Momo Deretic Sauder School of Business Main Points
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 discriminate, cautiously. Levitts Claim Theodore Levitt, late Harvard Business School professor wrote a paper in 1983, arguing Markets are globalized: The worlds needs and desires have become irrevocably homogenized. End of local products: Firms should sell the same thing the same way, everywhere. Or do they? Levitt says you shouldnt 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. Adaptation to foreign markets While Levitts claim may reflect some basic truths, there exists much counter- evidence. What are examples for firms that have adapted their product, promotion, and placement for foreign markets? Reasons Why Demands Differ Different physical environments Different levels of development Different cultures Environmental Adaptations Topography Climate Population Density Developmental Adaptations Income effects (Engel curves for superior goods) Quality (luxury) Safety Education effects Literacy Technical competence Cultural (Social) Adaptation Traditions: parental influence effects Learning by example Imprinting during childhood? Conformism: peer interaction effects Communication standards Costs of Adapting Products Research & Development (blueprint costs) Market Cultivation Costs Line costs (new machinery) Switching costs (for existing machinery) Input price rises Consumer confusion costs? Cost versus benefits of product adaptation Suppose an adapted product sells for PA whereas a standardized product will sell for PS (<PA). Now assume fixed costs for each alternative are FS<FA whereas marginal costs are MCS and MCA. Adaptation is optimal if A S > 0 where i = Q*(Pi - MCi) - Fi. Pricing Firms may maximize profits by charging a different price to different markets. Price is determined at the point where marginal revenues (MR) = marginal costs (MC) in each market. MR may vary across markets due to differences in demand elasticity. Constraints on pricing Antidumping law
Goods arbitrage: consumers/arbitragers buy in
low price market, thereby avoiding high price market. This is sometimes called grey markets or parallel imports (i.e., Canadian internet pharmacies) Major takeaways Demands differ from country to country/region to region, as does price elasticity of demand. Always calculate whether the additional costs of adaptation are justified in terms of increased overall profits. Be very careful about your pricing strategy- differentiation allows for price setting/discrimination, and cost leadership allows for low pricing, but beware of anti- dumping actions.