Unit III

Lesson 21
Moving Toward World Product

A MOVE TOWARD WORLD PRODUCT: INTERNATIONAL OR NATIONAL

PRODUCT

Product standardization and modification may give the impression that a marketer must
choose between these two processes and that one approach is better than the other. In many
instances, a compromise between the two is more practical and far superior to in selecting
either procedure exclusively. Black and Decker have stopped customizing products for every
country in favor of a few global products that can be sold everywhere. Such U.S. publishers
as Prentice Hall and HarperCollins also have adopted the "world book" concept, which makes
it possible for an English-language book to have world copyrights. Publisher’s change, if
necessary, only the title page, cover, and jacket.

World product and standardized product may sometimes be confused with each other.
A world product is a product designed for the international market In comparison, a
standardized product is a product developed for one national market and then exported with
no change to international markets. Zenith and RCA TV sets are standardized products,
whereas a German subsidiary of ITT makes a world product by producing a "world chassis"
for its TV sets. This world chassis allows assemblage of TV sets for all three color TV
systems of the world {i.e., NTSC, SECAM, and PAL) without changing all circuitry on the
various modules.

CULTURAL DIMENSION
Food brings the World Together
Because of McDonald’s Hamburgers and Big Macs are a common sight around the world. In the United
States, Mexican, Italian, Chinese, and even Thai foods have been quite strange some sixty years ago for
anyone in the United States to predict that flat bread with tomato sauce and melted cheese on it would become
mainstream. Nowadays, that flat bread (pizza) seems to be more American than Italian. Perhaps, following
pizza in the same direction is pho, the Vietnamese and Thai fish sauce, is becoming more like soy sauce in
terms of acceptance. The adaptive nature of American culture makes it easy for the foods and eating customs
of immigrant groups to get assimilated into society.

Malaysians are used to fast food offered by KFC and McDonald’s and are thus not averse to new American
concepts in food. Newer chain restaurants cater to a more affluent clientele. Kenny Rogers Roasters, Chili’s
Grill & Bar, and T.G.I Friday’s offer their own versions of an American culture, and they all have stuck
closely to their U.S.formulas. Friday’s imports 70 percent of its food, including beef, cheese, and potatoes.
However, it has made one concession to Malaysian taste by adding a bottle of chili sauce next to Heinz
ketchup on a table. Likewise, Chili’s has kept its American menu intact with one exception: replacing pork
ribs (which are inappropriate in mostly Muslim Malaysia) with beef ribs. While its customers have complained
that the portions are too large, Chili’s feels that it must keep that part of the culture. Besides, Malaysian
customers can simply order a few different dishes and share them the local way.
KFC provides another good illustration of the adaptation process. In Japan it is necessary to have a Shinto
priest periodically conduct mass funerals for the firm’s millions of chickens. The restaurant’s menu also has
been changed. In addition to serving French fries instead of mashed potatoes and gravy, KFC sells chicken
sandwiches and fish and chips. Another one of its products is yakitori (chicken in broiled and skewered bite-
size chunks). Several products require reformulation as well. The company cuts out half of the sugar from the
salads, because the Japanese like their salads to be tart. The firm’s corn-on-the-cob is a three-inch piece, which
is two inches less than the U.S. version, in order to satisfy the local preference for a lot of little things. For the
Malaysian market, the company has even had to change its cooking method. Because Malaysians consider
firm chicken to be fresh and soft chicken to be frozen, KFC cooks its chicken to firm texture instead of the
standard soft texture.
 A move toward a world product by a company is a logical and healthy move. If a
company has to adapt its product for each market, this can be a very expensive proposition.
But without the necessary adaptation, a product might not sell at all. Committing to the
design of a world product can provide the solution to these two major concerns faced by most
firms dealing in the international marketplace. GE, for example, produces a numerical control
system suitable in both metric and English measures. In addition, it has designed machines to
operate under the wide differences in voltage among the different European countries. GE
refrigerators are built in such a way that they can be used regardless of whether the frequency
is 50 Hz or 60 Hz. This emerging trend toward world products is also attractive for items with
an international appeal or for those items purchased by international travelers. Electrical
shavers made by Norelco and portable stereo radios made by Sony and Crown are produced
having a universal-voltage feature.

One might question whether a world product would be more expensive than a national
or local product, since the world product may need multipurpose parts. Actually, the world
product should result in greater saving for two reasons. First, costly downtime in production
is not needed to adjust or convert equipment to product" different national versions. Second,
a world product greatly simplifies inventory control because only one universal part, not
many individual parts, has to be stocked.

A world product may also be able to lower certain production costs by anticipating
necessary local adaptation and thus being adaptation ready. As an example, the Japanese
ministry requires thirty-two changes on most U.S.-built cars, and the changes include:
replacing headlamps that, because of left-hand drive, dip in the wrong direction; changing
"sharp-edged" door handles; replacing outside rearview mirrors, and filling the space between
the body and the rear bumper to prevent catching the sleeves of kimono-clad women. Honda
is able to sell its U.S.-made cars in Japan at relatively low prices because it produces the car
ready for sale in Japan. Because cars manufactured by GM, Ford, and Chrysler is built for the
American market, they must undergo expensive alterations to meet Japanese regulations. The
American automakers have taken some steps to remedy the problem.

MARKETING STRATEGY
A Global Product
Reader’s Digest is perhaps the world’s most global magazine. The publication has remained unchanged
and has been successful despite changes of culture. The magazine has endured for decades, earning the
distinction of being the only mass-circulation, general-interest magazine that has survived the advent of
television. The popularity of this largely standardized medium is confirmed by the 100 million people
who read the magazine’s forty-seven editions in nineteen languages. It has a worldwide circulation of
more than twenty-eight million. Its latest addition is the Thai-language edition which was introduced in
1991.
Reader’s Digest has always used the same formula for all markets: the same upbeat editorial format, with
the same folksy illustrations for the magazine’s back cover in all of its editions. The key to its success in
Eastern Europe is its formula for mixing feature editorial from the United States and international
sources with local stories. When it entered Poland in 1994, Reader’s Digest Association set up a wholly
owned subsidiary to publish Reader’s Digest Wybor. Its full page advertisement in the New York Times
proclaimed: “Hello Poland! The newest local edition of the world’s most global magazine”. According to
the company, “the key for us is to have local people manage the operations and to become a local
company.”
 It must be pointed out that a world product has some inherent problems as well. As
illustrated by Ford Escort, the car was designed in Europe as Ford's world car. The company's
American executives, however, proceeded to thoroughly redesign it for the U.S. market.
Therefore, corporate commitment is a necessity. There must be mechanisms to take care of
the conflicting views of executives working in the different countries. For example, Opel and
Cadillac have fought on the first joint transat1antic project involving Opel's Omega and its
modified version (Cadillac Catera) for the U.S. market. The disputes ranged from. styling to
acceleration. German engineers, appreciating the European obsession with fuel economy,
resisted it request to make changes to accommodate American drivers' desire for more power
when pulling away from a stop. In the end, the German product-development chief at GM's
International Operations ordered lower gearing for more power.

MARKETING STRATEGY-2

A World Car
Making a world car is anything but easy. When Ford Motor Co. wanted to build a “world car” that
could satisfy every taste, the concept sounded well. To make Ford Escort a world car, Ford pooled
design, engineering, and manufacturing from North America and Europe. Unfortunately, rivalries
were great. The car was designed in Europe, but American executives were skeptical of their
European counterpart’s business and engineering judgment. In the end, Ford produced two very
different models. The American version was so thoroughly redesigned that the only common part
that remained was the tiny water-pump seal.
Ford’s subsequent cooperation with Mazda represented a better attempt to design world products.
Mazda and Ford got together to design CT20 to be sold in ninety markets as Ford Escort or one of the
various Mazdas (323, Protégé, or Familia). The process again was not easy. Mazda’s designers
correctly pointed out that Ford’s license-plate recess was not large enough for all markets (e.g,
Malaysian plates). They also had to agree on a rust-resistent alloy as well as the wheelbase length.
While Mazda chose two lengths for different models) including a shorter one to achieve better
handling on cramped Asian roads), Ford opted for just one wheelbase. To reduce noise, Mazda
wanted to improve the engine, while Ford wanted other adjustments. A compromise was reached to
retune the engine, add more insulation, and install the motor on softer rubber mounts. Mazda also
manufactures Ford Probe, based on Mazda’s MX-6.
Ford wanted to do the world car right the second time around when it bet $6 billion on the Mondeo.
According to the company’s rationale, a single car was worthwhile because of the convergence of
emission standards, safety regulations, and consumer tastes. The plan was for the American and
European versions to have 75 percent common parts. The American model is slightly longer and has
more chrome.

Initial costs of this world car were high, but they were more than offset by the savings from
engineering one car instead of two. There were obstacles, of course, and five European and American
design studios had to compromise on design proposals that ranged from a soft and rounded body to a
sharply angular one. Major responsibilities were divided, with Ford’s chairman himself keeping an
eye on the development. The U.S. division was responsible for automatic transmissions, while the
European counterpart handled manual transmissions.

At last count, Mondeo is selling well in Europe. The American versions called Ford Contour and
Mercury Mystique have also received critical acclaim, but the relatively high prices have hampered
sales. Still Ford appeared to be successful in getting “two big elephants to dance”.
 As a product of compromise, a world product may have to be bland enough to partially
please everyone while not really pleasing anyone. That is, it must satisfy the lowest common
denominator of taste in different markets. Ford's Mondeo has done well in Europe, but
American consumers have found the backseat of the American versions (Ford Contour and
Mercury Mystique) to be too tight. Likewise, GM's 1997 front drive minivan is just right for
the Europeans but a little bit too small for the Americans. As far as the automobile industry is
concerned, a world car has another problem; it has to meet the world's toughest
environmental and safety rules, thus increasing costs.

The trend toward an international or world product and away from a national product
will continue as MNCs become more aware of the significance of world marketing. The
willingness of several companies to consider designing a universal product for the world
market is indeed a good indicator that this trend will continue.
 COCA-COLA: UNIVERSAL APPEAL?

On April 15, 1996, Douglas N. Daft, the President of the Middle and Far East Group' for
Coca-Cola Company was in a quandary He had just come back from a senior executive
committee meeting where the main focus was on the concern over the additional investment
in India and China, two countries that reported directly to him. He was baffled by the concern
the committee was placing on funding these new investments. Coca-Cola's strategy had
always been to take risks in emerging markets. It had always understood the need to be first
in new markets to gain the competitive advantage. Even in tough markets, Coca-Cola
ultimately wins market share. For instance, during apartheid in South Africa, the company
stayed in the country by maintaining a-presence through independent bottlers while Pepsi left
the country. Coke now dominates the market.

Daft could not understand the committee's reluctance to go ahead with these investments.
China's market potential was vast. With a population of 1.2 billion and per capita
consumption of only four (meaning each person in China consumed only four 8-ounce
servings of a company beverage per year), the opportunities were infinite (see Exhibit 1). The
investment slated for China was to build five additional plants in 1996 and two more in 1997,
which would bring the total number of plants to 23.A recent survey done by the company
indicated that Coke and Sprite were the two leading soft drink brands in China. In addition,
China's gallon sales grew by 30 percent last year.

India's market potential was similar to China's. Its population of 936 million and per capita
consumption of two also made it a desirable market to be in. Although gallon sales were up
21 percent over 1995, there was a concern about anti multinational sentiment. The company
already had a large, visible presence there and given the negative attitude toward large
multinationals, the committee felt further investment might not be a financially prudent
decision at that time.

Daft quickly got on the phone to John Farrell, head of the China Division, and Andrew
Angle, head of the Southeast and West Asia Division, to discuss this new turn of events.
Information needed to be gathered, and things need to be hammered out before going back to
committee with his recommendations. What were the political and economic risks of these
two countries and how could it affect Coca-Cola? If Coca-Cola chose not to increase its in-
vestment in these countries, would it be missing out on an opportunity to further establish
itself in these markets and to gain market share?

Coke articulated its vision in its annual report: "We have become mindful of one undeniable
fact-the average body requires at least 64 ounces of liquid every day just to survive, and our
beverages currently account for not even two of these ounces. For every person on this
planet, consuming at least 64 ounces is not an option; but choosing where those ounces come
from is." Draft’s concerns addressed this vision.

BOTTLING

During the 1980s, Coca-Cola aggressively acquired smaller family-owned bottlers in the
United States. Between 1980 and 1984, bottlers representing 50 percent of the company's
volume underwent a change of ownership. Small, family-owned bottlers were purchased by
either the company or large regional bottlers. This was done in order to control bottlers so
that the company had the ability to do nationwide advertising. knowing that their bottlers
would do the complementary promotional activities, as well as aggressive discounting when
needed.

During the 1990s. Coke began the implementation of a program consolidation and company
investment in

EXHIBIT 1 per capita consumption and market populations

Population
Per Capital Markets
(In Millions)
179 Argentina 35
292 Australia 18
169 Benelux Denmark 31
122 Brazil 162
181 Canada 29
248 Chile 14
4 China 1,221
107 Colombia 35
30 Egypt 63
71 France 58
201 Germany 82
114 Great Britain 56
125 Hungary 10
2 India 936
8 Indonesia 198
232 Israel 6
87 Italy 58
136 Japan 125
71 Korea 45
322 Mexico 94
45 Morocco 27
256 Norway 4
105 Philippines 68
65 Romania 23
6 Russia 147
147 South Africa 41
179 Spain 40
60 Thailand 59
343 United States 263
60 Zimbabwe 11

bottling operations in the rest of the world. Currently, Coke is consolidating its bottlers in
markets overseas.
Today, Coca-Cola is investing heavily in bottling operations in order to maximize the
strength and efficiency of production, distribution, and marketing. Their strategy is to get
involved in the bottling business so that it fuels continued growth of their syrup business. The
company has three criteria for making a bottling investment:
1. The company needs to move quickly in an emerging market
2. When an existing bottler lacks the resources to meet the company's objectives
3. To help ensure long-term strategic alignment with key bottling partners

BRAND EQUITY

The Coca-Cola trademark is invaluable. If all of the company's assets burned to the ground
today, it would have no trouble borrowing the money to rebuild, based on the strength of its
trademark alone. Its brand is pervasive around the world. Exhibit 2 indicates how strong the
brand Coca-Cola is in specified markets. The company's strategy for sustaining its brand
image is the three Ps:
1. Pervasive Penetration in the marketplace
2. Offering consumers the best Price relative to value
3. Making Coca-Cola the Preferred beverage every where

In addition, Coca-Cola is finding new ways of building relevant value into Coke and all its
other brands by further differentiating them, making them unique and distinctive. Three years
ago, the company abandoned the use of entrusting all advertising and marketing to one single
agency. Now, agencies are selected on the basis of their particular expertise in enhancing a
particular brand; this year, agency compensation is being tied to the results their ads produce.

Moreover, Coca-Cola is reigniting the symbols that encapsulate the essence of its brand-the
Dynamic Ribbon device, the contour bottle for Coke, the Coca-Cola script, the color red, and
the dimpled bottle for Sprite. The new contour bottle, which was launched in April 1994, is
credited with increasing sales by 500 million cases globally in 1994. Through June 1995,
volume increases for Coke were approaching 45 percent in the United States, 23 percent in
Japan, and 30 percent in Spain. In addition, it is currently linking its brands with one-of-a -
kind 7vents and activities such as the Olympic Games in 1996 and doing more-in store
pollutions -and displays especially in the U.S. market where growth is considered slow.

Coca-Cola's commitment to building and sustaining its brand image is indicated by the
amount of money it spends on marketing. For instance, in 1995, the company spent $3.8
billion for marketing. Ad spending, which is still considered one of the best tools for building
brand equity, was $1.3 billion. Its major rival, PepsiCo, spent more on advertising, at $1.8
billion but had to allocate these funds for its restaurant and snack-food segments as well.

FINANCIALS

Coca-Cola is the largest and most profitable soft-drink company in the world. Over a 10-year
period, revenues have grown at a compound growth rate of 11.9 percent. By 1995, worldwide
revenues exceeded $18 billion, and net income was a little under $3 billion (see Exhibit 3). Its
operating income margin outpaced its major competitor, PepsiCo, significantly. While
PepsiCo's beverage segment operating margin was 10 percent for 1995, Coca-Cola's was 23
percent. Its superior performance is further indicated

Market Leader Leadership Margin Second Place

Australia Coca-Cola 3.9:1 Diet coke
Belgium Coca-Cola 7.7:1 Coca cola light
Brazil Coca-Cola 3.3:1 Brazilian brand
Chile Coca-Cola 4.6:1 Fanta
France Coca-Cola 4.3:1 French brand
Germany Coca-Cola 3.1:1 Fanta
Great Britain Coca-Cola 1.9:1 Diet coke
Greece Coca-Cola 3.8:1 Fanta
Italy Coca-Cola 3.1:1 Fanta
Japan Coca-Cola 2.3:1 Fanta
Korea Coca-Cola 2.1:1 Korean brand
Norway Coca-Cola 3.3:1 Coca cola light
South Africa Coca-Cola 4.1:1 Sparletta
Spain Coca-Cola 3.0:1 Spanish brand
Sweden Coca-Cola 3.8:1 Fanta

by its return on equity, which were 56 percent in 1995, and its market year-end price of
$74.25 at the end of 1995, which showed an appreciation of 44 percent.
Coca-Cola's strong financial performance over the last 5 years has been due primarily to
increased expansion overseas, especially in the company's bottling and canning operations. In
fact, international operations account for the majority of Coca-Cola's revenues and operating
profits: In 1995, the company derived 71 percent of its revenues and 82 percent of its
operating profit outside the United States

EXHIBIT 3 Consolidated Statements of Income

Year Ended December 31 (In Millions Except Per-

1995 1994 1993
Share Data)
Net Operating-Revenues $18,018 $16,181 $13,963
Cost of goods sold 6,940 6,168 5,160
Gross-Profit 11,078 10,013 8,803
Selling, administrative, and general expenses 6,986 6,297 5,695
Operating Income 4,092 3,716 3,108
Interest income 245 181 144
Interest expense 272 199 168
Equity income 169 134 91
Other income (deductions)-net 20 (104) (2)
Gain on issuance of stock by Coca-Cola Amatil 74 - 12
Income Before Income Taxes and Change in
4,328 3,728 3,185
Accounting Principle
Income taxes 1,342 1,174 997
Income Before Change in Accounting Principle 2,986 2,554 2,188
Transition effect of change in accounting for post
- - (12)
employment benefits
Net Income $2,986 $2,554 $2,176
Income per Share
Before change in accounting principle $2.37 $1.98 $1.68
Transition effect of change in accounting for post
- - (.01)
employment benefits
Net Income per Share $2.37 $1. 98 $1.67
Average Shares Outstanding 1,262 1,290 1,302
Coke operates in 200 countries and employs 32,000 people worldwide.

CURRENT INDUSTRY OUTLOOK AND TRENDS

The US. Soft-drink market is considered mature, growing at approximately 3 percent to 4

percent annually. This is down considerably from the 1985 growth rate of 6.5 percent. In
1994, domestic retail sales were $52 billion, up 2.6 percent, year to year. Coca-Cola had 41
percent of the retail market and Pepsi had 31 percent. Coca-Cola's growth outpaced the
industry at 7 percent and accounted for 80 percent of the US soft drink's industry growth last
year.

Although there is increased competition from other beverage choices, soft drinks remain the
beverage of choice among US. Consumers, accounting for more than one of every four drinks
consumed. Colas continue to dominate the soft drink category but are slowly losing market
share. They were 66 percent of all soft drinks consumed in 1994, down from 70 percent in
1990. International markets appear to mirror this trend.

The international market has been the high growth segment in the beverage industry, growing
at 8 percent to 10 percent annually. In 1996, Coke sales grew at 8 percent, and it had 47
percent of the world market. Growth rates varied considerably around the world. Some
emerging markets grew phenomenally. For example, last year China grew at 32 percent and
Brazil grew at 52 percent. In 1997, worldwide growth was expected to be 6 percent to 7
percent for soft drinks. The highest growth was expected from developing Asian countries,
including China, India, Korea, and Indonesia. Moreover, continued growth from South Amer-
ica was expected. Internationally, Coke outsells Pepsi three to one.

COMPETITION

Coca-Cola's major competitor is PepsiCo (see Exhibit 6). PepsiCo has three segments:
beverage (35 percent of total revenues), snack foods (28 percent), and restaurants (37
percent). Over a 10 year period, revenues have grown at a compound rate of 15 percent. In
1995, $1.6 billion was generated from $30.4 billion of revenues, representing a net income
margin of 5 percent. Its growth has been fueled by the success of its beverage-and snack -
foods segments.
PepsiCo's beverage income was $10.5 billion for 1995, and it generated $1.3 billion in
operating profit, representing a 10 percent margin. Although overall beverage revenue and
operating income were up 9 percent and 8 percent, respectively, its significant revenue
growth came from overseas, at 13 percent. Yet, international revenue and operating profit
accounted for only 34 percent of total beverage revenue and 12percentof total beverage
operating profits (see Exhibit 8).

To gain more market share internationally, Pepsi is unveiling a comeback plan called "Project
Blue," which is expected to cost $500 million. It calls for revamping manufacturing and
distribution to get a consistent-tasting drink around the globe, as well as an overhaul of
marketing and advertising. The most risky part of the program calls for giving up the red,
white, and blue can in favor of an electric blue one. In addition, Pepsi-Cola plans to establish
new freshness standards and quality controls. Currently, Coke outsells Pepsi three to one
overseas; however, Pepsi predicts that with its new marketing plan it will be able to close the
gap to 2 to 1 by the year 2000. According to The Economist, this could be a risky strategy,
considering the fact that Pepsi has spent decades convincing consumers that Pepsi in a red,
white, and blue can is cool to drink. Image is a delicate thing. By changing the color of its
can, it may appear to consumers that Pepsi-Cola is trying too hard to convince them to drink
their brand; and thus, this plan may come off as just another blatantly obvious gimmick.

INTERNATIONAL MARKETS
Coca-Cola's worldwide philosophy has been:

“We understand that as a practical matter our universe is infinite, and that we, ourselves, are
the key variable in just how much of it we can capture”.

Coca-Cola always sees 64 daily ounces of opportunity. It currently has 2 percent of the
world's daily consumption of 64 ounces of liquid. In emerging markets, its potential remains
high, as 60 percent of the world's population live in markets where the average person
consumes less than 10 servings of Coca-Cola products per year.
For decades, Coca-Cola has had an established position in foreign markets. The first foreign
office was started in 1926, and by the 1940s and 19508, Coke was already entrenched
Overseas. In 1950, Time magazine wrote, "Coke's peaceful near conquest of the world is one
of the remarkable phenomena of the age. It has put itself always within an arm if length of
desire.
EXHIBIT 6 U S soft drink market share (percent)
1989 1990 1991 1992 1993 1994
Coca-Cola 40.1 40.4 40.7 40.4 40.4 40.7
PepsiCo 31.8 31.8 31.5 31.3 30.9 30.9
Dr. Pepper / 7Upa 9.9 9.9 10.6 11.2 11.4 11.6
Cadbury Schweppes 5.0 5.0 5.0 5.0 4.9 4.8
National Beverage 2.2 2.1 2.1 2.0 1.9 2.0
Royal Crown 2.7 2.6 2.4 2.3 2.2 2.0

Exhibit 8 Pepsi Co Beverage Revenue and operating income

% Growth Rates
($ in Millions) 1995 1994 1993 1995 1994
Net Sales
U.S. $6,977 $6,541 $5,918 7 11
International 3,571 3,146 2,720 14 16
$10,548 $9,687 $8,638 9 12
Operating Profit
Reported
U.S. $1,145 $1,022 $937 12 9
.' International 164 195 172 (16) 13
$1,309 $1,217 $1,109 8 10
Ongoing"
U.S. $1,145 $1,022 $937 12 9
International 226 195 172 16 13
$1,371 $1,217 $1,109 13 10
Today, the international segment has grown so much that it now contributes 71 percent to
total revenue. Because of the importance of international markets to Coca Cola's future
growth, it has eliminated its prior structure of two groups-international and domestic-and
formed five operating groups: North America, Latin America, Greater Europe, the Middle
and Far East, and Africa. The breakdown of unit case volume by group is found in Exhibit 9.
As indicated by the pie chart, North America, which includes the United States and Canada,
accounted for the largest, at 32 percent, and Latin America accounted for 24 percent of sales.
Greater Europe and the Middle and Far East accounted for 21 percent and 18 percent,
respectively. Africa trails at only 5 percent.

The hottest battles between Coca-Cola and PepsiCo will be in international markets,
especially emerging ones. First-mover advantages can be crucial in the international soft -
drink war. The strategic challenge is to establish greater brand awareness and preference
through advertising on a scale similar to that of the domestic market. Another challenge is to
make their brands as accessible and ubiquitous as they are in the United States. This is not
often easy, and the effort often requires the direct intervention of the country managers
(CMs) to secure improvements in the efficiency, cooperation, and competitive aggressiveness
of overseas bottlers. For example, in 1995, Coca-Cola acquired bottling interests in Italy and
Venezuela and took steps to consolidate its system in Germany. Although Coca-Cola controls
the wealthy markets of Greater Europe, PepsiCo has been more successful in emerging
markets such as India, the Arab nations of the Middle East, and Russia. Entry into new mar-
kets has often required creative maneuvering and increasingly flexible accommodations by
the CMs.

As the war heats up between Coca-Cola and PepsiCo, both CMs will be forced to take more
risks. Pepsi is a company going global 50 years late and cannot afford to follow the leader,
Coca-Cola, but must alter the market as indicated by its "Project Blue" plan. Moreover,
PepsiCo has rejuvenated the Pepsi Challenge for overseas markets. In 1994, PepsiCo
launched its first challenge internationally in Mexico, one of Pepsi's largest markets. The
result was that 55 percent preferred Pepsi to Coke. In addition, PepsiCo plans to stage these
challenges worldwide in such markets as Singapore, Malaysia, and Portugal. PepsiCo's
international commitment is both long term and aggressive, as indicated by its approval of a
$2 billion investment plan over 5 years for the international beverage segment. starting in
1994.

Of course, Coca-Cola does not take these aggressive moves sitting down. Coca-Cola will
fight back, as it did with the Pepsi Challenge, by slashing price5, purchasing bottlers, and
creating slick ads and promotions.

DAFT'S REPORT TO THE COMMITTEE

Douglas Daft recently met with John Farrell, who was responsible for China, and Andrew
Angle, who was responsible for India. Both Farrell and Angle wished to go ahead with the
investments in their respective countries. However, Douglas Daft was not sure he had enough
information on the political and economic risks of each country to make an informed
decision. Thus, he asked Farrell and Angle to update him on the political and economic status
of their respective countries. After he read their reports, he would make his-recommendations
to the senior executive committee. Their-reports are reproduced in Appendices I and II.
DISCUSSION QUESTIONS

1. What is Coca-Cola's international strategy?

2. What competitive advantages does Coca-Cola have over its major rival, PepsiCo?
3. What are the pros and cons of Coca-Cola's investing further in India's market?
4. What are the pros and cons of Coca-Cola's investing further in China's market?
5. What should Douglas Daft recommend to the senior executive committee concerning
further investment in the emerging markets of China and India? Why?

APPENDIX I
The India Report by Andrew Angle, Southeast and West Asia Division

In 1994, India's economy grew at 6 percent. 8 million new jobs were created, and there was
$818 million of U.S direct investment. For all these positive signs however. It appears that
there has been a backlash against the economic reforms started 5 years ago. Why? First, for
the 190 million Indians who live below the poverty line, 5 years of economic reforms have
not improved their standard of living. Millions of poor believe that only the elite have
benefited from economic liberalization. Second, soaring short-term interest rates, coupled
with competition from foreigners, have hurt local businesses and caused enthusiasm for
further economic change to wane. Now that foreign companies can increase their investment
to 51 percent, up from 40 percent, in most industries and even 100 percent in others, some
locals worry that foreigners will run roughshod over them.

Third, the Hindu right, led by the Bharatiya Janata Party (BJP), is divided over just what kind
of foreign investment should be allowed. The BJP has adopted a much used phrase-
"microchips, not potato chips"-to describe what sort of investment should be allowed.5 Thus,
it appears that the BJP is against big American consumer brands such as PepsiCo,
McDonald's, Colgate, and even ourselves, and they are the ones protesting against the
multinationals. Pepsi's KFC braved protests and saw one of its outlets briefly closed. Most of
the anti multinational sentiment has been against American companies, which bear the brunt
of Indian worries about cultural imperialism. In contrast, Japanese and German companies
encounter few such problems.

Last, these anti multinational demonstrations are being allowed to continue due to the
upcoming democratic elections, which will begin on April 27 and finish on May 7. The
existing Indian government, led by Prime Minister P. V. Narasimha Rao, dismisses these
protests against foreign companies as grumbling of fringe groups. In truth, Rao and his
government face stiff competition from the BJP and do not want to alienate voters by
seeming to be pro foreign. Therefore, the existing government does little to defend these-
companies in the eyes of the public.
India's legal system, though it may be slow, provides some recourse against failure to perform
in contracts. For instance, India backed away from a $2.8 billion power project with Enron,
an American company. Negotiations are resuming primarily because Enron has a cast-iron
case for compensation.

However, the most fundamental problem is that a backlash has set in before India has taken
the most painful changes. The government has not touched sacrosanct labor laws that make it
virtually impossible for any company employing more than 20'- workers to lay anyone off. In
addition, India must come up with a policy to deal with the state sector. About 200 of the
country's 220 centrally owned companies are chronic money losers. Heavy borrowing by
government companies-$60 billion from the central government alone-drives up interest
rates.

Regardless of who wins the upcoming election Rao's government, the BJP, or the Left-Front
National Front, they will not turn back reforms already taken place. Some foreign investors
have turned bullish on India, pouring $1.2 billion in the Bombay exchange for the first 4
months of 1996. Some companies such as McDonald's, Baskin-Robbins, and PepsiCo are
moving ahead with investments despite the difficulties. The risk is that India's reforms will
not be quick enough to appease the growing discontent among its large population.
Moreover. there are many examples of foreign investors who have already had great success
in China, but there are relatively few in India.

APPENDIX II
The China Report by John Farrell, China Division

According to a Business Week article entitled "Rethinking

China":
“In stunningly short order, a powerful China has emerged. As an economic force, it is
entering and altering the global marketplace-and in some cases writing its own rules”.

China had a $35 billion trade surplus with the United States last year, whereas its own
markets remain closed in sectors where U.S. businesses are competitive. Moreover, China is
notorious as one of the world's greatest rip-off artists and bent on strong-arming U.S. and
European companies into transferring jobs and technology as the cost for entering its markets.
Although China has cleaned up some intellectual property abuses, piracy remains rampant,
and the toll on U.S. businesses is growing. Trade officials estimate that bootlegging in China
cost U.S. business nearly $2.5 billion in lost sales last year, far exceeding the $866 million in
1994.

Tax preferences for foreign investors have been scaled back, and there currently is a proposal
to change the tax system in a way that puts foreign businesses at a disadvantage to local ones.
In addition, foreign companies in China must grapple with changing central government
rules, grasping local officials and capricious local business partners. The central government
is cracking down on joint ventures that provincial officials used to wave through. In addition,
contracts are not always enforceable in Chinese courts.

However, there is growing evidence that firms that are prepared to shrug off such obstacles
and build a business presence in China will be rewarded. The playing field may be tilted
against foreign companies, but domestic rivals are barely up and running. In the more open
climate, domestic companies already competing are not able to rely so heavily on their
connections. Privileged information and crony networks. Thus the battle for China's market
has been and will continue to be played out by foreigners for the time being.

This is especially true in the fast-moving consumer goods markets in which gross margins
average 18 percent to 25 percent, partly due to the fact that the Chinese love a good brand.
Just as in the United States, Procter & Gamble fights Unlived for Chinese consumers. Many
multinationals contend that transferring technology is largely risk free. Many pioneers in
China have reaped rewards without creating new competitors. Yet, China's effort to milk
more out of foreigners means few secrets are really safe. The demands on multinationals to
help make Chinese industry competitive are unrelenting. For example, Microsoft, under
threat of having its software banned, codeveloped a Chinese version of Windows 95 with a
local partner and agreed to aid efforts to develop a Chinese software industry.

To keep control of China's economy, Communist leaders are retreating on many risky
economic policies, which means no major reform of state enterprises or the banking system-
both seen as crucial to completing the transformation of China's economic system. There are
two reasons. First, to control economic growth and its resulting inflation, Vice Premier Zhu
Rongji engineered an austerity program in 1993 to curb inflation; it worked, Growth in 1995
slowed to about 10 percent from 12.6 percent, a year earlier, while retail price increases eased
from 21.7 percent in 1994 to_15 percent in 1995. Second, the central government fears that
the poor inland provinces are falling too far behind. Many of its 700 million peasants live in
near-feudal conditions, and 100 million have flooded into cities looking for work. The
government fears that high unemployment will only fuel crime and corruption, which is
already on the rise.

This recentralization is an attempt to enable the central government to set the pace of
economic development rather than cede the power to the coastal provinces. The most needed
reforms are in the state sector, which is one of the biggest drags on the economy. However,
because state-owned factories employ 50 percent of the urban population, the leadership will
not let them go bust. Yet, the state's companies chum out goods that nobody wants and then
demand loans from the state banks, ultimately causing more inflation.

Nevertheless, other economic reforms are accelerating, such as a convertible currency tied to
outside financial markets and regulations to protect intellectual property rights. The best hope
for major reform is for China to enter into the World Trade Organization (WTO) because as a
member, China would be forced over a designated period of time to liberalize its economy by
dropping many trade barriers. However, chances of China's entering are slim. China would
like to enter with developing-country status, which would allow it to protect domestic
industries from foreign competition, but the United States would like China to enter on terms
similar to those of other industrial nations.

The bottom line is that China's already large economy is set to double in the next 8 years,
making it the world's sixth-largest economy, and those companies anxious to get access to
China's riches are willing to take the risks.