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Recent Studies

On brand communities, European unions, economic forecasting tools, and other topics of interest.

(originally published by Booz & Company)

Don’t Neglect Brand Fans
Albert M. Muñiz Jr. and Thomas C. O’Guinn, “Brand Community,” Journal of Consumer Research, University of Chicago Press, March 2001

Marketers have long known that many consumers are loyal to particular brands because it makes them feel part of a larger community. “This intersection of brand — a defining entity of consumer culture — and community — a core sociological notion — is an important one,” write Albert Muñiz, a DePaul University marketing professor, and Thomas O’Guinn, an advertising professor at the University of Illinois.

Marketers commonly exploit this phenomenon by associating brands with celebrities. As Andy Warhol, the consummate exploiter of consumer attraction to fame, observed, “You can be watching TV and see Coca-Cola, and you know that the president drinks Coke. Liz Taylor drinks Coke and, just think, you can drink Coke too.”

But many consumers are far more active in their relationship with brands. They form what the authors call “brand communities,” informal social clubs that revolve around a common bond to a particular brand.

The authors conducted interviews in a medium-sized city in the Midwestern United States and looked at several hundred Web sites to explore the way that owners of Saabs, Ford Broncos, and Macintosh computers interact with those brands. Among the behaviors they found:

  • Brand Snobbery. Many brand communities form in opposition to another brand. Saab owners are fiercely opposed to Volvos, bragging that Saab makes jets while Volvo makes tractors. Some longtime Saab owners sneered at yuppies who were first-time owners of new models. They called these individuals “SNAABS,” people who buy a Saab because it is trendy, without understanding the brand’s traditions, such as the commitment to keep the car for many years. Macintosh owners denounced PC users, in general, and Bill Gates, in particular. Bronco owners derided owners of “smaller Japanese faux-SUVs,” believing these cars were less powerful than tough American Broncos.
  • Bonding with Owners. Often, Saab drivers honk or flash their lights at other Saabs they pass, and they will stop when they see another Saab driver on the side of the road who appears to need help. Mac users reported frequently helping other users restart crashed computers, and said they will alert others as to the best place to repair a Mac or buy software.
  • Celebrating Traditions. Brand communities rejoice in the long and rich histories of their brands. Saab owners say they love to tell how their company was founded as an aircraft manufacturer, which, after World War II, diversified first into boats (which the company abandoned after no one bought them) and then cars.

Marketers, the authors argue, can use brand communities to their advantage to spread news about positive new developments. But marketers should also realize that strong brand communities respond to negative campaigns, too. Competitors may use these communities to spread false rumors, or raise doubts about their rivals.

Brand snobbery can have a dampening effect on market growth. In the case of Broncos and Saabs, the study revealed a small group of loyalists who were vocal in their desire to keep out of their community people whom they considered “infidels” (people buying their brand of car for the “wrong reasons”). In this case, the authors say, “brand community members may define success quite differently than the marketers.”

Either way, Professors Muñiz and O’Guinn argue, companies must deal directly with brand communities as part of their relationship marketing programs, since communities clearly “exert pressure on members to remain loyal to the collective and the brand.”

Mexico: NAFTA’s Success Story
Mary E. Burfisher, Sherman Robinson, and Karen Thierfelder, “The Impact of NAFTA on the United States,” The Journal of Economic Perspectives, American Economic Association, Winter 2001

When the North American Free Trade Agreement (NAFTA) was implemented in 1993, friends and foes thought that the agreement would produce dramatic change within the U.S. But economists Mary Burfisher of the U.S. Department of Agriculture, Sherman Robinson of the International Food Policy Research Institute, and Karen Thierfelder of the U.S. Naval Academy believe NAFTA has actually had a greater economic impact and “relatively large positive effects” on Mexico.

NAFTA did not prevent the Mexican peso crisis of 1994, but it probably made Mexico’s depression shorter than it might have been by locking in Mexico’s commitment to open markets. Indeed, NAFTA prevented Mexico from “returning to a protectionist policy stance,” ensuring that Mexico could not prolong economic misery by raising tariffs. Moreover, NAFTA prevented the U.S. from raising trade barriers to Mexican products made more competitive by a weaker peso.

The authors note that there is strong evidence of increased integration in the North American auto industry since NAFTA went into effect. Before NAFTA, the U.S. was already a net importer from Mexico of vehicles and parts. According to the U.S. Department of Commerce, auto imports to the U.S. from Mexico more than doubled over five years since NAFTA took effect: from $11.1 billion in 1993 to $27.7 billion in 1998. One reason is that U.S. manufacturers were using their Mexican plants during this period to augment U.S.-based production to meet high demand.

Mexico also became a better market for U.S. manufacturers, thanks to an easing of domestic-content manufacturing requirements and the end of the ban on used-car imports. U.S. auto exports to Mexico increased from virtually none in 1993 to $2.4 billion by 1998. U.S. auto-parts makers also increased their exports to Mexico by 30 percent during this period. After five years, Mexico increased its imports from the U.S. by 16 percent.

But the larger significance of NAFTA is the signal it has sent to investors that trade between the U.S. and Mexico is stable and increasing steadily. NAFTA is now the cornerstone of Mexico’s “continuing commitment” to economic reform.

The Future of European Unions
Paul Teague, “Macroeconomic Constraints, Social Learning and Pay Bargaining in Europe,” British Journal of Industrial Relations, Blackwell Publishers Ltd., September 2000

Although the euro is already dramatically affecting Europe’s corporations and governments, Paul Teague, a management professor at Queens University in Northern Ireland, thinks it’s unlikely that a unified currency will usher in an era of transnational union negotiations.

Multinational corporations will continue to deal with the idiosyncrasies of national labor organizations. Some nations, such as the Netherlands and Ireland, have national wage negotiations. Other countries, such as Germany, have regional and national labor contracts. Britain, since the fierce labor battles of the 1980s, has the freest labor market, with most negotiations conducted on a company-by-company basis.

There are also substantial differences in how each member state handles unemployment insurance and retraining. Finnish unions have negotiated a “buffer-zone” fund, which grows in good economic times and is spent in hard times. The fund is also designed to provide assistance to workers when there are business or factory closures or disruptions caused by single-market reforms. Dutch unions and corporations have a new training system wherein workers accumulate “training miles,” which increase the longer a worker stays in the labor force. These “miles” can be used for retraining after layoffs, or to assist with voluntary career changes.

As the euro’s introduction draws closer, national unions are starting to consider labor practices beyond their borders. Belgian unions require, as part of national wage negotiations, that their pay increases are comparable to raises in Germany, the Netherlands, and France. Belgian, Dutch, German, and Luxembourgian unions recently concluded a cross-border pact to share information and coordinate wage demands. The European Metalworkers Federation has also begun to share information among national branches.

But these changes amount to “a Europeanization of national bargaining systems,” Professor Teague says. He argues it’s unlikely that a transnational union (such as the European Trade Union Congress) will ever end up gaining power at the expense of national unions. The differences in wages among the EU member states are too great for one organization to try to unify across borders. Moreover, the tough financial medicine implemented by the euro — a fully independent European Central Bank and punishment for member states that incur big deficits — makes it unlikely that unions will be stronger in the new economic order. For now, multinationals will conduct negotiations with labor unions as they always have — one country at a time.

Economic Forecasts — Take Your Pick
William T. Gavin and Rachel J. Mandal, “Forecasting Inflation and Growth: Do Private Forecasts Match Those of Policymakers?” Business Economics, National Association for Business Economics, January 2001

When determining which economic forecast to use, should you choose the Federal Reserve’s predictions for growth and inflation, or stick with those of a private forecaster?

In 1978, Congress mandated that the Federal Reserve produce economic forecasts twice a year. These are produced by the Federal Open Market Committee (FOMC). But according to economists William Gavin and Rachel Mandal of the Federal Reserve Bank of St. Louis, it doesn’t really make any difference today which one, FOMC or private forecast, you choose.

Mr. Gavin and Ms. Mandal found that in the 1980s the FOMC’s forecast was better at predicting the inflation rate and total U.S. output than was the Blue Chip forecast (a consensus of private forecasters). Blue Chip forecasters between 1983 and 1994 thought, on average, that the inflation rate would be 0.7 percent higher than it actually was. FOMC researchers’ predictions also exceeded actual inflation, but only by 0.5 percent. For U.S. output, the Blue Chip forecasters came out with estimates that, on average, were 0.04 percent too high, whereas FOMC economists overshot U.S. output by an average of 0.06 percent.

However, between 1995 and 1999, the private and FOMC forecasts converged. Inflation forecasts for both teams remained too high, but the difference was only one-tenth of 1 percent (0.6 percent error for the Blue Chip forecasters, 0.5 percent for the FOMC). Both sides also underestimated U.S. output; here the Blue Chip forecasters were 1.1 percent too low, and the FOMC forecast was nearly the same, at 1 percent too low.

Why did the private and the FOMC forecasts come together? “Both the FOMC members and the economists who contribute to the Blue Chip consensus now observe the same statistical releases and use similar economic theories to interpret their data,” the authors conclude. So it’s not surprising the two groups come to strikingly similar conclusions.

Building Multinational Product Teams
Mohan Subramaniam and N. Venkatraman, “Determinants of Transnational New Capability: Testing the Influence of Transferring and Deploying Tacit Overseas Knowledge,” Strategic Management Journal, John Wiley & Sons Ltd., April 2001

Any multinational corporation knows that in order to sell products in more than one country, you need to understand the differences among nations. Some of these are technical, such as the differences among the videotaping systems PAL, SECAM, and NTSC. But others are cultural differences that could make or break a product. For example, when Campbell Soup Company introduced condensed soups in Brazil in the 1980s, the product failed, because Brazilian housewives thought they were not doing their job if they served soup straight from the can. These women would buy dehydrated soup mixes, but not condensed soups.

How can managers learn to adapt their products to different nations’ cultural needs? Professors Mohan Subramaniam of the Carroll School of Management at Boston College and N. Venkatraman of the Boston University School of Management surveyed 40 managers responsible for new-product development at large multinational firms like 3M, General Electric Company, and Johnson & Johnson. They discovered three key components that new-product development teams must have if they are to be successful selling products in multiple countries:

  • Multinational Representation. New-product development teams must include managers from every country in which the product is to be launched, and meetings in person provide much richer information exchanges than e-mails and phone calls. When the Japanese electronics firm Sanyo launched its line of cordless telephones, it declared that the phones had to have a “soft appearance.” Only through face-to-face meetings could Sanyo’s managers learn what “soft appearance” meant in each country so they could modify their phones accordingly.
  • Managers with Overseas Experience. Managers of new-product development teams with experience abroad are better able to interpret information provided by country brand managers than are supervisors who have never left headquarters.
  • Frequent Information from Country Managers. Regular communications from managers in each country give new-product development managers the information they need to detect cultural differences.

The End of the Check?
James McAndrews and William Roberds, “The Economics of Check Float,” Economic Review, Federal Reserve Bank of Atlanta, Fourth Quarter 2000

Americans use far more checks than Europeans or Canadians do. In 1997 (the most recent year for which statistics are available), Americans used 66 billion checks, an average of 250 per person. In the U.S., 73 percent of payments were by check; in Britain, only 31 percent; in Canada, 36 percent.

Checks are very costly for banks, note James McAndrews, a vice president of the Federal Reserve Bank of New York, and William Roberds, an assistant vice president of the Federal Reserve Bank of Atlanta. On average, it costs a bank $1.60 more to process a check than to process a comparable electronic payment (such as a debit or credit card). This means that check use costs U.S. banks $100 billion a year. Even if Americans only decreased their check use to the level of Britons or Canadians, U.S. banks would save $60 billion.

Why are checks so popular? Part of the reason is “float,” the time between the day a check is deposited and when it clears the check-writer’s bank. But another reason is a clause of the Uniform Commercial Code that mandates that a bank has “the right to physical inspection” of a check before it is honored. This means that banks must transport the check, and not just hold it and transmit the payment data electronically, causing additional delay.

There are several proposals to speed up check payments, Messrs. McAndrews and Roberds write. One would allow stores to hold the customer’s check and transmit payment data from it as if it were a
debit or credit card. Another would automatically back-date the day a check is settled to the time of deposit, eliminating float.

But consumers won’t easily give up checks, the authors say, unless they get something in return. If banks want consumers to use debit cards more often, they will have to find ways to get people to stop using checks, either by offering discounts as an incentive for electronic payment or by imposing a surcharge for check use. If people don’t respond to this, the authors warn, cost-conscious banks — allied with the Federal Reserve — might persuade Congress to control or eliminate check use.

Martin Morse Wooster, Martin Morse Wooster is an associate editor of The American Enterprise, a visiting fellow at the Capital Research Center, the education book reviewer of the Washington Times, and a contributing editor to Reason and Philanthropy.
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