Discuss the main reason that simply multiplying the country's expected per capita consumption by its population doesn't necessarily lead to a good estimate for potential demand, and why this is an important consideration in the global business environment

University Degree Business and Administrative studies

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Discuss the main reason that simply multiplying the country's expected per capita consumption by its population doesn't necessarily lead to a good estimate for potential demand, and why this is an important consideration in the global business environment. You are expected to use some comparisons across different countries to help to illustrate your arguments.

Globalization

As said by Jack Welch, “Globalization has changed us into a company that searches the world, not just to sell or to source, but to find intellectual capital - the world's best talents and greatest ideas”. This is the simplest explanation about Globalization in the form of quotes. As stated in the book ‘Globalization’ by Malcolm Waters, it is clearly said that though the word ‘global’ is about 400 years old - people, countries or companies have actually started to use or practice it in the last two decades. I believe that maximum liberalization of the world has taken place in the last two decades and the major chunk of the credit goes to Globalization. Globalization has given substantial benefits to the countries around the world. For example: industries or companies from developed economy like The United states and The U.K have now reduced the cost of their production by rendering such services to the developing economies like India and china. Developing countries have lot of skilled manpower but the industries/companies or the governments don’t have enough capital to make full use of the manpower and developed countries have the money to invest so there is no shame in inviting them. This results in better quality of goods at lower prices. The benefits developing countries get are employment, the infrastructure becomes better, inflow of foreign capital and becomes more advanced with the technology developed countries bring in. Developed countries benefit as well with the reference of comparative advantage- same or better goods are produced at less than opportunity cost.

Organisations or companies around the globe, in order to expand in future, do require information or data for potential demand of the products and simply by multiplying the country’s per capita consumption by its population could/could not give them estimation for future demand of their products. There are other factors that need to be taken under consideration such as prices, income elasticity, income inequality, substitution, obsolescence and leapfrogging of products, cultural factors and taste, existence of trading blocs, economical, political and technological issues. This essay will further discuss the additional factors that need to be taken under consideration in order to estimate the potential demand of a product for a company.

Economic factors

Economics factors play a vital role in estimating potential demand of a product. The economic scenario is also interlinked with the political situation and the two are inseparable. Economic conditions vary from country to country. Economic factor co-relates with the buying patterns of consumers. For example: as income of consumers rises they prefer to go for a superior quality of the same product. Like the development of ready meal prepared foods. It’s becoming more and more popular in the U.K food market. As people’s incomes are rising, they have lesser time to cook and so they prefer to switch towards ready meals which are simpler to prepare like by simply heating in the microwave or the oven. Rather than buying grocery and cooking food at home or going out to a restaurant to eat - either way is time consuming, one could make out it is more desirable to buy a ready meal. Of course, it is logical that cooking food will fall cheaper most of the times but, however, with increasing incomes people prefer ready prepared meals.

Here’s a case study of the world’s largest producer of chips and one of the world’s largest frozen food companies “McCain”. (The Times 100).

How McCain responds to changes in the external environment

This is a preview of the whole essay

Here’s a case study of the world’s largest producer of chips and one of the world’s largest frozen food companies “McCain”. (The Times 100).

How McCain responds to changes in the external environment

McCain has a strong market focus and most people recognise McCain’s product as oven chips. So this certainly defines that McCain spends a lot of money to carry out research on what consumers wants are and then uses this market information to create/make products that consumers would want to buy. Earlier they use to just make frozen oven chips and now after carrying out the research and having the market information, they have started with a wide range of other frozen ready meal products – such as frozen light meals, roast potatoes and wedges, to appeal to a larger consumer base.

The above case study shows that how McCain anticipated the future demand of the consumers by keeping the economic factors in mind and made a wide range of other products to appeal to a larger consumer base.

Political factors

The company’s future growth rates and success is in-part dependant on the political scenario of the host country. As is the case with most international operations, the success and profitability of the company’s international operations are subject to numerous political risks and uncertainties. Even the political situation varies from country to country. Different countries have different laws and policies regarding trade and commerce and can also affect the businesses at large. Companies need to take Political factors under consideration when estimating the potential demand for their product. for example: In the past decade The U.K government has increased the pressure on the food companies to come up with more healthy foods and also support healthy eating by making ‘Hospitals and Schools’ healthy. So this gives a brief overview to the consumers of the availability of healthy food products in the market as well encourages them to think about what to eat.

Now, again let’s go to the case study of the world’s largest chips producer “McCain”. In the year 2005/06 a government organization had headed a campaign to encourage healthy foods because of the growing concern about obesity, particularly among young kids, and as a result to that, McCain and its rival food producers had seen a fall in their sales. McCain supported the government’s initiative and responded to this challenge positively by further reducing the quantities of oil and salt in its product range and also by passing on a message that its products are healthy and nutritious, provided they are cooked in a clean environment.

Income elasticity

Income elasticity is one of the important factors that need to be taken under consideration when estimating the potential demand of a product. Income elasticity can be measured by dividing the percentage of change in product demand by the percentage of change in income (in any given country). The more the demand of a product changes in relation to the income, the more elastic is the demand. There are three types of income elasticity – normal inferior, normal necessity and normal luxury. Demand for a normal necessity, such as utilities and food, is less elastic than is the demand for normal luxury, such as private education or designer clothes. For instance, let’s take the example of the luxury yacht given on the Telegraph website - ‘Alibella’. It is one of the luxurious yachts on the planet, owned by the London based yacht brokers ‘Edmiston and Company’. The cost of this luxury yacht is roughly 24.5 million Euros and the company was ready to give a hefty discount to its clients of about 9.5 million euro if the buyer’s were ready to purchase it within the next 30 days. When asked, one of the brokers at Edmiston and company, Mr William Christie wrote, “The current global economic conditions have produced a number of interesting opportunities on the large yacht market”. (The Telegraph 2008). This shows that the company is offering substantial discounts because of the current financial meltdown that has hit the global market and the yacht market. As well as, from the above article, we can also see that ‘the more the demand changes in relation to the income change; the more elastic is the demand’.

Cultural factors

It is a basic cause for an individual’s wants and behaviour. When young, we all our thought about basic values, perceptions and wants from our family or any other important group. Countries with similar per-capita income may have different wants or preferences for products. Organisations or the companies always look out for that ‘cultural shifts’ in the market because it helps them to figure out the products that may have an increased demand in future by the customer.

For a multinational company to make high profits they need to acclimatize to the host country’s culture, religion and language, if they don’t someday or the other their business will deteriorate. As said by Bate and Snell, “there must be local marketing to appeal to local consumers and also to build relationships and trust”. For instance Mc Donald’s Food Corporation, Mc Donald’s products are package according to the culture of the locales. Like for example, Mc Donald’s’ caters its menu in other countries with the culture of the region. For instance, In India, menus are served only with chicken and fish items, while beef became a no-no item because cows are considered sacred in Hindu culture.

Prices

In general prices and demand are interlinked – if the price of a product falls, the demand for that product rises and vice versa. On the other hand, when it comes to the basic necessities, demand doesn’t play a vital role, as consumers would purchase the products since it’s a necessity. Let’s take the example of ‘Instore’ previously known as ‘Poundstretcher’. Instore thought the market for the one pound store had become stagnant so they anticipated that their customers would move upmarket and changed their pricing of products. They didn’t realize that their customers are persistent on value and price. As a result, Instores this year’s projection shows that it has gone in a loss of a whooping 5.8million pounds and plans to change all its stores back to ‘Poundstretcher’.

This example shows that how importantly an organization needs to take pricing under consideration when it wants to estimate potential demand for its products. The Grocer (2009).

Obsolescence and leapfrogging of product

For an organisation leapfrogging is as important as any other factor when it comes to estimating potential demand for their products because most developing countries do not follow the same pattern as those in developed economy. For instance, In Tanzania, people have leapfrogged the use of landline phones, by directly moving towards cellular phones. The example of Tanzania cellular market is a perfect example for obsolescence and leapfrogging. According to the BBC report majority of people use cellular phone instead of landline as the technology of cell phone was implemented furiously throughout Tanzania. (BBC, 2005). Now even in the far flung places there’s mobile network but one can hardly find a landline in even the cosmopolitan cities of Tanzania which is quite surprising but due to leapfrogging the potential demand is much higher for cellular phones so an organization like ‘British Telecom’ will never want to invest in Tanzania due to the leapfrogging as they will have to face severe crack down in their business. Instead of profits they will be looking forward for losses.

Income inequality

In simple words income inequality means uneven distribution of wealth between the rich and the poor in a country. Income inequality is another factor that needs to be seen in order to estimate potential demand of a product. For example: the economist carried out a research about the income inequality in the U.S.A and its fascinating how it finds that twenty-five percent of America’s total income is earned by the top one percent of its population. The wealth that is earned by this top percentile is now at its peak since 1928. The Economist (2009).

Existing of trading Bloc

In past the world had number of trade barriers that made imports and exports complicated and expensive. In today’s day there are considerably fewer trade barriers and the credit for this cutback largely goes to W.T.O. (World Trade Organization) and is further working to reduce it even more. Similarly, there’s an increasing growth in the regional trading bloc. A country may not be rich in its GDP or may not even have large population but its existence in the regional trading bloc creates its reach to a much bigger market. A great example would be that of ‘The U.K’ being under a regional trading bloc ‘The E.U’. For instance, the population of The U.K is roughly about 61.4 million (office for national statistics, 2009) which is not much when compared with China and India but The U.K’s presence in the regional trading bloc ‘The E.U’ gives her output access to a much larger market.

In short, being/not being in a trading bloc will surely have an impact on the potential demand for its product.

Substitution

If the price of a good rises, the demand for that good decreases and there will be an increase demand for its substitute and similarly if the price of that good decreases, there will be a decrease demand for its substitute. To make us understand simpler, a case study in the book ‘Economics’ by John Sloman shows us how Brazil in 1970s substituted petrol with alcohol when there was a fourfold increase in oil price.

‘A case of import substitution in Brazil’

Brazil by itself has very little oil and in 1970s there was a severe shortage of petrol in the international market and so it was costing them a fortune to import petrol. On the other hand the demand for sugarcane in the world market had slumped and Brazil was a major sugarcane exporter so there was a surplus of sugarcane left in Brazil. They came with a cunning idea to use the surplus sugarcane to produce alcohol and use it as a substitute for petrol. It went off with great demand but later in late 80’s it was more feasible to import petrol as the oil prices had declined so it was cheaper to import rather than producing alcohol as a substitute for petrol.

Conclusion

The main reason that simply multiplying the country's expected per capita consumption by its population doesn't necessarily lead to a good estimate for potential demand is very much true although the per capita and population is one of the main reasons but there are several other important factors such as prices, income elasticity, income inequality, substitution, obsolescence and leapfrogging of products, cultural factors and taste, existence of trading blocs, economical, political and technological issues that are explained above. These factors need to be taken into account for an organization if it is thinking to go global and that’s the reason this is an important consideration in the global business environment.

References

Book References

Daniels J.D., Radebaugh L. H., Sullivan D. P. (2009) International Business Environments and Operations (12th Edition) Pearson International Edition.

Holt D. & Wigginton K.W. International Management (2nd Edition) Harcourt International (2002). Morrison J. The International Business Environment Palgrave (2002).

Charles Hill. (2008). Global Business Today. McGraw Hill

Sloman, John. Economics. 4th ed. New York: FT Prentice Hall, 2005. Print.

Friedman, Thomas L. The World Is Flat A Brief History of the Twenty-first Century. New York: Farrar, Straus and Giroux, 2005. Print.

Holt D. & Wigginton K.W. International Management (2nd Edition) Harcourt International (2002). Morrison J.

Bateman. Management: The New Competitive Landscape. 6th ed. New York: McGraw-Hill Company., 2004. Print.

Waters, Malcolm. Globalization. 2nd ed. London: Routledge, 2001. Http://books.google.co.uk/. British Library Cataloguing. Web. 1 Dec. 2009. <http://books.google.co.uk/books?id=zlayXJxb8aoC&source=gbs_navlinks_s>.

Website References

Http://news.bbc.co.uk. BBC, 22 July 2005. Web. 27 Nov. 2009. <http://news.bbc.co.uk/1/hi/programmes/click_online/4706437.stm>.

Http://www.economist.com. The Economist Newspaper, 7 Oct. 2009. Web. 2 Dec. 2009. <http://www.economist.com/daily/chartgallery/displayStory.cfm?story_id=14584960>.

Http://www.telegraph.co.uk. Telegraph Media Group, 16 Nov. 2008. Web. 3 Dec. 2009. <http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3469149/Luxury-yacht-Alibella-may-prove-the-ultimate-credit-crisis-bargain.html>.

Http://www.thetimes100.co.uk/. The Times Newspaper. Web. 6 Dec. 2009. <http://www.thetimes100.co.uk/case-study--how-mccain-responds-to-changes-external-environment--101-272-4.php>.

Http://www.thegrocer.co.uk/. William Reed Business Media, 30 June 2009. Web. 8 Dec. 2009. <http://www.thegrocer.co.uk/articles.aspx?page=articles&ID=201157>.