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Chapter 6: Market Adaptation Keith Head Sauder School of Business.

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Presentation on theme: "Chapter 6: Market Adaptation Keith Head Sauder School of Business."— Presentation transcript:

1 Chapter 6: Market Adaptation Keith Head Sauder School of Business

2 The “take-away” for this chapter Demands are less different than they were but the world is far from homogenization. When selling products in foreign countries, firms must decide how much to adapt their product and its “message” to local demands. Demands differ for systematic reasons. Adaptations may not pass a cost-benefit test.

3 What company? Which country? ????????????

4 What company? Which country? ????????????

5 About three years later…

6 What company? Which country? ?? ?

7 What company? Which country?

8

9 Levitt’s Claim Theodore Levitt, a Harvard Business School professor, wrote a paper in 1983, arguing… Markets are globalized: “The world’s needs and desires have become irrevocably homogenized.” End of local products: Firms should “sell the same thing the same way, everywhere.”

10 Components of the Levitt Argument The new cosmopolitanism [converging consumer preferences] The underappreciated power of large volume, low price strategies. [brand-level economies of scale] The power of promotional schemes that disregard stated wants and focus attention on ultimate needs.

11 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.

12 Every country wants a washing machine with different features

13 Or do they? Levitt says you shouldn’t 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.

14 Reasons Why Demands Differ Environmental Adaptations Developmental Adaptations Political/Cultural: de jure & de facto Standards

15 Environmental Adaptations Topography Climate Population Density

16 Env. Sep. & Trucks –Trucks in dense countries must have a tight turning radius. –Trucks in mountainous countries must have thicker axels, more likely to prefer diesel engines. –Trucks in cold countries need snow tires. –Trucks in hot countries need refrigeration, AC.

17 Population Density in Europe

18 Products adapted to high density

19 Photos courtesy of Fusako Sakasai

20 Developmental Adaptations Income effects (Engel curves for “superior” goods) –Quality (luxury, durability) –Convenience (time-saving) –Safety (avoid risks) –Environmental “friendliness” Education effects –Literacy –Technical competence

21 Cultural Adaptation Traditions: parental influence effects –Learning by example –Imprinting during childhood Conformism: localized peer-to-peer interactions –Technical product specification standards –Communication standards

22 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. Why Europeans don’t like Hershey, but Americans do.

23 Thunderbirds, Matchbox, and the Levitt Argument revisited

24 Different Keyboard Standards France’s AZERTY QWERTY

25 What share of the world drives on the left? 1/3 of the world’s population drives on the left! (so their cars should have steering wheels on the right)

26 Standard changes are rare, but there are strong pressures to conform to practices of neighboring countries. BC (1922), New Brunswick (1922), Nova Scotia (1923), PEI (1924), and Newfoundland (1947) switched. Sweden switched twice! (in 1736 to the left and 1967 back to the right)

27 AC Power Plugs U.K., Hong Kong, parts of Africa Europe, parts of Middle East Australia, China

28 The strange case of the Mars Climate Orbiter Sept. 23, 1999: NASA fired rockets intended to push its ($123mil.) Mars Climate Orbiter into a stable low- altitude orbit. But NASA never heard from its spacecraft again.

29 Mystery of the missing orbiter The manufacturer, Lockheed Martin, had specified the rocket thrust in pounds, while NASA assumed that the thrust had been specified in metric-system newtons.

30 “Metrication” everywhere (except US, Liberia, and Burma)

31 Paper sizes 210mm X 297mm (rest of world) 216mm X 279mm (US + Canada)

32 English is the 3 rd or 4 th most common native language. It is spoken/understood to some extent by 1/4 to 1/3 of the world English is an official language in 52 countries

33 Costs of Adapting Products Research & Development (“blueprint”) costs Market Cultivation Costs (new promotion) Line costs (new machinery) Switching costs (for existing machinery) Input price rises Consumer confusion costs

34 Weighing costs vs benefits of product adaptation Benefit: Rise in gross profits = Rise in price * Initial Mkt Size + Final profit margin*Rise in Mkt Size –Rise in marginal costs*Initial Mkt Size Cost: Sunk incremental blueprint and advertising costs required for new variety. Bottom line: Adapt for large mkts & important demand differences.

35 Adapting prices “Pricing to market”: setting prices in each market to maximize local profits Why prices should differ –Differences in delivered unit costs –Differences in market demand elasticity –Differences in firm’s share of market Constraints on pricing freedom –Anti-dumping duties –Gray (parallel) markets

36 The “take-away” for this chapter Demands are less different than they were but the world is far from homogenization. When selling products in foreign countries, firms must decide how much to adapt their product and its “message” to local demands. Demands differ for systematic reasons. Adaptations may not pass a cost-benefit test. Price should be locally adapted too—but not so different to cause ADD and/or smuggling.


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