Economic Environment

Economic Environment

Economic environment Markets require buying power as well as people. The economic environment Factors that affevt

consists of factors that affect consumer purchasing power and spending patterns. connitincr buying potmer

Marketers should he aware of the following predominant economic trends. and spending patterns.

Income Distribution and Changes in Purchasing Power

Global upheavals in technology and communications over the 1990s brought about a shift in the balance of economic power from the West (mainly North

American, Canadian and western European nations) towards the rapidly­ expanding economies of the Asian Pacific Rim. Many of the Asian 'tiger' economies, notably South Korea, Thailand, Malaysia, Indonesia and Singapore,

were enjoying annual growth rates in excess of 7 per cent, compared to the 2­3 per cent found in western Europe and the USA. Official statistics suggest that, by

2010, purchasing power income per head in countries like Singapore and South Korea will exceed that of the United States. Economic growth projections suggest that Europe will drop down the economic rankings. Assuming annual growth in western Europe and the United States of 2.5 per cent, and 6 per cent in Asia as a whole, the share of world grows domestic product (C.DP) taken by Asian devel­ oping countries, including China and India, could rise to 28 per cent in 2010 from

18 per cent in 1990. Western Europe's share will fall to 17 per cent from 22 per

The Company's Maeroenvtronment • 159

cent, while the United States will drop to 18 per cent from 23 per cent. 7 However,

in June 1997, Asia's economic miracle came to an end. Economic and financial turmoil struck some of the fastest­grow ing countries in the region.

The roots of the Asian economic crisis van' from country to country. Generally, the seeds of trouble lay in headlong economic growth and

policies and practices that resulted in over­burdened financial systems. The Asian 'tiger' economies attracted floods of foreign investment which

increased land and asset prices. Lending soared. Authorities embarked on huge, often economically questionable, infrastructure projects ­ new cities, railroads, highways, power stations ­ which brought little return on investment. The region's currencies were pegged to the US dollar, which had been appreciating in recent years. Country after country saw their currency depreciate as the crisis unfolded. Moreover, the region's exporters were gradually becoming uncompetitive. Many countries suffered from 'crony capitalism' in which authorities encouraged banks to lend to politically well connected businesses. Close neighbour, Japan, and the world's second biggest economy, has also become vulnerable to the crisis, as its financial institutions are big lenders to the rest of the region. s

Before the Asian financial crisis developed, it hod become almost an article of faith that the region would maintain perpetual growth. Business analysts believe

that, where authorities are committed to appropriate reforms, recovery will be possible. Meanwhile, authorities must adopt measures to arrest further decline

and to prevent the turmoil from spreading even wider. Although there has been a narrowing of the wealth and living standards gap between the developed western and rising Asian countries in recent decades, the uncertain economic climate in the Asian economies has important implications

for international marketers. They must determine how changing incomes affect purchasing power and how they translate into marketing threats and opportuni­ ties for the firm.

Where consumer purchasing power is reduced, as in countries experiencing economic collapse or in an economic recession, value­far­money becomes a key purchasing criterion. Marketers must pursue vaktv­based marketing to capture and retain price­conscious customers during lean economic times, unlike boom periods when consumers become literally addicted to personal consumption.''Rather than

offering high quality at a high price, or lesser quality at very low prices, marketers have to look for ways to offer the more financially cautious buyers greater value ­

just the right combination of product quality and good service at a fair price. 10 Consumers with the greatest purchasing power are likely to belong to the higher sociocconomic groups, whose rising incomes mean that their spending patterns are 5ess susceptible to economic downturns than lower­income groups.

So, marketers must determine a population's mcome distribution. The upper economic strata of a society become primary targets for expensive luxury goods,

the middle income groups are more careful about spending, but can usually afford some luxuries sometimes, while the lower strata will afford only basic food,

clothing and shelter needs. In some countries, an underclass exists ­ people permanently living on state welfare and/or below the poverty line ­ which has

little purchasing power, often struggling to make even the most basic purchases.