Marketing Channels & Going Global

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Copyright Managerial Marke�ng

James Finch University of Wisconsin, La Crosse

Bridgepoint Educa�on, Inc.

VP of Learning Resources: Beth Aguiar

Editor-in-Chief/AVP: Steve Wainwright

Director of Editorial Technology: Peter Galuardi

Sponsoring Editor: Mireille Yanow

Development Editor: Carrie Brandt

Assistant Editor: Kristle Maglunob

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Media Editor: Kim Purcell

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ISBN-10: 1621780082

ISBN-13: 978-1-62178-008-3

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Copyright © 2012, Bridgepoint Educa�on, Inc.

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Acknowledgments The Editorial team would like to thank the following reviewers for their feedback and guidance:

Christopher P. Blocker, Baylor University

Victoria L. Cri�enden, Boston College

Jacqueline Gilliard, Ashford University

Sharif Muhammad, Ashford University

M. Joseph Sirgy, Virginia Tech

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Chapter 13

Marketing Challenges in the New Economy

Associated Press

Learning Outcomes

By the end of this chapter, you should:

Be able to iden�fy how B2B and B2C marke�ng prac�ces have changed in the new economy and recognize the implica�ons of channel disintermedia�on. Understand how mass customiza�on has enabled consumers to par�cipate in the process of crea�ng products in the new economy and the significance of service-dominant logic as an emerging marke�ng paradigm. Be able to iden�fy the primary factors driving the phenomenon of globaliza�on and evaluate the consequences of interna�onal economic integra�on. Understand the significance of a company's Web presence as both a promo�onal tool and an e-commerce vehicle.

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Channel disintermedia�on has impacted every industry to some degree over the past 25 years.

Associated Press

Ch. 13 Introduc�on The global economy has experienced remarkable growth since the 1990s as a direct consequence of advances in computer technology. For many companies, produc�vity and profitability have grown at accelera�ng rates as faster microprocessors, the expansion of fiber-op�c networks, and the growth of wireless technologies have fueled the emergence of the Internet as a significant force in B2C and B2B commercial markets. These technologies, when combined with the lowering of trade barriers and the emergence of interna�onal agencies to promote free trade, have contributed to the rapid expansion of truly global product markets and growing globaliza�on.

This chapter examines how the tradi�onal processes and prac�ces of marke�ng management are being fundamentally challenged by forces that will con�nue to reshape and refine the world economic system throughout this century. Although the most visible and powerful of the factors driving this transforma�on may be the Internet, the focus of the chapter is on what this global informa�on network has made possible rather than on the technology itself. The beginning sec�ons of this chapter introduce the concept of channel disintermedia�on. This term refers to the elimina�on of middlemen primarily as a consequence of pursuing e- commerce alterna�ves. This is followed by an examina�on of how concep�ons of products and services are being substan�ally altered in the new millennium. Of par�cular note is how technology has produced new opportuni�es for marketers to personalize and customize products to suit buyers' preferences. The concluding sec�ons focus exclusively on the subject of globaliza�on. Although there are a wide range of social, poli�cal, and economic views about the rela�ve merits of interna�onal trade, there is li�le disagreement that the consequences for marketers are profound.

***

Badger Service & Supply is a regional wholesale distributor of hea�ng, ven�la�on, and air condi�oning (HVAC) equipment headquartered in rural Wisconsin. The firm sells a complete line of leading-edge products to licensed contractors, including replacement components and supplies. Opera�ng as a stocking distributor, the company has a substan�al investment in inventory, carrying more than 10,000 products and parts. It employs two technical sales representa�ves to help local contractors with service-related issues, a warranty administrator to handle warranty claims, five outside salespeople, and seven inside sales representa�ves. It provides training programs for its customers and ini�ates regional promo�onal efforts to support the products it sells. A small staff of engineers helps support the company's larger customers with their applica�on/design needs.

Recently, Badger has struggled to maintain sales revenue and profitability as large numbers of customers have turned to online suppliers to meet their HVAC product needs. Despite having reliably served its customers for more than 60 years, the company may soon go out of business. In many respects, Badger is a vic�m of the new economy.

At one �me, wholesale distributors and other channel intermediaries were regarded as immune from the direct impact of Internet-based compe��on by virtue of both the value-added func�ons they provided and their geographic proximity to channel end users. The protec�ve wall that being closer to the customer once provided is being rapidly eroded, however, as foreign compe�tors have pursued e-commerce strategies to shorten distribu�on channels or eliminate independent intermediaries altogether. Over �me, buyers' shi�ing percep�ons of value have led to the commodi�za�on of products and an increasing emphasis on price as the primary basis for compe��on rather than service.

The challenges that threaten this firm's con�nued existence and the limited strategic alterna�ves available to them illustrate some of the radical shi�s in compe��ve dynamics that have emerged in the new economy. Badger's response to the havoc produced by these forces has relied heavily on revisions to the firm's pricing policies. However, chronic price dealing and other defensive pricing strategies over the past five years have accelerated the decline in profitability rather than curtailing it (Frickenstein and Finch, 2006).

***

The Internet and e-commerce have created important new capabili�es and opportuni�es for both consumers and producers. For consumers, the new economy has provided access to a wider range of goods and services from around the world. They enjoy greater direct influence on the character of the products being created and even take an ac�ve role in the design of some of them. Informa�on technology has enabled them to obtain and share an ever-growing database of reviews and recommenda�ons about what to buy and what to avoid.

Companies have leveraged the power of the Internet to extend the geographic reach and size of their markets. Being directly connected to their customers has provided opportuni�es to reduce costs, improve customer service, and acquire a be�er understanding of their target markets. Clearly, this new economy has had a profound impact on both businesses and their customers.

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Channel disintermedia�on in the supply chain involves removing one or more parts of a supply chain or channel of distribu�on.

13.1 The New Economy The term new economy originated in the popular press when Time magazine ran a cover story in May 1983 heralding a fundamental sea change or transforma�on of the U.S. economy from one based on manufacturing and heavy industry to one based on new and emerging technologies.

Despite its popularity over the past 30 years, there is not a generally accepted defini�on for the term new economy. Within the discipline of marke�ng, the primary focus has been on the impact of informa�on technology and the Internet on the domes�c and global economy. This broadly defined term incorporates both emerging informa�on-driven industries (e.g., biotechnology) and technology-driven changes in the way businesses operate (e.g., e-commerce). The term is also used occasionally to highlight dis�nc�ons between the telecommunica�ons infrastructure that supports electronic commerce (e.g., Internet service providers) and the industrial infrastructure that supports the "old" manufacturing- based elements of the economy.

Think About It

Some�mes people get carried away when contempla�ng the impact of new ideas and ways of doing things. It has been argued that the inescapable consequence of the new economy will be that all forms of tradi�onal industrial produc�on will be relocated from tradi�onal industrial economies to less developed na�ons with lower labor costs. As a consequence, only high-value informa�on services and high-technology occupa�ons will remain in so-called first- world na�ons. In turn, the prosperity of these socie�es will become en�rely dependent on the success of the new economy. Does this seem likely to you?

What natural and economic obstacles exist to prevent this outcome? What factors or events might lead people to worry about this possibility?

E-commerce refers to the purchase or sale of products over an electronic medium such as the Internet or other computer facilitated exchange network. To effec�vely promote the direct sale of products via the Internet, suppor�ng technologies such as electronic funds transfer, online order processing, and inventory management so�ware are frequently employed. In some instances, these technologies may displace some intermediaries from the distribu�on channel since their func�ons are being shi�ed to producers. In this circumstance, e-commerce acts as the primary driving force behind a process referred to as channel disintermedia�on.

Channel Disintermedia�on

Channel disintermedia�on, as illustrated in Figure 13.1, refers to bypassing or elimina�ng one or more intermediaries from the supply chain or channel of distribu�on. Within the context of the new economy, this most o�en refers to "cu�ng out the middleman" by purchasing directly from a manufacturer's or reseller's website. The opening vigne�e about Badger Service & Supply illustrates this phenomenon clearly. Many of that company's customers were able to obtain both the products and services they required by going online rather than working with a regional supplier. Although e-commerce alterna�ves o�en offer lower prices on many products, the cost savings can some�mes temporarily obscure offse�ng losses in customer service and the value of a knowledgeable, full-service sales staff.

Figure 13.1: Channel disintermedia�on in the supply chain

Poten�al Benefits

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The primary objec�ve of search engine op�miza�on is to make your site easier for prospec�ve customers to find.

All Canada Photos/SuperStock

In many instances, however, the elimina�on of channel intermediaries can have several significant benefits for both buyers and sellers. Product purchasers o�en gain greater convenience, faster delivery, and lower prices. Sellers have the opportunity to respond to their end users directly. This may allow them to capture a por�on of the profits that would otherwise have to be shared with channel partners and o�en reduces the complexity and costs associated with maintaining high levels of customer service and sa�sfac�on.

The diffusion of informa�on via the Internet has fueled the progressive expansion of channel disintermedia�on over the past several decades. As product- and supplier-related informa�on has become widely available online, price compe��on has intensified in many markets. And as buyers become more knowledgeable about products and prices, they some�mes ins�gate the process of disintermedia�on by ini�a�ng direct contact with preferred sellers. In many instances, both par�es are responding to posi�ve cost-related incen�ves since bypassing distributors, wholesalers, and retailers allows buyers to pay less and enables sellers to earn more.

Poten�al Drawbacks

Although the opportunity to sell directly via the Internet is appealing to many sellers, it has several poten�ally nega�ve consequences. An organiza�on's tradi�onal channel partners will be directly harmed as a result of any migra�on toward direct sales. Cu�ng out wholesalers, retailers, agents, and distributors from some por�on of the firm's sales will necessarily create channel conflict. These intermediaries may, in turn, provide less sales support for those products and shi� their backing to compe��ve brands.

Other nega�ve outcomes associated with moving away from tradi�onal channel rela�onships to e-commerce can result from failing to fully understand the suppor�ng infrastructure required to compete online and serve customers directly. If channel intermediaries had previously performed the tasks associated with crea�ng the desired product assortments for buyers, companies new to direct Internet sales may be overwhelmed by the demands that arise from having to fill a much larger volume of orders for much smaller product quan��es. The order fulfillment and shipping capacity of firms that rely on tradi�onal channel arrangements is simply not compa�ble with the demands of comple�ng a large number of small transac�ons since these firms have previously relied on intermediaries to perform the sor�ng process. This deficiency is cri�cal when compe�ng in an online environment where customers expect fast and accurate billing and shipping.

As stated in the previous chapter, the func�ons performed by channel intermediaries can be shi�ed from one channel to another, but they cannot be eliminated. The rela�vely high costs associated with processing and shipping large numbers of small orders some�mes leads firms to recognize that the damaging effects and unan�cipated increased costs associated with disintermedia�on outweigh the benefits. When this results in the restora�on or reintroduc�on of an intermediary between buyers and sellers, the process is referred to as reintermedia�on.

Although disintermedia�on can result in the complete elimina�on of channel intermediaries, many of these specialists survive because their services add value to the process of mee�ng buyers' needs across a wide range of product markets. Warehousing, inventory management, storage, and shipping are valued services that are difficult to cost-effec�vely replace with in-house or company-owned subs�tutes. Consequently, it is not surprising to see reintermedia�on occur as online sellers restore rela�onships with previous channel partners or add new types of intermediaries.

New Costs in the New Economy

In addi�on to performing tradi�onal func�ons (e.g., holding inventory in warehouses), online merchants face new types of costs in the new economy. Both the presale and postsale tasks associated with online sales differ substan�ally from tradi�onal business models. Developing effec�ve websites, maintaining current product informa�on, automa�ng order processing, and performing search engine op�miza�on are all special�es that a company may opt to acquire from established providers rather than developing on an in-house basis.

Search engine op�miza�on (SEO) is a term used to describe the process of improving the features of a website so that search engines can find the pages easily and index them. The goal of SEO is to have a company's webpage ranked as high on the search results list as possible. The design features used to promote the rank or visibility of a website include the choice of keywords used in the site's text paragraphs and the placement of those words on the page. In general, higher ranked pages are visited more frequently by prospec�ve buyers. For companies that choose to limit their product's availability to the Internet, compe�ng effec�vely for customers' a�en�on in this crowded virtual space requires an effec�ve and diligent search engine op�miza�on program.

The Fate of Industrial Distributors in the New Economy

Although almost any good can conceivably be marketed and sold online without the assistance of intermediaries, certain types of B2B products are more easily and efficiently moved from seller to buyer with the help of industrial distributors. Distributors remain vital channel intermediaries to the extent that they add essen�al value to the supply chain. Tradi�onal industrial distributors play four primary value-adding roles that will determine their long-term viability in the new economy:

1. An aggregator of demand buffering manufacturers from orders too small and too logis�cally complex for them to handle. 2. A consolidator of mul�ple, o�en compe�ng suppliers that offer customers one-stop shopping for complementary products and accessories.

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3. A deployment point, pu�ng each manufacturer's inventory closer to consump�on for faster customer delivery. 4. A local contact point for billing, technical product and applica�on informa�on, and other customer services (Girard, 1999).

Both product type and complexity are major factors in determining the rela�ve contribu�on of distributors in the new economy. Consider product components and machine parts such as fasteners and belts. Even in the new economy, distributors are relied upon as primary sources due to the many sizes and product varia�ons within these categories. Buyers o�en rely on the exper�se and product knowledge of distributors to iden�fy the right parts and components. The same is true of components that are cri�cal to the manufacturing process, such as pressure gauges and monitoring meters. Ready availability and fast delivery are essen�al when considering sources for mission-cri�cal products.

Refined chemicals and basic metals are o�en handled through distributors or brokers who buy in large quan��es from producers and resell in smaller quan��es. A metal distributor, for example, can purchase from many very large producers such as U.S. Steel and provide metals in quan��es and dimensions specifically matched to the produc�on requirements of smaller firms. In situa�ons of this sort, it would be unrealis�c for any steel manufacturer to sell products directly to each end user.

In contrast, highly standardized products with uniform capabili�es and capaci�es are more easily sold direct from the manufacturer to the final customer. Electric motors, generators, and standard electronic components are products that are well suited to e-commerce business models.

Just as the new economy has promoted and facilitated substan�al changes in the way that products are distributed, the Internet and developments in informa�on technology in general have changed the character of the products themselves. The sec�on that follows will inves�gate how technology has enabled marketers to personalize and customize products to suit buyers' preferences. It will also examine how the marke�ng paradigm as a whole may be shi�ing from a product-based perspec�ve to a new conceptualiza�on focused on the customer's direct involvement in the design and produc�on of goods and services.

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Mass customiza�on is an essen�al element of the business model for smartphones. Customers have the ability to personalize their phones with applica�ons that allow access to e-mail or social networking accounts.

Imagebroker/Thinkstock

Apple's iTunes online music store is among the best known and most successful examples of mass customiza�on.

Associated Press

13.2 Emerging Product and Service Concepts The characteris�cs of e-commerce and the new economy have challenged many tradi�onal concep�ons about products, branding, and the role of the customer in the process of crea�ng unique goods and services. Two of the most provoca�ve concepts are mass customiza�on and the service-dominant logic paradigm. Mass customiza�on is a natural extension of the marke�ng concept that has only been made feasible on a broad scale in the age of the new economy. It refers to a company's capability to create substan�al quan��es of unique products, designed to each customer's specifica�ons, at a rela�vely low cost. The service-dominant logic paradigm goes one step further, explicitly recognizing that consumers play an essen�al role in the actual produc�on process.

Mass Customiza�on

Mass customiza�on refers to a company's ability to efficiently produce large volumes of products designed to customers' specifica�ons. To be compe��ve, this o�en requires the unit cost of produc�on to approximate the unit cost of comparable standardized, mass-produced goods. The capabili�es needed to sell compe��vely priced tailor-made products is almost always a direct consequence of applying high-tech enhancements to the processes of promo�ng, designing, crea�ng, and distribu�ng such products.

In Chapter 1 we introduced Michael Porter's three generic marke�ng strategies: product differen�a�on, cost leadership, and market focus. Product differen�a�on strategy emphasizes dis�nguishing your brand from compe�tors' brands based on the benefits that buyers value most. Cost leadership strategy enables a firm with lower costs of produc�on to a�ract price- sensi�ve customers by selling at rela�vely lower prices than compe�tors. Market focus strategy is not a dis�nctly different strategy from the other two, but it describes the scope over which the firm will implement either cost leadership or differen�a�on strategies. Implicit in choosing from among the three generic strategies is the assump�on that effec�vely differen�a�ng your brand requires investments in crea�ng customer value that make your brand incompa�ble with cost leadership. Mass customiza�on directly challenges the validity of this assump�on by employing technology to facilitate the produc�on of customized products on a large scale at costs equivalent to conven�onal mass-produced goods.

In the tradi�onal manufacturing economies of the twen�eth century, mass-produc�on technologies and methods provided the means to produce large volumes of finished goods at rela�vely low prices. The drive to realize the rewards derived from economies of scale in produc�on pushed producers to focus on building high sales volumes for standardized products. In fact, the efficiency of the produc�on line model requires the standardiza�on of both the manufacturing processes and the products produced to achieve the lowest possible per-unit costs. Responding to consumer demand for customized or unique alterna�ves necessarily raised the associated costs significantly. Within this old economy paradigm, the term mass customiza�on is an oxymoron.

The new economy introduced the technological means to make mass customiza�on and the personaliza�on of products possible with rela�vely li�le or no increases in unit cost. The ability to custom-design and create unique products for a large base of customers at rela�vely low costs hinges on the power of computers, the Internet, and other digital technologies. Mass customiza�on has applica�on across a wide range of industries in both B2C and B2B product markets. It is evident in both tradi�onal and e-commerce companies alike.

Among the best known examples of mass customiza�on is the Apple iTunes store. As with many other digital services, it is some�mes difficult to precisely define what iTunes is. From a strictly programming perspec�ve, it is a media program that enables users to download, play, save, and organize digital music and video files. As an e-commerce site, it is an online retail store where customers can purchase and download music, music videos, television shows, games, audiobooks, and podcasts. In the case of buying music, this u�lity enables consumers to purchase only the specific songs that they want rather than pre-assembled collec�ons or albums of music. In effect, buyers are able to create their own mix CDs and compila�ons according to their unique preferences.

Digital content providers of all kinds rou�nely provide customized products for their online customers. So�ware providers such as Microso� provide a limited range of customiza�on op�ons for their most popular Microso� Office products to suit the needs of different types of customers. However, smaller firms such as Comtech Solu�ons have built their business model on their capacity to create customized so�ware solu�ons that are unique to each customer's needs.

Although the range of customized digital goods being sold online is growing each day, the presence of customizable services on the Web is growing quickly as well. Insurance companies such as

Progressive use short ques�onnaires and menu-driven customiza�on op�ons to generate rate quotes for auto, home, and life insurance. Similar capabili�es also exist for e-commerce sites selling financial, legal, and educa�onal services.

E-commerce provides the means for tangible products to be customized for buyers as well. Floral arrangements can be custom designed and dispatched for delivery with a personal note from the sender from thousands of miles away. Everything from preferred tobacco blends and custom-designed wines to coffee mugs, books, and t-shirts can be easily personalized by placing an order online. In fact, even the Internet portals that enable buyers to find sellers can be readily customized to

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A personalized home page can promote loyalty and strengthen rela�onships with regular users of a site.

Associated Press

suit each individual's preferences. The Yahoo.com portal screen, for example, can be modified by the user to show the local weather, hometown sports, preferred news categories, and even the individual's personal stock por�olio.

The overall capacity for mass customiza�on within any organiza�on rests primarily on two cost considera�ons: product produc�on and product distribu�on. Mass customiza�on flourishes in markets where achieving economies of scale no longer depends on the crea�on of large volumes of standardized products. Independent of the Internet, the applica�on of technology has reduced both produc�on and distribu�on costs for many types of goods and services in the new economy era. Computers have made it less expensive to fabricate and deliver everything from houses and bicycles to books and shoes.

Growing opportuni�es for mass customiza�on and the personaliza�on of goods and services requires marke�ng managers to think differently about the sources of compe��ve advantage in many markets. The service-dominant logic of marke�ng in the current era provides a new perspec�ve on the customer's role in shaping the behavior of companies in the marketplace.

Think About It

How has mass customiza�on changed the value and the role of established brands in B2C markets? B2B markets?

Will branding take on lesser or greater importance to successfully introducing and managing products in an online environment? Why?

Service-Dominant Logic

In the midst of the development of the new economy paradigm, a new perspec�ve on marke�ng management itself has begun to emerge. "In the new economy, the gap between consumers and producers blurs. As mass produc�on is replaced by mass customiza�on, producers must create products that reflect the requirements and tastes of individual consumers. In the new economy, consumers become involved in the actual produc�on process" (Tapsco�, 1997).

The growing impact of customer par�cipa�on in the design of the products they buy is evident in a variety of tangible and digital goods and services sold over the Web. E-commerce merchants such as Dell.com allow consumers to design their own computers on their website. Procter & Gamble's Reflect.com website enables women to create their own personal line of makeup, skin care, and hair care products. Chipshot.com allows buyers to custom order golf equipment. Even Ford and GM have op�ons for customers to order custom cars. Each of these examples is consistent with the emergence of a service-dominant logic of marke�ng management.

The service-dominant logic view is a radically different way to consider the purpose of marke�ng management. Tradi�onal, goods-centered views of the marke�ng func�on recognize that value is embedded in the produc�on of tangible output. Though buyer preferences drive the marke�ng process, customers are viewed as passive recipients of the product being produced. Service-dominant logic is a service-centered view where "value is defined by and co-created in concert with the consumer" (Vargo and Lusch, 2004). Consequently, serving the customer's desire for custom-designed products displaces the emphasis on simply marke�ng standardized goods and services. Within this context, the concept of service also reflects the company's role as the collaborator in product design rather than simply the maker of goods.

The customer can be either a conscious or unaware collaborator in this process. Ordering custom trout lures from Ken's Custom Tackle (h�p://www.kenscustomtackle.com (h�p://www.kenscustomtackle.com) ), for example, requires the buyer's deliberate involvement in specifying the product design. However, customers may also provide Web vendors with valuable informa�on on their shopping habits without knowingly contribu�ng to a database. With each visit to a company website, for example, they leave a trail indica�ng how they navigated to reach the site, how they interacted on the company's Web pages, and which links they clicked on.

Personalizing the Buying Experience at Amazon.com

Amazon.com has been an innovator in developing the ability to personalize the buyer's shopping experience. By tracking each customer's purchases, it is able to iden�fy groups of shoppers who share similar preferences. This enables Amazon to use other consumers' buying pa�erns and product evalua�ons to create lists of recommended purchases that similar customers are likely to have an interest in. The fact that these anonymous referrals are drawn from the feedback and buying behavior of fellow customers adds credibility to the recommenda�ons. Should this be surprising?

Take, for example, the results of a recent Nielsen survey:

"Despite an ever-expanding array of adver�sing pla�orms and sources, consumers around the world s�ll place their highest levels of trust in other consumers, according to a recent global Nielsen Internet survey. Conducted twice a year among 26,486 internet users in 47 markets from Europe, Asia Pacific, the Americas and the Middle East, Nielsen most recently surveyed consumers on their a�tudes toward thirteen types of adver�sing—from conven�onal newspaper and television ads to branded web sites and consumer-generated content. The Nielsen survey found that overall, consumers trust other consumers above all else! 78% of respondents said they trusted—either completely or somewhat— the recommenda�on of other consumers" (Nielsen, 2007).

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More data from the survey are available in Figure 13.2.

Figure 13.2: Consumers trust other consumers most

Nielsen 2007

The range of communica�on vehicles available to consumers in the new economy is truly astounding. Groups of consumers with common interests can congregate via Facebook, MySpace, LinkedIn, Google+ or just plain blogs. Collabora�ve product evalua�on and recommenda�ons can be found from Angie's List to Craigslist and from Digg.com to eBay. Informa�on can be disseminated via e-mail, Twi�er, YouTube, or any number of social media outlets.

Now, consider how much more powerful this conclusion is when you recognize that product value in this new economy is co-created by companies together with their customers (Prahalad and Ramaswamy, 2004). If the value of a purchase is embedded in user-driven products, and consumers are the most trusted source of product-related informa�on, is it reasonable to conclude that consumers are truly the sovereigns of this new economy?

The relevance of this service-dominant logic to the prac�ce of marke�ng management lies in understanding the consequences of customers shaping product and service specifica�ons. As co-creators of value, the buyers' involvement in the process of designing products shi�s the compe��ve focus from how to make good products to crea�ng a service-driven organiza�on that effec�vely captures buyers' contribu�ons to the process of crea�ng goods. Consequently, intangibles such as specialized knowledge of customers, online connec�vity with markets, and customer rela�onship marke�ng take on greater importance. Learning how to best capture the informa�on required to serve the needs of the customer then becomes the focal point of the firm with this service-dominant logic.

For many types of digital products and services, distribu�on costs in the new economy are so low and independent of distance from the buyer. Consequently, the relevant market area for many online sellers is geographically limitless. Inventories are virtually limitless as well and without cost. Expanding geographic markets, however, also creates a much wider diversity of poten�al compe�tors. The next sec�on of this chapter addresses the growth of interna�onal trade and the growing interdependence of global cultures in the new economy.

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Outsourcing produc�on to less developed na�ons may have both posi�ve and nega�ve effects on the local economy and culture.

Associated Press

13.3 Globaliza�on in the Marke�ng Context Within the broad context of economics, the term globaliza�on refers to the process by which world economies have become increasingly interrelated, integrated, and interdependent in recent decades. Advances in informa�on technology and the reduc�on of trade barriers such as tariffs and quotas have greatly facilitated more efficient interna�onal trade. With respect to its significance for marke�ng management, globaliza�on refers simply to "the prac�ce of global branding and localized marke�ng adapta�on" (Lascu, 2008). Central to brand management on a global level are decisions about whether to standardize the essen�al character of products across mul�ple interna�onal markets or adapt them locally to suit local preferences. The term is also used to refer to an organiza�on's efforts to expand its opera�ons to new countries and markets.

Most companies are directly or indirectly impacted by the phenomenon of globaliza�on. Consider the case presented at the opening of this chapter. Badger Service and Supply thrived in the backwoods of rural Wisconsin for more than 60 years by serving the needs of the customers within its geographic market. In fact, its nearest major compe�tor was located more than 100 miles away. However, the Internet changes many things. In this case, it brought compe�tors from throughout the world to the desktops of Badger Service and Supply's customers. There really is no place to hide in the new economy. Whether compelled by compe��ve necessity, interac�ons with suppliers, or the expecta�ons of customers, most companies will have to respond to the effects of globaliza�on. Failing to do so will result in losing business to compe�tors or failing to take advantage of new market opportuni�es.

Forces Fueling Globaliza�on

A number of forces or drivers within the business environment have contributed to the accelera�ng pace of interna�onal trade and globaliza�on of markets. The World Trade Organiza�on has emerged as an effec�ve global agency for regula�ng interna�onal trade, promo�ng trade agreements, and resolving disputes between na�ons. Economic coopera�on between na�ons has created several trade blocs throughout the world where regional trade barriers are reduced among the par�cipa�ng countries. These include the European Union (EU), Associa�on of Southeast Asian Na�ons (ASEAN), and Central American Integra�on System (CAIS). Regional economic integra�on and coopera�on has also facilitated interna�onal trade agreements such as MERCOSUR in South America and NAFTA in North America.

Several other forces have also contributed to the growth of globaliza�on in recent years. For some na�ons, the pace of economic growth fueled by the specializa�on of produc�on and corresponding compara�ve advantage has outgrown domes�c demand. The aggregate output from the electronics industry in Japan and clothing produc�on in Thailand, for example, far exceed the level of domes�c market demand. The search for new markets and profits drives interna�onal sales and usually creates opportuni�es for mul�na�onal agreements or combina�ons with new business partners outside the producer's home market.

Many of the factors that promote greater globaliza�on are specific to individual na�ons or regions. Improvements in the transporta�on infrastructure within and between some countries have enabled the mass migra�on of people and goods across na�onal boundaries. Improved telecommunica�ons capabili�es have also contributed to the greater mobility of people and products. Over the past few decades, the economic systems of several na�ons have transi�oned from closed, government-directed schemes to truly open economies. This process is readily evident in many Eastern European na�ons, China, and Vietnam. However, informa�on technology and the Internet have had a pervasive and profound impact on interna�onal trade throughout the world.

In many ways, the Internet and the growth of e-commerce have emerged as the great equalizers of the new economy. In addi�on to providing both the smallest and largest companies with worldwide exposure, the direct costs associated with crea�ng an outstanding Web presence are roughly comparable for each.

Think About It

Globaliza�on has had far-reaching consequences on the lives of billions of people around the globe. However, there is no clear consensus as to whether these changes have created a net benefit or a net loss. Consider the list of globaliza�on pros and cons in Table 13.1.

Which side of this argument is more persuasive or compelling for you? Why?

Are there considera�ons that you feel should be added to this list?

Table 13.1: Globalists versus an�-globalists

Advocates argue that globaliza�on . . . Cri�cs argue that globaliza�on . . .

accelerates economic growth and promotes higher standards of living, be�er health, and longer lives.

imposes poverty and financial hardships in the name of market capitalism and greed.

can li� millions of people out of poverty. creates record profits for mul�na�onal corpora�ons while the worldwide income gap between the rich and poor con�nues to grow.

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Marmite is nearly as popular with children in the United Kingdom as peanut bu�er is with most U.S. kids.

age fotostock/SuperStock

benefits consumers by providing a greater variety of goods at lower prices. results in U.S. jobs being shipped overseas to low-wage na�ons.

increases employment and promotes be�er working condi�ons. promotes poor working condi�ons and abuses of workers.

promotes environmental responsibility by providing the wealth required to make posi�ve changes.

exploits local governments and the environment for the sake of financial gain.

can provide the means to promote economic freedom and protect human rights.

supports trade in human bondage and slavery.

fosters democra�c reforms. reduces the sovereignty of na�ons by making na�onal laws subordinate to interna�onal trade agreements.

threatens the health and economies of agricultural communi�es.

Table adapted from Ba�erson and Weidenbaum (2001).

The New Global Economy

Several a�endant advantages of the new economy technologies have applica�on on a global scale. As we have already seen, e-commerce has the poten�al to streamline the product distribu�on process by means of channel disintermedia�on and Web-based customer service. The nature of what is being sold can be reshaped as marketers respond to customer preferences through the mass customiza�on and personaliza�on of the products being sold. In addi�on, the Internet provides a powerful engine that gives both marketers and customers global reach, 24-hour access, and the instantaneous delivery of digital products on a worldwide basis.

As e-commerce and the Internet have promoted the globaliza�on of consumer and product markets, there have been several profound second-order effects. As consumer preferences and cultural values are shared via mass media, buyer preferences have converged with respect to many types of products. This is readily evident in markets for fashion, entertainment, and music. This convergence has created opportuni�es to reduce costs by standardizing some marke�ng ac�vi�es and products.

In some cases, however, the convergence of buyer preferences has also created new opportuni�es by increasing product- specific demand to a point where it becomes financially viable for companies to serve geographically diverse markets. Small pockets of consumers with converging preferences, dispersed across the globe, can be aggregated into substan�al market segments. Given the declining costs of mass customiza�on discussed in the preceding sec�on, this requisite minimum level of demand is also generally declining over �me.

Consider the case of Marmite (h�p://www.marmite.com (h�p://www.marmite.com) ), a s�cky brown food product sold in the United Kingdom that is most commonly spread on toast or used in sandwiches. Many Bri�sh children are raised on this product in the same way that many U.S. kids are raised on peanut be�er. Consequently, it is a much beloved and sen�mental product that is greatly missed by many Bri�sh expatriates living abroad. Given the broad dispersion of former UK residents around the world, there are rela�vely few local markets where the demand is sufficient to warrant stocking the products in tradi�onal stores. However, this geographical diffusion of buyers poses no obstacles to online vendors. Companies like Expat Direct (h�p://www.expatdirect-uk.com (h�p://www.expatdirect-uk.com) ) can create virtual food shops to meet the needs of buyers from around the globe.

Think About It

The KOF Index of Globaliza�on measures and ranks 181 na�ons according to several globaliza�on-related criteria. These include global connec�vity, economic integra�on and interdependence, and technological infrastructure. The most current data can be downloaded from h�p://globaliza�on.kof.ethz.ch/ (h�p://globaliza�on.kof.ethz.ch/) . But before you go there, consider the following:

Which countries do you expect to see in the top 10? Where do you expect to find the United States?

A�er you've looked at the list, iden�fy the rankings that surprised you the most.

The new economy facilitates many good things and represents many important opportuni�es for marketers in the 21st century. Although our focus to this point has been primarily on e-commerce, there are many goods and services that cannot be sold directly via the Internet due to the nature of the product itself. In these cases, the Internet may play an important role for many companies as a source of product and brand promo�on.

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Enterprise Rent-A-Car competes interna�onally by focusing its resources and marke�ng efforts in the most popular business travel des�na�ons.

Associated Press

13.4 Website Image and Informa�on As both a communica�ons and distribu�on channel, the Internet offers immediate global access to a company's products. Even small, locally based companies can create an online presence that rivals their largest compe�tors. The brand and company image conveyed online is a func�on of the informa�on presented. Companies that appear to have substan�al depth and width of product inventory, for example, may be relying on outside suppliers to fulfill customer orders without ever coming into direct contact with the products. Many of the tradi�onal cost-related barriers to building sales volume and market share on an interna�onal basis are dras�cally diminished by the efficiencies of e-commerce.

The cost savings linked to e-commerce marke�ng are most readily evident in the direct sale of products in digital formats such as so�ware, games, movies, and e-books. However, the brick-and- mortar retail presence of fast-food restaurants or rental car agencies, for example, cannot be wholly replaced by websites. Nonetheless, most marketers of this kind are eager to establish a global Web presence for their brands for promo�onal reasons rather than to facilitate direct e-commerce transac�ons.

The most cri�cal and essen�al reason for most companies to establish a posi�ve Web presence is that the Internet has become a primary source of product informa�on for many prospec�ve customers. Their reliance on company-sponsored websites, product evalua�on sites, and social networks for product informa�on con�nues to grow each year. Even for products that cannot be purchased online, the Internet has become a principal des�na�on for consumers seeking informa�on. Increasingly, people expect to easily find the informa�on they want in a user-friendly format on the Internet. Companies that fail to meet this expecta�on will certainly suffer as a consequence.

The interna�onal exposure provided by a corporate website can also provide product informa�on and marke�ng communica�ons to an audience in advance of the company's introduc�on to their geographic region. In an age when so many people travel interna�onally, such sites can also

familiarize prospec�ve customers with the nature of the goods and services being sold as well as how to find specific retail loca�ons in a given city.

Consider the Web presence of the Enterprise car rental company (h�p://www.enterprise.com (h�p://www.enterprise.com) ). Many of the customers who rent vehicles at interna�onal airports are origina�ng their travels where this brand is not available. However, the company's marke�ng strategy centers on crea�ng product availability in many of the top business travel des�na�ons. Consequently, clicking on a link at the bo�om of the page will take the user to informa�onal websites for the United States, Canada, United Kingdom, Ireland, or Germany that can be customized by the user according to both country and language.

Think About It

Each �me customers visit a company website, they leave an informa�on trail that o�en includes informa�on about how they got to the site, how they navigated through the site, and which links they clicked on.

How can this kind of informa�on be combined with other data to gain insights on buyer behavior?

Are there any ethical problems with tracking people in this way without their knowledge?

What are appropriate and inappropriate uses for this type of informa�on?

Social Media Marke�ng

One of the dis�nc�ve features of the new economy is the rise of social media. Social media has been defined more than 50 different ways by various Internet sources (Social Media Guide, 2012). Broadly defined, social media refers to all forms of electronic media through which users create and exchange content over the Internet via technologies that promote personal engagement and sharing informa�on about their lives. The details being shared o�en include biographical data, personal photos, and professional informa�on.

Social media technologies include a wide range of pla�orms including Internet forums, blogs, wikis, podcasts, and various forms of content-sharing communi�es. However, for marke�ng managers, social networking sites such as Facebook, MySpace, and LinkedIn are of par�cular interest. These kinds of sites help create and maintain meaningful online social rela�onships via posted profiles, e-mail, instant messages, and other forms of contact. In addi�on, it has been es�mated that 70 percent of social media users engage in online shopping (Nielsen, 2011).

Although marke�ng to social networking sites can be accomplished in different ways, the basic goal is to gain the approval or implicit endorsement of users for the brand being promoted. On Facebook, for example, the objec�ve is to have users "like" the brand on their personal page in much the same way that one can iden�fy human friends. In this way, a user who "likes" the brand or company effec�vely endorses it and in turn adver�ses this personal approval to his or her network of contacts. The marke�ng tasks required to secure this approval may include mass media adver�sing, e-mail messages, tweets, and other forms of electronic promo�on.

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From a marke�ng perspec�ve, social media provides an opportunity for companies to build awareness for their brands and direct traffic to company-sponsored websites. As an extension of tradi�onal media and communica�ons programs, social media marke�ng enables businesses to reach out to exis�ng and poten�al customers. In contrast to tradi�onal forms of promo�on, the social dimension of these alterna�ve media is par�cularly a�rac�ve due to their poten�al for spreading messages via social networks. By promo�ng the spread of messages to the ini�al recipient's personal network of contacts, social media marke�ng has the poten�al to propagate and exponen�ally disseminate a message from a single point of contact throughout a vast interconnected audience. In this way, social media marke�ng has the poten�al to accomplish two specific types of marke�ng objec�ves: building awareness and establishing trust.

Building brand awareness is a fundamental goal for many promo�onal ac�vi�es, and social media marke�ng has the poten�al to make a posi�ve contribu�on within this context. One advantage for marketers that comes with reaching prospec�ve buyers via social networking sites, however, is that the impact stemming from one posi�ve response can poten�ally spread to hundreds or thousands of members within that community. Given that Facebook averages more than 500 million daily ac�ve users and each user averages more than 120 contacts within his or her personal friend community (Facebook, 2012), the poten�al for posi�ve impressions to reach a wide audience is substan�al. However, bad reviews or poor product feedback can reach thousands of poten�al customers just as quickly.

Social media also has the poten�al to promote the establishment of trust by connec�ng with members of socially defined communi�es in a more personal and individualized way. The resul�ng endorsements and referrals provided by the members of one's online community tend to have greater credibility with prospec�ve users than company-sponsored messages such as those delivered by tradi�onal mass media. In turn, users who receive recommenda�ons from friends are more likely to trust, and therefore spend �me on, related commercial sites. However, a less obvious considera�on for marke�ng managers is consumers' concerns about adver�sers infringing on their electronic privacy. As the analy�cal tools for tracking and profiling prospec�ve buyers online have grown in sophis�ca�on, consumers' concern for their online privacy has also grown (Bandyopadhyay, 2009).

The payoff from successful social media marke�ng has the poten�al to be enormous since so many prospec�ve buyers are ac�vely involved with social networking sites on a daily basis. However, the risks associated with the rapid dispersion of nega�ve informa�on and adverse opinions are equally high. To date, there is insufficient evidence to defini�vely evaluate the power of social media marke�ng on influencing buyer behavior. Recent research has found that less than 1 percent of commercial website visits come directly from a social media sites. However, 18 percent of site visitors report being influenced by social media to visit a website (VentureBeat, 2011). As with all forms of adver�sing and promo�on, the effec�veness of social media marke�ng will necessarily vary widely across companies, industries, markets, and execu�on strategies.

Think About It

In a May 2012 public opinion poll sponsored by the Associated Press and CNBC, one-half of Americans surveyed said they believe that Facebook is simply a passing fad (CNBC, 2012; Fox News, 2012). This skep�cism was reflected in the ini�al public stock offering (IPO) for Facebook several days later, which fell far short of analysts' expecta�ons (Wall Street Journal, 2012). Underlying some of the skep�cism about Facebook is uncertainty within the marke�ng community that social media can be an effec�ve and reliable marke�ng tool in many applica�ons. Cri�cs argue that it shi�s a�en�on from brands to customers. Consequently, consumer opinion becomes the currency of social media rather than product informa�on. Others argue that providing many non-company- controlled sources for product informa�on creates confusion and dilutes brand iden�ty.

What do you think? Is social media a passing fad? If not, how can marketers use this medium crea�vely and effec�vely to promote their products?

How does it differ from tradi�onal adver�sing in consumers' percep�ons of it and in its effec�veness?

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Ch. 13 Conclusion By defini�on, marke�ng management is an adap�ve process. One of its primary func�ons is to assist the organiza�on in adap�ng to changing environmental condi�ons. The new economy has facilitated enormous change in the behavior of consumers and compe�tors alike. Just as prospec�ve customers are looking for opportuni�es to buy an increasingly diverse array of products online, businesses need to be cri�cally evalua�ng the role of e-commerce as they develop their strategic plans.

E-commerce has been instrumental in promo�ng the collabora�on of buyers and sellers in co-crea�ng product value. This stands in stark contrast to the old economy where consumers were passive recipients of the products created exclusively by manufacturers. However, the technological changes driving this new economy have also enabled consumers to interact with each other in remarkable ways to share informa�on about products and producers.

All of these dynamic shi�s are occurring on an interna�onal basis. The Internet readily facilitates the global dissemina�on of informa�on to buyers and sellers, changes the character of products, and promotes the globaliza�on of markets. In an integrated world marketplace, consumers have 24/7 access to an astounding array of product choices and informa�on. The response required of marke�ng managers in the new global economy is the subject of the closing chapter of this book.

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Ch. 13 Learning Resources

Key Ideas

Cri�cal Thinking Ques�ons

1. How does e-commerce change the ways that companies compete? List all of the different ways that you can think of and provide an example for each. 2. How has technology in general and the Internet specifically changed tradi�onal product and service markets? In what ways has the development and growth of e-

commerce changed buyers' expecta�ons about sellers? 3. Do ideas about product value change when consumers decide to look for brands online rather than in stores? 4. Are online prices usually lower than in-store prices? Why? For what types of products is this least and most likely to be true? 5. Mass customiza�on some�mes enables buyers to take a direct role in designing the products they buy. When might this arrangement be a bad idea? For what types

of goods is this likely to work best? 6. Is disintermedia�on generally a net posi�ve or net nega�ve for an economic system? Do you think that disintermedia�on is an irreversible trend? 7. What can wholesalers and distributors do to make themselves so indispensible to the supply chain that they are not at risk of being eliminated from the channel of

distribu�on? 8. Compe�ng effec�vely in an online environment requires excellent website development and maintenance. How should a company decide whether to do this work

in-house or hire outside professionals? Aside from technical skills and knowledge, what a�ributes would you want to see in the people working on your company website?

9. What new ethical issues and challenges have surfaced that are specific to e-commerce and the use of the Internet as a direct sales medium? Are the issues different for B2B versus B2C markets?

10. Do you think that online companies find it less difficult or more difficult to escape the consequences of unethical and illegal business prac�ces? Why? 11. What is the nature of the rela�onship between social media and e-commerce? Iden�fy three companies that successfully leveraged the reach of social media to

improve brand awareness or sales performance. Why is it difficult to create this type of linkage for many tradi�onal companies? 12. Many companies rely on strategic alliances with other firms to succeed in highly compe��ve markets. How might e-commerce and the Internet change the nature

of these alliances? Does informa�on technology make it more or less difficult to establish connec�ons between organiza�ons? 13. How does globaliza�on contribute to the diffusion of ideas and new product concepts? What are the benefits and risks associated with relying on the Internet to

build a worldwide audience and market for a new product or service? 14. The subject of outsourcing produc�on from the developed na�ons to underdeveloped na�ons has been a controversial one for decades. What is at the heart of the

controversy over this issue: the loss of jobs, lower wages, or the exploita�on of workers? What are the most persuasive arguments on each side of this debate? 15. What is your understanding of the term globaliza�on? How does this economic and cultural phenomenon impact your life? 16. What factors make some countries more global than others? Is it primarily a ma�er of culture, economics, or government policies? Why do some people worry that

economic globaliza�on diminishes the independence and sovereignty of na�ons? 17. Since the Internet and e-commerce tools tend to level the playing field between large and small compe�tors, why do large mul�na�onal corpora�ons dominate

interna�onal business?

Key Terms

Click on each key term to see the defini�on.

channel disintermedia�on (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

Elimina�ng one or more intermediaries from the channel of distribu�on that connects producers to ul�mate consumers. Within the context of the new economy, this may occur when online sales result in bypassing agents, distributors, wholesalers, or retailers.

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e-commerce (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

The sale of products over an electronic medium such as the Internet. It is o�en used in reference to all of the suppor�ng technology required to facilitate direct Internet sales to customers, such as electronic funds transfer, online order processing, and inventory management so�ware.

globaliza�on (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

The process by which global economies and markets have become increasingly interrelated and interdependent in recent decades. Within the narrow context of marke�ng management, the term refers to the prac�ce of global branding and adap�ng the marke�ng mix to suit local cultures and preferences.

mass customiza�on (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

The ability to produce large volumes of products designed to customers' specifica�ons at costs that are comparable to standardized, mass-produced goods.

new economy (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

A phrase used to refer to the impact of informa�on technologies since the mid-1980s on tradi�onal economic systems. Within business contexts, it is currently used in reference to the effect of informa�on technology and the Internet on both the domes�c and global economy.

reintermedia�on (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

The restora�on of a previously displaced intermediary between buyers and sellers.

search engine op�miza�on (SEO) (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

The process of revising and improving a company's website so that search engines will find and rank the pages higher on the results list from keyword searches.

service-dominant logic (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

An emerging view or marke�ng paradigm that recognizes that product value is defined by and co-created in concert with the consumer. This is in contrast to the prevailing view of customers as passive recipients of mass-produced goods and services.

social media (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

Electronic means of communica�on through which users exchange informa�on about their lives. The details being shared include biographical informa�on, personal photos, and details about professional pursuits.

Web Resources

This is an interes�ng site that provides access to a range of studies and research publica�ons on the effec�veness of various Internet marke�ng techniques and strategies. The site also provides an op�on to subscribe to a free monthly newsle�er that summarizes current trends and research in search engine op�miza�on research and related areas of study. h�p://www.marke�ngexperiments.com (h�p://www.marke�ngexperiments.com)

This is the portal to access a range of free services from Google that enable marketers to measure site traffic, sales, and conversions. It can also provide informa�on about how visitors use a given site and the route they took to arrive there. Content analy�cs can iden�fy which parts of a website are performing well, and social analy�cs can track the effec�veness of social media programs. h�p://www.google.com/analy�cs (h�p://www.google.com/analy�cs)

This is a site created by the Levin Ins�tute of the State University of New York. It provides an extensive collec�on of resources on many of the controversies surrounding globaliza�on. Topic areas include trade agreements, environmental policy, economic development, technology, and immigra�on. h�p://www.globaliza�on101.org (h�p://www.globaliza�on101.org)