International Marketing Week 4

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8GLOBAL MARKETING STRATEGIES

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CASE 8-1 GM AND FORD’S PURSUIT OF DIFFERENT BENEFITS FROM GLOBAL MARKETING

GLOBAL MARKETING THOUGHT: THE 1990s

Ford and General Motors have approached globalization dif- ferently. In its quest for a “world car,” Ford developed the so-called Ford 2000 program by creating five new vehicle centers—four in the United States and one in Europe—each responsible for designing and developing a different type of car worldwide. Ford’s plan was put to test when it built a mid- size world car in 1993 known as the Mondeo in Europe and the Ford Contour in North America. Its plan was to manu- facture 700,000 cars a year in Europe and North America for nearly a decade with only a “refreshing” after 4 or 5 years. Ford executives say they can no longer afford to duplicate efforts and they want to emulate the Japanese, who develop cars that with minor variations can be sold around the world. While the Mondeo/Contour sold 642,000 units in the first 2 years in Europe, it had disappointing sales in the United States, attributed to its comparably higher price relative to the car’s predecessors. Successful product development efforts require that the company avoid two problems that can arise from pur- suing global design. First, the high cost of designing products or components that are acceptable in many settings could negatively affect efficiency. Second, the product, in this case a “world car,” may be low cost but meet the lowest common denominator of taste in all countries.

Alternatively, General Motors took a more regional tack by retaining strong regional operations that develop distinctly different cars for their own. If a car has a strong crossover potential, engineers and marketers cross the Atlantic to suggest customization. Thus, Cadillac got an Americanized version of the Opel Omega small luxury sedan developed by GM’s Opel subsidiary in Germany. GM managers contend that ad hoc efforts are cheaper and more flexible. One senior executive at Ford of Europe countered that “doing two con- ventional car programs would have cost substantially more than doing one global program.”

The two automakers’ contrasting product development and marketing programs in the 1990s illustrate the traditionally viewed tradeoffs of efficiency and effectiveness, global stan- dardization versus customization, market segmentation versus product differentiation, and product orientation versus cus- tomer orientation. These debates are framed by the tension between bending demand to the will of supply (i.e., driving the market) versus adjusting to market demand (i.e., driven by the market).

It is difficult to conclude that one strategy is always better than the other. One has to be reminded that while the Ford Mondeo/Contour project cost $6 billion and took 6 years to develop, potential cost savings from the global strategy could also be enormous for years to come. On the other hand, GM’s regional strategy could also make sense if regional taste differ- ences remain so large that a Ford-style global strategy could, indeed, end up producing a “blandmobile” that hits the lowest common denominator of taste in different markets.

Which was a winning strategy in the 1990s? Ford’s ex-president, Jacques Nasser, wanted to keep the efficiencies generated from central thinking about design and production. Buthewantedtoreintroducethemarketfocusinregionsacross the globe that will give Ford stronger brands and more appeal- ing products. The Ford 2000 was a good idea carried a bit too far. Ford Contour was discontinued from the U.S. market in 2001. Ford is now trying to redefine the Ford 2000 program with a heightened emphasis on the company’s brands and to give the various regional and brand units more autonomy.

GLOBAL MARKETING THOUGHT: THE 2000s

The first decade of the twenty-first century proved to be period of struggle and retrenchment for both Ford and GM as they faced eroding U.S. market share, soaring gasoline prices, and an overdependence on declining sales of sport utility vehicles

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(SUVs) as well as high U.S. healthcare costs for their aging workforce. By 2005, both Ford and GM’s corporate bonds had been downgraded to junk status. In order to shore up its cash flow, Ford had to sell its luxury brands, Aston Martin and Volvo, ending its intended goal to build strong luxury divisions. While Ford managed to further reduce debt and maintain cash flow by a debt-for-equity exchange, GM filed for bankruptcy in 2009. While in bankruptcy, GM shed Hummer, Pontiac, Saturn, and Saab to streamline its operations. With the U.S. government’s financial backing (i.e., the government’s majority ownership), GM appeared from bankruptcy and made an initial public offering in 2010 to continue its business and returned to profitability in 2011. During this period, both automakers were busy dealing with their own survival issues and as a result, they did not develop any clear strategic vision other than cutting costs and streamlining operations.

GLOBAL MARKETING THOUGHT: THE 2010s

The automobile industry today is a growth industry in emerg- ing markets. Only about 12 percent of the earth’s 7 billion people enjoy the benefits of vehicle ownership, and industry growth remains positive at about 20 percent per decade, with the potential for global annual sales of 96 million vehicles by 2016. Most of this expansion will occur in emerging markets such as China, India, Russia, and Brazil.

General Motors’ strategy in China and other Asian mar- kets is very aggressive. Alliances have been the key to its marketing strategies. For example, GM earlier acquired the majority of Korea’s Daewoo Motor Company’s automotive assets in 2002. At the same time, the company has used an approach that is more akin to a “loose confederation” in join- ing recently with other partners such as Suzuki, Fuji, and Fiat. GM has a minority equity stake in each of these companies. In addition, GM has major joint ventures in both China and Russia. GM’s alliance strategy and its initiatives to develop new markets are key elements in the company’s approach to globalization. Alliances afford the opportunity for com- ponent and architecture sharing as well as the reduction in

Sources: Larry J. Howell and Jamie C. Hsu, “Globalization within the Auto Industry,” Research Technology Management, 45, July/August 2002, pp. 43–49; “Where Are the Hot Cars?” Business Week, June 24, 2002, pp. 66–67; “Small Carmakers Rise in Large China Market,” China Daily, June 3, 2005; Jill Jusko, “Counterfeiters Be Gone,” “Can Global Automakers Learn from Their Mistakes?,” Business- Week.com, June 16, 2008; “Autos: China Auto Sales Up 17% in First Half Year,” ChinaDialy.com, July 10, 2008; “Autos: GM, Ford: China H1 Sales Up Steadily,” ChinaDaily.com, July 9, 2008; “China 2011 Car Sales up 5.2 Percent,” Reuters, January 16, 2012; “2nd UPDATE: GM, Ford China Sales Exceed Industry Forecast,” Wall Street Journal, January 9, 2012; “Global Auto Forecasts 77.2 Million in 2012 and 96 Million in 2016,” NextBigFigure.com, January 3, 2012; “GM Seen Planning Global Reorganization Against ‘Fiefdoms’,” Bloomberg.com, August 17, 2012; and “China Car Sales Growth Slows Further,” Wall Street Journal, January 12, 2016.

R&D costs that will be critical for manufacturers look- ing ahead to hybrid vehicle technology and, ultimately, hydrogen-based fuel-cell vehicles. By pulling together the tal- ents and resources from its global R&D network, GM has been able to reduce redundancy, accelerate ongoing development, and jump-start new development. Nevertheless, globaliza- tion entails risks from many quarters: economics, political forces, energy, and national differences in social and cultural norms. Consequently, GM is now focusing on the recruitment and empowerment of an international executive team, which will help accelerate the globalization process. For example, in Australia, GM operates through a subsidiary Holden, and it is closely integrated into GM’s global manufacturing and marketing strategies. In other words, GM is now planning a reorganization that would move it away from long-entrenched regional authority toward a structure built on global functions to improve efficiency. Power would shift from regional chiefs to global leaders in areas such as marketing, purchasing, and product development.

Ford is also planning to boost its worldwide sales volumes, putting it close to parity with GM and Toyota. But the task will not be easy. The company faces a variety of challenges, including the need to revive its long-struggling Lincoln brand and rebuild its European operations for the past decade. Its new global goal calls for a much stronger market position in emerging markets, including China where Ford has been able to capture only 4 percent market share as opposed to GM’s 15 percent. Although Ford once tried to emulate GM’s regional strategy focus, a new management team at Ford has shaken up its management structure and transformed its operations from a network of regional fiefdoms into a truly integrated global entity. Again, we see a much clearer efficiency-seeking strategy at work.

In the promising growing economy, car demand in China is shifting away from large sedans long favored by government officials to economy models demanded by families. GM and Ford face harsh competition from both homegrown and Korean and Japanese automakers.

Car sales in China climbed 5.2 percent in 2011, the slowest pace since the turn of the century when the nation’s car culture started to take off. This rate is much lower than that of 2007 and 2008, which reached 22.3 percent and 17.1 percent, respec- tively. Still, according to the China Association of Automobile Manufacturers, a total of 14.5 million sedans, SUVs, and mul- tipurpose vehicles were shipped to dealers in 2011. Amid a slowing economy and a less favorable domestic policy envi- ronment that caused this drop, GM and Ford still exceeded an industry group’s forecast for total vehicle sales growth in China, suggesting that demand for some foreign brands con- tinues to grow in the market. Ford’s vehicle sales in China rose 7 percent to 519,390 units in 2011, following growth of 40 percent in 2010. GM’s sales in China rose 8.3 percent to 2.55 million in 2011. China’s car sales reached a new high in 2015, but due to a recent recessionary cooling-off of the Chinese economy, growth in vehicle sales has slowed and demand in

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the world’s largest auto market is expected to cool further in 2016 and beyond. With looming overcapacity, it could result in more severe competition among foreign automakers.

Although we cannot say that General Motors’ and Ford’s global strategies are converging to emphasize manufacturing and marketing efficiency, one thing is clear. When the cost and competitive pressures are mounting, the companies have to emphasize operational efficiency on a global scale. And as the growth markets have shifted from developed countries to emerging markets, the automakers have to shift their focal marketing strategy to these new markets. As a result, the new markets’ customer needs and tastes are increasingly shaping the automakers’ product development strategy.

DISCUSSION QUESTIONS

1. Discuss what is missing in GM’s and Ford’s global strategy. 2. Evaluate GM’s going eco-friendly in China and discuss the possible global strategy for GM and Ford in an era of oil shortages. 3. Do you think GM’s success in China was largely helped by its joint ventures? If so, do you think the approach can be applied in other emerging markets? Explain your answer. 4. Evaluate Ford’s decision to expand its factory and assem- bly plant in China. To what extent do you think Ford’s move will help the company gain better position in the market as compared to its GM counterpart?

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CASE 8-2 P&G: WE’RE ALSO CHINESE

It is common knowledge that having dominated the Triad region comprising of North America, Europe, and Japan for the better half of the last century, multinational firms (MNCs) turned their heads toward emerging economies like China, India, and other Asian economies, which are no longer just sources of cheap labor for MNC operations but are also large consumer bases. China, with the largest national population in the world, just became part of the World Trade Organiza- tion and therefore became even more attractive to Western multinationals.

However, as MNCs are aware, doing business in China is not simple even though the economy is more open to foreign firms now than it has ever been. Local Chinese firms are grow- ing rapidly and therefore pose a significant threat to foreign firms that are often unable to provide goods at competitive prices the way the local firms can. Today, more MNCs are find- ing success in the unique Chinese market than they used to. But, they have learned the formula to success the hard way.

Take the example of American consumer products giant Procter & Gamble (P&G) that first set up shop in China in 1998 through a joint venture with a local partner, Hutchison Whampoa. Eventually P&G bought out the remaining stake in the venture. P&G’s brands like Tide detergent, Crest tooth- paste, and skin care product Oil of Olay made their place in homes in over 75 different countries worldwide and P&G’s modus operandi included marketing its products as quality goods at profitable prices. When the company started sell- ing its products in China, it soon discovered that its tried and tested global marketing strategy would not work the same way it had in other markets—for a variety of reasons.

A developing market like China is characterized by huge disparity in income levels between the wealthy and the not so wealthy. Another glaring feature is the diversity in con- sumer needs based on whether the area is rural, urban, or semi-urban. These differences are further enhanced by the variety of outlets for sale of consumer goods ranging from large-scale foreign stores like French retailer Carrefour to

local Chinese retailers and independent small stores. There- fore, for a company to succeed in China would mean offering a wide variety of products at reasonable prices. And succeed P&G did!

After entering the Chinese market, P&G soon figured out that selling its premium priced products would not help it achieve a significant market share let alone grant it the status of market leader, as many of its brands enjoyed in other foreign markets. Therefore, the company planned out a detailed marketing strategy specifically for the Chinese mar- ket. An important feature of strategic implementation was the three-tiered market system, whereby P&G divided the Chinese market up into three segments. According to Laurent Philippe, head of P&G’s Greater China region, “Because we aspire to leadership, we need to compete in more than the premium segment. We need to compete at least in the mid- dle segment as well. In volume terms, you can segment our categories into three price tiers: the top tier is 15 percent of the volume in units, the middle tier is 30 percent, and the bottom tier is 55 percent. The split in value, or revenue, is a little bit different: it is 30 percent in premium, 40 percent in the mid-priced segment, and only 30 percent in the low-end segment. This segmentation, by the way, is not mechanical; it is consumer driven.” The main objective behind the company’s marketing efforts in China was to promote their global prod- ucts sold in China as Chinese brands so that consumers could identify with these products. And this strategy proved to be important given that P&G’s competitors in the market include not only other foreign firms but also indigenous Chinese ones.

So, how did the company manage to successfully implement this strategy? Well, in the words of Philippe, “You cannot just take a global technology and make it cheaper by simply remov- ing or replacing certain ingredients. The cost gap is too big. So we are now using our research-and-development capabili- ties to create different value offerings superior to those of the local competitors but at an equal or even lower manufacturing cost. These products are designed from the outset to meet

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certain cost, and therefore pricing, targets.” P&G realized that low-income consumers in China often purchase single serve packets of shampoo, detergent, and so on, and it soon began offering some of its products in these sizes. The com- pany is using local resources to achieve its goals. Research and development for the Chinese market is done in Beijing at the Beijing Technical Center, and it makes use of local ingredients desired by consumers.

P&G is also sending its advance staff into as many out-of- the-way villages as it can to get a feel for what rural Chinese want to buy and how much they are willing to spend. Just as it has done for years in the cities, P&G’s teams of so-called customer research managers descend on villages, often mov- ing in with families for a few days. They have discovered that

Sources: Jacques Penhirin, “Understanding the Chinese Consumer,” McKinsey Quarterly, 2004 Special Edition, p. 46; “Scrambling to Bring Crest to the Masses in China,” Business Week, June 25, 2007, pp. 72–73; “Emerging Markets Key to P&G Growth Plans,” Finan- cial Times, June 25, 2008; and Procter & Gamble Greater China, http://www.pghongkong.com/en-US/Company/China.aspx, accessed March 10, 2016.

while low prices surely help sales, it is equally important to develop products that follow cultural traditions. Urban Chinese are happy to pay more than $1 each for tubes of Crest toothpaste with exotic flavors such as Icy Mountain Spring and Morning Lotus Fragrance. However, those living in the coun- tryside are apt to prefer 50 cents Crest Salt White, since many rural Chinese believe that salt whitens teeth. P&G applies sim- ilar segmenting strategies to its Olay moisturizing cream, Tide detergent, Rejoice shampoo, and Pampers diapers.

With more than $2.5 billion of annual sales, P&G has become the biggest consumer goods company in China today.

DISCUSSION QUESTIONS

1. How does China’s entry into the WTO affect multinational firms’ outlook toward China and their future investment in the country? 2. What are the drawbacks of P&G’s strategy for the Chinese market? 3. What other marketing strategy could P&G have adopted for the Chinese market as an alternative to the tier system one?