Chapter 6: Market Adaptation

Keith HeadSauder School of

Business

The “take-away” for this chapter

• Demands are less different than they were but the world is far from homogenization.

• When selling products in foreign countries, firms must decide how much to adapt their product and its “message” to local demands.

• Demands differ for systematic reasons.• Adaptations may not pass a cost-benefit

test.

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

What company? Which country?

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About three years later…

What company? Which country?

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What company? Which country?

What company? Which country?

Levitt’s Claim

• Theodore Levitt, a Harvard Business School professor, wrote a paper in 1983, arguing…

• Markets are globalized: “The world’s needs and desires have become irrevocably homogenized.”

• End of local products: Firms should “sell the same thing the same way, everywhere.”

Components of the Levitt Argument

• The new cosmopolitanism [converging consumer preferences]• The underappreciated power of large

volume, low price strategies. [brand-level economies of scale] • The power of promotional schemes

that disregard stated wants and focus attention on ultimate needs.

The Washing Machine Example

When asked, consumers described preferences over washing machine features:– British wanted top loading, agitator

action, no water heater, and inconspicuous, 700 rpm speed

– Italians and French wanted front loading, tumble action.

– But Italians wanted bright colors and 400rpm spin speed, whereas French wanted elegant appearance and 600rpm speed.

Every country wants a washing machine with different features

Or do they?

• Levitt says you shouldn’t ask what people want from a washing machine, you should ask what they want from life

• And, he claims, everyone wants the same thing:– Clean clothes– More leisure time– More money left over to spend on things

they enjoy.

Reasons Why Demands Differ

• Environmental Adaptations • Developmental Adaptations• Political/Cultural: de jure & de facto

Standards

Environmental Adaptations

• Topography• Climate• Population Density

Env. Sep. & Trucks

– Trucks in dense countries must have a tight turning radius.

– Trucks in mountainous countries must have thicker axels, more likely to prefer diesel engines.

– Trucks in cold countries need snow tires.– Trucks in hot countries need

refrigeration, AC.

Population Density in Europe

Products adapted to high density

Products adapted to high density

Photos courtesy of Fusako Sakasai

Developmental Adaptations

• Income effects (Engel curves for “superior” goods)– Quality (luxury, durability)– Convenience (time-saving)– Safety (avoid risks)– Environmental “friendliness”

• Education effects– Literacy– Technical competence

Cultural Adaptation

• Traditions: parental influence effects– Learning by example– Imprinting during childhood

• Conformism: localized peer-to-peer interactions– Technical product specification

standards– Communication standards

The strange case of Hershey chocolate bars

Tastes are sometimes shaped during childhood, but influenced by history.

In a process called lipolysis, the fatty acids in the milk decompose, resulting in a rancid, or "goaty" taste. Hershey purposefully puts their chocolate through controlled lipolysis, giving it that unique flavor.

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

Thunderbirds, Matchbox, and the Levitt Argument revisited

Different Keyboard Standards

France’sAZERTY

QWERTY

What share of the world drives on the left?

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

Standard changes are rare, but there are strong pressures to conform to practices of neighboring countries.

BC (1922), New Brunswick (1922), Nova Scotia (1923), PEI (1924), and Newfoundland (1947) switched.

Sweden switched twice! (in 1736 to the left and 1967 back to the right)

AC Power Plugs

U.K., Hong Kong, parts of Africa

Europe, parts of Middle East

Australia, China

The strange case of the Mars Climate Orbiter

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

Mystery of the missing orbiter

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

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

Paper sizes

210mm X 297mm(rest of world)

216mm X 279mm(US + Canada)

English is the 3rd or 4th most common native language.

It is spoken/understood to some extent by 1/4 to 1/3 of the world

English is an official language in 52 countries

Costs of Adapting Products

• Research & Development (“blueprint”) costs

• Market Cultivation Costs (new promotion)

• Line costs (new machinery)• Switching costs (for existing

machinery)• Input price rises• Consumer confusion costs

Weighing costs vs benefits of product adaptation

• Benefit: Rise in gross profits = Rise in price * Initial Mkt Size+ Final profit margin*Rise in Mkt Size– Rise in marginal costs*Initial Mkt Size

• Cost: Sunk incremental blueprint and advertising costs required for new variety.

• Bottom line: Adapt for large mkts & important demand differences.

Adapting prices

• “Pricing to market”: setting prices in each market to maximize local profits

• Why prices should differ– Differences in delivered unit costs– Differences in market demand elasticity– Differences in firm’s share of market

• Constraints on pricing freedom– Anti-dumping duties– Gray (parallel) markets

The “take-away” for this chapter

• Demands are less different than they were but the world is far from homogenization.

• When selling products in foreign countries, firms must decide how much to adapt their product and its “message” to local demands.

• Demands differ for systematic reasons.• Adaptations may not pass a cost-benefit

test.• Price should be locally adapted too—but

not so different to cause ADD and/or smuggling.