Chapter 6: Market Adaptation

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

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

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

5. About three years later…

6. What company? Which country?

7. What company? Which country?

8. 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.”

9. Components of the Levitt Argument • The new cosmopolitanism • The underappreciated power of large volume, low price strategies. • The power of promotional schemes that disregard stated wants and focus attention on ultimate needs.

10. 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.

11. Every country wants a washing machine with different features

12. 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.

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

14. Environmental Adaptations • Topography • Climate • Population Density

15. 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.

16. Population Density in Europe

17. Products adapted to high density

18. Products adapted to high density Photos courtesy of Fusako Sakasai

19. 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

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

21. The strange case of Hershey chocolate bars Tastes are sometimes shaped during childhood, but influenced by history. Why Europeans don’t like Hershey, but Americans do. 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.

22. Thunderbirds, Matchbox, and the Levitt Argument revisited

23. Different Keyboard Standards France’s AZERTY QWERTY

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

25. 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)

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

27. 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.

28. 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.

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

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

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

32. 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

33. Weighing costs vs benefits of product adaptation • Benefit: Rise in gross profits = Rise in Willingness to Pay * Initial Mkt Size + Initial 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.

34. 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