it publishes in its Grey China Base Annual Consumer Study. Recent findings point to growing concerns about the future, Westernization of grocery purchases, growing market saturation, increasingly discerning customers, and a rise in consumer willingness to try new products. Even with such data collection efforts, however, data gathered by different sources may be inconsistent. What is the level of soft drink consumption in China? Euromonitor International estimates consumption at 23 billion liters, whereas Coca-Cola’s in-house marketing research team places the figure at 39 billion liters. Like- wise, CSM, a Chinese television-rating agency, estimates the TV-advertising market at $2.8 billion per year, but Nielsen Media Research puts this figure closer to $7.5 billion.22

In such situations, and in countries where such data are not available, researchers must first estimate the market size, the level of demand, or the rate of product purchase or consumption. A second research objective in existing markets may be assessment of the company’s overall com- petitiveness in terms of product appeal, price, distribution, and promotional coverage and effec- tiveness. Researchers may be able to pinpoint a weakness in the competitor’s product or identify an underserved or unserved market segment. The minivan and sport-utility vehicle segments of the auto industry illustrate the opportunity that an existing market can present. For years, Chrysler dominated the U.S. minivan segment, for which annual sales at one time totaled nearly 1.2 million vehicles. Most global marketers compete in this segment, although a number of models have been discontinued due to declining sales. For example, Toyota introduced its Japanese-built Previa in the United States in 1991; critics mocked the teardrop styling and dismissed it as being underpowered. For the 1998 model year, the Previa was replaced with the American-built Sienna. To ensure that the Sienna suited American tastes, Toyota designers and engineers studied Chrysler minivans and dupli- cated key features such as numerous cup holders and a second sliding rear door on the driver’s side.

In some instances, there is no existing market to research. Such potential markets can be further subdivided into latent and incipient markets. A latent market is, in essence, an undis- covered segment. It is a market in which demand would materialize if an appropriate product were made available. In a latent market, demand is zero before the product is introduced. In the case of existing markets, such as the one for minivans previously described, the main research challenge is to understand the extent to which the competition fully meets customer needs. As J. Davis Illingworth, an executive at Toyota Motor Sales USA, explained, “I think the American public will look at Sienna as an American product that meets their needs.”23 With latent markets, initial success is not based on a company’s competitiveness, but rather depends on the prime- mover advantage—that is, a company’s ability to uncover the opportunity and launch a marketing program that taps the latent demand. This is precisely what Chrysler achieved by single-handedly creating the minivan market.

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Sometimes, traditional market research is not an effective means for identifying latent mar- kets. As Peter Drucker has noted, the failure of U.S. companies to successfully commercialize fax machines—an American innovation—can be traced to research that indicated no potential demand for such a product. The problem, in Drucker’s view, stems from the typical survey question for a product targeted at a latent market. Suppose a researcher asks, “Would you buy a telephone accessory that costs upward of $1,500 and enables you to send, for $1 a page, the same letter the post office delivers for $0.25?” On the basis of economics alone, the respondent most likely will answer, “No.”

According to Drucker, Japanese companies are the leading sellers of fax machines today because their understanding of the market was not based on survey research. Instead, they reviewed the early days of mainframe computers, photocopy machines, cell phones, and other information and communications products. The Japanese companies realized that, judging only by the initial costs associated with buying and using these new products, the prospects of market acceptance were low. However, each of these products became a huge success after people began to use them. This realization prompted the Japanese companies to focus on the market for the benefits provided by fax machines, rather than the market for the machines themselves. By looking at the success of courier services such as FedEx, they realized that, in essence, the fax machine market already existed.24

To illustrate Drucker’s point, consider the case of Red Bull energy drink. Dietrich Mateschitz hired a market research firm to assess the market potential for his creation. In the tests, consumers reacted negatively to the taste, the logo, and the brand name. Mateschitz ignored the research, and Red Bull is now a $2 billion brand. As Mateschitz explains, “When we first started, we said there is no existing market for Red Bull, but Red Bull will create it. And this is what finally became true.”26

An incipient market is a market that will emerge if a particular economic, demographic, political, or sociocultural trend continues. A company is not likely to succeed if it offers a product in an incipient market before the trends have taken root. After the trends have had a chance to gain traction, the incipient market will become latent and, later, existing. The concept of incipi- ent markets can also be illustrated by the impact of rising income on demand for automobiles and other expensive consumer durables. As per capita income rises in a country, the demand for automobiles will also rise. Therefore, if a company can predict a country’s future rate of income growth, it can also predict the growth rate of its automobile market.

For example, to capitalize on China’s rapid economic growth, Volkswagen, Peugeot, Chrysler, and other global automakers have established in-country manufacturing operations. China even has incipient demand for imported exotic cars; in early 1994, Ferrari opened its first showroom in Beijing. Because of a 150 percent import tax, China’s first Ferrari buyers were entrepreneurs who had profited from China’s increasing openness to Western-style marketing and capitalism. By the end of the 1990s, demand for luxury cars had grown at a faster rate than anticipated.27 Today, annual passenger vehicle sales in China have passed the 20 million unit mark. Clearly, China represents a very attractive market opportunity for carmakers.

In the past, some companies had concluded that China had limited potential for their products. For example, in 1998, U.K.-based retailer Marks & Spencer closed its office in Shanghai and tabled plans to commence operations there. Commenting to the press, a spokesperson directly addressed the issue of whether the company viewed China as an incipient market:

After 3 years of research, we have come to the conclusion that the timing is not right. The majority of our customers are from middle-income groups. But, our interest is in Shanghai, and the size of the middle-income group, although it is growing, is not yet at a level that would justify us opening a store there.28

Within a decade, however, China’s emerging middle class represented an attractive opportunity. Marks & Spencer opened its first store in Shanghai in 2008; by 2017, there were 10 stores. However, when its sales stalled, the company pulled out of China for the second time. Part of the problem: low brand awareness, plus the fact that many Chinese shoppers prefer “fast-fashion” brands such as Zara and H&M.29

RESEARCH METHODOLOGIES Survey research, interviews, consumer panels, observation, and focus groups are some of the tools used to collect primary market data. These are the same tools

“At that time, Japanese women almost never used mascaras because, by nature, they have very straight, short and thin lashes. We designed mascara that was able to lengthen and curl lashes. It was a huge success. We would never have seen that in a focus group.”25

Jean-Paul Agon, Chairman and CEO, L’Oréal, discussing the deci- sion to relaunch the Maybelline makeup brand in Japan with mascara

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used by marketers whose activities are not global, though some adaptations and special consider- ations for global marketing may be required.

Survey research utilizes questionnaires designed to elicit quantitative data (“How much would you buy?”), qualitative responses (“Why would you buy?”), or both. Survey research is often conducted by means of a questionnaire distributed through the mail, asked over the tele- phone, or asked in person. Many good marketing research textbooks provide details on question- naire design and administration.

In global market research, a number of survey design and administration issues may arise. When using the telephone as a research tool, it is important to remember that what is customary in one country may be impossible in others because of infrastructure differences, cultural barriers, or other reasons. For example, telephone directories or lists may not be available; also, important differences may exist between urban dwellers and people in rural areas. In China, for example, the Ministry of Information Industry reports that 77 percent of households in coastal areas have at least one fixed-line telephone; in rural areas, that proportion is only 40 percent.

At a deeper level, culture shapes attitudes and values in a way that directly affects people’s willingness to respond to interviewer questions. Open-ended questions may help the researcher identify a respondent’s frame of reference. In some cultures, respondents may be unwilling to answer certain questions or may intentionally give inaccurate answers.

Recall that step 2 of the global market research process calls for identifying possible sources of SRC bias. This issue is especially important in survey research: SRC bias can originate from the cultural backgrounds of those designing the questionnaire. For example, a survey designed and administered in the United States may be inappropriate in non-Western cultures even if it is carefully translated. This is especially true if the person designing the questionnaire is not familiar with the SRC. A technique known as back-translation can help increase comprehension and valid- ity; it requires that, after a questionnaire or survey instrument is translated into a particular target language, it is translated once again, this time into the original language by a different translator. For even greater accuracy, parallel translations—two versions by different translators—can be used as input to the back-translation. The same techniques can ensure that advertising copy is accurately translated into different languages.

A consumer panel is a sample of respondents whose behavior is tracked over time. For example, a number of companies, including the Nielsen Media Research unit of Netherlands- based VNU, AGB, GfK, and TNS, conduct television audience measurement (TAM) by studying the viewing habits of household panels. Broadcasters use audience share data to set advertising rates; advertisers such as Procter & Gamble, Unilever, and Coca-Cola use the data to choose pro- grams during which to advertise. In the United States, Nielsen has enjoyed a virtual monopoly on viewership research for half a century. For years, however, the four major U.S. television networks have complained that they lose advertising revenues because Nielsen’s data collection methods undercount viewership. Nielsen has responded to these concerns by upgrading its survey meth- odology; the company now uses an electronic device known as a peoplemeter to collect national audience data. Peoplemeter systems are currently in use in dozens of countries around the world, including China; Nielsen is also rolling out peoplemeters to collect local audience viewership data in key metropolitan markets such as New York City.

When observation is used as a data collection method, one or more trained observers (or a mechanical device such as a video camera) watch and record the behavior of actual or prospective buyers. The research results are then used to guide marketing managers in their decision making. For example, after Volkswagen’s U.S. sales began to slump, the company launched “Moonraker,” an 18-month effort designed to help its engineers, marketers, and design specialists better under- stand American consumers. Despite the presence of a design center in California, decision mak- ers at headquarters in Wolfsburg, Germany, generally ignored feedback from U.S. customers. As Stefan Liske, director of product strategy at VW, acknowledged, “We needed a totally different approach. We asked ourselves, ‘Do we really know everything about this market?’” The Moon- raker team visited the Mall of America in Minneapolis and the Rock and Roll Hall of Fame in Cleveland; they also spent spring break in Florida observing college students.

The experience was an eye-opener. As one designer explained, “In Germany, it’s all about driving, but here, it’s about everything but driving. People here want to use their time in other ways, like talk on their cell phone.” Another member of the team, an engineer, shadowed a single mom as she took her kids to school and ran errands. The engineer noted that American drivers need

“Data regresses to the mean. Something that’s really original, really authentic, it’s probably not going to score that well because people have a knee-jerk reaction against new things.”30

James Gilmore, coauthor, Authen- ticity: What Consumers Really Want

“You can’t go out and ask people what they need or want because they don’t know. The whole trick is to come out with a product and say, ‘Have you thought of this?’ and hear the con- sumer respond, ‘Wow! No, I hadn’t.’ If you can do that, you’re on.”31

David Lewis, chief designer, Bang & Olufsen

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a place to store a box of tissues and a place to put a bag of fast food picked up at a drive-through window. “I began thinking about what specific features her car needed. It was about living the customer’s life and putting ourselves in their place,” he said.32

A marketer of breakfast cereals might send researchers to preselected households at 6 a.m. to watch families go about their morning routines. The client could also assign a researcher to accompany family members to the grocery store to observe their behavior under actual shop- ping conditions. The client might wish to know about the shoppers’ reactions to in-store promo- tions linked to an advertising campaign. The researcher could record comments or discretely take photographs. Of course, companies using observation as a research methodology must be sensitive to concerns about privacy issues. A second problem with observation is reactiv- ity, which is the tendency of research subjects to behave differently for the simple reason that they know they are under study. Additional examples of observation-based studies include the following:

d To gain insights for product and package design improvements, Procter & Gamble sent video crews into 80 households in the United Kingdom, Italy, Germany, and China. P&G’s ultimate goal was to amass an in-house video library database. Stan Joosten, an IT man- ager, noted, “You could search for ‘eating snacks’ and find all [the] clips from all over the world on that topic. Immediately, it gives you a global perspective on certain topics.”33

d Michelle Arnau, a marketing manager for Nestlé’s PowerBar brand, attended the 2004 New York City Marathon to see how runners were using single-serve packets of PowerGel. Arnau observed that runners typically tore off the top with their teeth and attempted to consume the gel in a single squeeze without breaking their stride. Designers at Nestlé then created an improved package with an upside-down, triangular-shaped top that is narrow enough to control the flow of the gel but also fits into the athlete’s mouth.34

In focus group research, a trained moderator facilitates discussion of a product concept, a brand’s image and personality, an advertisement, a social trend, or another topic with a group of 6 to 10 people. Global marketers can use focus groups to arrive at important insights. For example:

d In the mid-1990s, Whirlpool launched a successful advertising campaign in Europe that featured fantasy characters such as a drying diva and a washing-machine goddess. Before adapting the campaign for the United States and Latin America, the company conducted focus groups. Nick Mote, Whirlpool’s worldwide account director at France’s Publicis advertising agency, said, “We’ve had some incredible research results. It was just like somebody switched the lights on.”35

d In Singapore, focus groups of young teens were used to help guide development of Coca-Cola’s advertising program. As Karen Wong, Coke’s country marketing director for Singapore, explained, “We tested everything from extreme to borderline boring: body-piercing all over, grungy kids in a car listening to rock music and head-banging all the way. Youth doing things that youth in America do.” Some participants found much of Coke’s imagery to be too rebellious. As one young Singaporean remarked, “They look like they’re on drugs. And if they’re on drugs, then how can they be performing at school?” Armed with the focus group results, Coca-Cola’s managers devised an ad campaign for Singapore that was well within the bounds of societal approval.36

A typical focus group meets at a facility equipped with recording equipment and a two-way mirror, behind which representatives of the client company observe the proceedings. The mod- erator can utilize a number of approaches to elicit reactions and responses, including projective techniques such as visualization and role plays. When using a projective technique, the researcher presents open-ended or ambiguous verbal stimuli to a subject. Presumably, when responding, the subjects will “project”—that is, reveal—any unconscious attitude, needs, or biases. By analyz- ing the responses, researchers are better able to understand how consumers perceive a particular product, product concept, brand, or company.

Visualization is especially appropriate and effective for companies wishing to create break- through or disruptive innovations. Suppose a consumer electronics company wants to generate ideas for a new home theater system. In the focus group, the moderator attempts to erase all stimuli

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Daniel Ek is an entrepreneur who developed an innovative service and started a company called Spotify to market it. By applying the basic tools and principles of modern global marketing, Ek achieved remark- able success (see Exhibit 6-5).

As is true with many entrepreneurs, Ek’s idea was based on his own needs and wants. In the late 1990s, he discovered Napster, the original file-sharing Web site for music. Ek recalls, “Napster changed my life. You could search for any band, and there it was. It allowed me to listen to all this music that I never knew existed.” Ultimately, the courts ordered Napster to shut down for infringing intellectual property rights.

Within a few years of Napster’s demise, a number of legal music- subscription services appeared on the scene, including Rhapsody, MOG, and a legal version of Napster. Meanwhile, Apple created the market for paid, legal music downloads with its iTunes Store. Unde- terred by the competitive landscape, Ek was convinced that “there had to be a better way” to learn about new music and share music with others while also compensating songwriters and performers. Ek’s insight was to tap the power of social media—specifically Facebook— for music sharing.

As a young man growing up in Sweden, Ek benefitted from a government program designed to ensure that most households had computers. At home, he was exposed to both music and technology; by the time he was 14 years old, he was earning as much as $15,000 per month designing Web pages. When he was 16, Ek applied for a job at Google but was turned away with the advice, “Come back when you have a degree.” Ek briefly attended Sweden’s Royal Institute of Technology, but dropped out to start Tradedoubler, an Internet mar- keting company.

After taking time off to do some soul searching, Ek decided to start a music streaming company; the result was Spotify. From his base in

Sweden, Ek expanded across Europe and, in 2011, he launched the service in the United States. By mid-2017, Spotify had 140 million users with on-demand access to more than 30 million songs. Spotify’s busi- ness model is built on the “freemium” pricing strategy. Several service tiers are available. The service is free for listeners who are willing to listen to ads. Student subscribers pay $4.99 per month; otherwise, individual subscriptions cost $9.99 per month. Family plans are available for $14.99 per month. Apple Music offers similar pricing, but without the free tier.

Spotify gathers a great deal of data from its listeners. First-time sub- scribers provide basic demographic and geographic data such as age, gender, and country of residence. In addition, every time a user hits the “play” button, data are generated. Spotify uses these data to improve the listening experience for its subscribers, many of whom are Millen- nials. What’s more, Spotify users have created more than 1.5 billion playlists; the different names tell Spotify a great deal about the listening context—for example, “coffeehouse,” “exercise,” and so on.

Among the challenges facing Spotify today as it expands globally is the difficulty of licensing songs on a country-by-country basis. As Ek notes, “That doesn’t really work in this Internet world where a song made here in Sweden might be shared with someone in Ukraine.” A related issue is rights holder compensation. Even though Spotify pays hundreds of millions of dollars—about 70 percent of its revenues—in royalties and licensing fees, many artists have criticized Spotify for not paying them enough. In addition, Apple Music is on track to surpass Spotify in terms of paid U.S. subscribers.

Sources: Anne Steele, “Apple Nips at Spotify’s Lead,” The Wall Street Journal ( February 5, 2018), p. A9; Johannes Ledel and John Stoll, “Boss Talk: Spotify—Eating Google’s Lunch and Loving It,” The Wall Street Journal (August 27, 2013), p. B7; Jefferson Graham, “Daniel Ek Wants to Turn You on to New Music,” USA Today (February 20, 2013), p 1B.

ENTREPRENEURIAL LEADERSHIP, CREATIVE THINKING, AND THE GLOBAL STARTUP

Daniel Ek, Spotify

Exhibit 6-5 Daniel Ek is the Swedish entrepreneur who started Spotify, the popular on-demand music streaming service. For a song that receives 1 million plays, Spotify pays out fees totaling $6,000 to $8,000; the money is split between record labels, artist, songwriters, and publishers.

Source: norazaminayob/ Shutterstock.

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by dimming the lights. Participants close their eyes and lie down on pillows or comfortable sur- faces. The moderator speaks quietly and gently:

Picture yourself lying comfortably in a hammock on a lovely spring day. Gaze intently at a tree, then focus on one leaf, and watch it turn from green to white, like a movie screen, where you can project anything that you want. Picture whatever is your perfect place, and put yourself and anyone else you desire into the scene. Now imagine you’re watching and hearing your favorite program. Maybe Kerry Washington is once again saving the White House in Scandal. How are you seeing the image? What furniture or equipment—if any— do you see? What else is in the room? What size is the image? Who else is there?

After further questions of this type, the moderator guides the participants back to the “here and now” by suggesting that the scene they are visualizing is fading until the screen is white, the tree leaf turns from white back to green, and then they see the whole tree again. The participants open their eyes, sit up, take a pad of paper, and record in words and pictures as much as possible of what they experienced. These experiences are shared with the group, and can serve as springboards for new home entertainment concepts.

Many variations on the role-play technique exist, which can be used to uncover insights for innovation. The quest to reveal these hidden points often takes the form of an ideation workshop. A consumer may have unmet needs or wants that she hasn’t conveyed directly because she’s not consciously aware of them. Those needs may emerge during role plays; the technique is projec- tive because the consumer projects onto others what she can’t (or won’t) see in herself. Perhaps a variety of psychological factors—such as motivations, attitudes, or fears—contribute to whether a consumer accepts or rejects a product. In addition, when participants in a role play act out each minute step in a process, the researchers may notice something that is incongruous or unconscious that can lead to a product improvement.

For example, managers at a home-care products company might participate in a role play that also involves consumers. Before the focus group is convened, each manager on the client team is briefed about a consumer who has been recruited. Then, the managers meet in a group and each one role-plays his or her consumer using a particular product. In other words, they “walk” in the consumers’ shoes, with the goal of understanding and predicting consumers’ behavior and interac- tions with the product. Then the actual consumers arrive at the session and perform the task with the product. The managers from the client company can see for themselves how well or poorly they role-played their respective consumers. In this case, the managers witness first-hand what they got right or wrong, and why.

As example, suppose an automaker convenes a focus group to assess car-buying prefer- ences among a segment consisting of twenty-somethings. The researcher might ask participants to describe a party where various automotive brands are present. What is Nissan wearing, eating, and drinking? Which kind of sneakers does Honda have on? What are their personalities like? Who’s shy? Who’s loud? Who gets the girl (or guy)? Interactions among group members can result in synergies that yield important qualitative insights that are likely to differ from those based on data gathered through more direct questioning.

For example, executives at the ABC Family channel realized that they needed to rebrand the network after research revealed the associations that viewers made with the name. As Karey Burke, vice president for programming and development, explained:

We saw a psychographic study of what sort of person audiences thought different channels would be. MTV was a “cool teenager,” the CW was a “thoughtful college student,” and ABC Family was a “Midwestern housewife.” That’s not what we were.37

Within a few months, the channel was renamed Freeform. Focus groups, visualization, and role plays yield qualitative data that do not lend themselves

to statistical projection. Such data suggest, rather than confirm, hypotheses; also, qualitative data tend to be directional rather than conclusive. Such data are extremely valuable in the exploratory phase of a project and are typically used in conjunction with data gathered via observation and other methods.

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SCALE DEVELOPMENT Market research requires assigning some type of measure, ranking, or interval to a response. To take a simple example of measurement, a nominal scale is used to establish the identity of a survey element. For example, male respondents could be labeled “1” and female respondents could be labeled “2.” Scaling can also entail placing each response in some kind of continuum; a common example is the Likert scale, which asks respondents to indicate whether they “strongly agree” with a statement, “strongly disagree,” or whether their attitude falls somewhere in the middle. In a multicountry research project, it is important to have scalar equivalence, which means that two respondents in different countries with the same value for a given variable receive equivalent scores on the same survey item.

Even with standard data-gathering techniques, the application of a particular technique may differ from country to country. Matthew Draper, vice president at New Jersey–based Total Research Corporation, cites “scalar bias” as a major problem: “There are substantial differences in the way people use scales, and research data based on scales such as rating product useful- ness on a scale of 1 to 10 is therefore frequently cluttered with biases disguising the truth.” For example, while the typical American scale would equate a high number such as 10 with “most” or “best” and 1 with “least,” Germans prefer scales in which 1 is “most/best.” Also, while American survey items pertaining to spending provide a range of figures, Germans prefer the opportunity to provide an exact answer.38

SAMPLING When collecting data, researchers generally cannot administer a survey to every possible person in the designated group. A sample is a selected subset of a population that is representative of the entire population. The two best-known types of samples are probability samples and nonprobability samples. A probability sample is generated by following statistical rules that ensure each member of the population under study has an equal chance—or probabil- ity—of being included in the sample. The results of a probability sample can be projected to the entire population with statistical reliability reflecting sampling error, degree of confidence, and standard deviation.

In contrast, the results of a nonprobability sample cannot be projected with statistical reli- ability. One form of nonprobability sample is a convenience sample. As the name implies, with this type of sample researchers select people who are easy to reach. For example, in one study that compared consumer shopping attitudes in the United States, Jordan, Singapore, and Turkey, data for the latter three countries were gathered from convenience samples recruited by an acquain- tance of the researcher. Although data gathered in this way are not subject to statistical inference, they may be adequate to address the problem defined in step 1. In this study, for example, the researchers were able to identify a clear trend toward cultural convergence in shopping attitudes and customs that cut across modern industrial countries, emerging industrial countries, and devel- oping countries.39

To obtain a quota sample, the researcher divides the population under study into catego- ries; a sample is then taken from each category. The term quota refers to the need to make sure that enough people are chosen in each category to reflect the overall makeup of the population. For example, assume a country’s population is divided into six categories according to monthly income, as follows:

Percentage of population 10% 15% 25% 25% 15% 10%

Earnings per month 0–9 10–19 20–39 40–59 60–69 70–100

If it is assumed that income is the characteristic that adequately differentiates the population for study purposes, then a quota sample would include respondents of different income levels in the same proportion as they occur in the population—that is, 15 percent with monthly earnings from 10 to 19, and so on.

Step 7: Data Analysis40

The data collected up to this point must be subjected to some form of analysis if they are to be useful to decision makers. Although a detailed discussion is beyond the scope of this text, a brief overview of data analysis is in order. First, the data must be prepared—the term cleaned is sometimes used—before further analysis is possible. They must be logged and stored in a central location or database. When research has been conducted in various parts of the world,

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this process of rounding up data can pose some difficulties. Are data comparable across samples so that multicountry analysis can be performed? Some amount of editing may be required; for example, some responses may be missing or difficult to interpret. Next, questionnaires must be coded. Simply put, coding involves identifying the respondents and the variables. Finally, some data adjustment may be required.

Data analysis continues with tabulation—that is, the arrangement of data in tabular form. Researchers may wish to determine various things: the mean, median, and mode; range and standard deviation; and the shape of the distribution (e.g., that of a normal curve or not). For nominally scaled variables such as “male” and “female,” a simple cross-tabulation may be performed.

Suppose, for example, that Nielsen Media Research surveyed video gamers to determine how they feel about products (e.g., soft drinks) and advertisements (e.g., a billboard for a cell phone) embedded in video games. Nielsen could use cross-tabulation to separately examine the responses of male and female subjects to see if their responses differ significantly. If females are equally or more positive in their responses than males, video game companies could use this information to persuade consumer products companies to pay to have select products tar- geted at women featured as integral parts of the games. Researchers can use various relatively simple statistical techniques such as hypothesis testing and chi-square testing; advanced data analysis such as analysis of variance (ANOVA), correlation analysis, and regression analysis can also be used.

If the researcher is interested in the interactions among variables, interdependence techniques such as factor analysis, cluster analysis, and multidimensional scaling can be used to study these aspects of the data. Factor analysis can be used to transform large amounts of data into man- ageable units; specialized computer programs perform data reduction by “distilling out” from a multitude of survey responses a few meaningful factors that underlie attitudes and perceptions. Factor analysis is useful in psychographic segmentation studies and can also be used to create perceptual maps.

In this form of analysis, variables are not classified as dependent or independent. Instead, sub- jects are asked to rate specific product benefits on five-point scales. Table 6-2 shows a hypotheti- cal scale that Google might use to assess consumer perceptions of a new smartphone. Although the scale shown in Table 6-2 lists 10 characteristics/benefits, factor analysis will generate factor

TA B L E 6 - 2 Hypothetical Scales for Obtaining Consumer Perceptions of Google Pixel 2 Smartphone

Instructions: Please rate this product on the following product characteristics or benefits.

Rating

Low High

Variables (Product Characteristics/Benefits)

1 2 3 4 5

1. Long battery life — — — — —

2. Many apps available — — — — —

3. 4G Internet access — — — — —

4. Thin case — — — — —

5. Intuitive interface — — — — —

6. Music storage capacity — — — — —

7. Large display screen — — — — —

8. Fits hand comfortably — — — — —

9. Works anywhere in the world — — — — —

10. Fast processing speed — — — — —

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196 PART 3 • APPROACHING GLOBAL MARKETS

loadings that enable the researcher to determine which two or three factors underlie the benefits. In this way, factor analysis results in data reduction. For the smartphone, the researcher might label the factors “easy to use” and “stylish.” The computer doing the analysis will also output factor scores for each respondent; respondent 1 might have a factor score of .35 for the factor identified as “easy to use”; respondent 2 might have a factor score of .42, and so on. When all respondents’ factor scores are averaged, Google’s position on a perceptual map can be determined (see Figure 6-3). Similar determinations can be made for other smartphone brands.

Cluster analysis allows the researcher to group variables into clusters that maximize within- group similarities and between-group differences. This type of analysis shares some characteristics of factor analysis: It does not classify variables as dependent or independent, and it can be used in psychographic segmentation. Cluster analysis is well suited to global market research because it can help establish similarities and differences among local, national, and regional markets of the world. Such analysis can also be used to perform benefit segmentation and to identify new product opportunities.

Multidimensional scaling (MDS) is another technique for creating perceptual maps. When the researcher is using MDS, the respondent is given the task of comparing products or brands, one pair at a time, and judging them in terms of similarity. The researcher then infers the dimensions that underlie these judgments. MDS is particularly useful when there are many alternatives from which to choose—soft drink, toothpaste, or automotive brands, for instance—and when consum- ers may have difficulty verbalizing their perceptions. To create a well-defined perceptual map, a minimum of eight products or brands should be used.

For example, suppose that a luxury goods marketer such as Coach initiates a study of consumer perceptions of global luxury brands. There are many luxury brands to choose from; some (including Coach) have outlet stores featuring discounted merchandise, and some offer “flash sales” offering selected styles for a limited time. Some brands, including Michael Kors and Ralph Lauren, offer lower-priced but highly profitable “diffusion” lines in addition to high-end collections. Some luxury goods firms, including Louis Vuitton, distribute their goods exclusively through company-owned retail stores; for Burberry and other brands, channel strategy includes wholesale operations.

Consumers may differentiate one designer brand from another in various ways: how easy it is to purchase each brand, how visible each brand is, whether the brand offers diffusion lines, and so on. To the researcher, this might represent an underlying perceptual dimension of “ubiquitous versus rare.” Table 6-3 shows a five-point similarity judgment scale for eight designer brands.

TA B L E 6 - 3 MDS Study Inputs: Similarity Judgment Scales for Pairs of Luxury Brands

Very Similar Very different

1 2 3 4 5

Burberry/Gucci — — — — —

Burberry/Coach — — — — —

Burberry/Michael Kors — — — — —

Burberry/Tod’s — — — — —

Burberry/Dolce & Gabbana — — — — —

Burberry/Dior — — — — —

Burberry/Bottega Veneta — — — — —

Gucci/Coach — — — — —

Gucci/Michael Kors — — — — —

Gucci/Tod’s — — — — —

Gucci/Dolce & Gabbana — — — — —

Gucci/Dior — — — — —

Gucci/Bottega Veneta — — — — —

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Figure 6-4 shows the position of the eight brands on the “ubiquity” dimension for a hypothetical respondent. The figure shows that Burberry and Coach are perceived as the most similar while Coach and Dior are the farthest apart.

The responses help marketers understand which brands in a particular category—luxury fashion brands in this example—are in direct competition with each other and which are not. The responses are used as input into a computer running an MDS program; the output is a perceptual map such as that shown in Figure 6-5. Once the computer has generated the map, the marketer examines the positions of different brands and infers the dimensions, which in this case are “ubiquity/rarity” and “exclusivity/accessibility.” Coach’s high ranking in terms of accessibility could be attributed in part to a pricing strategy that includes the lowest-priced entry-level handbag. Coach’s position on the ubiquity dimension would be a function of the brand’s multiple company-owned retail and outlet stores, wide availability at department stores, and the Poppy diffusion line.

This type of study could help Coach and other luxury goods marketers respond to new indus- try realities, which include a shift in the perception of what constitutes luxury and the increasing fragmentation of consumer tastes. Some of these changes in the market are driven by increasing opportunities in China and other emerging markets.41 Such a map would also be helpful to, say, an up-and-coming fashion designer hoping to launch a new line. Perhaps the designer could find an optimal ubiquity/accessibility balance and fit in the gap between Burberry, Coach, and Ralph Lauren.

Dependence techniques assess the interdependence of two or more dependent variables with one or more independent variables. Conjoint analysis is an example of a dependence technique that is useful in both single market and global market research. Let us illustrate this with an

FIGURE 6-4 Hypothetical One-Dimensional Illustration of Similar- ity Judgments for Luxury BrandsFarthest Pair

Closest Pair

Dior Bottega Veneta

Dolce & Gabbana

Tod’s Michael Kors

Gucci Burberry Coach

Ubiquity

FIGURE 6-5 Hypothetical MDS-Based Perceptual Map for Luxury Fashion Brands

Dior

Bottega Veneta

Exclusivity

Rarity Ubiquity

Accessibility

Gucci

Burberry

Coach

Michael Kors

Tod’s Dolce &

Gabbana

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198 PART 3 • APPROACHING GLOBAL MARKETS

example from the SUV category of the automotive industry. Suppose Kia’s new-product team has performed an MDS study and created a perceptual map similar to the one shown in Figure 6-4. The next task is to select an ideal position and then identify specific product features that match up with the desired positioning. To so, the researchers must determine the relative importance of a product’s salient attributes in consumer decision making—that is, the relevance or importance that consumers attach to a product’s qualities or properties. If the target position is “smooth, car- like ride with sports handling,” the team must determine relevant physical product characteristics (e.g., 6-cylinder engine, 6-speed transmission). The team must also determine other characteristics (e.g., price, mileage, warranty) that consumers most prefer. Each attribute should be available in different levels—for example, a 5-year or 10-year warranty.

Conjoint analysis is a tool that researchers can use to gain insights into the combina- tion of features that will be most attractive to consumers; it is assumed that features affect both perception and preferences. Table 6-4 shows a listing of possible features—a total of 36 combinations in this case. In a full-profile approach, each of these combinations (e.g., 6-cylinder engine, 6-speed automatic transmission, 5-year warranty, $27,500) is printed on an index card, and consumers are asked to rank them in order by preference. Conjoint analysis then determines the values or utilities of the various levels of product features and plots them graphically. Because the number of combinations can overwhelm subjects and lead to fatigue, it is sometimes preferable to use a pair-wise approach that allows subjects to consider two attributes at a time.

Better marketing research might have helped Nokia in its struggle to maintain leadership in the highly competitive global cellular phone market. Nokia focused on the functionality and features of its phones, even as consumer tastes and preferences were shifting to trendy styling and features such as cameras and large color screens. For years, Nokia manufactured only “candy bar” phones; because executives believed that the shape was a signature of the Nokia brand, the company did not offer flip (clamshell), slide, or swivel styles. Meanwhile, Sony, LG, Samsung, and Motorola were offering sleek new designs.

In Europe, Nokia’s market share fell from 51 percent in 2002 to about 33 percent in 2004. “Nokia didn’t have the coolness factor,” says industry consultant Jack Gold. “They didn’t really do flip phones; they were a little late with cameras, and they didn’t push them. Coolness in the consumer space is a big deal, and they were stodgy.” Ansii Vanjoki, Nokia’s head of multimedia, acknowledges, “We read the signs in the marketplace a bit wrong. The competition was emphasiz- ing factors such as color richness and screen size. That’s attractive at the point of sale. We missed that one.”42

COMPARATIVE ANALYSIS AND MARKET ESTIMATION BY ANALOGY One of the unique opportu- nities in global marketing analysis is to conduct comparisons of market potential and marketing performance in different country or regional markets at the same point in time. A common form of comparative analysis is the intra-company cross-national comparison. For example, general market conditions in two or more countries (as measured by income, stage of industrialization, or some other indicator) may be similar. If there is a significant discrepancy between per capita sales

TA B L E 6 - 4 Crossover SUV Product Feature Combinations for Conjoint Analysis

Engine Size Transmission Warranty Price

Level 1 4-cylinder 4-speed automatic 3 years/50,000 miles $22,500

Level 2 6-cylinder 6-speed automatic 5 years/75,000 miles $27,500

Level 3 8-cylinder 8-speed automatic 10 years/100,000 miles $32,500

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of a given product in the countries, the marketer might reasonably research that gap and determine which actions need to be taken. Consider the following examples:

d Campbell is the world’s largest soup company, commanding approximately 80 percent of the U.S. canned soup market. However, the company has a presence in only 6 percent of the world’s soup markets. Russians eat 32 billion servings of soup each year, and the Chinese consume 300 billion! By contrast, Americans eat 15 billion servings each year. Sensing a huge opportunity, Campbell CEO Douglas Conant dispatched teams to observe Russian and Chinese habits.43

d Cadbury, the British confectionary company owned by Kraft Foods, estimates that the chocolate market in India is worth approximately $465 million per year. By contrast, annual chocolate sales are $4.89 billion in Britain, which has one-tenth the population of India. Cadbury executives believe the Indian market for confections and chocolate will grow at more than 12 percent annually.44

d In India, only 10 percent of men who shave use Gillette razors. Worldwide, 50 percent of male shavers use Gillette products. To achieve greater penetration in India, Gillette rolled out a no-frills brand that costs 15 rupees—about 34 cents. The Gillette Guard has a lighter handle that is cheaper to produce, it lacks the lubrication strip found in Gillette’s more expensive razors, and replacement blades cost only 5 rupees (11 cents).45

In these examples, data are, for the most part, available for assessing the source and scale of these market discrepancies. In other situations, global marketers may find that certain types of desired data are unavailable for a particular country market, especially in developing-country markets. If this is the case, it is sometimes possible to estimate market size or potential demand by analogy. Drawing an analogy is simply stating a partial resemblance. For example, Germany and Italy both have flagship automakers—Volkswagen and Fiat, respectively. A less well-known flagship automaker is Russia’s AvtoVAZ. So, we could say that “AvtoVAZ is to Russia what Volkswagen is to Germany and Fiat is to Italy.” Statements such as this are analogies. Analogy reduces the unknown by highlighting the “commonness” of two different things.”47

According to David Arnold, there are four possible approaches to forecasting by analogy:48

d Data are available on a comparable product in the same country. d Data are available on the same product in a comparable country. d Data are available on the same product from an independent distributor in a neighboring

country. d Data are available about a comparable company in the same country.

Time-series displacement is an analogy technique based on the assumption that an analogy between markets exists in different time periods. Displacing time is a useful form of market analysis when data are available for two markets at different levels of development. The time- displacement method requires a marketer to estimate when two markets are at similar stages of development. For example, the market for Polaroid instant cameras in Russia at the present time is comparable to the instant camera market in the United States in the mid-1960s. By obtaining data on the factors associated with demand for instant cameras in the United States in 1964 and in Russia today, as well as actual U.S. demand in 1964, one could estimate the current potential for these products in Russia.

Step 8: Interpretation and Presentation The report based on the market research must be useful to managers as input to the decision- making process. Whether the report is presented in written form, orally, or electronically via video, it must relate clearly to the problem or opportunity identified in step 1. Generally, it is advisable

“Truffles are to the earth as oysters are to the sea. They capture the very essence of their habitat.”46

Chef patron Jacob Kenedy, Boca di Lupa

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200 PART 3 • APPROACHING GLOBAL MARKETS

for major findings to be summarized concisely in a memo that indicates the answer or answers to the problem first proposed in step 1. Many managers are uncomfortable with research jargon and complex quantitative analysis. To overcome their resistance, results should be clearly stated and provide a basis for managerial action. Otherwise, the report may end up on the shelf, where it will gather dust and serve as a reminder of wasted time and money.

As the data provided by the corporate information systems and market research become increasingly available on a worldwide basis, it becomes possible to analyze marketing expen- ditures’ effectiveness across national boundaries. Managers can then decide where they are achieving the greatest marginal effectiveness for their marketing expenditures and can adjust expenditures accordingly.

6-4 Headquarters’ Control of Market Research An important issue for the global company is where to locate control of the organization’s research capability. The difference between a multinational, polycentric company and a global, geocentric company on this issue is significant. In the multinational company, responsibility for research is delegated to the operating subsidiary. In contrast, the global company delegates responsibility for research to operating subsidiaries but retains overall responsibility and control of research as a headquarters’ function. A key difference between single-country market research and global mar- ket research is the importance of comparability. In practice, this means that the global company must ensure that research is designed and executed so as to yield comparable data.

Simply put, comparability means that the results can be used to make valid comparisons between the countries covered by the research.49 To achieve this goal, the company must inject a level of control and review of marketing research at the global level. The director of worldwide marketing research must respond to local conditions as he or she develops a research program that can be implemented on a global basis. The research director must pay particular attention to whether data gathered are based on emic analysis or etic analysis. These terms, which come from anthropology, refer to the perspective taken in the study of another culture. Emic analysis is similar to ethnography in that it attempts to study a culture from within, using its own system of meanings and values. Etic analysis is “from the outside”; in other words, it is a more detached perspective that is often used in comparative or multicountry studies. In a particular research study, an etic scale would entail using the same set of items across all countries. This approach enhances comparability, but means that some precision is inevitably lost.

By contrast, an emic study would be tailored to fit a specific country; inferences about cross- cultural similarities based on emic research have to be made subjectively. Consider, for example, Coca-Cola’s experience in China when it launched fruit-flavored bottled teas. After the launch failed, the drinks giant commissioned an ethnographic study that revealed two key insights. First, Coca-Cola’s U.S. headquarters is in Atlanta, Georgia. The researchers discovered that tea with added sweeteners and flavors is associated with pleasure and indulgence, especially when enjoyed with afternoon barbeques that are customary in the warm Southern states. The context helps explain the popularity of fruit flavors and added sugar. By contrast, in China, tea has different associations; its essence is subtraction, rather than addition of sugar and flavorings. Christian Madsbjerg described these findings in a recent book:

Tea—like meditation—is a tool in Chinese culture for revealing the true self. The experience should take away irritants and distractions like noise, pollution, and stress. It wasn’t until Coke incorporated this fundamentally different understanding of the “tea experience” that their bottled products gained significant market share.50

A good compromise is to use a survey instrument that incorporates elements of both types of analysis. It is likely that the marketing director will end up with a number of marketing programs

6-4 Compare the way a multina- tional firm organizes the market- ing research effort with the way a global or transnational firm approaches the organizing issue.

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tailored to clusters of countries that exhibit within-group similarities. The agenda of a coordinated worldwide research program might look like the one in Table 6-5.

The director of worldwide research should not simply direct the efforts of country research managers. Instead, his or her job is to ensure that the corporation achieves maximum results worldwide from the total allocation of its research resources. Accomplishing this feat requires that personnel in each country are aware of research being carried out in the rest of the world and are involved in influencing the design of their own in-country research as well as the overall research program. Ultimately, the director of worldwide research is responsible for the overall research design and program. It is his or her job to take inputs from the entire world and produce a coordinated research strategy that generates the information needed to achieve global sales and profit objectives.

6-5 The Marketing Information System as a Strategic Asset

The advent of the transnational enterprise means that boundaries between the firm and the out- side world are dissolving. Marketing has historically been responsible for managing many of the relationships across those boundaries. The boundaries between marketing and other functions are also dissolving, and the traditional notion of marketing as a distinct functional area within the firm may be giving way to a new model. Likewise, the process of marketing decision making is changing, largely because of the changing role of information from a support tool to a wealth- generating, strategic asset.

Many global firms are creating flattened organizations with less hierarchical and less central- ized decision-making structures. Such organizations facilitate the exchange and flow of informa- tion among departments that previously may have operated as autonomous “silos.” The more information intensive the firm, the greater the degree to which marketing is involved in activities traditionally associated with other functional areas. In such firms, parallel processing of informa- tion takes place.

Information intensity in the firm has an impact on perceptions of market attractiveness, com- petitive position, and organizational structure. The greater a company’s information intensity, the more the traditional product and market boundaries are likely to shift. In essence, companies increasingly face new sources of competition from other firms in historically noncompetitive industries, particularly if those other firms are also information intensive. Diverse firms now find themselves in direct competition with each other. They offer essentially the same products as a natural extension and redefinition of their traditional product lines and marketing activities. Today, when marketers speak of “value added,” the chances are they are not referring to unique product features. Rather, the emphasis is on the information exchanged as part of customer transactions, much of which cuts across traditional product lines.

TA B L E 6 - 5 Worldwide Marketing Research Plan

Research Objective Country Cluster A Country Cluster B Country Cluster C

Identify market potential X

Appraise competitive intentions X X

Evaluate product appeal X X X

Study market response to price X

Appraise distribution channels X X X

6-5 Explain how information’s role as a strategic asset affects the structure of global corporations.

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202 PART 3 • APPROACHING GLOBAL MARKETS

Summary Information is one of the most basic ingredients of a successful marketing strategy. A company’s management information system (MIS) and intranet provide decision makers with a continuous flow of information. Information technology is profoundly affecting global marketing activities by allowing managers to access and manipulate data to assist in decision making. Electronic data interchange (EDI), electronic point of sale (EPOS) data, efficient consumer response (ECR), customer relationship management (CRM), and data warehouses are some of the new tools and techniques available. The global marketer must scan the world for information about opportunities and threats and make information available via a management information system.

Formal market research—the project-specific, systematic gathering of data—is often required before marketers make key decisions. Global market research links customers and marketers through information gathered on a global scale. The research process begins when marketers define the problem and set research objectives; this step may entail assessing whether a particular market should be classified as latent or incipient. A research plan specifies the relative amounts of qualitative and quantitative information desired. Information is collected using either primary or secondary data sources. In today’s wired world, the Internet has taken its place alongside more traditional channels as an important secondary information source. In some instances, the cost of collecting primary data may outweigh the potential benefits. Sec- ondary sources are especially useful for researching a market that is too small to justify a large commitment of time and money.

If collection of primary data can be justified on a cost–benefit basis, research can be conducted via survey research, personal interviews, consumer panels, observation, and focus groups. Before collecting data, researchers must determine whether a probability sample is required. In global marketing, careful attention must be paid to issues such as eliminating cultural bias in research, accurately translating surveys, and ensuring data comparability in different markets. A number of techniques are available for analyzing survey data, includ- ing factor analysis, cluster analysis, multidimensional scaling (MDS), and conjoint analysis. Research findings and recommendations must be presented clearly. A final issue is how much control headquarters will have over research and the overall management of the organization’s information system. To ensure comparability of data, the researcher should utilize both emic and etic approaches.

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