Class Notes 6

Market Adaptation

Momo Deretic
Sauder School of Business
 Main Points

Demands are less different than they were but the

world is far from homogenization.
When selling products in foreign countries, firms
must decide how much to adapt their product and
its message to local demands.
Demands differ for systematic reasons.
Adaptations may not pass a cost-benefit test.
Price discriminate, cautiously.
 Levitts Claim
Theodore Levitt, late Harvard Business
School professor wrote a paper in 1983,
arguing
Markets are globalized: The worlds
needs and desires have become
irrevocably homogenized.
End of local products: Firms should sell
the same thing the same way,
everywhere.
 Components of the Levitt Argument

The new cosmopolitanism

The underappreciated power of large
volume, low price strategies.
The power of promotional schemes that
disregard stated wants and focus attention
on ultimate needs.
The Washing Machine Example
When asked, consumers described
preferences over washing machine
features:
British wanted top loading, agitator action, no
water heater, and inconspicuous, 700 rpm
speed
Italians and French wanted front loading,
tumble action.
But Italians wanted bright colors and 400rpm
spin speed, whereas French wanted elegant
appearance and 600rpm speed.
Every country wants a washing
machine with different features
 Or do they?
Levitt says you shouldnt ask what people
want from a washing machine, you should
ask what they want from life
And, he claims, everyone wants the same
thing:
Clean clothes
More leisure time
More money left over to spend on things they
enjoy.
 Adaptation to foreign markets
While Levitts claim may reflect some
basic truths, there exists much counter-
evidence.
What are examples for firms that have
adapted their product, promotion, and
placement for foreign markets?
 Reasons Why Demands Differ
Different physical environments
Different levels of development
Different cultures
 Custom-Made
1: Dominos
2: Heinz
3,4: Green Giant
5: Frito-Lay
6: KFC/Pizza Hut
7: Ben & Jerrys
8: Procter &Gamble
9: De Beers
 Environmental Adaptations
Topography
Climate
Population Density
 Developmental Adaptations
Income effects (Engel curves for superior
goods)
Quality (luxury)
Safety
Education effects
Literacy
Technical competence
 Cultural (Social) Adaptation
Traditions: parental influence effects
Learning by example
Imprinting during childhood?
Conformism: peer interaction effects
Communication standards
 The strange case of Hershey
chocolate bars
Tastes are
sometimes
shaped during
childhood, but
influenced by
history:

In a process called lipolysis, the fatty acids in the milk decompose,

resulting in a rancid, or "goaty" taste. Hershey purposefully puts
their chocolate through controlled lipolysis, giving it that unique
flavor. Because of this, most Europeans don't like Hershey's
chocolate but Americans do.
 Different Keyboard Standards

QWERTY

Frances
AZERTY
 Costs of Adapting Products
Research & Development (blueprint
costs)
Market Cultivation Costs
Line costs (new machinery)
Switching costs (for existing machinery)
Input price rises
Consumer confusion costs?
 Cost versus benefits of product
adaptation
Suppose an adapted product sells for PA
whereas a standardized product will sell for PS
(<PA). Now assume fixed costs for each
alternative are FS<FA whereas marginal costs
are MCS and MCA. Adaptation is optimal if
A S > 0
where i = Q*(Pi - MCi) - Fi.
 Long-run pricing issues
A MNE entering a new market must consider
long-run effects of its pricing decision today
Costs: learning by doing. The more a firm
produces this year, the lower will production costs
be next year due to learning by doing.
demand: potential entry, consumer/distributor
awareness, network externalities, price a signal of
quality, durable goods.
 Constraints on pricing
Antidumping law

Goods arbitrage: consumers/arbitragers buy in

low price market, thereby avoiding high price
market.
This is sometimes called grey markets or
parallel imports (i.e., Canadian internet
pharmacies)
 Major takeaways
Demands differ from country to
country/region to region, as does price
elasticity of demand.
Always calculate whether the additional
costs of adaptation are justified in terms of
increased overall profits.
Be very careful about your pricing
strategy- differentiation allows for price
setting/discrimination, and cost leadership
allows for low pricing, but beware of anti-
dumping actions.