Chapter 2

The Global Economic

Environment

2-1
Review of Chapter 1
What is Global
Marketing?
How is it different
from regular
marketing?

2-2
Reasons for Global Marketing
Growth
– Access to new markets
– Access to resources
Survival
– Against competitors with lower costs (due to
increased access to resources)

2-3
Global Marketing: What it is and
What it isn’t
Strategy development comes down to two
main issues similar to single country
marketing
– Target market
– Marketing Mix

2-4
The Importance of Global Marketing
For US-based companies, 75% of sales
potential is outside the US.
– About 90% of Coca-Cola’s operating income is
generated outside the US.
For Japanese companies, 85% of potential
is outside Japan.
For German and EU companies, 94% of
potential is outside Germany.

2-5
Standardization versus Adaptation
Globalization (Standardization)
– Developing standardized products marketed worldwide
with a standardized marketing mix
– Essence of mass marketing
Global localization (Adaptation)
– Mixing standardization and customization in a way that
minimizes costs while maximizing satisfaction
– Essence of segmentation
– Think globally, act locally

2-6
Management Orientations

Polycentric:
Each host country Is
Ethnocentric:
Unique, sees differences
Home country is
In foreign countries
Superior, sees
Similarities in foreign
Countries

Regiocentric:
Sees similarities and
differences in a world
Region; is ethnocentric or
polycentric in its view of
the rest of the world
Geocentric:
World view, sees
Similarities and
Differences in home
And host countries

2-7
Forces Affecting Global Integration
and Global Marketing
Driving Forces
Restraining Forces
– Management
Regional economic
myopia
– agreements
Organizational culture
– Market
Nationalneeds and wants
controls
– Technology
– Transportation and
communication
improvements
– Product development costs
– Quality
– World economic trends
– Leverage

2-8
Introduction to Chapter 2
Market definition – People or organizations
with needs and wants; both have the
willingness and ability to buy or sell
The global economic environment plays a
large role in the development of new
markets for organizations

2-9
Turkish Trading Partners (2005)
Germany 13%,
UK 8.2%,
Italy 7%,
US 6.9%,
France 5.1%,
Spain 4.2%

2-11
2-12
2-13
2-14
Gross National Product TURKEY
Total Per Person
Year Population Million $ % $ %
1995 61,644 170,081 28.6 2,759 26.3
1996 62,697 183,601 7.9 2,928 6.1
1997 62,480 192,383 4.8 3,079 5.2
1998 63,459 206,552 7.4 3,255 5.7
1999 64,345 185,267 -10.3 2,879 -11.6
2000 67,461 200,002 8 2,965 3
2001 68,618 145,693 -27.2 2,123 -28.4
2002 69,620 180,828 24.1 2,597 22.3
2003 70,717 239,235 32.3 3,383 30.2
2004 71,782 299,475 25.2 4,172 23.3
2005 72,070 360,876 20.5 5,008 20

2-15
Gross National Product TURKEY

2-16
2-17
Rank Country GDP (millions of USD)
— World 44,384,871
1 United States 12,455,068
2 Japan 4,505,912
3 Germany 2,781,900
4 People's Republic of China 2,228,862
5 United Kingdom 2,192,553
Source:
6 France 2,110,185 World Bank
7 Italy 1,723,044
(2006)
8 Spain 1,123,691
11 South Korea 787,624
12 India 785,468
14 Russia 763,720
19 Turkey 363,300
28 Greece 213,698
30 Iran 196,343
73 Bulgaria 26,648
74 Syrian Arab Republic 26,320
87 Cyprus 15,418
95 Iraq 12,602

2-18
Gross Domestic Income (Nominal)

2-19
 GDP (PPP)
Rank Country
$ per capita
1 Luxembourg 69,800
2 Norway 42,364
3 United States 41,399
6 Denmark 34,740
7 Canada 34,273
8 Hong Kong 33,479
9 Austria 33,432
10 Switzerland 32,571
17 Germany 30,579
21 Italy 28,534
30 Greece 22,392
33 Cyprus 21,177
62 Russia 11,041
66 Bulgaria 9,223
74 Iran 7,980
75 Turkey 7,950
107 Azerbaijan 4,601
118 Syria 3,847

2-20
Purchasing Power Parity (per capita)

2-21
Turkey

2-22
Gini coefficient
The Gini coefficient is a measure of statistical dispersion most
prominently used as a measure of inequality of income distribution or
inequality of wealth distribution. It is defined as a ratio with values
between 0 and 1: A low Gini coefficient indicates more equal income
or wealth distribution, while a high Gini coefficient indicates more
unequal distribution. 0 corresponds to perfect equality (everyone
having exactly the same income) and 1 corresponds to perfect
inequality (where one person has all the income, while everyone else
has zero income). The Gini coefficient requires that no one have a
negative net income or wealth. Worldwide, Gini coefficients range
from approximately 0.232 in Denmark to 0.707 in Namibia although
not every country has been assessed.
The Gini index is the Gini coefficient expressed as a percentage. Thus
Denmark's Gini index is 23.2%.

2-23
Human Development Index
The Human Development Index (HDI) is an index
combining normalized measures of life expectancy,
literacy, educational attainment, and GDP per capita for
countries worldwide. It is claimed as a standard means of
measuring human development—a concept that, according
to the United Nations Development Program (UNDP),
refers to the process of widening the options of persons,
giving them greater opportunities for education, health
care, income, employment, etc. The basic use of HDI is to
rank countries by level of "human development", which
usually also implies to determine whether a country is a
developed, developing, or underdeveloped country.

2-24
Human Development Index

2008 update

2-25
 U.S. Multinational in Europe - 1960’s

Fifteen years from now the

2-3
world’s third greatest industrial
power, just after the United States
and Russia, may not be Europe, but
American industry in Europe.
J.S. Servan Schreiber:
What Happened? Le Defi American, 1967

2-26
 The Nationality of the World’s 100 Largest
Industrial Corporations (by country of origin)
1963 1979 1984 1990 1993 1995 1996 2000
United States 67 47 47 33 32 24 24 36
Germany 13 13 8 12 14 14 13 12
Britain 7 7 5 6 4 1 2 5
France 4 11 5 10 6 12 13 11
Japan 3 7 12 18 23 37 29 22
2-4 Italy 2 3 3 4 4 3 4 3
Netherlands-United Kingdom 2 2 2 2 2 2 2 --
Netherlands 1 3 1 1 1 2 2 5
Switzerland 1 1 2 3 3 3 5 3
Argentina -- -- 1 -- -- -- -- --
Belgium -- 1 1 -- -- -- -- 1
Brazil -- 1 -- 1 1 -- -- --
Canada -- 2 3 -- -- -- -- --
India -- -- 1 -- -- -- -- --
Kuwait -- -- 1 -- -- -- -- --
Mexico -- 1 1 1 1 -- 1 --
Venezuela -- 1 1 1 1 -- 1 --
South Korea -- -- 4 2 4 2 4 --
Sweden -- -- 1 2 1 -- -- --
South Africa -- -- 1 1 -- -- -- --
Spain -- -- -- 2 2 -- -- --
Turkey -- -- -- -- 1 -- -- --
China -- -- -- -- -- -- -- 2

2-27
The World Economy – An Overview

The new realities:

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

2-28
The World Economy – An Overview

The new realities continued:

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

2-29
Economic Systems
4 main types of economic systems
– Market Capitalism
– Centrally planned socialism
– Centrally planned capitalism
– Market socialism

2-30
Economic Systems
Resource Allocation
Market Command

Centrally
Private Market Planned
Capitalism Capitalism
Resource
Ownership
Centrally
Market Planned
State Socialism Socialism

2-31
Economic Freedom
Rankings of economic freedom among countries
– Ranges from “free” to “repressed”
Variables considered include such things as:
– Trade policy
– Taxation policy
– Banking policy
– Wage and price controls
– Property rights

2-32
Economic Freedom
Free
Repressed
– Bosnia
Hong Kong
– Vietnam
Singapore
– Laos
Ireland
– Iran
New Zealand
– Cuba
United States
– Iraq
United Kingdom
– Libya
Netherlands
– North
Australia
Korea
– Congo
Switzerland
2-33
 Buying Boom for Asia, 1995-2000
What the added Between 1993 and
middle class will 1995 2000 73.3
buy (In million) Millions of
households
Bedrooms 32 116 approaching
Living Rooms 16 58 $18,000 per year
Kitchens 16 58 buying power
Indexed to
Bathrooms 32 116 Singapore prices
Living space (sq.m.) 1,200 4,350
Large appliances 16 58 32.5
Televisions 24 87
Telephones 24 87 14.4
Cars 16 58
1991 1995 2000

SOURCE: Bill Saporito, “Where the Global Action Is.”

Fortune, Autumn-Winter 1993, p.64.
2-34
 What Would One U.S. Dollar Buy?
(Selected Years)
1985 1987 1988 1992 1993 1994 1995 1996 1997 1999 2000

British Pound 0.86 0.67 0.54 0.56 0.66 0.68 0.63 0.64 0.59 0.62 0.68
French Franc 9.6 7.55 5.4 5.29 5.67 5.55 4.95 5.12 5.94 6.49 7.28
Japanese Yen 250.23 123.32 123.70 126.70 111.08 102.18 93.96 108.78 129.15 102.58 112.21
Swiss Franc 2.25 2.07 1.29 1.41 1.48 1.37 1.18 1.24 1.43 1.58 1.68
EURO 0.99 1.11
Mexico Peso 0.37 2.21 2.28 3.12 3.11 5.31 6.45 7.60 7.92 9.43 9.47

* Foreign Exchange Rates for 1999 and 2000 are the average rate pf exchange in December.

Source: Adapted from www.stat-usa.gov

2-35
2-36
 The Price of Protectionism
Industry Total Costs to Number of Cost per
Consumers Jobs Saved Job Saved
(in $ millions)

Textiles and
apparel $27,000 640,000 $ 42,000
Carbon Steel 6,800 9,000 $ 750,000
Autos 5,800 55,000 $ 105,000
Dairy products 5,500 25,000 $ 220,000
Shipping 3,000 11,000 $ 270,000
Meat 1,800 11,000 $ 160,000

SOURCE: Michael McFadden, “Protectionism Can’t Protect Jobs,”

Fortune, May11, 1987, pp. 125.

2-37
Big Emerging Markets
China
India
Indonesia
South Korea
Brazil
Mexico
Argentina
South Africa
Poland
Turkey ██ Emerging markets██ Developed markets

2-38
Rapidly Developing Economies
The term "rapidly developing economies" is
now being used to denote emerging markets
such as
– The United Arab Emirates,
– Chile and
– Malaysia
that are undergoing rapid growth.

2-39
Stages of Market Development

2-40
Stages of Market Development
World Bank has defined four categories of
development
– High-income countries
– Upper-middle income countries
– Lower-middle income countries
– Low-income countries
Based upon Gross National Product (GNP)

2-41
Marketing Opportunities in LDCs
Characterized by a shortage of goods and
services
Long-term opportunities must be nurtured
in these countries
– Look beyond per capita GNP
– Consider the LDCs collectively rather than
individually
– Consider first mover advantage
– Set realistic Deadlines

2-42
Turkey

Return

2-43
Influencing the World Economy
Group of Seven (G-7)
Organization for Economic Cooperation
and Development
The Triad

2-44
The Triad: Trade Between the United States and Canada,
the European Community, and Japan, 1997 ($ billions)
EUROPEAN
COMMUNITY

97.1 31.4

110.9 68.8

UNITED STATES & JAPAN

CANADA

52.7

99.5

For additional figures see: “Indicators of Market Size for 115 Countries I”
Crossborder Monitor, August, 1994, pp.4-7 2-45
N-11
The Next Eleven (or N-
11) is a short list of
countries named by
Goldman Sachs
investment bank on 1
December 2005 as
having promising
outlooks for investment
and future growth.

2-46
N-11

2-47
BRIC
BRIC or BRICs are terms used to refer to the
combination of Brazil, Russia, India, and China.
The economies of the BRICs are rapidly
developing and by the year 2050 will eclipse most
of the current richest countries of the world.

2-48
BRICET
"BRIMC" (M for Mexico),
"BRICS" (S for South Africa)
"BRICET" (including Eastern Europe and
Turkey)
have become more generic marketing terms to
refer to these emerging markets.

2-49
Market Characteristics
• Population demographics
- Age distribution, life expectancy, household size, urbanisation
• Income
- Low, Medium and High
- GDP per capita
- Purchasing Power Parity (PPP)
• Consumption Patterns
- Income spent on necessities and luxuries
- Product saturation and diffusion
- Product form differences

2-50
Market Characteristics
Availability and quality of infrastructure
- Distribution networks (road, rail)
- Communication systems for marketing
- Supply and use of energy
Foreign involvement in the economy
- Degree of FDI (foreign direct investments) and the industries
- Investment rules and guidelines
Impact of economic environment on social
development
- urbanisation, life expectancy, literary rates, physical quality of life
index (PQLI)

2-51
Movie Clip from India

2-52
Marketing Implications of the
Stages of Development
Product Saturation
Levels
– The percentage of
potential buyers or
households that
own a particular
product
– Graph shows that
in India a private
phone is owned by
1% of the
population

2-53
Balance of Payments
The balance of payments (or BOP)
measures the payments that flow between
any individual country and all other
countries.

2-55
 Balance of Payments (2005)

Blue = countries in current account surplus; Red = countries in current account deficit, 2005
2-56
US Trade Balance

2-57
2-58
Managed Dirty Float?
Definitions
– Float refers to the system of fluctuating
exchange rates
– Managed refers to the specific use of fiscal and
monetary policy by governments to influence
exchange rates
• Devaluation is a reduction in the value of the local
currency against other currencies

2-61
Managed Dirty Float?
Definitions
– Dirty refers to the fact that central banks, as
well as currency traders, buy and sell currency
to influence exchange rates

2-62
Foreign Exchange Market Dynamics

Supply and Demand interaction

– Country sells more goods/services than it buys
– There is a greater demand for the currency
– The currency will appreciate in value

2-63
Purchasing Power Parity (PPP) –
The Big Mac Index

Is a certain currency over/under- valued compared

to another?
Assumption is that the Big Mac in any country
should equal the price of the Big Mac in the US
after being converted to a dollar price
2-64
Big Mac Index for Selected
Countries

2-65
Managing Economic Exposure
Economic exposure refers to the impact of
currency fluctuations on the present value
of the company’s future cash flows
– Transaction exposure is from sales/purchases
– Real operating exposure arises when currency
fluctuations, together with price changes, alter a
company’s future revenues and costs

2-66
Managing Economic Exposure
Numerous techniques and strategies have
been developed to reduce exchange rate risk
– Hedging involves balancing the risk of loss in
one currency with a corresponding gain in
another currency
– Forward Contracts set the price of the exchange
rate at some point in the future to eliminate
some risk

2-67
Looking Ahead
Chapter 3 – The Global Trade Environment:
Regional Market Characteristics and
Preferential Trade Agreements

2-68
2-69
Market Capitalism
Individuals and firms allocate resources
Production resources are privately owned
Driven by consumers
Government should promote competition
among firms and ensure consumer
protection

2-70
2-71
Index of Economic Freedom
In practice, the index measures:
– Size of Government: Expenditures, Taxes, and
Enterprises
– Legal Structure and Security of Property Rights
– Access to Sound Money
– Freedom to Trade Internationally
– Regulation of Credit, Labor, and Business

Return

2-72
Centrally Planned Socialism
Opposite of market capitalism
State holds broad powers to serve the public
interest; decides what goods and services are
produced and in what quantities
Consumers can spend on what is available
Government owns entire industries
Demand typically exceeds supply
Little reliance on product differentiation,
advertising, pricing strategy
Return

2-73
Centrally-Planned Capitalism
Economic system in which command
resource allocation is used extensively in an
environment of private resource ownership
Examples:
– Sweden
– Japan

Return
2-74
Market Socialism
Economic system in which market
allocation policies are permitted within an
overall environment of state ownership
Examples:
– China
– India

Return
2-75
Low-Income Countries
GNP per capita of $785 or less
Characteristics
– Limited industrialization
– High percentage of population involved in farming
– High birth rates
– Low literacy rates
– Heavy reliance on foreign aid
– Political instability and unrest
Of these, only China and India are BEMs
Return

2-76
Lower-Middle-Income Countries
GNP per capita between $786 and $3,125
Sometimes called less-developed countries
(LDCs)
Characteristics
– Early stages of industrialization
– Cheap labor markets
– Factories supply items such as clothing, tires, building
materials, and packaged foods
3 BEMs: Poland, Turkey, Indonesia

2-77
Turkey

Return

2-78
Upper-Middle-Income Countries
GNP per capita between $3,126 to $9,655
Characteristics
– Rapidly industrializing
– Rising wages
– High rates of literacy and advanced education
– Lower wage costs than advanced countries
Sometimes called newly industrializing economies (NIEs)
3 BEMs: Argentina, Brazil, Mexico, South Africa

Return

2-79
High-Income Countries
GNP per capita above $9,656
Sometimes referred to as post-industrial countries
Characteristics
– Importance of service sector, information processing
and exchange, and intellectual technology
– Knowledge as key strategic resource
– Orientation toward the future

Return
2-80
Group of Seven (G-8)
Leaders from these high income countries work to
establish prosperity and ensure monetary stability

World
Development
Report 2006

Return

2-81
Return
2-82
Organization for Economic
Cooperation and Development

30 nations each with market-allocation

economic systems
Mission: to enable its members to achieve
the highest sustainable economic growth
and improve the economic and social well-
being of their populations
www.oecd.org

2-83
OECD

2-84
OECD Members (2006)

Return 2-85
The Triad
Dominant economic centers of the world
– Japan
– Western Europe
– United States
Expanded Triad
– Pacific Region
– North America
– European Union

2-86
EU

2-87
EU Statistics

Return
2-88
2-89
APEC
Asia Pacific Economic Cooperation

Members
– US, Japan, China, Australasia, Russia, …

Goal
– Lose economic association, forum

2-90
APEC

2-91
Economic Integration in Asia
Asia-Pacific Economic Cooperation (APEC)
Association of Southeast Asian Nations
(ASEAN)
East Asia Economic Group
South Asian Association for Regional
Cooperation (SAARC)

2-92
Economic Integration in Africa and the
Middle East
Economic Community of West African
States (ECOWAS)
Afro-Malagasy Economic Union
East Africa Customs Union
West African Economic Community
Maghreb Economic Community
Gulf Cooperation Council (GCC)

2-93