Economical

Environment
• Within the past decade, there have been several
remarkable changes in the world economy that hold
important implications for business
• The likelihood of business success is much greater
when plans and strategies are based on the new reality
of the changed world economy:
• Capital movements rather than trade have
become the driving force of the world economy
• Production has become “uncoupled” from
employment
• The world economy dominates the scene. The
macroeconomics of individual countries no longer
control economic outcomes
 • The growth of commerce via the Internet
diminishes the importance of national barriers.
• The first change is the increased volume of capital
movements
• The dollar value of world trade is greater than ever
before
• Trade in goods and services is running at roughly $
4 trillion per year, but the London Eurodollar market
turns over $ 400 billion each working day
• That totals $ 100 trillion per year – 25 times the
dollar value of world trade
• In addition, foreign exchange transactions are
running at approximately $ 1 trillion per day
worldwide, which is $ 250 trillion per year – 40 times
the volume of world trade in goods and services
• There is an inescapable conclusion in these data:
Global capital movements far exceed the volume of
global merchandise and services trade
• This explains the bizarre combination of U.S trade
deficits and a continually rising dollar during the first
half of the 1980s
• Previously, when a country ran a deficit on its trade
accounts, its currency would depreciate in value
• Today, it is capital movements and trade that
determine currency value.
• The second change concerns the relationship
between productivity and employment
• Although employment in manufacturing remains
steady or has declined, productivity continues to grow
• The pattern is especially clear in American
agriculture, where fewer farm employees produce
more output
• In the United States, manufacturing holds a steady
23 to 24 percent of gross national product (GNP)
• This is true of all the other major industrial
economies as well
• Manufacturing is not in decline – it is employment
in manufacturing that is in decline
• Countries such as the United Kingdom, which have
tried to maintain blue-collar employment in
manufacturing, have lost both production and jobs for
their efforts
• The third major change is the emergence of the
world economy as the dominant economic unit
• Company executives and national leaders who
recognize this have the greatest chance of success
• Those who do not recognize this fact will suffer
decline and bankruptcy (in business) or overthrow (in
politics)
• The real secret of the economic success of
Germany and Japan is the fact that business leaders
and policy makers focus on the world economy and
world markets; a top priority for government and
business in both Japan and Germany has been their
competitive position in the world
• In contrast, many other countries, including the
 United States, have focused on domestic objectives
and priorities to the exclusion of their global competitive
position
• In the 1990s the greatest economic change was the
end of the Cold War
• The success of the capitalist market system had
caused the overthrow of communism as an economic
and political system
• The overwhelmingly superior performance of the
world’s market economies has led socialist countries to
renounce their ideology
• A key policy change in such countries has been the
abandonment of futile attempts to manage national
economies with a single central plan.
 Economic Systems

• There are three types of economic systems:

capitalist, socialist, and mixed
• This classification is based on the dominant method
of resources allocation: Market allocation, Command or
central allocation, and mixed allocation, respectively.
Market Allocation

• A market allocation system is one that relies on

consumers to allocate resources
• Consumers “write” the economic plan by deciding
what will be produced by whom
• The market system is an economic democracy –
citizens have the right to vote with their pocketbooks for
the goods of their choice
• The role of the state in a market economy is to
promote competition and ensure consumer protection
• The United States, most Western European
countries, and Japan – the triad countries that
account for three quarters of gross world product
 - are examples of predominantly market economies
• The clear superiority of the market allocation system
in delivering the goods and services that people need
and want has led to its adoption in many formerly
socialist countries.
Command Allocation

• In a command allocation system, the state has broad

powers to serve the public interest
• These include deciding which products to make and
how to make them
• Consumers are free to spend their money on what is
available, but decisions about what is produced and,
therefore, what is available are made by state
planners
• Because demand exceeds supply, the elements of
the marketing mix are not used as strategic variables
• There is little reliance on product differentiation,
advertising, and promotion; distribution is handled
 by the government to cut out “exploitation” by
intermediaries
• Three of the most populous countries in the world –
China, the former USSR, and India – relied on
command allocation systems for decades
• All three countries are now engaged in economic
reforms directed at shifting to market allocation
systems
• The prediction made by India’s Jawaharlal Nehru
nearly a half century ago regarding the imminent
demise of capitalism has been refuted
• Market reforms and nascent capitalism in many parts
of the world are creating opportunities for large-scale
investments by global companies
• Indeed, Coca-Cola returned to India I 1994, two
decades after being forced out by the government
• A new law allowing 100 percent foreign ownership
of enterprises helped pave the way
• By contrast, Cuba stands as one of the last
bastions of the command allocation approach.
Mixed System

• There are, in reality, no pure market or command

allocation systems among the world’s economies
• All market systems have a command sector, and all
command systems have a market sector; in other
words, they are “mixed”
• In a market economy, the command allocation
sector is the proportion of gross domestic product
(GDP) that is taxed and spent by government
• For the 24 member countries of the Organization
for Economic Cooperation and Development (OECD),
this proportion ranges from 32 percent of GDP in the
United States to 64% in Sweden
• In Sweden, therefore, where 64% of all expenditures
are controlled by government, the economic system is
more “command” than “market”
• The reverse is true in the United States
• Similarly, farmers in most socialist countries were
traditionally permitted to offer part of their production in
a free market
• China has given considerable freedom to
businesses and individuals in the Guangdong province
to operate within a market system
• Still, China’s private sector constitutes only 1 to 2
percent of national output.
 Stages of Market Development

• Global country markets are at different stages of

development
• GNP per capita provides a very useful way of
grouping these countries
• Using GNP as a base, we have divided global
markets into four categories
• Although the income definition for each of the stages
is arbitrary, countries in each of the four categories have
similar characteristics
• Thus, the stages provide a useful basis for global
market segmentation and target marketing
• The categories are shown in table
• For complete information about the economic status
of each country and predictions for 2010 and 2020.
Low-Income Countries

• Low-income countries, also known as preindustrial

countries, are those with incomes of less than $ 786
per capita
• They constitute 37% of the world population but less
than 3% of world GNP
• The following characteristics are shared by countries
at this income level:
1. Limited industrialization and a high
percentage of the population engaged in
agriculture and subsistence farming
2. High birthrates
 3. Low literacy rates
4. Heavy reliance on foreign aid
5. Political instability and unrest
6. Concentration in Africa, south of the Sahara
• In general, these countries represent limited
markets for all products and are not significant
locations for competitive threats
• Still, there are exceptions; for example, in
Bangladesh, where GNP per capita is $ 366, a
growing garment industry has enjoyed burgeoning
exports.
Lower-middle-Income Countries

• Lower-middle-income countries (also known as less

developed countries or LDCs) are those with a GNP
per capita of more then $ 786 and less than $ 3,125
• These countries constitute 39% of the world
population but only 11% of world GNP
• These countries are at the early stages of
industrialization
• Factories supply a growing domestic market with
such items as clothing, batteries, tires, building
materials, and packaged foods
• The countries are also locations for the production
 of standardized or mature products such as clothing for
export markets
• Consumer markets in these countries are expanding
• LDCs represent an increasingly competitive threat as
they mobilize their relatively cheap – and often highly
motivated – labor to serve target markets in the rest of
the world
• LDCs have a major competitive advantage in mature,
standardized, labor-intensive products such as athletic
shoes
• Indonesia, the largest country in Southeast Asia, is a
good example of an LDC on the move: Despite political
problems GNP per capita has risen from $ 250 in 1985 to
$ 1,176 in 2000
• Several factories there produce athletic shoes under
contract for Nike
Income group by per 2000 GNP 2000 GNP % of 2000
capita GNP ($ millions) per Capita ($) World Population
GNP (million)
High-income Countries 24,259 24,722 81 981
(GNP per Capita > $
9,656)
Upper-Middle-Income 2,031 4,503 7 451
Countries
(GNP per Capita > $ 3,126
but < $ 9,655
Lower-Middle-Income 3,148 1,302 10 2,418
Countries
(GNP per Capita > $ 785
but < $ 3,125)
Low-Income Countries 812 356 3 2,284
(GNP per Capita < $ 785)

(Table) Stages of Market Development