Part Six Managing International Operations

PART SIX MANAGING INTERNATIONAL OPERATIONS

International Business Chapter Sixteen

Marketing Globally

Chapter Objectives • To understand a range of product policies and the • • • • • •

circumstances in which they are appropriate internationally To grasp the reasons for product alternations when deciding between standardized versus differentiated marketing programs among countries To appreciate the pricing complexities when selling in foreign markets To interpret country differences that may necessitate alterations in promotional practices To comprehend the different branding strategies companies may employ internationally To discern complications of international distribution and practices of effective distribution To perceive why and how emphasis in the marketing mix may vary among countries 16-2

Marketing Strategies Marketing: the performance of a wide range of business activities directed at satisfying needs wants through the exchange process

and

• Marketing strategies depend upon a firm’s: – marketing orientation – target market(s)

• When firms select target markets, they may choose

market segments that exist in more than one country. within • Ways of identifying consumer market segments and across countries include demographics (income, age, gender, religion) and psychographics (attitudes, values, lifestyles).

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Marketing Orientations • production orientation: emphasizes production variables such as efficiency, quality, and/or capacity [used internationally for selling commodities and passive exports and for serving foreign market segments that resemble domestic markets]

• sales orientation: assumes that global customers are reason-ably

similar and that the same product can be sold at home and abroad • customer orientation: stresses sensitivity to customer needs, i.e., identifying and serving the needs of the customer • strategic marketing orientation: commits to continuously serving foreign markets and to making incremental adapta-tions to satisfy local customers [draws upon elements of the production, sales, and customer orientations, as appropriate]

• societal marketing orientation: requires that activities be con-

ducted in a way that preserves or enhances the well-being of all stakeholders [addresses the environmental, health, social, and workrelated problems that arise in foreign operations]

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Fig. 16.1: Marketing in International Business

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Product Policy: Reasons for Making Alterations • Legal reasons: explicit product-related legal requirements vary widely by country but are usually meant to protect customers, the environment, or both. [Protective packaging laws and product standards are very complicated legal issues.]

• Cultural reasons: cultural factors affecting product demand may or may not be easily discerned [While religious beliefs offer clear guidelines regarding product acceptability, other factors such as color, design, and artistic preferences are more subtle.] • Economic reasons: levels of income, differences in income distribution, and the extent and condition of available infrastructure can all affect demand for a given product [Price-reducing alterations may be required if a firm expects to enter an emerging market.] Firms usually prefer to standardize basic components altering critical end-use characteristics.

while

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Product Policy: Other Considerations • Extent and Mix of the Product Line

– Whereas narrowing a product line allows for the concentration of effort and resources, the broadening of a product line may capture distribution economies.

• Product Life-cycle Considerations

– A product facing declining sales in one country may have growing or sustained sales in another; such country differences can lead to an extended life for a specific product. Differences will likely exist across countries both the shape and the length of a product’s life cycle.

in

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Pricing • Price: the value asked for a product [Although usually expressed as a monetary value, in countertrade transactions, it might not be.]

– The complexities of pricing are exacerbated in the international arena. – Pricing decisions must assure the firm of sufficient funds to replenish inventory. – In the long-run, price must be low enough to generate sufficient demand but high enough to yield a profit. The Internet is causing more firms to compete for the same business as customers gain increasing access to global products and global prices. 16-8

Pricing Complexities • Government Intervention

– Every country has laws that either directly or indirectly affect prices to the final customer. – Price controls may set either maximum or minimum prices for designated products. – The WTO permits a government to establish restric-tions against any imports that enter the country at a price below the price charged to customers in the exporting country (dumping). – A firm may charge different prices in different regions or countries because of differing competitive and demand factors. 16-9

Pricing Complexities •

Market diversity, i.e., country variation, leads to many ways of segmenting the market for a given product. Depending upon market conditions, a firm may adopt any of the following pricing strategies: – skimming price: sets a high price for a new product

aimed at market innovators [Over time, the price will be progressively lowered in response to demand and supply conditions, i.e., the presence of additional competitors.] – penetration price: sets an aggressively low price (i) to discourage competition and (ii) to attract a maximum number of customers (some of whom will hopefully switch from competitors’ brands) – cost-plus price: sets the price at a desired margin over cost

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Pricing Complexities • Price Escalation in Exporting

– Common reasons for price escalation in export sales are (i) tariffs and (ii) the often greater distance to the market. – If standard markups occur within a distribution channel, either lengthening the channel or adding expenses at additional points within the network will increase the delivered cost of a product. its – To compete in export markets, a firm may have to sell products to intermediaries at reduced prices in order to lessen the amount of price escalation.

A firm may choose to exclude fixed costs in the price calculation of products exported to developing countries order to be price competitive in those markets.

in

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Fig. 16.3: Price Escalation in Exporting if Companies Use Costplus Pricing

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Pricing Complexities • Currency Values and Inflation Rates

– Currency fluctuations: affect a firm’s competitiveness and, ultimately, its profitability [Sales contracts may specify that payment made in a given currency.]

– High inflation in a host country: negatively the value of a firm’s foreign receipts

be

affects

[A firm may need to adjust margins downward in order to remain competitive.]

its

̶ High inflation in a home country: negatively af- fects the costs of a firm’s foreign-sourced inputs [A firm may need to source locally in order remain competitive.]

to

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Effect of Taxes and Inflation on Pricing: An Example Assumptions: beginning cost = $1,000; inflation = 36%; tax rate = 40%; after-tax profit goal on replacement cost = 30% IF STOCK IS SOLD AND FUNDS IF STOCK IS SOLD AND FUNDS ARE COLLECTED WHEN STOCK ARE COLLECTED ONE YEAR IS PURCHASED AFTER STOCK IS PURCHASED Cost$1,000Replacement cost $1,360 + Mark-up 500+ Replacement mark-up 320 Sales price 1,500Sales price 1,680 - Cost 1,000- Original cost 1,000 Taxable income 500Taxable income 680 - Tax @40% 200- Tax @ 40% 272 After-tax income 300 After-tax income 408

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Pricing Complexities • Fixed-cost vs. Variable-cost Pricing – The extent to which producers can set prices at the retail level varies substantially by country. – There is substantial variation in whether, where, and for which products customers expect to be able to negotiate a price. – Local laws and customs may limits firm’s abilities to set optimal prices. – In many cultures prices are simply the starting point in the bargaining process. 16-15

Import-Export Price Negotiations: An Example Goal: to delay a pricing commitment while discussing a whole package of other commitments IMPORTER’S REACTION

1. 2. 3. 4.

EXPORTER’S RESPONSE Offer is too expensive What is meant by expensive? Determine what price is acceptable. Budget is insufficient How large is the importer’s budget? Determine the time frame and explore payment alternatives. Offer does not fit needs Insist on specific details of real needs. Repackage offer in light of new info. Offer is not competitive Determine details of competitors’ offers. Reformulate offer in non-comparative ways; stress uniqueness of offer.

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Promotion Promotion: the presentation of messages intended to help sell a product [direct and indirect forms of communication designed to inform, persuade, and/or remind a target audience about an organization, its products, and/or its positions]

Promotion Mix: the particular combination elements used in a promotion strategy

of

̶ personal selling ̶ advertising ̶ sales promotion activities ̶ publicity/public relations activities

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Promotion: The Push-Pull Mix Push strategy: direct marketing techniques designed to create immediate demand, i.e., personal selling [primarily used when a product is relatively and distribution is tightly controlled]

expensive

Pull strategy: indirect marketing techniques designed to create final demand, i.e., advertising, sales promotion, and publicity/public relations

• The cross country push-pull mix is determined by: – – – –

types of distribution systems the cost and availability of media customer attitudes toward sources of information the relative price (affordability) of a product

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Promotion: The Standardization of Advertising Programs Advertising: any paid form of (nonpersonal) presentation

media

• The advantages of standardized advertising include: – substantial cost savings – improved quality (effectiveness) at the local level – rapid entry into new country markets

• The challenges of standardized advertising include:

– translation [content, meaning, images] – legality [differing views on consumer protection, competitive protection, standards of morality, and nationalism] – message needs [national differences in perceptions and product demand]

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Branding • Brand: a name, term, symbol, and/or design

intended to identify a product or product line and differentiate it in the marketplace • Trademark: a brand, or part of a brand, i.e., a mark, that is granted legal protection because it is capable of legal appropriation

• MNEs must consider the following branding options: – – – –

brand vs. no brand manufacturer’s brand vs. private brand one brand vs. multiple brands worldwide brands vs. local brands

Overall, the portion of local brands to international (regional or global) brands is decreasing. [continued]

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• Challenges to regional and global brands include:

– language factors [the translation and pronunciation of

brand names; the cultural sensitivity of shapes, symbols, and colors] – brand acquisitions [local brands may be well-known but expensive and strategically difficult to maintain] – country-of-origin images [products from particular countries may be perceived as being particularly desirable and of relatively high quality] – generic and near-generic names [generic names may either stimulate or frustrate the sales of the firm from whom a name is expropriated]

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Distribution Distribution: the physical and legal path that products follow from the point of production to the point of consumption Distribution channel: the set of interdependent individuals and organizations that take title to or assist in the transfer of a title to a product from producer to final customer [banks --- transportation companies]

[producers --- wholesalers --- retailers] [agents & brokers]

• Often, geographic barriers and poor transport infrastructure

divide a country into distinctly viable and non-viable markets. The selling of goods through unauthorized distributors, i.e., the gray market, causes a firm’s operations in different countries to complete with one another, thus preventing them from pricing according to local market conditions.

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Distribution: The Difficulty of Standardization

• Each country has its own national distribution system that is historically intertwined with its cultural, economic, and legal environments. • Factors that influence the distribution of consumer products within a country include:

citizens’ attitudes towards their own retailers the ability (or inability) to pay retail workers retailers’ trust in their employees legislation affecting chain and individually-owned stores restrictions on the size of stores and their hours of operation – the financial ability of retailers to carry large inventories – the efficacy of the national postal system – – – – –

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Distribution: Distributor and Channel Selection • Firms should handle the distribution function internally if: – sales volume is high – human, capital, and financial resources are sufficient – the nature of the product demands that the producer deal directly with customers – customers are global – it is possible to gain a competitive advantage

• The more complex and expensive a product, the greater the importance of after-sales service.

– Firms may need to invest in service centers, which in turn can become important sources of revenues and profits. [continued]

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• Criteria for the selection of potential distributors include:

– financial strength – quality of connections – the extent of a distributor’s other commitments regarding both complementary and competitive products – the state of a distributor’s equipment, facilities, and personnel – trustworthiness and contract enforcement issues

• A new client must convince a desired distributor of the viability of its firm and its products.

– A new client may need to offer distributors extra incentives or be willing to enter into exclusive arrangements. Firms may choose a combination of internal distribution outsourced distribution services.

and

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Distribution: Hidden Costs • Differences in national distribution systems that may contribute to increased costs include:

– poor infrastructure [port, roads, warehouse facilities] – levels within a distribution system [multi-tiered wholesale systems]

– retail inefficiencies [an insistence upon counter service] – government restrictions [laws protecting small retailers or limiting hours of operation]

– lack of retail storage space [more frequent, smaller deliveries required to prevent stock-outs]

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The Internet and Electronic Commerce • Opportunities

– E-commerce offers firms a unique opportunity market their products worldwide. – The Internet permits suppliers to deal quickly with their customers.

to more

• Challenges

̶

̶

̶

Customers worldwide can quickly compare prices from different distributors, thus intensifying price competition. Differentiation is difficult because the same web ads and prices reach customers everywhere. Internet ads and prices must comply with the laws of each country where a firm markets its products.

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Internet Usage by Region, 2005 WORLD REGIONS

% OF WORLD POPULATION

INTERNET USAGE

% OF POP. % OF WORLD [USAGE RATE] USERS

Africa 900,465,411 13,468,600 1.5% 1.5% Asia 3,612,363,165 302,257,003 8.4% 34.0% Europe730,991,138 259,653,144 35.5% 29.2% Middle East 259,499,772 19,370,700 7.5% 2.2% North Amer. 328,387,059 221,437,647 67.4% 24.9% Latin Amer. 546,917,192 56,224,957 10.3% 6.3% Oceania 33,443,448 16,269,080 46.6% 1.8% WORLD 6,412,067,185 888,681,131 13.9% 100.0% Source: Miniwatts International, Ltd.

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Managing the Marketing Mix: Gap Analysis Gap analysis: a method for estimating a firm’s potential sales of a given product by determining the difference between the total market potential and gaps in usage, competition, product line offers, and distribution

Total market potential: the total potential sales of all competitors within a given product market (category)

• The difference between total market potential and current sales, i.e., the gap, is due to: – – – –

usage patterns product line characteristics distribution coverage strategies the effect(s) of competitors’ strategies Gap analysis helps managers determine both the size of and the reasons for the differences between market potential and actual sales.

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Fig. 16.4: Gap Analysis

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Implications/Conclusions • Marketing is a social and managerial

process through which individuals and organizations satisfy their needs and objectives through the exchange process. • A standardized approached to worldwide mar-keting means maximum uniformity in products and programs amongst countries in which sales occur. 16-31

• A variety of legal, cultural, and economic con-

ditions may cause firms to alter their marketing strategies, but the cost of adaptation must be measured against the potential gain in sales. • Gap analysis is a tool that help firms deter- mine (i) why they have not yet maximized their market potential in given countries and (ii) what parts of the marketing mix to empha-size in which countries and regions.

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