GLOBALIZATION, BUSINESS TRENDS, AND IMPLICATIONS FOR BRAZILIAN FIRMS

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1 GLOBALIZATION, BUSINESS TRENDS, AND IMPLICATIONS FOR BRAZILIAN FIRMS S. Tamer Cavusgil Callaway Professorial Chair & CIBER Executive Director October 2011 PLEASE DO NOT DISTRIBUTE WITHOUT PERMISSION

2 Agenda New realities of global business Implications for international marketers The next big thing: Focus on Cities Why target the Middle Class? What has been Brazil s experience in building its middle class? What can be learned from the experience of Born Global companies?

3 The New Realities of Global Business Economic center of gravity is now in Asia Growth in Emerging Markets Rise of Middle Class in EMs The new multinationals: EM challengers Focus on risk identification and mitigation Megacities as units of analysis New economic sectors gaining popularity

4 Growing Sectors in Global Business Health care services, software, insurance Consumer financial services Infrastructure & public transportation Education IT and Internet services Clean technology: Recycling, pollution control, waste management Clean energy, water, natural gas, sustainable agriculture Pharmaceuticals and medical devices

5 Trends in Global Marketing - 1 Diffusion of new products, ideas, and consumption patterns is much faster! Opportunities to build regional/global brands are much more feasible. Transnational market segments Social media -- marketing can be instrumental in establishing virtual communities of global scale. Duality of brand dominance: Iconic global brands thrive and command premium value (e.g., Volvo, Cadbury, Godiva). Liability of Foreignness does not appear to handicap foreign firms

6 Trends in Global Marketing - 2 Globally connected enterprise: Coordination and integration vehicles: global product platforms, teams, talent pools, and brands Governance issues in cross-border inter-firm relationships: how to mitigate opportunism, conflicts, and destructive acts Internationalization of retail enterprises on the rise with mixed success Global corporate citizenship and social responsibility have risen to top of the organization as a critical agenda item

7 Trends in Global Marketing - 3 Commercial diplomacy, business development, and corporate social responsibility are new mandates Marketing productivity What marketing investments return the best value in IM? Intangible assets most valuable - Brand loyalty; reputation; and integration and relationships with customer/supplier/distributor Fine-tuning of global marketing strategy through modeling and marketing engineering

8 Emerging Market Cities as Targets

9 The City Typology Megacities Pop: + 10 m. Leading edge for consumption habits and high-end brands Financial and trade capitals / International gateways Pool of top talent: young, highly motivated employees Congested and saturated Middleweight Cities / Cluster Capitals Pop: 5-10 m. Sometimes specialist hubs surrounded by smaller satellite cities Growing faster than megacities Specialist Hubs / Horizon Towns Pop: 1-5 m. Specialist cities with niche markets Variations in consumption patterns & income Complex logistics

10 Emerging Market Cities in Four Major Segments

11 20 in 25 cities are in EMs. Top 600 cities are projected to realize 60% of global GDP in 15 years. Top 25 Mega Cities in 2025 Rank GDP Growth Population 1 Shanghai Tokyo 2 Beijing Mumbai 3 New York Shanghai 4 Tianjin Beijing 5 Chongqing Delhi 6 Shenzhen Kolkata 7 Guangzhou Dhaka 8 Nanjing Sao Paulo 9 Hangzhou Mexico City 10 Chengdu New York 11 Wuhan Chongqing 12 London Karachi 13 Los Angeles Kinshasa Rank GDP Growth Population 14 Foshan London 15 Taipei Lagos 16 Delhi Cairo 17 Moscow Manila 18 Singapore Shenzhen 19 Sao Paulo Los Angeles 20 Tokyo Buenos Aires 21 Shenyang Rio de Janeiro 22 Xi an Tianjin 23 Dongguan Paris 24 Mumbai Jakarta 25 Hong Kong Istanbul Source: McKinsey 2011

12 By 2030, another 1.3 billion people will live in EM cities, more than the total population of today s developed-market cities!

13 Small Big Mega Megacities & Clusters in China 2015 Urban GDP as % of national urban GDP Source: McKinsey, 2011

14 Urban power centers shift from the U.S. and Europe to Asia! Top 25 cities by GDP, 2007 and 2025 Los Angeles San Fransisco Mexico City London Paris Rhein-Ruhr Randstad New York Chicago Dallas Washington Houston Philadelphia Boston Moscow Tokyo Shanghai Beijing Shenzen Tianjin Chongqing Guangzhou Osaka Hong Kong Atlanta Miami Madrid Milan Sao Paulo

15 Emerging Market Cities in Numbers 40% of world population by % of world GDP growth by 2015 By 2030, another 1.3 billion people will live in EM cities Top 600 cities will account for 60% of global GDP by 2025, with 734 million households living in these cities with average per capita GDP of $32,000

16 Emerging-Market Cities Will Play an Increasingly Large Role in the Global Economy

17 Why Emerging Markets Cities? Concentration of Middle Class households More sophisticated customers Dynamic and productive segment of the economy Easier access to a critical mass of customers More developed infrastructure

18 Cavusgil/Kardes 2011 GSU-CIBER Expenditure per HH in 2015: Grouping the country and its cities together

19 Companies that are Targeting EM Cities Grupo Bimbo Coca-Cola P&G IKEA Unilever Samsung

20 African Nations vs Capital Cities Senegal vs. Dakar GDP / Capita USD per year, ,711 1, % Household Income Distribution USD per year, 2008 <2k 2-5k 5-10k 10-20k 20-35k >35k Senegal Dakar Senegal Dakar 1 Zambia vs. Lusaka 1,732 1, % Zambia Lusaka Zambia Lusaka Mali vs. Bamako 1, % Mali 38 Bamako Mali Bamako Cameroon vs. Douala 1,362 1, % Cameroon Douala Cameroon Douala

21 Why Target Middle Class Consumers in EMs?

22 The Aspiring Consumer in EMs Young demographics Rapidly urbanizing Engaged in technological leapfrogging Exposed to western brands Rising expectations Eager to consume material things Highly brand conscious

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24 What is Middle Class? Income left for discretionary spending exceeds 30% of total income Incomes between 75 percent and 125 percent of the median of the income distribution Able to enjoy stable housing, healthcare, educational opportunities for children, reasonable retirement, and discretionary income that can be spent on vacation and leisure.

25 Why Middle Class Matters? The rise of middle class is associated with better governance, freedom expression, and entrepreneurial dynamism Countries tend to grow faster with a larger middle class The middle class consumers demand quality goods and services Consumption becomes sophisticated and favors branded, premium products The middle class is the backbone of the market economy

26 Some 50 households join the middle class every minute!

27 Factors Contributing to MC Trends Advanced Economy Absence of savings Aging population Rising debt Increased health care expenses Increased housing expenses Decline in real income Decline in secure retirement futures Emerging Economy High aspirations Young population Urbanization Dynamic economy Well educated talent pool Favorable government policy

28 Consumption Patterns Change Radically as the Middle-Class Population Grows Cars Luxury goods Home décor Travel

29 Consumption Patterns as Income Rises Year: 2010 Cavusgil/Kardes 2011 GSU-CIBER Calculated with data from Euromonitor; China, India, Indonesia, Malaysia, Pakistan, Philippines, South Korea, Taiwan, Thailand, Vietnam, Czech Republic, Hungary, Poland, Russia, Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela, Egypt, Israel, South Africa, and Turkey

30 Spending of Different Income Groups in Brazil Year: 2010 Data from Euromonitor

31 Data from Euromonitor Expenditures may Exceed Income!

32 Middle Class Scorecard

33 Our Guiding Principles in Quantifying MC Adjust income for Purchasing Power Parity Income Deciles are preferred to Mean Household income, not per capita Disposable income, not total income Actual spending needs to be captured Informal economy to be accounted for Urban population, not total population

34 Methodology for GSU-CIBER s Middle Class Scorecard Income & expenditure data from the Euromonitor All variables are standardized [(variable mean)/standard deviation)] Variables are multiplied by their respective weights An index from is created [(weighted totals variable its minimum value) / (its maximum its minimum value)] *99 +1

35 Scorecard is Calculated for Two Income Groups Affluent Middle Class Income percentiles of 7-9 Expenditure percentiles of 7-9 Mass Middle Class Income percentiles of 3-6 Expenditure percentiles of 3-6

36 GSU-CIBER Middle Class Scorecard Indicators 1: INTENSITY OF MIDDLE CLASS Current household disposable income (40%) Current household expenditures (60%) 2: MC INTENSITY vs. URBAN HOUSEHOLDS Above variables + Urban population 3: MARKET SIZE OF MIDDLE CLASS (HH, $) - Household expenditures x Number of households in each MC cluster Cavusgil/Kardes 2011 GSU-CIBER

37 1: Intensity of Middle Class (2010) *Red: lower ranking **Green: higher ranking Cavusgil/Kardes 2011 GSU-CIBER

38 2: MC Intensity with Urban Households AFFLUENT MIDDLE CLASS

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50 Step 2: MC Intensity vs. Urban Households MASS MIDDLE CLASS

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62 GSU-CIBER Middle Class Scorecard Step 1: INTENSITY OF MIDDLE CLASS Current household disposable income (40%) Current household expenditures (60%) Step 2: MC INTENSITY vs. URBAN HOUSEHOLDS Above variables + Urban population Step 3: MARKET SIZE OF MIDDLE CLASS (HH, $) - Household expenditures x Number of households in each MC cluster Cavusgil/Kardes 2011 GSU-CIBER

63 MARKET SIZE OF AFFLUENT MIDDLE CLASS

64 Market Size of Affluent Middle Class Households Cavusgil/Kardes 2011 GSU-CIBER

65 Market Size of Affluent Middle Class Households in EMs In trillion US $ 50% Total: 16 82% Total: 11 59% 9,2 BRIC Total: 6,2 2,6 1,9 1,6 120% 40% 71% 5,8 2,7 2,7 43% 38% 3,8 3,7 Next Tier (Mexico, Turkey, S. Korea, Indonesia, Poland) Other EMs ( 16 Countries) Cavusgil/Kardes 2011 GSU-CIBER *Approximate value of market size is given.

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69 MARKET SIZE OF MASS MIDDLE CLASS

70 Market Size of Mass Middle Class Households Cavusgil/Kardes 2011 GSU-CIBER

71 Market Size of Mass Middle Class Households in EMs in trillion US$ 52% Total: 16 81% Total: 10 64% 8,1 BRIC Total: 5,9 127% 4,9 43% 4,3 2,2 39% 3 40% 2,2 74% 2,7 3,8 1, Next Tier (Mexico, Turkey, S. Korea, Indonesia, Poland) Other EMs Cavusgil/Kardes 2011 GSU-CIBER *Approximate value of market size is given.

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75 Born Global Firms: What Can We Learn from Their Experience?

76 Characteristics of Born Global Firms Experience early, rapid, and substantial internationalization Formed by sometimes technically inclined, marketoriented founders with entrepreneurial drive Do with fewer financial and other resources than traditional exporters Able to perform multiple functions simultaneously Often enjoy internationally recognized technical eminence and universal appeal in a product category Exhibit persistence and patience in cultivating relationships with foreign partners

77 A Sample of Born Global Companies

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79 Lessons Learned from Born Global Firms Entrepreneurial vision & drive Risk Takers Willing to experiment Adept at dealing with uncertainty Resilient; can cope with turbulence Agility Exploit technology (IT); offer unique value; superior quality Indigenous innovation & adaptation Seek collaboration with foreign partners to develop business networks

80 Can we Compete Globally? Checklist Are we too content or eager to push the envelope? Are we too conservative or willing to give it a try? Are we able to move forward under uncertainty? Are we inhibited by turbulence? Are we quick to come to a decision and take action swiftly? Do decisions get stuck at the senior management level?

81 Can we Compete Globally? Checklist (2) Are we constantly looking for new solutions, unmet needs? Are we developing specialized knowledge and expertise in a particular area? Are we deepening our technological advantage? Are we continuously in touch with our valued customers and their needs? Do we have close, trusting relationships with our suppliers and customers?

82 Can we Compete Globally? Checklist (3) Are we developing a steady stream of globally competent managers who can operate internationally? Are our employees empowered to take independent action? Do we use them for new ideas? Do we punish failure or reward experimentation? De we form venture teams to pursue new opportunities?

83 Source: McKinsey Quarterly, 2010 Research & Development

84 Entrepreneurship Orientation in Brazil Entrepreneurial Intention: Percentage of population (individuals involved in any stage of entrepreneurial activity excluded) who intend to start a business within three years. Total early-stage Entrepreneurial Activity: Percentage of population who are either a nascent entrepreneur or ownermanager of a new business. New Business Ownership Rate: Percentage of population who are currently a owner-manager of a new business, i.e., owning and managing a running business that has paid salaries, wages, or any other payments to the owners for more than three months, but not more than 42 months. Data from GEM

85 What Can be Done to Stimulate Entrepreneurial Activity Entrepreneurial Finance Availability of financial resources-equity and debt for SMEs (including grants and subsidies). Entrepreneurship Education Whether training in creating or managing SMEs is incorporated within the education and training system at all levels Entry Regulations Market Dynamics: the level of change in markets from year to year. Market Openness: the extent to which new firms are free to enter existing markets. Government Policy The extent to which taxes or regulations are either sizeneutral or encourage SMEs. R&D Transfer National research and development to lead to new commercial opportunities for SMEs. Infrastructure Ease of access to physical resources communication, utilities, transportation, land or space- at a price that does not discriminate against SMEs Government Entrepreneurship Programs The extent to which taxes or regulations are either sizeneutral or encourage SMEs. Commercial and Legal Infrastructure The presence of property rights and commercial, accounting, and other legal services and institutions. Cultural and Social Norms Whether social and cultural norms encourage or allow actions leading to new business methods or activities that can potentially increase personal wealth and income.

86 Brand Building

87 Developing World Class Companies Brazil has 7 companies in Fortune Global 500 BCG highlights 13 Brazilian companies as Global Challengers Brasil Foods, Camargo Correa Group, Coteminas, Embraer, Gerdau, JBS, Magnesita Refratarios, Marcopolo, Natura, Odebrecht Group, Petrobras, Votorantim Group, and WEG

88 The List of Fortune Global 500 (2010) Number of Companies From EMs Mexico: 2 Brazil: 7 Russia: 6 S. Korea: 10 Turkey: 1 China: 45 Taiwan: 8 India: 8 Thailand: 1 Malaysia: 1 # of Companies China = 45; BRIC = 66; All EMs = 89

89 Nation Branding Facilitates Firm Success Brazil ranks 21 st in Anholt s Nation Brand Index (based on exports, culture and heritage, tourist attractions, governance, education, investment and immigration) South Korea has implemented a deliberate strategy of nation branding: Create a unifying organization and brand imagery Find, capture, and retell the stories of South Korean designers Create a living design experience, a design theme park Create a global design award

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91 For More Information, Contact: S. Tamer Cavusgil Fuller E. Callaway Professorial Chair Executive Director, CIBER Georgia State University 404/ About GSU-CIBER Designated as a center of excellence by the U.S. Department of Education, GSU s Center for International Business Education and Research (CIBER) serves as a regional and national resource to businesses, students and academics. CIBER at Georgia State offers implements programs focused on improving American competitiveness and helping U.S. businesses succeed in global markets.