Marketing Exam 1 (Chapters 1-5)

Terms in this set (45)

One method for developing alternatives is Ansoff's strategic opportunity matrix (see Exhibit 2.1), which matches products with markets. Firms can explore these four options:
Market penetration: A firm using the market penetration alternative would try to increase market share among existing customers. FTR Energy Services, a division of Frontier Communications, introduced a Green-e certified energy service into New York, Ohio, and Indiana markets served by Frontier's telephone and broadband services. Though these markets were already served by separate, well-established energy companies, FTR Energy hoped to penetrate the energy market by allowing customers to lock in competitive rates and offering five percent cash back on energy usage.* Customer databases, discussed in Chapter 9, would help managers implement this strategy.
Market development: Market development means attracting new customers to existing products. Ideally, new uses for old products stimulate additional sales among existing customers while also bringing in new buyers. McDonald's, for example, has opened restaurants in Russia, China, and Italy and is eagerly expanding into Eastern European countries. In the nonprofit arena, the growing emphasis on continuing education and executive development by colleges and universities is a market development strategy.
Product development: A product development strategy entails the creation of new products for present markets. In January 2014, Beats Electronics launched Beats Music, a subscription-based streaming music service that offers advanced personalization systems and forward-thinking family sharing plans. Beats hopes this service's novel features, sleek design, and celebrity endorsements will catapult it to the front of the music streaming pack, which is currently fronted by competitors such as Spotify and Rdio.*
Diversification: Diversification is a strategy of increasing sales by introducing new products into new markets. For example, UGG, a popular footwear brand known for its casual boots, has introduced an upscale men's footwear collection. The shoes are inspired by rock'n'roll legends such as Jimi Hendrix and Jim Morrison, and are meant to appeal to new customers. "There are some UGG customers that will be interested in the Collection product, but it will also bring in new customers for us," says Leah Larson, UGG's vice president and creative director.* A diversification strategy can be risky when a firm is entering unfamiliar markets. However, it can be very profitable when a firm is entering markets with little or no competition.
Management must find a balance among the SBUs that yields the overall organization's desired growth and profits with an acceptable level of risk. Some SBUs generate large amounts of cash, and others need cash to foster growth. The challenge is to balance the organization's portfolio of SBUs for the best long-term performance.
To determine the future cash contributions and cash requirements expected for each SBU, managers can use the Boston Consulting Group's portfolio matrix. The portfolio matrix classifies each SBU by its present or forecast growth and market share. The underlying assumption is that market share and profitability are strongly linked. The measure of market share used in the portfolio approach is relative market share, the ratio between the company's share and the share of the largest competitor. For example, if a firm has a 50 percent share and the competitor has five percent, the ratio is 10 to 1. If a firm has a 10 percent market share and the largest competitor has 20 percent, the ratio is 0.5 to 1.
Exhibit 2.3 is a hypothetical portfolio matrix for a computer manufacturer. The size of the circle in each cell of the matrix represents dollar sales of the SBU relative to dollar sales of the company's other SBUs. The portfolio matrix breaks SBUs into four categories:
Stars: A star is a fast-growing market leader. For example, the iPad is one of Apple's stars. Star SBUs usually have large profits but need lots of cash to finance rapid growth. The best marketing tactic is to protect existing market share by reinvesting earnings in product improvement, better distribution, more promotion, and production efficiency. Management must capture new users as they enter the market.
Cash cows: A cash cow is an SBU that generates more cash than it needs to maintain its market share. It is in a low-growth market, but the product has a dominant market share. Personal computers and laptops are categorized as cash cows in Exhibit 2.3. The basic strategy for a cash cow is to maintain market dominance by being the price leader and making technological improvements in the product. Managers should resist pressure to extend the basic line unless they can dramatically increase demand. Instead, they should allocate excess cash to the product categories where growth prospects are the greatest. For example, Heinz has two cash cows: ketchup and Weight Watchers frozen dinners.
Problem children: A problem child, also called a question mark, shows rapid growth but poor profit margins. It has a low market share in a high-growth industry. Problem children need a great deal of cash. Without cash support, they eventually become dogs. The strategy options are to invest heavily to gain better market share, acquire competitors to get the necessary market share, or drop the SBU. Sometimes a firm can reposition the products of the SBU to move them into the star category. Elixir guitar strings, made by W. L. Gore & Associates, maker of Gore-Tex and Glide floss, were originally tested and marketed to Walt Disney theme parks to control puppets. After trial and failure, Gore repositioned and marketed heavily to musicians, who have loved the strings ever since.
Dogs: A dog has low growth potential and a small market share. Most dogs eventually leave the marketplace. In the computer manufacturer example, the mainframe computer has become a dog. Another example is BlackBerry's smartphone line, which started out as a star for its manufacturer in the United States. Over time, the BlackBerry moved into the cash cow category, and then more recently, to a question mark, as the iPhone and Android-based phones captured market share. Even if it never regains its star status in the United States, BlackBerry has moved into other geographic markets to sell its devices. In parts of Africa, Blackberry is seen as a revolutionary company that is connecting people in a way that they have never been before. The company currently owns 48 percent of the mobile market and 70 percent of the smartphone market in South Africa.While typical strategies for dogs are to harvest or divest, sometimes companies—like BlackBerry—are successful with this class of product in other markets. Other companies may revive products that were abandoned as dogs. In early 2014, Church's Chicken brought its Purple Pepper dipping sauce back to the market using a "Back by Popular Demand" promotional campaign.
After classifying the company's SBUs in the matrix, the next step is to allocate future resources for each. The four basic strategies are to:
Build: If an organization has an SBU that it believes has the potential to be a star (probably a problem child at present), building would be an appropriate goal. The organization may decide to give up short-term profits and use its financial resources to achieve this goal. Apple postponed further work on the iPad to pursue the iPhone. The wait paid off when Apple was able to repurpose much of the iOS software and the iPhone's App Store for the iPad, making development less expensive and getting the product into the marketplace more quickly.*

Hold: If an SBU is a very successful cash cow, a key goal would surely be to hold or preserve market share so that the organization can take advantage of the very positive cash flow. Fashion-based reality series Project Runway is a cash cow for the Lifetime cable television channel and parent companies Hearst and Disney. New seasons and spin-off editions such as Project Runway: Under the Gunn are expected for years to come.*
Harvest: This strategy is appropriate for all SBUs except those classified as stars. The basic goal is to increase the short-term cash return without too much concern for the long-run impact. It is especially worthwhile when more cash is needed from a cash cow with long-run prospects that are unfavorable because of a low market growth rate. For instance, Lever Brothers has been harvesting Lifebuoy soap for a number of years with little promotional backing.
Divest: Getting rid of SBUs with low shares of low-growth markets is often appropriate. Problem children and dogs are most suitable for this strategy. Nestle, for example, is in the process of selling its PowerBar SBU. Once the pioneering brand in the nutritional bar market, PowerBar has become an underperforming brand.*
Cost leadership can result from obtaining inexpensive raw materials, creating an efficient scale of plant operations, designing products for ease of manufacture, controlling overhead costs, and avoiding marginal customers. Hydraulic fracturing (or fracking) is a controversial mining technique used to release petroleum, natural gas, and other valuable chemicals from layers of rock in the earth's crust. In the United States, fracking has revealed a vast supply of natural gas locked in shale rock, greatly reducing the cost of energy across the country and making the United States a primary player in the global natural gas market. According to George Blitz, vice president of energy and climate change at Dow Chemical Company, the shale gas boom has given the United States the biggest competitive advantage the industry has seen in several decades.* Having a cost competitive advantage means being the low-cost competitor in an industry while maintaining satisfactory profit margins. Costs can be reduced in a variety of ways:
Experience curves: Experience curves tell us that costs decline at a predictable rate as experience with a product increases. The experience curve effect encompasses a broad range of manufacturing, marketing, and administrative costs. Experience curves reflect learning by doing, technological advances, and economies of scale. Firms like Boeing use historical experience curves as a basis for predicting and setting prices. Experience curves allow management to forecast costs and set prices based on anticipated costs as opposed to current costs.
Efficient labor: Labor costs can be an important component of total costs in low-skill, labor-intensive industries such as product assembly and apparel manufacturing. Many U.S. publishers and software developers send data entry, design, and formatting tasks to India, where skilled engineers are available at lower overall cost.
No-frills goods and services: Marketers can lower costs by removing frills and options from a product or service. Southwest Airlines, for example, offers low fares but no seat assignments or meals. Low costs give Southwest a higher load factor and greater economies of scale, which, in turn, mean lower prices.
Government subsidies: Governments can provide grants and interest-free loans to target industries. Such government assistance enabled Japanese semiconductor manufacturers to become global leaders.
Product design: Cutting-edge design technology can help offset high labor costs. BMW is a world leader in designing cars for ease of manufacture and assembly. Reverse engineering—the process of disassembling a product piece by piece to learn its components and obtain clues as to the manufacturing process—can also mean savings. Reverse engineering a low-cost competitor's product can save research and design costs. The car industry often uses reverse engineering.
Reengineering: Reengineering entails fundamental rethinking and redesign of business processes to achieve dramatic improvements in critical measures of performance. It often involves reorganizing functional departments such as sales, engineering, and production into cross-disciplinary teams.
Production innovations: Production innovations such as new technology and simplified production techniques help lower the average cost of production. Technologies such as computer-aided design (CAD) and computer-aided manufacturing (CAM) and increasingly sophisticated robots help companies such as Boeing, Ford, and General Electric reduce their manufacturing costs.
New methods of service delivery: Medical expenses have been substantially lowered by the use of outpatient surgery and walk-in clinics. Online-only magazines deliver great savings, and even some print magazines are exploring ways to go online to save material and shipping costs.
The term marketing mix refers to a unique blend of product, place (distribution), promotion, and pricing strategies (often referred to as the four Ps ) designed to produce mutually satisfying exchanges with a target market. The marketing manager can control each component of the marketing mix, but the strategies for all four components must be blended to achieve optimal results. Any marketing mix is only as good as its weakest component. For example, the first pump toothpastes were distributed over cosmetics counters and failed. Not until pump toothpastes were distributed the same way as tube toothpastes did the products succeed. The best promotion and the lowest price cannot save a poor product. Similarly, excellent products with poor placing, pricing, or promotion will likely fail.
Successful marketing mixes have been carefully designed to satisfy target markets. At first glance, McDonald's and Wendy's may appear to have roughly identical marketing mixes because they are both in the fast-food hamburger business. However, McDonald's has been most successful at targeting parents with young children for lunchtime meals, whereas Wendy's targets the adult crowd for lunches and dinner. McDonald's has playgrounds, Ronald McDonald the clown, and children's Happy Meals. Wendy's has salad bars, carpeted restaurants, and no playgrounds.
Variations in marketing mixes do not occur by chance. Astute marketing managers devise marketing strategies to gain advantages over competitors and best serve the needs and wants of a particular target market segment. By manipulating elements of the marketing mix, marketing managers can fine-tune the customer offering and achieve competitive success.
The utilitarian ethical theory is founded on the ability to predict the consequences of an action. To a utilitarian, the choice that yields the greatest benefit to the most people is the choice that is ethically correct. One benefit of this ethical theory is that the utilitarian can compare similar predicted solutions and use a point system to determine which choice is more beneficial for more people. This point system provides a logical and rational argument for each decision and allows a person to use it on a case-by-case context.
There are two types of utilitarianism: act utilitarianism and rule utilitarianism. Act utilitarianism adheres exactly to the definition of utilitarianism as just described. In act utilitarianism, a person performs the acts that benefit the most people, regardless of personal feelings or societal constraints such as laws. Rule utilitarianism, however, takes into account the law and is concerned with fairness. A rule utilitarian seeks to benefit the most people but through the fairest and most just means available. Therefore, added benefits of rule utilitarianism are that it values justice and doing good at the same time.
As is true of all ethical theories, however, both act and rule utilitarianism contain numerous flaws. Inherent in both are the flaws associated with predicting the future. Although people can use their life experiences to attempt to predict outcomes, no human being can be certain that his predictions will be true. This uncertainty can lead to unexpected results, making the utilitarian look unethical as time passes because his choice did not benefit the most people as he predicted.
Another assumption that a utilitarian must make is that he has the ability to compare the various types of consequences against each other on a similar scale. However, comparing material gains such as money against intangible gains such as happiness is impossible because their qualities differ so greatly.
Today's business ethics actually consist of a subset of major life values learned since birth. The values businesspeople use to make decisions have been acquired through family, educational, and religious institutions.
Ethical values are situation specific and time oriented. Everyone must have an ethical base that applies to conduct in the business world and in personal life. One approach to developing a personal set of ethics is to examine the consequences of a particular act. Who is helped or hurt? How long do the consequences last? What actions produce the greatest good for the greatest number of people? A second approach stresses the importance of rules. Rules come in the form of customs, laws, professional standards, and common sense. "Always treat others as you would like to be treated" is an example of a rule.
A third approach to personal ethics emphasizes the development of moral character within individuals. In this approach, ethical development is thought to consist of three levels.*
Preconventional morality, the most basic level, is childlike. It is calculating, self-centered, and even selfish, based on what will be immediately punished or rewarded. Fortunately, most businesspeople have progressed beyond the self-centered and manipulative actions of preconventional morality.
Conventional morality moves from an egocentric viewpoint toward the expectations of society. Loyalty and obedience to the organization (or society) become paramount. A marketing decision maker operating at this level of moral development would be concerned only with whether a proposed action is legal and how it will be viewed by others.
Postconventional morality represents the morality of the mature adult. At this level, people are less concerned about how others might see them and more concerned about how they see and judge themselves over the long run. A marketing decision maker who has attained a postconventional level of morality might ask, "Even though it is legal and will increase company profits, is it right in the long run? Might it do more harm than good in the end?"
Ethical questions rarely have cut-and-dried answers. Studies show that the following factors tend to influence ethical decision making and judgments:*
Extent of ethical problems within the organization: Marketing professionals who perceive fewer ethical problems in their organizations tend to disapprove more strongly of "unethical" or questionable practices than those who perceive more ethical problems. Apparently, the healthier the ethical environment, the more likely it is that marketers will take a strong stand against questionable practices.
Top management's actions on ethics: Top managers can influence the behavior of marketing professionals by encouraging ethical behavior and discouraging unethical behavior. Researchers found that when top managers develop a strong ethical culture, there is reduced pressure to perform unethical acts, fewer unethical acts are performed, and unethical behavior is reported more frequently.*
Potential magnitude of the consequences: The greater the harm done to victims, the more likely that marketing professionals will recognize a problem as unethical.
Social consensus: The greater the degree of agreement among managerial peers that an action is harmful, the more likely that marketers will recognize a problem as unethical. Research has found that a strong ethical culture among coworkers decreases observations of ethical misconduct. In companies with strong ethical cultures, 9 percent of employees observed misconduct, compared with 31 percent in companies with weaker cultures.*
Probability of a harmful outcome: The greater the likelihood that an action will result in a harmful outcome, the more likely that marketers will recognize a problem as unethical.
Length of time between the decision and the onset of consequences: The shorter the length of time between the action and the onset of negative consequences, the more likely that marketers will perceive a problem as unethical.
Number of people to be affected: The greater the number of persons affected by a negative outcome, the more likely that marketers will recognize a problem as unethical.
An important aspect of social responsibility is stakeholder theory. Stakeholder theory says that social responsibility is paying attention to the interest of every affected stakeholder in every aspect of a firm's operation.Employees have their jobs and incomes at stake. If the firm moves or closes, employees often face a severe hardship. In return for their labor, employees expect wages, benefits, and meaningful work. In return for their loyalty, workers expect the company to carry them through difficult times.
Management plays a special role, as they also have a stake in the corporation. Like employees, managers have their jobs and incomes at stake. On the other hand, management must safeguard the welfare of the organization. Sometimes this means balancing the multiple claims of conflicting stakeholders. For example, stockholders want a higher return on investment and perhaps lower costs by moving factories overseas. This naturally conflicts with the interests of employees, the local community, and perhaps suppliers.
Customers generate the revenue for the organization. In exchange, they expect high-quality goods and services delivered in a timely manner. Customer satisfaction leads to higher revenues and the ability to enhance the satisfaction of other stakeholders.
The local community, through its government, grants the firm the right to build facilities. In turn, the community benefits directly from local taxes paid by the corporation and indirectly by property and sales taxes paid by the workers. The firm is expected to be a good citizen by paying a fair wage, not polluting the environment, and so forth.
Suppliers are vital to the success of the firm. For example, if a critical part is not available for an assembly line, then production grinds to a halt. The materials supplied determine the quality of the product produced and create a cost floor, which helps determine the retail price. In turn, the firm is the customer of the supplier and is therefore vital to the success and survival of the supplier. A supplier that fails to deliver quality products can create numerous problems for a firm. For example, Burger King stopped buying beef from an Irish supplier whose patties were found to contain traces of horse meat in Britain and Ireland.*
Owners have a financial stake in the form of stock in a corporation. They expect a reasonable return based upon the amount of inherent risk on their investment. Sometimes managers and employees receive a portion of their compensation in company stock. When Apple launched its initial public stock offering, 30 Apple employees became instant millionaires. Similarly, more than 10,000 Microsoft employees have become millionaires from their stock holdings.
An outgrowth of the social responsibility and sustainability movements is green marketing. Green marketing is the development and marketing of products designed to minimize negative effects on the physical environment or to improve the environment. One approach that firms use to indicate that they are part of the green movement is to use third-party eco-logos. Examples include the chasing-arrows recycling logo (the product is either recyclable or contains recycled materials); the Energy Star logo (the product is energy efficient); and Certified Organic (the U.S. Department of Agriculture created standards relative to soil quality, animal raising practices, pest and weed control, and the use of additives). These logos can enhance a product's sales and profitability.
Nearly four in 10 Americans (about 93 million people) say that they are dedicated to buying green products and services. Green purchasing is driven by young adults (age 18 to 34) and Hispanics; about half of the respondents in these groups report that they regularly seek out green products. Young adults are also more likely to be interested in a company's green practices and to avoid companies with poor environmental records.*
When a firm takes an action that is perceived as not environmentally friendly, it can create a significant amount of negative publicity. The New Yorker magazine recently ran a story about furniture and decorative accessories company Restoration Hardware. The article notes: The first stirrings of dissent came from the UPS drivers. They began posting on Brown Café, an anonymous message board, about the thirty-three-hundred page catalogue bundles sent out by Restoration Hardware. "My building for the last few days is slammed with RF catalogues (17 pounds each) with another trailer full coming in next week," one wrote. One driver described orders to give the catalogues to passersby, if necessary, rather than return them to UPS distribution centers. "I see them all over my route in the recycle bins."
Then, customers rebelled. In Palo Alto, seven volunteers returned two thousand pounds of the catalogues to a Restoration Hardware store in one day, on hand trucks.
One page of the catalogue is devoted to Restoration Hardware's environmental impact. First, the company claims that sending out the catalogues all at once is more responsible than spreading them throughout the year. It does not acknowledge that, in 2003, when it mailed six catalogues annually, it used half as many total pages. Second, the company says that it purchases paper certified by the Programme for the Endorsement of Forest Certification. However, as Business Week explained, other retailers, such as Pottery Barn, buy paper from forests certified by the Forest Stewardship Council, which has stricter environmental standards. Third, Restoration Hardware points out that it purchases carbon offsets through UPS to fund conservation projects. Those offsets, while helpful, cover only the shipping, not the paper production, the most harmful of the process, because of the energy used to break down wood into pulp. The company responded to the New Yorker's questions about its environmental practices by emailing a press release containing information identical to what's in the catalogue.*
Unless marketing managers understand the external environment, the firm cannot intelligently plan for the future. Thus, many organizations assemble a team of specialists to continually collect and evaluate environmental information, a process called environmental scanning. The goal in gathering the environmental data is to identify future market opportunities and threats.UNDERSTAND CURRENT CUSTOMERS
You must first understand how customers buy, where they buy, what they buy, and when they buy. McDonald's had a rough year in 2014, suffering a net loss as customers moved on to different venues. While upcoming chains like Five Guys limit their offering to around a half dozen items, customers find the McDonald's menu confusing and too big. More upscale fast-casual restaurants like Chipotle Mexican Grill and Shake Shack are luring customers, particularly younger ones, by offering better quality food and the ability to customize their meals. For its part, McDonald's is in the process of changing its marketing mix to counter this trend and regain its lost market share around the globe.
In a brand-new McDonald's outlet near the company's headquarters in Oak Brook, Illinois, customers do not have to queue at the counter. They can go to a touch screen and build their own burger by choosing a bun, toppings, and sauces from a list of more than 20 ingredients including grilled mushrooms, guacamole, and caramelized onions. Customers then sit down and wait an average of seven minutes until a server brings their burgers to their table. The company is planning to roll out these "Create Your Taste" burgers in up to 2,000 restaurants by late 2015, and possibly more if they do well. McDonald's is also trying to engage with customers on social media and is working on a smartphone app as well as testing mobile-payment systems such as Apple Pay, Softcard, and Google Wallet.*
McDonald's is also changing its slogan of the past ten years from "I'm Lovin' It" to "Lovin' Beats Hatin'." The idea of the shift is to promote happiness over hate. So far, reaction to the new slogan has been underwhelming. The "It" in the old slogan can be tied back to McDonald's main product—food. Not so with the new slogan. The word "hatin'" is negative, and most advertisers try to avoid negative words in their slogans.* Clearly, McDonald's new slogan seems to have problems with both clarity (no ties to food) and likability.
Does McDonald's understand its current customers? By the time you read this text, you should be able to answer this question.
UNDERSTAND HOW CONSUMER DECISIONS ARE MADE
Hotel chains like Hyatt, Holiday Inn, and Marriott must understand the decision process that consumers use when selecting a hotel. Boston research firm Chadwick Martin Bailey (CMB) found that mobile, social, and online factors influence leisure travelers very differently at different stages in the purchase process. Mobile devices play an important role in the initial research phase of hotel planning but are used sparingly to book hotel stays. More than 60 percent of travelers use a mobile device—47 percent use a smartphone—during their hotel purchase journey, but only 6 percent book their hotel via a smartphone. Mobile applications are used infrequently throughout the hotel purchase journey. In total, only 6 percent of shoppers use a mobile app.
Consumer reviews trump social media in influence, research, evaluation, and final decision making. Only 13 percent of bookers use social media during the purchase process versus the 59 percent who consult consumer reviews.
Price-comparison sites play an important role—even when they are not the final purchase location. Nearly half of travelers (49 percent) used a price-comparison site such as Expedia, Priceline, or Kayak. Thirty-six percent of those who use one or more of these sites ultimately book their stay with them.* The challenge for hotels, then, is to decide how to align their marketing budgets to intercept potential travelers and deliver the right promotion on the appropriate device and through the right channel.
IDENTIFY THE MOST VALUABLE CUSTOMERS AND UNDERSTAND THEIR NEEDS
Often, 20 percent of a firm's customers produce eighty percent of the firm's revenue. An organization must understand what drives that loyalty and then take steps to ensure that those drivers are maintained and enhanced. Airlines use loyalty programs to satisfy and retain their best customers. For example, persons who fly more than 100,000 miles a year on American Airlines are called Executive Platinum members. They are granted priority boarding and seating, free domestic upgrades, no fees for checked luggage, coupons for international upgrades, and other benefits.
UNDERSTAND THE COMPETITION
Successful firms know their competitors and attempt to forecast those competitors' future moves. Competitors threaten both a firm's market share and its profitability. With 55 million wireless customers and growing, T-Mobile is projected to overtake Sprint as the nation's third largest mobile carrier. What is behind this meteoric rise? After examining the competition, T-Mobile decided to be as different as possible from its rivals. As an innovation leader, T-Mobile is changing the way that carriers offer services. T-Mobile was first to eliminate monthly contracts and offer international data roaming at no extra cost. It was also the first to announce it would allow customers to roll over data capacity from month-to-month. The carrier still has a long way to go to overtake Verizon or AT&T, but its marketing strategy is fostering rapid growth.*
4-2b The Growth of Component Lifestyles
People in the United States today are piecing together component lifestyles. A lifestyle is a mode of living; it is the way people decide to live their lives. With component lifestyles, people are choosing products and services that meet diverse needs and interests rather than conforming to traditional stereotypes.
In the past, a person's profession—for instance, banker—defined his or her lifestyle. Today, a person can be a banker and also a gourmet, fitness enthusiast, dedicated single parent, and Internet guru. Each of these lifestyles is associated with different goods and services and represents a target audience. Component lifestyles increase the complexity of consumers' buying habits. Each consumer's unique lifestyle can require a different marketing mix.
4-2c How Social Media Have Changed Our Behavior
In 2015, nearly half of the world's population—3 billion people—were on the Internet. Beyond accessing the Internet via computer, tablet, or smartphone, today there is much talk about the Internet of Things. In 2008, the number of "things" (clothing, thermostats, washing machines, fitness trackers, and lightbulbs, for example) connected to the Internet exceeded the number of people on earth. By 2020 there will be 50 billion connected tools, devices, and even cattle.* Yes, Dutch startup Sparked is developing a wireless sensor for cattle. When one is sick or pregnant, the sensor sends a message to the farmer. Similarly, Corventis makes a wireless cardiac monitor that doctors can use to monitor people for health risks in real time. And this is just the beginning—the Internet of Things has the potential to change life as we know it in nearly every area of life.
Social media are making profound changes in the way we obtain and consume information—consumers are interacting; sharing beliefs, values, ideas, and interests; and, of course, making purchases at a dizzying rate. These media have even played a major role in the beginnings of revolutions!
What exactly are social media? They are Web-based and mobile technologies that allow the creation and exchange of user-generated content. Social media encompasses a wide variety of content formats—you have most likely used sites such as Facebook, YouTube, Twitter, Tumblr, Instagram, and Pinterest, each of which serves a different function (see Chapter 18). These media have changed the way we communicate, keep track of others, browse for products and services, and make purchases. Social networking is part of regular life for people of all ages. Of the 3 billion Internet users, 2 billion use social media. From 2014 to 2015, 222 million people opened their first social media account. Slightly more women than men use social media. At 89 percent, the heaviest users by age are 18- to 29-year-olds. Usage rates are lower among older age groups.
More than one minute out of every five spent on the Internet worldwide is dedicated to social networking. Facebook, Instagram, Pinterest, LinkedIn, and Twitter are the most-used social networking sites worldwide. Facebook, by far, is the world's most popular, with more than 1.4 billion users. Sixty-six percent of Millennials around the world use Facebook.* A recent survey of persons using the Internet in America found:
Multi-platform use is on the rise. Fifty-two percent of online adults now use two or more social media sites—a 10 percent increase since 2013.

For the first time, more than half of all online adults 65 and older (56 percent) use Facebook. This represents 31 percent of all seniors.

For the first time, roughly half of Internet-using young adults ages 18 through 29 (53 percent) use Instagram. Half of all Instagram users (49 percent) use the site daily.

For the first time, the share of Internet users with college educations using LinkedIn reached 50 percent.

Women dominate Pinterest. Forty-two percent of online women now use the platform, compared with 13 percent of online men.*

HOW FIRMS USE SOCIAL MEDIA
Social networking has changed the game when it comes to opinion sharing. Now, consumers can reach many people at once with their views—and can respond to brands and events in real time. In turn, marketers can use social media to engage customers in their products and services. Marketers have learned that social media are not like network television, where a message is pushed out to a mass audience. Instead, social media enable firms to create conversations with customers and establish meaningful connections. In other words, social media marketing can humanize brands. Marketers for brands like Charmin tissues and Oreo cookies post custom videos about their products to Facebook and then invite feedback. Clearly it's a winning strategy—Facebook now attracts over a billion video views per day.*
A successful social media company requires creativity. For example, Airline WestJet recently asked travelers on one flight what they wanted for Christmas. While the passengers were airborne, WestJet shoppers raced to buy and wrap the requested items. These presents were then delivered to the recipients via the destination airport's baggage carousel. The campaign's YouTube video received more than 38 million views.* Most importantly, it created a positive image and goodwill for WestJet.
When fast-food chain Wendy's released the Pretzel Bacon Cheeseburger, it quickly became the chain's most successful product launch ever. Fans tweeted about their love for the new burger, and Wendy's turned the tweets (misspellings and all) into a series of silly love song music videos (including one staring Nick Lachey). In addition to being reported on all of the major news channels, the videos received 7.5 million Facebook views.*
On average, about 6,000 tweets are posted on Twitter every second. That equates to 350,000 tweets per minute and 500 million tweets (by 248 million unique users) per day. * Frozen pizza manufacturer DiGiorno has proven to be a master at making its tweets stand out from the crowd. The company frequently employs humor, Internet memes, and casual language to endear itself to customers.
People are directly or indirectly the basis of all markets, making population the most basic statistic in marketing. There are more than seven billion people alive today. China has the largest population with 1.39 billion persons; India is second with 1.23 billion. The U.S. population is slightly over 318 million. Older Americans have moved to retirement communities like the Villages in Central Florida. This area is the nation's fastest growing metropolitan area. Midland and Odessa, in western Texas, are the second and third fastest growing areas in the country. Both cities have seen an employment boom in recent years amid new techniques to extract oil and natural gas. This growth may slow or stop in coming years as global oil prices tumbled in 2015.
Rural areas away from the oil fields, meanwhile, posted their first-ever net loss of population in 2012. The populations of the United States' rural regions—from the Great Plains to the Mississippi delta to rural New England—are aging. These populations are not receiving many young transplants to replace those who die or migrate to urban areas. In many parts of the country, multigenerational households are increasingly common. More than 57 million people live in households with at least two adult generations. About 24 percent of young adults age 25 to 34 live in multiple generation households.*
Population is a broad statistic that is most useful to marketers when broken into smaller, more specific increments. For example, age groups present opportunities to focus on a section of the population and offer opportunities for marketers. These groups are called tweens, teens, Millennials (or Generation Y), Generation X, and baby boomers. Each cohort has its own needs, values, and consumption patterns.
The American demographic profile is rapidly changing as racial and ethnic groups continue to grow. The minority population today is about 118 million. By 2050, around one in three U.S. residents will be Hispanic. The United States will flip completely to a majority-minority makeup in 2041, meaning that whites of European ancestry will make up less than 50 percent of the population. Already, minorities make up about half of all Americans under the age of five.* As the demographic environment of America evolves, so too must the marketing mix change to reach growing target markets.
4-4a Marketing to Hispanic Americans
The term Hispanic encompasses people of many different backgrounds. Nearly 60 percent of Hispanic Americans are of Mexican descent. Puerto Ricans, the next largest group, make up just under ten percent of Hispanics. Other groups, including Central Americans, Dominicans, South Americans, and Cubans, each account for less than five percent of all Hispanics.
According to surveys, Hispanics believe that the number one way they contribute to American society is through their commitment to family. Over three-fourths say that the traditional family is the main building block of a healthy community. Research has found that many adults who have been in the United States for a number of years become acculturated, but not to the mainstream U.S. culture. That is, they do not use much English for their everyday activities. Instead, they acculturate to the locally dominant Spanish-speaking Hispanic community, referred to as the primal 45-Latino society. The primal culture tends to be regional. It differs widely enough that Latinos from one region may be unaware of the food, slang, and even music from another region. A good example is the difference in primal cultures between Los Angeles (which draws much of its influence from Mexico) and Miami (which draws much of its influence from Cuba). The same is true for brands purchased. Hispanics are more likely to purchase Jerritos soda if they are integrated into the primal Los Angeles culture than if they live elsewhere in the United States.*
Hispanic Millennials now account for 25 percent of all Hispanics living in the United States.* Many Hispanic Millennials were born in the United Sates or came when they were very young, and unlike older generations, they have become more acculturated into mainstream America. Hispanic Millennials are less likely than their peers to live at home with their parents. Of those who do live at home, 86 percent contribute to the family's finances. Moreover, they often act as language translators and cultural advisors to their Spanish-dominant family members. Normally, purchase decisions revolve around the Millennial son or daughter who is helping to interpret and manage bills.
Bilingual Hispanic Millennials share common behaviors and beliefs with both older Hispanics and their Millennial peers. They are more optimistic about politics and economics than non-Hispanic Millennials, and they have a stronger faith in the American dream. Bilingual Millennials also place more value on higher education.*
Hispanic Millennials in the U.S. are particularly prone to taking a bilingual, bicultural approach to their media consumption. Forty percent of Hispanic Millennials consume an equal amount of Spanish and English media. Spending on Hispanic media now tops $8.3 billion in the United States. The leading advertisers targeting Hispanics are Procter & Gamble, AT&T, and L'Oreal. The 2014 World Cup was very popular in the Hispanic market, and Kraft Foods targeted Hispanics with its "Flavor of the Championship" campaign. Throughout this campaign, Kraft used social media to suggest appropriate recipes for World Cup viewing parties. Finally, Hispanics, particularly Millennials, have embraced technology. They are more likely to download apps, chat, stream video, listen to music, and play games than non-Hispanics.*
4-4b Marketing to African Americans
There are approximately 44 million African Americans (14 percent of the country's population). They are young—53 percent are under the age of 35—giving them a strong influence on the latest trends, especially in regards to music and pop culture. Higher academic achievement has translated into increases in household income; 44 percent of all African American households now earn $50,000 or more and 23 percent earn more than $75,000. Higher household incomes, coupled with an overall population growth, are driving the substantial purchasing power of the African American consumer upwards. Total purchasing power is expected to reach $1.3 trillion within a few years.*
Black Americans want companies to recognize their unique culture. A recent study found that 87 percent feel that ethnic recognition is important, compared to 59 percent of the general population. Seventy-three percent of African American adults age 18 to 54 state that cultural/ethnic heritage is a critical part of their identity. Among African Americans age 18 to 54 with a household income greater than $50,000, 77 percent indicate that their heritage is an important part of who they are, as compared to 58 percent of the general population.*
Also compared to the general population, African Americans are 30 percent more likely to believe that diversity in advertising is important and 38 percent are more likely to make a purchase when advertisements include African American people. Further, 44 percent of African Americans are more likely to support companies that are owned by African Americans or other minority groups and 43 percent are more likely to purchase products endorsed by African American celebrities or musicians.*
Black Americans tend to be loyal to both brands and stores; they spend 18 percent more than the general population on store brands. African Americans also are more likely to patronize convenience, drug stores, and dollar stores than other groups. Relative to other cohorts, they spend more on groceries and hair care products. Featuring nonwhite Americans has become a cornerstone of Cheerios' promotional strategy. A recent Honey Nut Cheerios commercial features musician Usher and Buzz Bee dancing and discussing heart health while Usher's song "She Came to Give It to You" plays in the background. Usher was chosen for the spot because of his broad appeal—he has more than 50.5 million Facebook fans.
4-4c Marketing to Asian Americans
The Asian American population reached 19 million in 2015. U.S. births have been the primary driving force behind the increase in the Hispanic and African American populations. By contrast, Asian American population growth has been fueled primarily by immigration. Seventy-four percent of Asian Americans were foreign-born. California and Hawaii are home to the largest Asian American populations. Asian Americans, who still represent only 6 percent of the U.S. population, have the highest average family income of all groups. At $67,000, it exceeds the average U.S. household income by roughly $15,000. About 53 percent of Asian Americans over age 25 have at least a bachelor's degree. Because Asian Americans are younger (the average age is 34), better educated, and have higher incomes than average, they are sometimes called a "marketer's dream." Asian Americans are heavy users of technology. Moreover, they are early adopters of the latest digital gadgets. They visit computer and consumer electronics Web sites 36 percent more often and spend 72 percent more time at these sites than the total population. Because of their high level of education, Asian Americans are thriving in America's technology sector.Although Asian Americans embrace the values of the larger U.S. population, they also hold on to the cultural values of their particular subgroup. Consider language: many Asian Americans, particularly Koreans and Chinese, speak their native tongue at home (though Filipinos are far less likely to do so). Cultural values are also apparent in the ways different groups make big-ticket purchases. In Japanese American homes, husbands alone make large purchase decisions nearly half the time; wives decide only about six percent of the time. In Filipino families, however, wives make these decisions a little more often than their husbands do, although, by far, most decisions are made by husbands and wives jointly or with the input of other family members.
Asian Americans like to shop at stores owned and managed by other Asian Americans. Small businesses such as flower shops, grocery stores, and appliance stores are often best equipped to offer the products that Asian Americans want. For example, at first glance, the Hannam Chain supermarket in Los Angeles's Koreatown seems like any other grocery store. But next to the Kraft American singles and the State Fair corn dogs are jars of whole cabbage kimchi. A snack bar in another part of the store cooks up aromatic mung cakes, and an entire aisle is devoted to dried seafood.
Asian Americans are big adopters of technology. More than 70 percent use smartphones—the highest rate of any ethnic group.* Social media continues to be a primary way to reach Asian Americans. Mobile chat apps like Kakao, Viber, Tango, WeChat and WhatsApp are also starting to become very popular in the Asian American community. Many Asian Americans use these apps to communicate with family and friends back in their home countries.
In addition to social and demographic factors, marketing managers must understand and react to the economic environment. The three economic areas of greatest concern to most marketers are consumers' incomes, inflation, and recession.
4-5a Consumers' Incomes
As disposable (or after-tax) incomes rise, more families and individuals can afford the "good life." In recent years, however, average U.S. incomes have actually fallen. The annual median household income in the United States in 2015 was approximately $52,000, though the median household income varies widely from state to state. This means half of all U.S. households earned less, and the other half earned more. Census data shows that average family incomes, when adjusted for inflation (discussed later in the chapter), fell around eight percent between 2007 and 2012. However, it rose slightly in 2013 and 2014. The unemployment rate was 5.6 percent in early 2015, which is the lowest it had been in six years. Scars from the Great Recession continue to affect the United States as 2.8 million people continue to suffer from long-term unemployment (defined as not having a job for 27 weeks or longer).
Education is the primary determinant of a person's earning potential. For example, just 1 percent of workers with only a high school education earn over $100,000 annually. By comparison, 13 percent of college- educated workers earn six figures or more. People with a bachelor's degree take home an average of 38 percent more than those with just a high school diploma. Over a lifetime, an individual with a bachelor's degree will earn more than twice as much total income as a nondegree holder.*
In recent years, stores that cater to lower-income consumers—like Family Dollar and Dollar General—have done well. P&G has found that its typical middle-class customers are increasingly unwilling to spend their money on household staples with extra features, such as Tide with bleach. Many customers have switched to cheaper brands, while P&G brands like Bounce fabric softener and Bounty paper towels suffered. To regain market share, P&G has launched its bargain-priced Gain dish soap. The firm has also reduced some package sizes of Tide in order to sell them at Walmart for less than ten dollars.
4-5b Purchasing Power
Even when incomes rise, a higher standard of living does not necessarily result. Increased standards of living are a function of purchasing power. Purchasing power is measured by comparing income to the relative cost of a standard set of goods and services in different geographic areas, usually referred to as the cost of living. Another way to think of purchasing power is income minus the cost of living (i.e., expenses). In general, a cost of living index takes into account housing, food and groceries, transportation, utilities, health care, and miscellaneous expenses such as clothing, services, and entertainment. HomeFair.com's salary calculator uses these metrics when it determines that the cost of living in New York City is almost three times the cost of living in Youngstown, Ohio. This means that a worker living in New York City must earn nearly $279,500 to have the same standard of living as someone making $100,000 in Youngstown.
When income is high relative to the cost of living, people have more discretionary income. That means they have more money to spend on nonessential items (in other words, on wants rather than needs). This information is important to marketers for obvious reasons. Consumers with high purchasing power can afford to spend more money without jeopardizing their budget for necessities like food, housing, and utilities. They also have the ability to purchase higher-priced necessities—for example, a more expensive car, a home in a more expensive neighborhood, or a designer handbag versus a purse from a discount store.
4-5c Inflation
Inflation is a measure of the decrease in the value of money, generally expressed as the percentage reduction in value since the previous year, which is the rate of inflation. Thus, in simple terms, an inflation rate of five percent means you will need 5 percent more units of money than you would have needed last year to buy the same basket of products. If inflation is 5 percent, you can expect that, on average, prices have risen by about 5 percent since the previous year. Of course, if pay raises are matching the rate of inflation, then employees will be no worse off in terms of the immediate purchasing power of their salaries.
In times of low inflation, businesses seeking to increase their profit margins can do so only by increasing their efficiency. If they significantly increase prices, no one will purchase their goods or services. The Great Recession brought inflation rates to almost zero. In January 2015, the inflation rate was 0.8 percent.*
In creating marketing strategies to cope with inflation, managers must realize that, regardless of what happens to the seller's cost, the buyer is not going to pay more for a product than the subjective value he or she places on it. No matter how compelling the justification might be for a 10 percent price increase, marketers must always examine its impact on demand. Many marketers try to hold prices level for as long as is practical.
4-5d Recession
A recession is a period of economic activity characterized by negative growth. More precisely, a recession is defined as occurring when the gross domestic product falls for two consecutive quarters. Gross domestic product is the total market value of all final goods and services produced during a period of time. The official beginning of the Great Recession of 2008-2009 was December 2007. While the causes of the recession are very complex, this one began with the collapse of inflated housing prices. Those high prices led people to take out mortgages they could not afford from banks that should have known the money would not be repaid. By 2008, the recession had spread around the globe. A very slow economic recovery began in July 2009 and continues to this day.
Stimulating Innovation
Companies attempting to innovate often limit their searches to areas they are already familiar with. This can help lead to incremental progress but rarely leads to a dramatic breakthrough. Companies are now using several approaches such as Shell's Idea Factory to keep innovation strong. These include:
Building scenarios: Some firms use teams of writers to imagine detailed opportunities and threats for their companies, partners, and collaborators in future markets. With more than 1 billion smartphones in use around the world, more and more companies are creating mobile-friendly sites and mobile apps. However, Senior Vice President at Forrester Research John Bernoff advises that simply cramming a piece of a Web site into a mobile experience is a recipe for disaster that will result in complaints and lost customers. Instead, he says, firms must identify mobile moments and context. A mobile moment is the point in time at which a customer pulls out a mobile device to get immediate access to the information that he or she wants. Rob Moore, chief technical officer at Hertz, figured out number of key mobile moments during which he could make customers happier. For example, he found that customers preferred searching the lot for the best available car right from the airport bus. Krispy Kreme figured out that one of its key moments was right when fresh doughnuts came off of the line. To take advantage of this moment, the company built an app that lets customers know when hot doughnuts are available near them. Half a million downloads later, Krispy Kreme's same-store sales are up by double digits—without advertising.

Enlisting the Web: A few companies have created Web sites that act as literal marketplaces of ideas where innovators can go to look for help with scientific and business challenges.

Talking to early adopters: Early adopters tend to be innovators themselves. They are risk takers and look for new things or wish for something better to help in daily tasks at home and work.

Using marketing research: Firms find out what customers like and dislike about their products and competitors' products.

Creating an innovative environment: Companies let employees know that they have the "freedom to fail." They create intranets to encourage sharing ideas. Most importantly, top management must lead by example to create an atmosphere where innovation is encouraged and rewarded.

Catering to entrepreneurs: Policies that reserve blocks of time for scientists or engineers to explore their own ideas have worked well at some companies. At 3M, scientists can spend fifteen percent of their time on projects they dream up themselves—a freedom that led to the development of the yellow Post-It note. Google is well known in the tech industry for its "20% time" policy, which grants employees a day a week to follow their entrepreneurial passions.*

Although developing new technology internally is a key to creating and maintaining a long-term competitive advantage, external technology is also important to managers for two reasons. First, by acquiring the technology, the firm may be able to operate more efficiently or create a better product. Second, a new technology may render existing products obsolete.
Radio frequency identification (RFID) chips were supposed to be a game changer for inventory tracking. Walmart tried using them, but was less than satisfied. JC Penney found that the chips interfered with existing anti-theft sensors. The company removed the anti-theft sensors, and shoplifting surged. Zara, a fashion chain that operates in 88 countries, claims to have learned from others' mistakes and is using RFID chips in a new way. A Zara employee suggested putting the RFID chips inside items' security tags. The security tag's plastic case protects the chip, preventing interference and allowing for reuse.
Before the new tags, taking inventory took 40 employees about five hours to complete. Now, ten employees walking down store aisles while waving pistol-like scanners can finish in half the time. Each time a garment is sold, data from its chip prompts the stockroom to send out an identical item. Previously, store employees using paper sales reports restocked shelves a few times a day. If a customer can't find an item, a salesperson can point an iPod camera at a similar item's bar code and, using data gathered by the chips, see whether the desired item is available in the store, at a nearby Zara store, or online.
Federal Legislation
Federal laws that affect marketing fall into several categories of regulatory activity: competitive environment, pricing, advertising and promotion, and consumer privacy. The key pieces of legislation in these areas are summarized in Exhibit 4.1. The primary federal laws that protect consumers are shown in Exhibit 4.2. The Patient Protection and Affordable Care Act, commonly called Obamacare, has had a significant impact on marketing. A few key provisions of the Act are that:
Large employers must offer coverage to full-time workers.

Workers cannot be denied coverage.

A person cannot be dropped when he or she is sick.

A worker cannot be denied coverage for a preexisting condition.

Young adults can stay on their parents' plans until age 26.*
In 2010, Congress passed the Restoring American Financial Stability Act, which brought sweeping changes to bank and financial market regulations. The legislation created the Consumer Financial Protection Bureau (CFPB) to oversee checking accounts, private student loans, mortgages, and other financial products. The agency deals with unfair, abusive, and deceptive practices. Some groups have expressed concerns that the CFPB is assembling massive databases on credit cards, credit monitoring, debt cancellation products, auto loans, and payday loans. CFPB officials claim that they need the information to make effective rules and enforce those policies. One way or another, the CFPB has certainly had a significant impact on several United States businesses—the agency has recovered more than $1.6 billion from financial services firms in the name of wronged consumers.*
Central to any society is the common set of values shared by its citizens that determines what is socially acceptable. Culture underlies the family, the educational system, religion, and the social class system. The network of social organizations generates overlapping roles and status positions. These values and roles have a tremendous effect on people's preferences and thus on marketers' options. A company that does not understand a country's culture is doomed to failure in that country. Cultural blunders lead to misunderstandings and often perceptions of rudeness or even incompetence. For example, when people in India shake hands, they sometimes do so rather limply. This is not a sign of weakness or disinterest; instead, a soft handshake conveys respect. Avoiding eye contact is also a sign of deference in India.
When eBay entered China in 2001, it did quite well because it had no competition. But when the Chinese competitor Taobao launched, eBay quickly lost ground. Its market share dropped from eighty percent to 7 percent in just five years. If you looked at eBay's site in China, you would recognize it—it looks very similar to eBay's United States site. This failure to adapt to Chinese culture led to eBay's decline: Americans do not want celebrity gossip or social interaction when they shop online, but the Chinese do.Taobao is more than a one-stop shop for online shoppers—it is a social forum as well. The site features pictures and descriptions—very long descriptions—of products, but shoppers can also chat online about current trends, share shopping tips, and catch up on celebrity news at Taobao. Chinese shoppers are more inclined to follow fashion trends than American shoppers are, so Taobao lists trends in order of popularity, unlike eBay. Finally, when eBay entered China, it did not allow direct communication between buyers and sellers. As in the United States, all communication was handled by eBay's messaging system. This system was not well received in China because Chinese are much less likely than Americans to buy from strangers. Chinese Internet users expect Web sites to be much denser than many Western Internet users are used to. That is, Chinese Web sites tend to have more links, many more images, and longer page lengths than Western Web sites do. Eye-grabbing animations and floating images are common on Chinese sites. A page with less text, fewer embedded links, and nice imagery might be called "well-designed" by Western Internet users but "boring" by Chinese ones.
User experience issues also plague the digital divide between China and the West. In China, form fields like "first name," "middle name," and "last name" often confuse users. If you ask for name information this way in an online form, many Chinese users will be left scratching their heads. The simplest and most common approach to accommodate this cultural difference is to ask simply "name" instead of "first," "middle," and "last name." Similarly, addresses are not written in line with street names in Japan. For Japanese consumers, this small issue can make it incredibly hard to order products from Western Web sites.*
Language is another important aspect of culture that can create problems for marketers. Marketers must take care in translating product names, slogans, instructions, and promotional messages so as not to convey the wrong meaning. Free translation software, such as babelfish.com or Google Translate, allows users to input text in one language and output in another language. But marketers must take care using the software, as it can have unintended results—the best being unintelligible, the worst being insulting.
Each country has its own customs and traditions that determine business practices and influence negotiations with foreign customers. In many countries, personal relationships are more important than financial considerations. For instance, skipping social engagements in Mexico may lead to lost sales. Negotiations in Japan often include long evenings of dining, drinking, and entertaining, and only after a close personal relationship has been formed do business negotiations begin.
Making successful sales presentations abroad requires a thorough understanding of the country's culture. Germans, for example, do not like risk and need strong reassurance. A successful presentation to a German client will emphasize three points: the bottom-line benefits of the product or service, that there will be strong service support, and that the product is guaranteed. In southern Europe, it is an insult to show a price list. Without negotiating, you will not close the sale. The English want plenty of documentation for product claims and are less likely to simply accept the word of the sales representative. Scandinavian and Dutch companies are more likely to approach business transactions as Americans do than are companies in any other country.
A second major factor in the external environment facing the global marketer is the level of economic development in the countries where it operates. In general, complex and sophisticated industries are found in developed countries, and more basic industries are found in less developed nations. Average family incomes are higher in the more developed countries compared to the less developed countries. Larger incomes mean greater purchasing power and demand, not only for consumer goods and services, but also for the machinery and workers required to produce consumer goods.
According to the World Bank, the average gross national income (GNI) per capita for the world is $10,679. GNI is a country's GDP (defined earlier) together with its income received from other countries (mainly interest and dividends) less similar payments made to other countries. The United States' GNI per capita is $53,470, but it is not the world's highest. That honor goes to Bermuda at $104,610. Of course, there are many very poor countries: Rwanda, $630; Afghanistan, $690; Ethiopia, $470; Liberia, $410; and Democratic Republic of Congo, $430. GNI per capita is one measure of the ability of a country's citizens to buy various goods and services. A marketer with a global vision can use these data to aid in measuring market potential in countries around the globe.
Not only is per capita income a consideration when going abroad, but so is the cost of doing business in a country. Although it is not the same as the cost of doing business, we can gain insights into expenses by examining the cost of living in various cities.*
Political structure is a fourth important variable facing global marketers. Government policies run the gamut from no private ownership and minimal individual freedom to little central government and maximum personal freedom. As rights of private property increase, government-owned industries and centralized planning tend to decrease. But a political environment is rarely at one extreme or the other. India, for instance, is a republic with elements of socialism, monopoly capitalism, and competitive capitalism in its political ideology.
A recent World Bank study found that less regulation fosters the strongest economies. The least regulated and most efficient economies are concentrated among countries with well-established common-law traditions, including Australia, Canada, New Zealand, the United Kingdom, and the United States. On par with the best performers are Singapore and Hong Kong. Not far behind are Denmark, Norway, and Sweden—social democracies that recently streamlined their business regulation. In the United States, starting a new business—the future lifeblood of any economy—on average takes 7 procedures, 25 days, and costs the entrepreneur 32 percent of income per capita in fees. While it takes as little as one procedure, half a day, and almost nothing in fees in New Zealand, a businessperson must wait 208 days in Suriname and 144 in Venezuela.*
It is not uncommon for international politics to affect business laws. China recently started investigating dozens of America's largest multinationals—companies structured to compete with other corporations, not governments. Among the investigated companies, Google left China after enduring cyber-attacks and governmental pressure to release user information. Apple CEO Tim Cook expressed "sincere apologies" in the wake of Beijing's media campaign against the company. Adobe shut down both its China headquarters and ended its research and development in the country. Not all of China's oversight is excessive, however. Mead Johnson and Abbott Laboratories were fined $110 million by Chinese authorities for price fixing. Glaxo Smith Kline was fined $490 million for bribing doctors to prescribe its drugs..* Walmart was fined $9.8 million for misleading pricing, selling poor quality products, and selling donkey meat that turned out to be fox. But Walmart is also doing something rare for a Western company: telling the Chinese government that it needs to clean up its own act.
In the U.S. and most other countries, manufacturers rather than retailers are responsible for ensuring product quality. In China, however, retailers are accountable. In 2014, Walmart executives met with China's Food and Drug Administration and urged officials to step up their inspections of food purveyors. Walmart later reported that it ended relationships with 300 suppliers in 2014 because they didn't pass the retailer's testing and safety standards. Those 300 suppliers had paperwork proving that they passed muster with local food watchdogs, however. Clearly, international business can be a proxy for political jousting when governments enter the mix.*
Russia has also directly attacked American companies in the wake of political disagreement. In 2014, Russia seized the Crimean peninsula, leading to an onslaught of sanctions from the European Union, the United States, and others. Russia fought back, banning these countries from selling billions of dollars worth of fruits, vegetables, fish, and meat to Russians. Russia then went after McDonald's, closing down a number of restaurants for "sanitary conditions."*
LEGAL CONSIDERATIONS
As you can see, legal considerations are often intertwined with the political environment. In France, nationalistic sentiments led to a law that requires pop music stations to play at least forty percent of their songs in French (even though French teenagers love American and English rock and roll).
Many legal structures are designed to either encourage or limit trade:
Tariff: a tax levied on the goods entering a country. Because a tariff is a tax, it will either reduce the profits of the firms paying the tariff or raise prices to buyers, or both. Normally, a tariff raises prices of the imported goods and makes it easier for domestic firms to compete. In general, the U.S. economy is open to imports. America has tariffs on 1,000 product categories, but at a relatively low rate of 1.4 percent. Exceptions to this are footwear and apparel, which carry a rate that is ten percent higher. In 2014, China and the U.S. slashed tariffs on a range of technology products. The agreement covered $1 trillion in trade and benefited companies like Apple, Intel, and Microsoft. Nearly every piece of military gear that recruits get when they show up for training is made in the United States. The Pentagon recently conceded that even running shoes should be made domestically. New Balance will likely review the contract outlining production of up to 250,000 pairs of running shoes per year.*

Quota a limit on the amount of a specific product that can enter a country. Several U.S. companies have sought quotas as a means of protection from foreign competition. The United States, for example, has a quota on raw cane sugar.

Boycott: the exclusion of all products from certain countries or companies. Governments use boycotts to exclude companies from countries with which they have a political dispute. Several Arab nations have boycotted products made in Israel.

Exchange control: a law compelling a company earning foreign exchange from its exports to sell it to a control agency, usually a central bank. A company wishing to buy goods abroad must first obtain a foreign currency exchange from the control agency. Some countries with foreign exchange controls are Argentina, Brazil, China, Iceland, India, North Korea, Russia, and Venezuela.

Market grouping (also known as a common trade alliance): occurs when several countries agree to work together to form a common trade area that enhances trade opportunities. The best-known market grouping is the European Union (EU), which will be discussed later in this chapter.

Trade agreement: an agreement to stimulate international trade. Not all government efforts are meant to stifle imports or investment by foreign corporations. The largest Latin American trade agreement is Mercosur, which includes Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru, Uruguay, and Venezuela. The elimination of most tariffs among the trading partners has resulted in trade revenues of more than $16 billion annually. The economic boom created by Mercosur will undoubtedly cause other nations to seek trade agreements on their own or to enter Mercosur.
The Uruguay Round is a trade agreement that has dramatically lowered trade barriers worldwide. Adopted in 1994, the agreement has been signed by 159 nations. It is the most ambitious global trade agreement ever negotiated. The agreement has reduced tariffs by one-third worldwide—a move that has raised global income by over $235 billion annually.* Perhaps most notable is the recognition of new global realities. For the first time, a trade agreement covers services, intellectual property rights, and trade-related investment measures such as exchange controls.
The Uruguay Round made several major changes in world trading practices:
Entertainment, pharmaceuticals, integrated circuits, and software: The rules protect patents, copyrights, and trademarks for twenty years. Computer programs receive 50 years of protection, and semiconductor chips receive 10 years of protection. But many developing nations were given a decade to phase in patent protection for drugs. Also France, which limits the number of U.S. movies and television shows that can be shown, refused to liberalize market access for the U.S. entertainment industry.

Financial, legal, and accounting services: Services came under international trading rules for the first time, creating a vast opportunity for these competitive U.S. industries. Now, it is easier for managers and key personnel to be admitted to a country. Licensing standards for professionals, such as doctors, cannot discriminate against foreign applicants. That is, foreign applicants cannot be held to higher standards than domestic practitioners.

Agriculture: Europe is gradually reducing farm subsidies, opening new opportunities for such U.S. farm exports as wheat and corn. Japan and Korea are beginning to import rice. But U.S. growers of sugar and citrus fruit have had their subsidies trimmed.

Textiles and apparel: Strict quotas limiting imports from developing countries are being phased out, causing further job losses in the U.S. clothing trade. But retailers are the big winners, because past quotas have added $15 billion a year to clothing prices.

A new trade organization: The World Trade Organization (WTO) replaced the old General Agreement on Tariffs and Trade (GATT), which was created in 1948. The WTO eliminated the extensive loopholes of which GATT members took advantage. Today, all WTO members must fully comply with all agreements under the Uruguay Round. The WTO also has an effective dispute settlement procedure with strict time limits to resolve disputes. Beijing recently lost a case on rare earth metals such as molybdenum and tungsten. The WTO charged that China's policies violated global trade rules and that Beijing was using export quotas to restrict trade. China claimed that the laws were for environmental protection. But the WTO said that this was an invalid reason for limiting exports.*
Two international financial organizations are instrumental in fostering global trade. The World Bank offers low-interest loans to developing nations. Originally, the purpose of the loans was to help these nations build infrastructure such as roads, power plants, schools, drainage projects, and hospitals. Now the World Bank offers loans to help developing nations relieve their debt burdens. To receive the loans, countries must pledge to lower trade barriers and aid private enterprise. In addition to making loans, the World Bank is a major source of advice and information for developing nations. The International Monetary Fund (IMF) was founded in 1945, one year after the creation of the World Bank, to promote trade through financial cooperation and eliminate trade barriers in the process. The IMF makes short-term loans to member nations that are unable to meet their budgetary expenses. It operates as a lender of last resort for troubled nations, such as Greece. In exchange for these emergency loans, IMF lenders frequently extract significant commitments from the borrowing nations to address the problems that led to the crises. These steps may include curtailing imports or even devaluing the currency. Greece, working with both the IMF and the EU, has raised taxes to unprecedented levels, cut government spending (including pensions), and implemented labor reforms such as reducing minimum wage as part of its austerity measures to receive loans from the IMF and the European Union.
The Group of Twenty (G-20) finance ministers and central bank governors was established in 1999 to bring together industrialized and developing economies to discuss key issues in the global economy. The G-20 is a forum for international economic development that promotes discussion between industrial and emerging-market countries on key issues related to global economic stability. By contributing to the strengthening of the international financial system and providing opportunities for discussion on national policies, international cooperation, and international financial institutions, the G-20 helps to support growth and development across the globe. Members of the G-20 met in Brisbane, Australia in November 2014. The meeting focused on raising global growth to deliver better living standards and create high-quality jobs. In Brisbane, the G-20 set a goal to lift global GDP by two percent by 2018. This alone would add more than $2 trillion to the global economy and would create millions of new jobs.*
A company should consider entering the global marketplace only after its management has a solid grasp of the global environment.
Companies decide to "go global" for a number of reasons. Perhaps the most important is to earn additional profits. Managers may believe that international sales will result in higher profit margins or more added-on profits. A second stimulus is that a firm may have a unique product or technological advantage not available to other international competitors. Such advantages should result in major business successes abroad. In other situations, management may have exclusive market information about foreign customers, marketplaces, or market situations not known to others. While exclusivity can provide an initial motivation for international marketing, managers must realize that competitors can be expected to catch up with the firm's information advantage. Finally, saturated domestic markets, excess capacity, and potential for economies of scale can also be motivators to go global. Economies of scale mean that average per-unit production costs fall as output is increased.
Many firms form multinational partnerships—called strategic alliances—to assist them in penetrating global markets; strategic alliances are examined in Chapter 7. Five other methods of entering the global marketplace are, in order of risk, exporting, licensing and franchising, contract manufacturing, joint venture, and direct investment (see Exhibit 5.2). When a company decides to enter the global market, exporting is usually the least complicated and least risky alternative. Exporting is selling domestically produced products to buyers in other countries. A company can sell directly to foreign importers or buyers. China is currently the world's largest exporter, but the United States and Germany are not far behind.
Small companies comprise the majority of U.S. exporters. Businesses with fewer than 500 employees accounted for 294,589 of 301,238 U.S. exporters (about 98 percent) in 2012, the last year for which data is available.* Just over half were small manufacturers and wholesalers. Together they generated $460 billion in foreign trade—about 34 percent of total U.S. exports.
While paperwork is a headache for some small companies, it's not their biggest concern according to a survey of small businesses fielded by the National Small Business Association and the Small Business Exporters Association. Asked to identify the largest challenges to selling goods and services to foreign customers, 41 percent of respondents selected, "I worry about getting paid."*
"I think the biggest issue is getting a staff up overseas, as well as the cost of business travel, and of communication with far-flung clients," said Chris Coccio, chief executive of Sono-Tek Corp., which develops ultrasonic spray coating technology. Sono-Tek's primary overseas clients include contract manufacturers for electronic companies and medical firms. According to Coccio, about 60 percent of the company's roughly $10 million in annual revenue comes from sales to non-U.S. markets.*
Sono-Tek exports widely in Europe as well as to many parts of Asia (including China, Japan, and the Philippines). Its products can also be found in Mexico and Brazil. About 80 percent of the company's sales and marketing budget is spent on international sales, "so there clearly is extra cost per sales dollar," says Coccio.
On the whole, Coccio remains an advocate for exporting. "Without it, we would be one-third of our size," he says. Receiving payment is a regular concern when exporting goods, but "to deal with this our payment terms are front-end loaded with most of the payment prior to shipment."*
Instead of selling directly to foreign buyers, a company may decide to sell to intermediaries located in its domestic market. The most common intermediary is the export merchant, also known as a buyer for export, which is usually treated like a domestic customer by the domestic manufacturer. The buyer for export assumes all risks and sells internationally for its own account. The domestic firm is involved only to the extent that its products are bought in foreign markets.
A second type of intermediary is the export broker, who plays the traditional broker's role by bringing buyer and seller together. The manufacturer still retains title and assumes all the risks. Export brokers operate primarily in agricultural products and raw materials.
Export agents, a third type of intermediary, are foreign sales agents/distributors who live in the foreign country and perform the same functions as domestic manufacturers' agents, helping with international financing, shipping, and so on. The U.S. Department of Commerce has an agent/distributor service that helps about 5,000 U.S. companies each year find an agent or distributor in virtually any country of the world. A second category of agents resides in the manufacturer's country but represents foreign buyers. This type of agent acts as a hired purchasing agent for foreign customers operating in the exporter's home market.
5-4b Licensing and Franchising
Another effective way for a firm to move into the global arena with relatively little risk is to sell a license to manufacture its product to someone in a foreign country. Licensing is the legal process whereby a licensor allows another firm to use its manufacturing process, trademarks, patents, trade secrets, or other proprietary knowledge. The licensee, in turn, pays the licensor a royalty or fee agreed on by both parties.
A licensor must make sure it can exercise sufficient control over the licensee's activities to ensure proper quality, pricing, distribution, and so on. Licensing may also create a new competitor in the long run, if the licensee decides to void the license agreement. International law is often ineffective in stopping such actions. Two common ways of maintaining effective control over licensees are shipping one or more critical components from the United States and locally registering patents and trademarks to the U.S. firm, not to the licensee. Garment companies maintain control by delivering only so many labels per day; they also supply their own fabric, collect the scraps, and do accurate unit counts.
Franchising is a form of licensing that has grown rapidly in recent years. More than 400 U.S. franchisors operate more than 40,000 outlets in foreign countries, bringing in sales of more than $13 billion.* More than half of the international franchises are for fast-food restaurants and business services.
5-4c Contract Manufacturing
Firms that do not want to become involved in licensing or to become heavily involved in global marketing may engage in contract manufacturing, which is private label manufacturing by a foreign company. The foreign company produces a certain volume of products to specification, with the domestic firm's brand name on the goods. The domestic company usually handles the marketing. Thus, the domestic firm can broaden its global marketing base without investing in overseas plants and equipment. After establishing a solid base, the domestic firm may switch to a joint venture or direct investment.
5-4d Joint Venture
Joint ventures are somewhat similar to licensing agreements. In an international joint venture, the domestic firm buys part of a foreign company or joins with a foreign company to create a new entity. Thanks to a joint venture between General Electric and CFM International, workers assemble the best-selling aircraft engine in history in a huge factory just south of Paris. The engine's core, consisting of the combustion chamber and related elements, is produced in a GE factory near Cincinnati, Ohio and shipped to France. Once the core arrives in France, engineers and technicians in blue overalls carefully marry the core to French-made turbo fans, turbines, and compressors. Combined, these parts form jet engines weighing two and a half tons each. Every month, about 65 of these engines are tested and shipped out. Like many successful joint ventures, one partner recently decided to acquire the other. General Electric made a $13.5 billion offer for CFM, and after much bickering with the French government, the deal was approved in November 2014.*
While this collaboration was successful, joint ventures can also be very risky. Many fail. Sometimes joint venture partners simply cannot agree on management strategies and policies. Often, joint ventures are the only way a government will allow a foreign company to enter its country. Joint ventures enable the local firm to acquire managerial skills and new technology.
5-4e Direct Investment
Active ownership of a foreign company or of overseas manufacturing or marketing facilities is called direct foreign investment. Direct foreign investment by U.S. firms is currently about $5.4 trillion.* Direct investors have either a controlling interest or a large minority interest in the firm. Thus, they have the greatest potential reward and the greatest potential risk. Because of problems with contract manufacturing and joint ventures in China, multinationals are going it alone. Today, nearly five times as much foreign direct investment comes into China in the form of stand-alone efforts as comes in for joint ventures.
A firm may make a direct foreign investment by acquiring an interest in an existing company or by building new facilities. It might do so because it has trouble transferring some resource to a foreign operation or getting that resource locally. One important resource is personnel, especially managers. If the local labor market is tight, the firm may buy an entire foreign firm and retain all its employees instead of paying higher salaries than competitors.
The United States is a popular place for direct investment by international companies. Foreign direct investment in the United States accounts for approximately $2.8 trillion. The United States continues to receive more foreign investment flows than any country in the world. The United Kingdom is home to the largest investors in the United States, followed by Japan, the Netherlands, Canada, and France. U.S. affiliates of foreign firms employ more than 5.8 million people in the United States. These companies spend more than $50 billion on U.S. research and development and export over $345 billion worth of goods manufactured in the United States.
Once marketing managers have determined a global product and promotion strategy, they can select the remainder of the marketing mix. Pricing presents some unique problems in the global sphere. Exporters must not only cover their production costs but also consider transportation costs, insurance, taxes, and tariffs. When deciding on a final price, marketers must also determine how much customers are willing to spend on a particular product. Marketers also need to ensure that their foreign buyers will pay the price. Because developing nations lack mass purchasing power, selling to them often poses special pricing problems. Sometimes a product can be simplified in order to lower the price. A firm must not assume low-income countries are willing to accept lower quality, however. L'Oréal was unsuccessful selling cheap shampoo in India, so the company targets the rising class. It now sells a $17 Paris face powder and a $25 Vichy sunscreen. Both products are very popular.
Walmart's low-price business model has been slow to catch on with Chinese shoppers, many of whom like to shop for bargains online and in mom-and-pop stores. Chinese consumers expect foreign retailers to offer the highest quality shopping environments, not the warehouse-like design common to United States Walmart stores. The company recently decided to close 29 underperforming stores in China.
EXCHANGE RATES
The exchange rate is the price of one country's currency in terms of another country's currency. If a country's currency appreciates, less of that country's currency is needed to buy another country's currency. If a country's currency depreciates, more of that currency will be needed to buy another country's currency. Global trade does not always involve cash. Countertrade is a fast-growing way to conduct global business. In countertrade, all or part of the payment for goods or services is in the form of other goods or services. Countertrade is thus a form of barter (swapping goods for goods), an age-old practice whose origins have been traced back to cave dwellers. The U.S. Department of Commerce says that roughly thirty percent of all global trade is countertrade.* In fact, both India and China have made billion-dollar government purchasing lists, with most of the goods to be paid for by countertrade.
One common type of countertrade is straight barter. The Malaysian government purchased 20 diesel-electric locomotives from General Electric in exchange for a supply of 200,000 metric tons of palm oil. Sometimes, countertrades involve both cash and goods. General Motors sold locomotive and diesel engines to Yugoslavia in exchange for $4 million and Yugoslavian cutting tools.* Another form of countertrade is the compensation agreement. Typically, a company provides technology and equipment for a plant in a developing nation and agrees to take full or partial payment in goods produced by that plant. For example, General Tire Company supplied equipment and know-how for a Romanian truck tire plant. In turn, General Tire sold the tires it received from the plant in the United States under the Victoria brand name. Both sides benefit even though they do not use cash.
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