L3: International MR (economic)

Question 1

Economic environment definition (Hollensen, 2013)

Answer 1

It is determined by total buying power, availability of infrastructure, and market size and growth.

Question 2

How exchange rates affect business decisions (Hollensen, 2013)

Answer 2

• Affect demand for a company’s products. Weak currency => ↓ export price, ↑ import price => ↑ export, ↑ profits.
• Should be stable as it improves the accuracy of financial planning including cash flow forecasts.

Question 3

Devaluation and Revaluation (Hollensen, 2013)

Answer 3

↓ value of currency by the nation’s gov.

↑ value of currency by the nation’s gov.

Question 4

Devaluation pros and cons (Hollensen, 2013)

Answer 4

• Pros: good for domestic firms when compete with other countries, and ↑ exports to eliminate trade deficit.
• Cons: ↓ consumers’ buying power; domestic firms less concern with production costs, which may lead to inflation.

Question 5

Law of one price (Hollensen, 2013)

Answer 5

• An identical product must have an identical price in all countries when price is expressed in a common-denominator currency.
• Products must be identical in quality and content, and must be entirely produced within each particular country.

Question 6

Big Mac Index (Hollensen, 2013)

Answer 6

The index is based on theory of PPP: a dollar should buy the same amount in all countries. PPP calculated for a ‘basket’ of products, which is a McDonald’s Big Mac.

Question 7

Pros and cons of Big Mac Index (Hollensen, 2013)

Answer 7

• Pros: Predict the movement of currency value and Estimate exchange rate
• Cons: a simplistic method.
• Cannot reflect local production and delivery cost, advertising cost, and what the local market bears.
• Price is affected by subsidies for agricultural products, or different tax imposed on restaurants.
• Not a ‘traded’ product to buy in low-priced countries and sell in high-priced ones.

Question 8

Index to measure a nation’s income (Hollensen, 2013)

Answer 8

GNI ( = GNP) = GDP + NI

Question 9

Classify countries by income (3 main levels of industrialization) (Cateora et al., 2012; Hollensen, 2013)

Answer 9

• Less developed countries (LDCs)
• Newly industrialized countries (NIC)
• More-developed countries (MDCs)

Question 10

LDCs characteristics (Hollensen, 2013)

Answer 10

• Heavily reliant on one product and often on one trading partner, usually agricultural crop or on mining.
• Low capita per income
• Ex: Cuba (sugar), Vietnam (rice).
• Considerably vary in quality of distribution channels between countries.

Question 11

Risks of LDCs (Hollensen, 2013)

Answer 11

Unreal prospects for rapid economic development:

• Changing supply and demand patterns can affect the nation’s earnings.
• Private sources of capital (L-T infrastructure) are reluctant to invest in such countries. Important capital spending projects rely heavily on world aid programs.

Question 12

NICs characteristics (Hollensen, 2013)

Answer 12

• Countries with an emerging industrial base, rapid industrialization, medium per capita income, become the formidable exporters and importers
• Ex: Singapore, Taiwan, South Korea, Brazil, Mexico.

Question 13

Risk of NICs (Hollensen, 2013)

Answer 13

Although the infrastructure develops considerably, high growth in the economy results in difficulties with producing what is demanded by domestic and foreign customers.

Question 14

MDCs characteristics (Hollensen, 2013)

Answer 14

Considerable GDP per capita, a wide industrial base, considerable development in the services sector and substantial investment in the infrastructure of the country.

Question 15

11 Economic growth factors in NICs (Cateora et al., 2012)

Answer 15

1) Accessible markets with low tariff
2) Economic and legal reforms
3) Entrepreneurship
4) Factors of production
5) Incentives to force high domestic rate of savings and direct capital.
6) Industries targeted for growth
7) Investment in IT
8) Outward orientation
9) Planning
10) Political stability
11) Privatization of state-owned enterprises

Question 16

Three roles of IT and the Internet to Economic development (Cateora et al., 2012)

Answer 16

1) Internet cuts transaction costs and reduces economies of scale from vertical integration. => Small firms to work together to develop a global reach.
2) Internet speeds up the diffusion of new technologies to emerging economies.
3) Mobile phones and other wireless technologies reduce the need to lay a costly telecom infrastructure to bring telephone service to areas not served.

Question 17

Two roles of Infrastructure to Economic development (Cateora et al., 2012)

Answer 17

1) Represent capital goods that serve the activities of many industries, support distribution and mkt.
- Ex: paved roads, railroads, communication networks, financial networks, and energy supplies and distribution
2) Directly affect a country’s economic growth potential and the firm’s ability to engage effectively in business.

Question 18

Marketing in developing countries (Cateora et al., 2012)

Answer 18

• The ↑ developed an economy, the ↑ variety of MKT functions demanded, the ↑ sophisticated and specialized the firms become to perform MKT functions.
• MKT structures of many developing countries are simultaneously at many stages. Ex: traditional small retailer
• Estimate market potential in developing countries is difficult as coexistence of three different markets - rural sector, urban sector and transitional sector (urban slum).

Question 19

Types of markets

Answer 19

• Big emerging countries (BEM): BRIC
• Bottom-of-the-pyramid (BOP)
• Europe: EU, EMU, Eastern Europe, Baltic States
• The Americas: NAFTA & Mercosur
• Asia: ASEAN, APEC
• Africa: SADC
• Middle East: GAFTA, OPEC

Question 20

Characteristic of BEMS (Cateora et al., 2012)

Answer 20

Ex: China, India, Brazil, Mexico, South Africa, Turkey

• Geographically large with great population
• Represent sizable market for a wide range of products
• Economic driven and political importance of the region
• Strong and potential growth rate
• Lack of modern infrastructure => Need to develop IT, environmental technology, transportation, energy, healthcare technology and financial services.

Question 21

Bottom-of-the-pyramids (BOP) (Hollensen, 2013)

Answer 21

• ⅔ population of the world earn < USD2,000/ year.

- Regional areas: Africa, Asia, eastern Europe and Latin America and the Caribbean.

Question 22

4 key elements to thrive in low-income market (BOP)

Answer 22

• Creating buying power
• Shaping aspirations through product innovation and consumer education
• Improving access through better distribution and communication system
• Tailoring local solutions

Question 23

Two-stage models to reach BOP customers (Gollakota et al., 2010)

Answer 23

1) The poor as consumers: deep cost management and deep benefit management.
2) The poor as marketers: Access to credit and Establishment of alliances.

Question 24

Deep cost management in BOP market (Gollakota et al., 2010)

Answer 24

Identify core value proposition to match customers’ needs and wants, then re-engineering the value chain to reduce costs.
=> Solutions: cheaper inputs, reduce package sizes (ex: Chotukool refrigerator in India), using credit to reduce the up-front payments and accepting payment in installment, adopt pay-per-use strategies (ex: laundry service for students).

Question 25

Deep benefit management in BOP market (Gollakota et al., 2010)

Answer 25

Identify different needs from poor customers in affluent society. => Solutions: Add important features - offering convenient locations, transport or other services. (Ex: Vodacom positions mobile phone as an income-earning asset).

Question 26

Access to credit in BOP market (Gollakota et al., 2010)

Answer 26

- Consumers gain a small loan (USD100) and become a producer contributing to family income and independence. - Role: widen a nation’s economic base and promote the growth that leads to real increases in living standards. - Ex: Grameen bank in Bangladesh with microfinance banks.

Question 27

Establishment of alliances in BOP market (Gollakota et al., 2010)

Answer 27

Requires the involvement of multiple players like private companies, gov, NGOs, financial institutions, etc. - Private companies take the leading role in serving BOP and alleviate poverty. - Change from traditional gov assistance delivery to different ways of creating a sustainable environment. Ex: funding and training entrepreneurs. - Alliances in health care sector: reduce daily doses or fewer full-strength doses to breed drug-resistant organisms.

Question 28

Five major forms of regional economic forms (Cateora et al., 2012; Hollensen, 2013)

Answer 28

- Regional cooperation groups (RCD) - Free trade area: free trade among members - Custom union: common external trade policy - Common market: factor mobility - Economic union: harmonization of economic policies

Question 29

Regional cooperation groups

Answer 29

Govs participate jointly to develop basic industries beneficial to each other. Each country commit to financing of a JV and purchase a specified share of the output. - Ex: Colombia and Venezuela built hydroelectric generating plant

Question 30

Free trade area

Answer 30

- Least restrictive and loosest form of economic integration. - All barriers to trade (customs duties and non-tariff barriers) are removed. - Ex: NAFTA

Question 31

Custom union

Answer 31

- A common trade policy between members with respect to non-members. Typically it is an external tariff. - Ex: Benelux countries (later became part of EU), France and Monaco.

Question 32

Common market

Answer 32

- Factors of production (labour, capital and technology) are mobile. Restrictions on immigration and cross-border investment are abolished. - Ex: East African Common Market (EAC) of Uganda, Tanzania, South Sudan, Burundi, Kenya and Rwanda.

Question 33

Economic union

Answer 33

- Integrate all economic policies: monetary policies, taxation, and government spending. A common currency is used and apply fixed exchange rates. To join EU, countries must fulfill ‘Copenhagen criteria’. - Ex: EU with 28 members in 2015. Yet there is Brexit.

Question 34

Factors for a successful economic union (Cateora et al., 2012)

Answer 34

1) Economic: provide assured outlets and preferential treatment for goods produced within the economic union. 2) Political: members have comparable aspirations and general compatibility before surrendering their national sovereignty. 3) Geographic and Temporal proximity: reduce differences in time zone, and interrelated transportation network. 4) Cultural factors: ease the shock of economic cooperation, as members understand the outlook and viewpoints. (ex: EU - christian religion)

Question 35

Implication of market integration with opportunities

Answer 35

1) Create large mass markets. They are important to businesses accustomed to mass production and mass distribution because of economies of scale and marketing efficiencies. 2) Increase purchasing power, improve regional infrastructure, and fostering economic development. 3) Reduce cost from developing different versions of products to meet a hodgepodge of national standards.

Question 36

Implication of market integration with barriers (Cateora et al., 2012)

Answer 36

1) Initial goal: Protect businesses that operate within its border. 2) Exporters are in a considerably weaker position. 3) Small firms have to adjust to the EU standards or to be closed out when an EU-wide standard is adopted. It is due to large MNCs and European firms had the advantage of setting standards to their benefits. 4) Loss of national sovereignty: give up some of their sovereign rights to participate in other international regional groups.

Question 37

Marketing implication of market integration (Cateora et al., 2012)

Answer 37

1) Price standardization among country markets. 2) Reduction in the number of brands. Ex: Unilever cut from 1,600 brands down to focus on 400 core brands. 3) Increased competition at the retail level, and the creation of Europewide distribution channels. 4) Local integration ultimately serves globalization and harmonization of the world trading system, thus reducing business costs and delivering greater choice to consumers and greater opportunities to marketers.

Question 38

Eight business technology trends (Manyika et al., 2008)

Answer 38

1) Distributing co-creation: Linux operating systems was developed over the Internet. 2) Using consumers as innovators: OhmyNews - South Korean online newspaper written by 60,000 citizens 3) Tapping into a world of talent: TopCoder let other companies into their talent pool of software developers 4) Extracting more value from interactions: wikis, virtual team environments, and videoconferencing 5) Expanding the frontiers of automation: automate tasks in supply chain, HR, customer data, etc. 6) Unbundling production from delivery: Amazon let other retailers use its logistics 7) Putting more sciences into management: Google let employees submit and carry out ideas. 8) Making businesses from information: digital cameras to prevent shoplifting are used to sell customer shopping pattern.

Question 39

Three strategies in the emerging markets (Khanna et al., 2005)

Answer 39

1) Adapt strategies to the voids: modify business models for each nation, but remain the core value propositions. Ex: Dell offered a smaller product range to keep inventory levels low when first entered the market. 2) Change the context. Ex: Big 4 improves financial reporting and auditing standards in Brazil 3) Stay away: Home Depot (DIY) has problems with inventory system in the poor physical infrastructure. >> While companies can’t use the same strategies in all developing countries, they can generate synergies by treating different markets as part of a system. Example: GE Healthcare set up facility in India as a global sourcing base >> later produce equipment cheaply.