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Information on household income distribution is important, and companies can use it to segment the market and consider the classes that should be targeted. Purchasing power parity PPP of consumers in both countries must be evaluated.

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For example, prices in Japan are relatively higher than those in China. Thus, on comparing household income levels in both countries, the purchasing power of households in China is, in real terms, greater than that in Japan. As of , the purchasing power parity values of Japan, China, and India were , 53, and 44 keeping that of the US at , respectively.

In other words, while price levels in Japan are 1. This indicates that prices in Japan are approximately three times higher than those in China and India, thereby making the purchasing power of a Chinese household with USD 10, in annual income equivalent to a household earning USD 30, in Japan. Products with large differences in domestic and international prices are daily necessities such as personal services or foodstuffs that are difficult to import from overseas; thus, the percentage of these products consumed by households with high income levels is low.

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On the other hand, goods such as automobiles and high-end consumer electronics have a marginal price disparity among Japan, China, and India. Therefore, companies must note that data income levels that are used to calculate the average purchasing power are too high to be considered in marketing strategies by advanced countries.

However, in the shorter term, companies must analyze the strategies for targeting the middle classes below the volume zone. Among the assumptions of marketing strategies targeting this group, adaptation for local markets is required for providing products that will be accepted in local markets with somewhat low income levels. Companies must, therefore, reduce the functionality and performance of products in order to sell them at a price which is lower than the price of the same product for domestic market.

In addition, companies must review the entire value chain of a product, from materials procurement and the manufacturing processes, through distribution and post-sales service, in pursuing a low price model. Companies might have to form an alliance with a local company to improve their cost competitiveness.

This example indicates that waiting for premium markets to take hold in emerging countries is not an effective strategy. While companies from advanced countries may have high expectations for the premium markets in China and India, in which they do well, companies that have prioritized short-term profits must undertake an adaptation strategy for local markets by targeting the volume zone of the middle-class. Should a company prioritize the premium market, or should it take the low-price path to succeed in an emerging country?

This question is important in determining a global strategy. Source : Adapted from Gadiesh et al. First, we consider cases in which there exist customer requirements for product quality and functionality. Business-to-business B2B products such as high-performance materials used in automotive parts, industrial equipment, and construction equipment for the most part fit this category. Customers have an incentive to constantly improve productivity, thus creating high demands for performance and quality.

In addition, durable consumer goods, such as cars and air conditioners, often fit this category. Because these products are often used over an extended period, customers often demand energy-saving features and high quality. Cases in which there is a large technological gap between entering and local companies in terms of consumer durables, strategies that target premium markets with high-quality, high-function products are reasonable.

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On the other hand, companies must plan to differentiate products that local companies can technologically catch up with, and those that are easily prone to price wars. Companies must plan to shift away from the stand-alone product model explained in Chap. Next, companies must seriously consider a low price strategy for good enough markets in industries where they face difficult competition against cheap local products and where customer demands for product functionality and quality are fully satisfied. Even in this case, a company must respond differently depending on the size of the technological gap between it and local companies.

If a company is technologically superior and cannot be easily imitated by local companies, it can, to a certain extent, differentiate its products from low price local products on functionality and quality. However, since companies must provide products at a lower price than markets in the home country, they must develop products for the local market that have only the functionality and level of quality that customers there need.

In addition, it is necessary that companies make the value chain of suppliers, manufacturing processes, and distribution channels more efficient to cut costs, and realize a low-cost model that depends on alliances with local companies in many areas. Companies cannot differentiate their products on technology in such a case, and must instead compete directly in terms of price. Considering that the headquarters head the company from advanced nations, competing in terms of price with local companies will be difficult unless that company has a high level of productivity.

Thus, companies may opt to acquire a local company and make the management more efficient, but they will need to create a management structure on the basis of local personnel to avoid the rising operating costs. Should companies in advanced countries opt for a low price strategy in good enough markets within emerging countries, they must be careful not to fall prey to cannibalization of their high-end products made for premium markets.

Manufacturers such as Sony and Panasonic have a brand image that conveys quality and performance. They therefore need to make marketing plans for quality levels, prices, distribution channels, and other areas such that their brand value is not damaged when competing in terms of price. Shiseido ensures that cannibalization does not occur through brand management, using the global SHISEIDO brand made for premium markets and the Aupres brand for products in the Chinese market.

This point should be noted by companies pursuing a low price strategy where they already have some history of selling to premium markets.

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As mentioned earlier, BOP signifies the lowest level in the income class distribution pyramid. Of the global population of approximately six billion people, two-thirds or four billion live on only a few dollars a day. The BOP business derives profit from these poorer classes, but at the same time, it involves the people in these lower classes in the process of operating this business by providing opportunities to participate in society to those who otherwise have no stable employment.

In addition, some companies have businesses that aim to improve the living conditions of those who struggle with poor nutrition or sanitation; they often partner with international organizations or NGOs that are working on poverty issues. Companies expanding their global business are expected to contribute to society through work on environmental issues or in other areas. Global corporations face the growing need of balancing their traditional for-profit businesses with non-profit activities, and thus can gain some important suggestions from the BOP business model.

The BOP model does not merely comprise activities that contribute to society. A business must generate profits, therefore requiring companies to understand from where value is derived. For example, in Mumbai, India, there is a large slum area called Dharavi, as well as a wealthy neighborhood called Warden Road. High-quality public utility services are not provided in slum areas, and higher credit risks imply higher service fees. If some sort of system can be implemented to enable credit transactions in these areas, new businesses can be established to promote value creation.

Microfinance is an example of a business system that reduces the poverty penalty in financial services. In such a system, locals become bankers and provide small loans. Borrowers use this funding to finance small businesses such as shops or individual services, thereby contributing to the creation of new businesses in that region.

Key to this service are the reduction in credit risk whereby local citizenry become bankers as well as a personal relationship with borrowers. Bankers receive income from the interest generated when loans are paid back, creating incentives for the lenders to make loans corresponding to their ability to repay. Having many locals acting as bankers reduces the risk of bad debt, and the system generates a profit from the low interest.

The system of microfinance is relatively simple, and though it began in Bangladesh through Muhammad Yunus and his Grameen Bank, it has since spread to countless operations in India as well as across the African continent. It has been accompanied by criticism as well, owing to the unreasonable amount of profit made by some banks by charging high interest rates, and the accumulation of excess debt by some borrowers, thereby becoming unable to repay their loans.

Marketing costs can become an entry barrier for manufacturers wanting to expand to a BOP business.

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First, a solid business cannot be built around BOP without products that have the prospect of a certain amount of demand from the poor who make up the target market. These people often live in limited communities, making it difficult for companies to understand market needs. In addition, many people are simply living day to day, causing large fluctuations in demand. Furthermore, creating distribution channels to deliver products to customers entails exorbitant costs.

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In such a business, where low-priced products are sold in large volumes, high demand volatility can be fatal. Thus, partnering with various players is ideal for running a successful BOP business.

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For example, market needs of the poor can be obtained from detailed information held by NGOs that provide local assistance. Product distribution can be built through tie-ups with banks that provide microfinance and by leveraging the local banker network. Hindustan Unilever the Indian subsidiary of the European CPG manufacturer Unilever formed alliances with multiple parties to create a successful soap business in India.

It first launched a global public—private partnership PPP to promote the idea of washing hands with soap to improve hygiene in India. In the process, it partnered with approximately NGOs and conducted local seminars on how to use soap. It employed saleswomen in rural areas referred to as shakti , who educated locals on hygiene and offered advice in addition to selling products.

The company led with the societal goal of improving rural hygiene and was successful in generating royalties and creating a brand image for its products. However, only a few companies have been successful in BOP businesses. BOP businesses benefit society by solving poverty issues that invigorate rural areas or improve nutrition and hygiene; however, companies must balance these efforts by actually creating a profitable business.

BOP businesses require the creation of ecosystems that involve a broad range of players, from public organizations for developmental assistance and NGOs to local communities. Thus, companies that run these businesses must first understand the objectives of each organization they work with, and then act as coordinators in win—win joint efforts.