Homework answers / question archive / Chapter 12 – Global Marketing Management: Planning and Organization Chapter 12 – Global Marketing Management: Planning and Organization   Teaching Objectives An issue facing many multinationals today is how to compete in an increasingly competitive global market

Chapter 12 – Global Marketing Management: Planning and Organization Chapter 12 – Global Marketing Management: Planning and Organization   Teaching Objectives An issue facing many multinationals today is how to compete in an increasingly competitive global market

Business

Share With

---

Chapter 12 – Global Marketing Management: Planning and Organization

Chapter 12 – Global Marketing Management: Planning and Organization

 

Teaching Objectives

An issue facing many multinationals today is how to compete in an increasingly competitive global market. Whether a small company or one of the giants, staying competitive means constantly re-accessing marketing strategies. How product, promotion, distribution, and pricing strategies evolve in international marketing is dependent on the approach to internationalization the company takes. Of the three operating concepts that characterize a company’s international orientation, Domestic Market Extension Concept, Multidomestic Market Concept, or Global Market Concept, the main focus of this chapter and the text is on the Global Market Concept. I believe that regardless of the size of a company or in how many countries it operates, it should have a global orientation. The teaching objectives of this chapter are to:

1) Present the operating concepts an international company may have and explore the idea of global marketing management.

2) Discuss the benefits of global orientation.

3) Stress the importance of quality and cost containment in global marketing competition.

4) Examine the different types of collaborative relationships and show how these alliances are being embraced by international companies.

5) Focus on relationship marketing and strategic international alliances as two important types of collaborative relationships for the global marketer.

6) Stress the need for strategic planning to achieve company goals.

Comments and Suggestions

1. The subject of collaborative relationships and the subsequent discussion of relationship marketing and strategic international alliances are important ideas to focus on in this chapter. Changes in technology, the shortening product life cycle, competition, the rapid growth of emerging markets and the need for cost containment as major trends in global marketing means that many firms must engage in collaborative relationships to remain competitive. There are several good examples in the text that illustrate how these relationships have been used. Also, Michael Schrage, “Notes on Collaboration,” The Wall Street Journal, June 19, 1995, p. A-10, had three good examples of important collaborations by IBM, Microsoft, and Boeing. As Schrage states, “. . . ‘winning’ in tomorrow’s global markets isn’t going to be a matter of scoring points but of creating value with customers, clients, suppliers and colleagues in innovative ways.” These relationships span the complete range of contacts a company has from customers through suppliers to other companies.

2. Not to be overlooked in this chapter are the various alternative market entry strategies. It is important to stress that there are a variety of ways to enter international markets and a company may use only one or a combination depending on the goals of the company and target market characteristics.

 

Lecture Outline

I. Global Marketing Management

A. Global Marketing Management

B. Benefits of a Global Orientation

II. Planning for Global Markets

A. Company Objectives and Resources

B. International Commitment

C. The Planning Process

III. Alternative Market-Entry Strategies

A. Exporting

B. Contractual Agreements

1. Licensing

2. Franchising

3. Joint Ventures

4. Consortia

C. Strategic International Alliances (SIA)

D. Direct Foreign Investment

IV. Organizing for Global Competition

A. Locus of Decision

B. Centralized versus Decentralized Organizations

 

Discussion Questions

1.	Define:
		Licensing
	Corporate planning	Franchising
	Direct exporting	Joint Venture
	Strategic planning
	Indirect exporting	SIA
	Tactical planning

 

 

2. Define strategic planning. How is strategic planning different for international marketing than domestic marketing?

Strategic planning is a systemized way of relating to the future. It is an attempt to manage the effects of external uncontrollable factors on the firm’s strengths, weaknesses, objectives, and goals to attain a desired end. Further, it is a commitment of resources to a country market to achieve specific goals.

The principles of planning are not in themselves different between international and domestic marketing, but the intricacies of the operating environments of the MNC (host country, home, and corporate environments), its organizational structure, and the task of controlling a multicountry operation create differences in the complexity and processes of international planning. Strategic planning on an international level allows for rapid growth of the international function, changing markets, increasing competition, and the ever-varying challenges of different national markets. The plan blends the changing parameters of external country environments with corporate objectives and capabilities to develop a sound, workable marketing program.

3. Discuss the benefits to an MNC of accepting the global market concept. Explain three points that define a global approach to international marketing.

 

Potential economies of scale; transfers of experience and product and marketing ideas across markets; having access to the toughest, most demanding customers; and stability of revenues should all be on the students’ lists of answers.

 

(1) Identification of market segments that cut across countries, (2) potential economies of scale in manufacturing and marketing, and (3) firm goals, strategies, structures, and personnel that support a global approach.

4. Discuss the effect of shorter product life cycles on a company’s planning process.

Global competition is placing new emphasis on some basic tenets of business. It is reducing time frames and focusing on the importance of quality, competitive prices, and innovative products. Time is becoming a precious commodity for business, and expanding technology is shortening product life cycles and creating greater opportunities for innovative products. A company no longer can introduce a new product with the expectation of dominating the market for years while the idea spreads slowly through world markets. In any given year, for example, two thirds of Hewlett-Packard’s revenue comes from product introduced in the prior three years. Shorter product life cycles mean that a company must maximize sales rapidly to recover development costs and generate a profit by offering its products globally. Along with technological advances have come enhanced market expectation for innovative products at competitive prices. Today, strategic planning must include emphasis on quality, technology, and cost containment. To achieve the flexibility and speed required under such conditions, many firms are entering collaborative relationships to shore up their weaknesses whether in distribution, technology or manufacturing that will enable them to respond to the problems created by shorter life cycles.

 

5. What is the importance of collaborative relationships to competition?

The competitive environment of international business is changing rapidly. To be competitive in global markets a company must meet or exceed new standards for quality and new levels of technology. There is an increasing change of pace for product development and profitability. Cost efficient, technologically advanced products are being offered by competitors and demanded in established markets as well as in markets rising from formerly Marxist-socialist economies. Opportunities abound the world over, but to benefit, firms must be current in new technology, have the ability to keep abreast of technological change, have distribution systems to capitalize on global demand, have cost-effective manufacturing, and have capital to build new systems as necessary.

The accelerating rate of technological progress, market demand created by global industrialization, and the creation of new middle classes will result in tremendous potential in global markets. But, along with this surge in global demand comes an increase in competition as technology and management capabilities spread beyond global companies to new competitors from Asia, Europe, and Latin America. Although global markets offer tremendous potential, companies seeking to function effectively in a fragmented global market of five billion people are being forced to stretch production, design\engineering, and marketing resources and capabilities because of the intensity of competition and the increasing pace of technology. Improvements in quality and staying on the cutting edge of technology are critical and basic for survival but often are not enough. Restructuring, reorganizing and downsizing are all avenues being taken by firms to strengthen their competitive positions. Additionally, many multinational companies are realizing they must develop long term, mutually beneficial relationships throughout the company and beyond to competitors, suppliers, governments, and customers. In short, multinational companies are developing orientations that focus on building collaborative relationships to promote long-term alliances and they are seeking continuous, mutually beneficial exchanges.

The environment facing multinational companies demands flexibility, quality, cost containment, cutting edge manufacturing skills, and a rapid response to market changes to sustain a competitive advantage. The strengths and capabilities a company must have to be a major player are enormous and few companies can cover all the bases all of the time. To shore up weaknesses, companies are entering relationships with others to share what each does best whether in marketing, research or manufacturing. Collaborative relationships are becoming a common way to meet the demands of global competition and a successful collaboration means that each achieves more together than either can accomplish alone.

6. In phases one and two of the international planning process, countries may be dropped from further consideration as potential markets. Discuss some of the conditions in each phase that may exist in a country that would lead a marketer to exclude a country.

In phase one of the planning process, there are a host of reasons why a country would no longer be considered. On balance, those countries that do not offer sufficient potential for further consideration will be eliminated. Some of the reasons why this may occur are that product acceptance within the country could not be achieved without extensive investment and new product development, and the firm does not have sufficient resources to make that investment; the legal structure may be such that it would be impossible for the company to function within that country. Competition in the country is such that, based on the company’s objectives, resources, etc., it is felt that it would not be a profitable venture. In other words, any problem that would lead to minimum market potential, minimum profit, minimum return on investment, unacceptable competitive levels, unacceptable political stability, unacceptable legal requirements, etc., may all lead to the dropping of a country.

 

While the major reasons for dropping a country in phase one center around general environmental constraints, the reasons that a country may be dropped in phase two center around the more specific questions of what cultural environmental adaptations are necessary for successful acceptance of the company’s marketing mix, and will adaptation costs allow for profitable market entry. In phase two, the marketing mix is the focal point of analysis. Still, the final determination of whether or not a country is dropped depends upon the anticipated profitability of the market after necessary adaptations are made.

7. Assume that you are the director of international marketing for a company producing refrigerators. Select one country in Latin America and one in Europe and develop screening criteria to use in evaluating the two countries. Make any additional assumptions about your company that are necessary.

This is a library-type project. Whatever the details of the screening criteria, the major points that should be considered are: (1) company objectives and goals, (2) product-use characteristics, (3) country environmental characteristics.

8. “The dichotomy typically drawn between export marketing and overseas marketing is partly fictional; from a marketing standpoint, they are but alternative methods of capitalizing on foreign market opportunities.” Discuss.

The dichotomy drawn between export marketing and overseas marketing is very misleading, for in fact they are but alternative methods of approaching the foreign markets. Yet, on the other hand, these approaches are often interrelated in the complete marketing structure. Both exporting and overseas marketing can be successfully interchanged to reach various heterogeneous markets. Depending on market structure, competition, and company policies, the organizational structure can be so devised so as to use exporting, overseas marketing, or a combination of both to successfully reach a wide assortment of foreign markets. In one country, due to high tariff rates, overseas production and marketing might be advised; on the other hand, poor communications or resources might necessitate exporting.

9. How will entry into a developed foreign market differ from entry into a relatively untapped market?

The differences between entering a fully developed market and an untapped foreign market are many and extremely varied. Some of these differences are channels of distribution which may or may not be developed. Governmental attitudes toward business, foreigners, and industry may be very liberal in a growing economy, while an established market may be very restrictive. Communication and transportation may be highly limited in untapped markets and highly developed in successful countries. The amount of capital, banks, and exchange-rate systems will vary according to the market’s development. Finally, the degree and amount of competition will vary accordingly. To this list, endless factors could be added such as cost of entering the market, social customs, laws, etc.

 

10. Why do companies change their organizations when they go from being an international to a global company?

An international marketing plan should optimize the resources committed to stated company objectives. The organizational plan includes the type of organizational arrangements to be used, and the scope and location of responsibility. Many ambitious multinational plans meet with less than full success because of confused lines of authority, poor communications, and lack of cooperation between headquarters and subsidiary organizations.

Companies are usually structured around one of three alternatives: global product divisions responsible for product sales throughout the world; geographical divisions responsible for all products and functions within a given geographical area; and a matrix organization consisting of either of these arrangements with centralized sales and marketing run by a centralized functional staff, or a combination of area operations and global product management.

Market-oriented firms are finding greater competitiveness in world markets makes it essential to assume a global perspective in planning and organizational structure. Global competition also requires quality products designed to meet ever-changing customer needs in the face of rapidly growing competition from every corner of the world. Cost containment, escalating technology, customer satisfaction and a greater number of players mean that every opportunity to refine international business practices must be examined in light of company goals. Strategic international alliances, strategic planning and alternative market entry strategies are important avenues to global marketing that must be implemented in the planning and organization of global marketing management.

11. Formulate a general rule for deciding where international business decisions should be made.

International business decisions should reflect the culture of the country in which they will be implemented. Thus the decision should be as close to the country where it is to be implemented as possible.

12. Explain the popularity of joint ventures.

Joint ventures have become popular for a number of reasons. One important marketing reason is to gain access to markets. Nearly all of the developing countries, and many developed countries, require some degree of local participation for operating in their country. Mergers with distributor companies or companies which already have well-established local distribution may provide rapid market access and distribution to foreign companies entering a country. Sometimes companies join forces in order to broaden the line of merchandise that they have available, thereby gaining marketing efficiency and better public image. Another market reason for joining ventures is that local firms possess market information and the marketing know-how which would take years for a foreign company to acquire. Such participation minimizes the risk of market failure and speeds the marketing effort. Joint ventures may also arise for financial and manpower reasons. Financially it is sometimes desirable to merge with foreign companies because the merger provides access to local capital markets and combines the resources and fund raising capabilities the companies have. It may also give access to a higher quality and more capable managerial manpower.

 

13. Compare the organizational implications of joint ventures versus licensing.

Joint ventures involve the partners in a new venture and usually require significant inputs of both capital and management. In licensing, the companies retain separate identity. Usually the licensor is little affected by his licensing actions.

14. Visit the homepages of Maytag Corporation http://www.maytag.com/ and the Whirlpool Corporation http://www.whirlpool.com/, both appliance manufacturers in the United States. Each has some international involvement. Search their Web sites and compare their international involvement. How would you classify each, as exporter, international, or global?

 

15. Using the sources in question above i.e., http://www.maytag.com/) and http://www.whirlpool.com/, list the different alternative entry modes each uses.

Both use foreign direct investment although Whirlpool is the most advanced. Maytag exports from the United States.

16. Visit the Nestlé Corporation homepage http://www.nestle.com and Unilever N.V. http://www.unilever.com/ and compare their strategies towards international markets. In what ways to they differ (besides product categories) do they differ in their international marketing?

This exercise can lead to a good class discussion of multinational and/or global companies and strategies. These two global giants probably are among the first real global companies. From their beginning they viewed the world as their market and still follow that direction.

Chapter 13 – Products and Services for Consumers

 

Teaching Objectives

Products and services, the first part of the marketing mix to be discussed, is covered here with consumer products and the next chapter on industrial products and services. An overall point that needs to be made with these two chapters is that companies face two different problems in developing products for international markets – they either have an existing product that needs to be evaluated for possible adaptation or they are developing a product for global markets from scratch. The two situations require different approaches to product development. The decisions as to whether to standardize or adapt, to develop global products and global brands need to be addressed at the beginning of the chapter since the direction taken will influence later discussions. The teaching objectives are to:

1) Familiarize students with the debate between standardization and adaptation and global products and brands.

2) Stress the importance of offering products and services suitable to the intended market. That the issue is not whether to adapt or standardize, but how much adaptation is necessary and to what point a product can be standardized.

3) Make them aware of the country of origin effect on how products are perceived.

4) Explore the relationship between consumer perceptions of products and culture. Special emphasis on the product as an innovation and the possibility of resistance to an innovation if it is too new or disruptive of the norm.

5) Present two methods for screening products and services for adaptation; the analysis of characteristics of innovation and analysis of product components model.

Comments and Suggestions

1. Coverage of this chapter can be divided into three parts. First, a broad discussion of how cultural factors and the country of origin affect the acceptance of a product, how a product is received if it is perceived as an innovation and the issues of global products and standardization versus adaptation. Second, there are physical and mandatory requirements that require adaptation, and third, screening products for adaptation. This third point recognizes the fact that most companies have existing products that require evaluation for adaptation, whether mandatory or cultural, before being introduced in another country.

2. Exhibit 13.2, Product Component Model is helpful in focusing on the different components of a product that may require adaptation. Using this model also helps me discuss the issue of the core component and product platform–the most costly part of a product to adapt yet possibly the most easily standardized.

3. If the students are asked to do a research project similar to the one described Part I-F, above, The Country Notebook – A Guide for Developing a Marketing Plan, many of the points in the chapter can be brought out in class. I bring a product to class and ask students to respond on how they think the product will need to be adapted or could be standardized in the country they are studying.

Lecture Outline

I. Quality Products

A. Quality Defined

B. Maintaining Quality

C. Physical or Mandatory Requirements for Adaptation

D. Green Marketing and Product Development

II. Products and Culture

A. Innovate Products and Adaptation

B. Diffusion of Innovations

C. Production of Innovations

III. Analyzing Product Components for Adaptation

A. Core Component

B. Packaging Component

C. Support Services Component

IV. Marketing Consumer Services Globally

A. Services Opportunities in Global Markets

B. Barriers to Entering Global Markets for Consumer Services

V. Consumer Services

VI. Brands in International Markets

A. Global Brands

B. National Brands

C. Country of Origin Effect and Global Brands

D. Private Brands

 

Discussion Questions

1.	Define the following terms and show their significance to international marketing:
	Diffusion	Innovation
	Product Component Model	Green marketing
	Quality	Product Homologation
	Global brand

 

2. Debate the issue of global versus adapted products for the international market.

A recurring debate exists relative to product planning and focuses on the question of standardized products marketed worldwide versus differentiated products adapted or even redesigned for each culturally unique market. Those with a strong production and unit cost orientation advocate standardization and others, perhaps more culturally sensitive, propose the policy of a different product for each market. The issue cannot be resolved with a simple either/or decision. Cost revenue analyses need to be done and decisions made in the hard, cold lights of profitability. There is no question that significant cost savings can be realized from having standardized products, packages, brand names, and promotional messages but this makes sense only if there is adequate demand for the standardized products: costs must be balanced with demand. On the other hand, if the cost of an individualized product when evaluated against price/demand characteristics within a market exceeds potential profit, then it is ridiculous not to consider other alternatives including not marketing the product at all.

 

To differentiate for the sake of differentiation is no solution, and realistic business practice requires a company to strive for uniformity in its marketing mix whenever and wherever possible. Economies of production, better planning, more effective control, and better use of creative managerial personnel are all advantages of standardization.

3. Define the country-of-origin effect and give examples.

Country of Origin Effect (COE) can be defined as any influence that country-of-manufacturer has on a consumer’s positive or negative perception of a product. Today a company competing in global markets will manufacture products worldwide and, when the customer is aware of the country of origin, there is the possibility that the place of manufacture will affect product/brand image. Some examples are French wines, German beer, Swiss watches, Cuban cigars, and Irish woolens are some positive COEs. A negative COE is an automobile from Yugoslavia (the Yugo).

4. The text discusses stereotypes, ethnocentrism, degree of economic development, and fads as the basis for generalizations about country-of-origin effect on product perception. Explain each and give an example.

The country, the type of product, and the image of the company and its brands all influence whether or not the country of origin will engender a positive or negative reaction. There are a variety of generalizations that can be made about country of origin effects on products and brands. Consumers tend to have stereotypes about products and countries that have been formed by experience, hearsay, and myth. Following are some of the more frequently cited generalizations.

Consumers have broad but somewhat vague stereotypes about specific countries and specific product categories that they judge “best”: English tea, French perfume, Chinese silk, Italian leather, Japanese electronics, Jamaican rum, and, so on. Stereotyping of this nature is typically product specific and may not extend to other categories of products from these countries.

Ethnocentrism can also have country of origin effect; feelings of national pride, the “buy American” effect among members, for example, can influence attitudes toward foreign products. Honda, which manufactures one of their models almost entirely in the United States, recognizes this phenomenon and points out how many component parts are made in America in some of their advertisements. On the other hand, others have a stereotype of Japan as producing the “best” automobiles. A recent study found that U.S. automobile producers may suffer comparatively tarnished in-country images regardless of whether they actually produce superior products.

Countries are also stereotyped on the basis of whether they are industrialized, in the process of industrializing or less-developed. These stereotypes are less country-product specific; they are more a perception of the quality of goods in general produced within the country. Industrialized countries have the highest quality image, and there is generally a bias against products from developing countries. Within groups of countries grouped by economic development there are variations of image. For example, one study of COE between Mexico and Taiwan found that a microwave oven manufactured in Mexico was perceived as significantly more risky than an oven made in Taiwan. However, for jeans there was no difference in perception between the two countries. One might generalize that the more technical the product, the less positive is the perception of one manufactured in a less-developed or newly industrializing country. There is also the tendency to favor foreign made products over domestic made in less developed countries. Not all foreign products fare equally well since consumers in developing countries have stereotypes about the quality of foreign made products even from industrialized countries. A survey of consumers in the Czech Republic found that 72 percent of Japanese products were considered to be of the highest quality, German goods followed with 51%, Swiss goods with 48%, Czech goods with 32% and, last, the United States with 29%.

 

One final generalization about COE involves fads that often surround products from particular countries or regions in the world. These fads are more often product specific and generally involve goods that are themselves faddish in nature. European consumers are apparently enamored with a host of American made products ranging from Jeep Cherokees, Budweiser beer, and Jim Beam bourbon, to Boise sound systems. In the 1970s and 80s there was a backlash against anything American, but, in the 1990s, American is in. In China, anything Western seems to be the fad. If it is Western it is in demand even at prices three and four times higher than domestic products. In most cases such fads wane after a few years as some new fad takes over.

5. Discuss product alternatives and the three marketing strategies: domestic market extension, multidomestic market, and global market strategies.

The marketer has at least three viable alternatives when entering a new market: (1) sell the same product presently sold in the home market (Domestic Market Extension Strategy); (2) adapt existing products to the tastes and specific needs in each new country market (MultiDomestic Market Strategy); or (3) develop a standardized product for all markets (Global Market Strategy.)

An important issue in choosing which alternative to use is whether or not a company is starting from scratch (i.e., no existing products to market abroad), or whether it has products already established in various country markets. For a company starting fresh, the prudent alternative is to develop a global product. If the company has several products that have evolved over time in various foreign markets, then the task is one of repositioning the existing products into a global product.

6. Discuss the different promotional/product strategies available to an international marketer.

The marketer has at least three viable alternatives when entering a new market: he can (1) sell the same product he presently sells elsewhere, (2) individualize existing products to the tastes and specific needs of the new country, or (3) develop a totally new product. These three basic alternatives, when combined with promotional effort, can be developed into five different product strategies available to the international marketer. First, a company can sell the same product using the same promotional message worldwide as Pepsi-Cola and the Coca-Cola company do. A second version is to sell the same product but with promotions featuring different use patterns, for example, garden power equipment designed for United States home use but sold as agricultural equipment in underdeveloped countries. A third strategy involves altering the basic physical features of the product to meet local environmental needs but promoting the product to fill the same use patterns as are prevalent in the domestic market. Detergents redesigned to function in cold water but still promoted to get clothes clean is an example of this strategy. The fourth strategy requires both a change in the product to meet different use patterns and a change in the promotional message accompanying it. For example, the fifth strategy is one of investing or developing a totally new product rather than adapting an existing one. This is less frequently done, but as companies move into less developed markets and seek greater economic penetration into these markets it becomes more prevalent. As examples, the CocaCola Company has developed Saci, a protein fortified beverage to sell in foreign countries as a diet supplement; and Ford and General Motors are experimenting with a “bare bones” Model Ttype truck to sell in developing countries. The success of any of these strategies depends upon the product and the fundamental need it fulfills, its characteristics and their perception within the culture, and finally, the associated costs of each program.

 

7. Assume you are deciding to “go international” and outline the steps you would take to help you decide on a product line.

Library research project.

 

8. Products can be adapted physically and culturally for foreign markets. Discuss.

Products can be adapted to a new culture in a variety of ways ranging from simple package changes to total redesign in the physical product. Some need for change becomes obvious with relatively little analysis. For example, a cursory analysis of a country will uncover the need to require electrical goods if it uses a different voltage system, or to indicate product simplification when the local level of technologies is not high, or the need for a color change if the present color violates local taboos, etc. Most such superficial changes can be spotted by looking at product use patterns, the economy, and other related culture elements. One international scholar has categorized these changes into thirteen environmental factors listed below. Each is quickly detected and requires only basic changes to bring the product in line with a culture.

 

Environmental Factor	Design Change
Level of technical skills	Product simplification
Level of labor cost	Automation or manualization of product
Level of literacy	Remarking and simplification of product
Level of income	Quality and price change
Level of interest rates	Quality and price change (investment in high quality might not be financially desirable
Level of maintenance	Change in tolerances
Climatic differences	Product adaptation
Isolation (heavy repair difficult and expensive)	Product simplification and reliability improvement
Differences in standards	Recalibration of product and resizing

 

 

The suggested changes are primarily concerned with the price and physical or mechanical properties of a product. Such product characteristics certainly can impede effective use of a product within another culture, but more subtle differences within a culture require other kinds of changes that must be resolved before a product gains acceptance.

Internal cultural variations may require product adaptation that hinges more on the product’s conflict with norms, values, and behavior patterns than on its physical or mechanical aspects. For example, introduction of a new product into a culture that does not perceive a need for such an item can conflict with established norms, locally accepted values can be upset by trying to introduce personal care items into a culture that prefers body functions remain very private and assuming too high a level of sophistication in product usage may overlook local behavior patterns.

 

9. What are the three major components of a product? Discuss their importance to product adaptation. The three major components of a product are: (1) its core, the physical product and all its functional features; (2) the packaging component that includes the physical package in which the product is presented, as well as the brand name, trademark, styling and design features, price and quality levels; (3) the support services component, which completes the product buyers receive and from which the bundle of satisfactions received are derived. This support services component includes repair and maintenance services, installation, delivery, warranty, spare parts, training and instructions, credit, and any other services related to the use and purchase of the product. The importance of each component, as well as the perceived component attributes are functions of culture. What may be desirable in one culture may be unimportant in another. A product is, in a large part, a cultural phenomenon; that is, culture determines the individual’s perception of what a product is and what satisfaction that product provides. Therefore, in developing products for international markets, adaptation of that bundle of utilities or satisfaction received may be necessary to bring the product in line with the culture’s needs. Such adaptation may require changes of any one or all of the product components as defined above.

10. How can the knowledge of the diffusion of innovations help a product manager plan his international investments?

Knowledge of the diffusion of innovation provides the international marketer with several important pieces of information; for example, a knowledge of the concept may provide the marketer with an estimate of the time it will take before his innovation would be accepted by a culture, and therefore help him decide whether or not to make the necessary investment. It can also give him insights into how to accelerate the rate of acceptance of his product and the steps that he as a marketer can take to eliminate some of the “newness” thereby gaining more rapid acceptance of his product. In preparing characteristics of innovations study of the new product, he or she might determine a product profile which could be extremely useful as a model for planning product strategy. By analyzing the product in terms of those attributes which contribute to its newness (or innovativeness) the marketer’s attention is focused on those factors which give rise to resistance; thus, the marketer can estimate the possible rate of adoption and perhaps effect the rate of adoption of an innovation by changing its characteristics through physical modifications, advertising, and/or sales promotion efforts.

11. Old products (that is, old to the U.S. market) may be innovations in a foreign market. Discuss fully.

It is important for the marketer to appreciate that a product which has gained acceptance and is now at the top or perhaps even in the declining stage of the product life cycle, may be perceived in another culture as a new and, in fact, very innovative product. The marketer must guard against assuming that an “old hat” in one market which has achieved acceptance after many years of exposure and learning and adaptation on the part of the culture toward the product can be transferred to another culture with its learned acceptance intact. In fact, the “old hat” may be so outside the experience of the new market that the marketer will have to start at the beginning of the assimilation process.

12. “. . . If the product sells in Dallas, it will sell in Tokyo or Berlin.” Comment.

Basically, the needs and hence the demand for a product are the same in all markets. Similarities in wants are universal and, as income increases, practically everyone desires the “good life.” The important aspect to consider is that in crossing one culture to another, separate characteristics of nationality and stages of economic and industrial development determine consumer behavior to a great extent. Hence, each group’s interpretation of the “good life” as reflected in consumer behavior relates heavily to cultural heritage. Thus, the statement can be very wrong and represents an attitude which has frequently led to international market failures.

 

13. How can a country with a per capita GNP of $100 be a potential market for consumer goods? What kinds of goods would probably be in demand? Discuss.

A country with a low GNP can have a large demand for consumer goods because of the need that exists for certain products and because there are no production facilities or very limited ones within the country. India, for example, has a per capita income of $58/year, yet its imports were about $2.4 billion in 1963. The type of goods that likely are in demand are the more basic type of consumer goods, such as clothing or basic housing needs.

14. Discuss the characteristics of an innovation which can account for differential diffusion rates.

The characteristics of an innovation which can account for differential diffusion rates are: (1) relative advantage, (2) compatibility, (3) complexity, (4) trialability, and (5) observability. Relative advantage is the degree to which an innovation is better than the products it replaces or with which it competes. Compatibility is concerned with how consistent a product is with existing value and behavior patterns. Complexity refers to how difficult it is to understand and use the new product. Trialability is the degree to which a product may be tried, on a limited basis, without complete commitment to the product. And, observability refers to the ease with which the results of an innovation may be communicated to others.

15. Give an example of how a foreign marketer can use knowledge of the characteristics of innovations in product adaptation decisions.

 

An answer to this question should be based on the 5 characteristics (listed just above) that influence diffusion rates of new products: relative advantage, compatibility, complexity, trialability, and observability. For example, consider selling smart phones in India. For the urban, high-income segment that frequently uses the computer and Internet, little adaptation would be necessary. However, for the rural population the relative advantages of the product (apps, etc.) may not be useful, signals may be weak reducing compatibility, complexity may be too great, and infrastructure for product trial inadequate. Substantial product adaptations would be necessary for all these reasons. Similar problems would be encountered for introductions of the latest medical equipment and instruments in several markets around the world.

 

16. Discuss “environmentally friendly” products and product development.

Germany has a strict Eco-labeling program to identify, for the concerned consumer, products that have a lesser negative impact on the environment than similar products. Under German law, a manufacturer is permitted to display a logo, called the “Blue Angel,” on all products that comply with certain criteria that make it environmentally friendly. More than 3,200 products in 58 product categories have been examined and given the Blue Angel logo. While it is difficult to judge the commercial value of a Blue Angel designation, manufacturers are seeking the eco-label for their products in response to growing consumer demand for environmentally friendly products. Similar national labels are under discussion in France, Denmark, the Netherlands and the United Kingdom. The EC Commission issued guidelines for eco-labeling that became operational in October 1992. Under the EC directive, a product is evaluated on all significant environmental effects throughout its life cycle, from manufacturing to disposal, a cradle-to-grave approach. Companies will be encouraged to continuously update their environmental technology because eco-labels will be granted for only a limited period. As more environmentally friendly products come onto the market, the standards will become tougher, and products that have not been improved will lose their eco-label.

 

The “Blue Angel” and similar eco-labels are awarded on the basis of a product’s environmental friendliness, that is, how “friendly” when used and when its residue is released into the environment. A detergent formulated to be bio-degradable and not pollute would be judged more friendly than a detergent whose formulation would be harmful when discharged. Aerosol propellants that do not deplete the ozone layer are another example of environmentally friendly products. No country’s laws yet require products to carry an “eco-label” to be sold. The designation that a product is “environmentally friendly” is voluntary and its environmental success depends on the consumer selecting the “eco-friendly” product. However, laws that mandate systems to control solid waste management, while voluntary in one sense, do carry penalties in that consumers may not select their products.

Chapter 15 – International Marketing Channels

 

Teaching Objectives

In some markets the distribution system may be the single biggest impediment to successful marketing. An inadequate distribution system may make the cost of reaching some consumers so high that it puts the price of the product out of reach of the market. In China, for example, the market for a product that exists in areas outside the major urban centers is often inaccessible because of a lack of a viable distribution system. In others, the distribution system may be so structured and difficult to enter that is serves as a major non-tariff barrier. Although beginning to show signs of weakening, the hold that wholesalers and manufacturers have over many small retailers and laws that protect the system make the distribution network almost inaccessible to an outsider. The broad focus of this chapter is to present an overview of a range of distribution systems that confront an international marketer. The teaching objectives are to:

1) Present the variety of distribution channel structures and show how they affect cost and efficiency in marketing.

2) Examine the Japanese distribution system as it exists today, changes that are rapidly occurring, and speculate on the eventual changes that will come about there.

3) Detail both the home country and foreign country middleman alternatives available to an international marketer.

4) Discuss the factors affecting the choice of a channel.

5) Review the methods of locating, selecting, and motivating channel members.

Comments and Suggestions

1. To illustrate the extreme channel structures that can confront an international marketer, I like to begin the discussion of this chapter with a comparison of a channel structure with a minimum number of middlemen (import-oriented distribution structure), the channel structure found in the United States, and the Japanese distribution system. This discussion provides students with a comprehensive view of some of the types of channel structures confronting the international marketer.

2. Following the discussion above, I present a brief overview of the international channel of distribution alternatives, Exhibit 15.3 followed by a discussion of the six Cs of channel strategy.

3. Catalog sales and mail order are growing in importance as an effective way to enter some markets. There have been a number of large U.S. catalog retailers, L.L. Bean, Lands’ End, and Eddie Bauer for example, that are experiencing some success in Japan. Such companies have a good “quality” image in Japan and, furthermore, U.S. goods are cheaper than comparable Japanese goods. The strength of the yen helps U.S. companies to be price competitive but the biggest benefit may come from the personal exemption on import tariffs a Japanese consumer receives when ordering from the U.S., up to 10,000 yen (approximately $115) per order. With express shipping, a U.S. company can deliver in 72 hours.

4. Locating and the management of middlemen conclude the discussion on this chapter.

 

Lecture Outline

I Global Perspective

II. Channel of Distribution Structures

A. Import Oriented Distribution Structure

B. Japanese Distribution Structure

C. Trends – From Traditional to Modern Channel Structure

III. Distribution Patterns

A. Retail Patterns

IV. Alternative Middleman Choices

A. Home Country Middlemen

B. Foreign Country Middlemen

C. Government-Affiliated Middlemen

V. Factors Affecting Choice of Channels

A. Cost

B. Capital Requirement

C. Control

D. Coverage

E. Character

F. Continuity

VI. Channel Management

A. Locating Middlemen

B. Selecting Middlemen

C. Motivating Middlemen

D. Terminating Middlemen

E. Controlling Middlemen

VII. The Internet

VIII. Logistics

 

 

Discussion Questions

1.	Define:
	Distribution process
	Distribution structure
	Large-Scale Retail Store Law
	Complementary marketing
	Agent middlemen
	Merchant middlemen
	Home country middlemen
	Dealer
	Export management company (EMC)
	Export Trading Company Act (ETC)

 

2. Discuss the distinguishing features of the Japanese distribution system.

Distribution in Japan has long been considered the most effective non-tariff barrier to the Japanese market. The distribution system is different enough from its United States or European counterparts that it should be carefully studied by anyone contemplating entry. The Japanese system has four distinguishing features: 1) a structure dominated by many small wholesalers dealing with many small retailers; 2) channel control by manufacturers; 3) a business philosophy shaped by a unique culture; and 4) laws that protect the foundation of the system, the small retailer.

High Density of Middlemen. There is a density of middlemen, retailers and wholesalers in the Japanese market unparalleled in any Western industrialized country. The traditional structure serves consumers who make small, frequent purchases, at small conveniently located stores. The high density of small stores with small inventories is supported by an equal density of wholesalers. It is not unusual for consumer goods to go through three or four intermediaries before reaching the consumer—producer to primary, secondary, regional, and local wholesaler, and finally to retailer to consumer.

Channel Control. Manufacturers depend on wholesalers for a multitude of services to other members of the distribution network. Financing, physical distribution, warehousing, inventory, promotion and payment collection are provided to other channel members by wholesalers. The system works because wholesalers and all other middlemen downstream are tied to manufacturers by a set of practices and incentives designed to ensure strong marketing support for their products and to exclude rival competitors from the channel.

Business Philosophy. Coupled with the close economic ties and dependency created by trade customs and the long structure of Japanese distribution channels is a unique business philosophy that emphasizes loyalty, harmony, and friendship. The value system supports long-term dealer/supplier relationships that are difficult to change as long as each party perceives economic advantage. The traditional partner, the insider, generally has the advantage.

 

Large-Scale Retail Store Law. Competition from large retail stores has been almost totally controlled by Daitenho–the Large-Scale Retail Store Law. Designed to protect small retailers from large intruders into their markets, the law requires that any store larger than 5,382 square feet (500 square meters) must have approval from the prefectural government to be “built, expanded, stay open later in the evening, or change the days of the month they must remain closed.” All proposals for new “large” stores are first judged by MITI (Ministry of International Trade and Industry). Then, if local retailers unanimously agree to the plan, it is swiftly approved. However, without approval at the prefecture level (all small retailers in the area must agree), the plan is returned for clarification and modification that may take several years (ten years is not unheard of) for approval. Besides the large-scale retail store law, there are myriad licensing rules. One investigation of the regulations that governed the opening of a retail store revealed 39 different licenses, each with a separate law, needed to open a full-service store.

3. Discuss the ways Japanese manufacturers control the distribution process from manufacturer to

retailer.

Manufacturers depend on wholesalers for a multitude of services to other members of the distribution network. Financing, physical distribution, warehousing, inventory, promotion and payment collection are provided to other channel members by wholesalers. The system works because wholesalers and all other middlemen downstream are tied to manufacturers by a set of practices and incentives designed to ensure strong marketing support for their products and to exclude rival competitors from the channel.

Wholesalers typically act as agent middlemen and extend the manufacturer’s control through the channel to the retail level. Control is maintained by: 1) inventory financing, sales made on consignment with credits extending for several months; 2) cumulative rebates, rebates given annually for any number of reasons including quantity purchases, early payments, achieving sales targets, performing services, maintaining specific inventory levels, participating in sales promotions, loyalty to suppliers, maintaining manufacturer’s price policies, cooperation, and contribution to overall success; 3) merchandise returns, all unsold merchandise may be returned to the manufacturer; and, 4) promotional support, intermediaries receive a host of displays, advertising layouts, management education programs, instore demonstrations, and other dealer aids which strengthen the relationship among middlemen and the manufacturer.

4. Describe the large-scale retail store law found in Japan and show how the Structural Impediments Initiative (SII) is bringing about change in Japanese retailing.

Competition from large retail stores has been almost totally controlled by Daitenbo, the LargeScale Retail Store Law. Designed to protect small retailers from large intruders into their markets, the law requires that any store larger than 5,382 square feet (500 square meters) must have approval from the prefectural government to be built, expanded, stay open later in the evening or change the days of the month they must remain closed. All proposals for new large stores are first judged by MITI (Ministry of International Trade and Industry). Then, if local retailers unanimously agree to the plan, it is swiftly approved. However, without approval at the prefecture level (all small retailers in the area must agree), the plan is returned for clarification and modification that may take several years (10 years is not unheard of) for approval.

 

Designed to protect small retailers against competition from large stores, the law has been imposed against both domestic and foreign companies. It took ten years for one of Japan’s largest supermarket chains to get clearance for a new site. Toys `R’ Us fought rules and regulations for over three years before it gained approval for a store. Besides the “large-scale retail store” law, there are myriad licensing rules. One investigation of the regulations governing the opening of retail stores uncovered 39 different laws, each with a separate license that had to be met to open a full-service store.

Agreements between the United States and Japan under the Structural Impediments Initiative (SII) have had a profound impact on the Japanese distribution system by leading to deregulation of retailing and strengthening rules on monopoly business practices. The retailing law has been relaxed to permit new outlets as large as 1,000 square meters without prior permission and limits on store hours and business days per year have also been lifted. Officially relaxing laws and regulations on retailing is but one of the important changes signaling the beginning of profound changes in how the Japanese shop.

The SII negotiations to pry open new markets for American companies is producing strong evidence of cracks in the system. Japanese businesspeople are challenging the traditional system and Japanese consumers are undergoing a change in attitude toward shopping and traditional retailing by responding favorably to bargain prices.

SII and deregulation will undoubtedly have a part in changing Japanese distribution practices but those merchants willing to challenge traditional ways and give the consumer quality products at competitive, fair prices will bring about the demise of the way department stores and small shops wedded to the traditional distribution system operate. Specialty discounters are sprouting up everywhere and entrepreneurs are slashing prices by buying direct and avoiding the distribution system altogether. Japanese consumers, described as brand loyal and more interested in services and quality than price, seem to be willing accomplices to the changes taking place and understandably so. The Japanese consumer has traditionally paid the highest prices in the world for the goods they buy. Before Toys `R’ Us changed the price levels, toys in Japan cost four times as much as toys in any other country. Japanese-made products imported to the United States can be purchased in the U.S. for less than they cost in Japan. Such inequities did not seem to matter to the Japanese consumer when they had no other alternatives. But, more often now, the Japanese consumer has a choice of prices for everything from appliances to beer.

The “new” retailers are relatively small and account for no more than three percent of retail sales, compared with 14 percent for all specialty discounters in the U.S. But their impact extends beyond their share of market because they are forcing the system to change. Traditional retailers are modifying marketing and sales strategies in response to the new competition as well as to take advantage of changing Japanese lifestyles. There are also indications that some wholesalers are modernizing and consolidating operations as retailers demand to buy direct from the manufacturer or from the largest wholesalers. The process is slow because the characteristics of the distribution system are deeply rooted in the cultural history of Japan.

 

5. “Japanese retailing may be going through a change similar to that which occurred in the United States after World War II.” Discuss and give examples.

Japanese retailing may be going through a change similar to that which occurred in the United States after World War II. At that time the U.S. retailing structure was made up of many small retailers served by a multilayered wholesaling system and full service department stores and specialty stores offering all the needs of the shopper from soup to nuts including a long list of “services.” Resale price maintenance laws (also referred to as fair trade laws) allowed national manufacturers to dictate high retail prices necessary to support an inefficient distribution system and amenities, i.e., “services,” which, when offered the opportunity, the consumer was willing to give up for lower prices. High margins were an attraction to the discounter who offered few, if any services and priced items well below manufactured suggested prices. Department stores and other “traditional retailers” fought back with attempts to enforce fair trade laws. When that failed, they also began to discount items but found they could not continue to operate in the old way with discounted prices. At that point, retailing in the United States began to change. Some traditional stores went out of business, others down-sized and dropped entire lines, others reinvented themselves into different operations and many of the small “mom and pop” stores went out of business. Thus began a retailing revolution that ultimately spawned new types of retailers like Wal-Mart, Kmart, Target, Price/Costco, Levitz Furniture, Best, Toys `R’ Us, and a whole host of other retail store types that did not exist a few decades earlier. If retailing follows a similar pattern in Japan, as it appears to be doing, Japanese retailing will not be recognizable in a decade or two. What seemed to be an impenetrable retailing system just a few years ago now appears to be on the verge of opening up and creating opportunities for U.S. marketers.

6. Discuss how the globalization of markets, especially Europe 1992, affects retail distribution.

There are some important trends in distribution systems that will lead to their eventual globalization. That is, there is greater commonalty than disparity among middlemen in different countries. U.S. based Southland Corporation’s 7-Eleven Stores are replacing many of the traditional “Mom and Pop” stores that have dominated a significant part of Japan’s retail food distribution. In Spain, 7-Eleven and Campsa, the Spanish gasoline monopoly, opened 200 7-Eleven minimarkets at Campsa service stations. Hypermarkets, a retailing innovation developed in France, have expanded beyond French borders to other European countries and to the United States. Discount, home repair, self-service, and supermarkets are all mass merchandising concepts gradually spreading all over the world. In anticipation of Europe 1992, national and international retailing networks developed throughout the world. European integration, global brands, globalized media communications, consumers that expect rational and predictable product assortments, and global companies anxious for their products to be distributed in the most efficient manner are factors driving a growing number of traditional distribution channel members to greater efficiencies and competitiveness. Many are developing into transnational, if not global, operations. Global products require integrated, efficient distribution systems to achieve maximum effectiveness.

7. To what extent, and in what ways, do the functions of domestic middlemen differ from their foreign counterparts?

The functions of the domestic and foreign middlemen are quite similar in many areas, but there are certain differences. First, the domestic agent usually takes possession of the goods, whereas the foreign agent does not. In the area of setting prices, the domestic agent has the authority to do so, while his foreign counterpart does not. Both types of domestic middlemen arrange for the shipping of goods, but the foreign middlemen do not. Two other differences exist between foreign and domestic agents. The domestic agent does some promotion and selling, and occasionally extends credit. On the other hand, foreign agents usually do not participate in these activities.

 

8. Why is the EMC sometimes called an independent export department?

The EMC is sometimes called an international marketing department. There are several reasons for this title. First, many of the firms it represents are small and cannot afford extensive overseas marketing themselves. They must rely on the EMS. The EMC does business in the name of the manufacturer. This includes not only normal selling activities, but also active promotion, provision of credit information, physical handling, and even financing. In this light the EMC appears to be an independent marketing arm of the manufacturer.

9. Discuss how physical distribution relates to channel policy and how they affect one another.

Two extremely different channel policies exist in various areas which affect physical distribution. For example, in Turkey the buyer must seek out the seller with very little service offered by the latter. This is an example of the marketing channel working backwards. The normal policy is for the seller to seek out the buyer, excluding the retail market, and for the seller to offer a whole range of services. In some areas, middlemen are characterized by specialization. This practice tends to make the distribution process overly complex. Another channel policy found in many countries is the existence of huge middlemen and tiny middlemen with no one in between these two. The large ones tend to be very efficient in distribution, while the other is not. In most countries other than the United States and U.S.S.R., channel length is very long. This slows up the physical distribution of goods. Often, distribution of goods is slowed up because of low inventories caused by the high cost of money. It is unprofitable to maintain a large stock of goods.

10. Explain how and why distribution channels are affected as they are when the stage of development of an economy improves.

As an economy advances, the distribution system begins to take the form of distribution in the U.S. The apparent reason for this change in structure is due to the decentralization of the total marketing function. As an economy becomes more sophisticated it places increasingly complicated and sophisticated demands upon the marketing function. This results in modification of the existing system to be able to meet the increased demand placed upon it by the emerging economy. Consumer segments become much larger and diversified and each in turn places new demands on the distribution system which causes modification in order to administer to the requirements of that segment.

11. In what circumstances is the use of a EMC logical?

The export management company is the logical choice of middlemen for firms with relatively small international volume or for those that do not want to involve their own personnel in the international function.

12. In what circumstances are trading companies likely to be used?

Trading companies are likely to be employed when adequate coverage of a market, market access, or political acceptability is not possible by one firm. This would be the case in trade between developed and underdeveloped countries as well as between Western nations and the former Communist bloc countries.

 

13. How is the distribution channel structure affected by increasing emphasis on the government as a customer and by the existence of state trading agencies?

The growth of government both as a user and as a middleman has placed new emphasis on marketing to monopsonies. Government is especially important in dealing with industrial goods and commodities. Facilitating middlemen are often used to gain advantage from their strong government contacts and ability to cut red tape. In general government dealings call for short channels with direct contact or one local middleman at most.

14. Review the key variables that affect the marketer’s choice of distribution channels.

The four main variables which affect the marketer’s choice of distribution channels are (1) the availability of middlemen, (2) the cost of their services, (3) the functions performed (and the effectiveness with which each is performed) and (4) the extent of control which the manufacturers can exert over the middlemen’s activities.

15. Account, as best you can, for the differences in channel patterns which might be encountered in a highly developed country and an underdeveloped country.

The attitude toward the middlemen in underdeveloped countries is generally negative, whereas his or her place in developed countries is accepted. This feeling in underdeveloped areas exists because the people emphasize production and consider the middleman unproductive. The result is often that this function is done on the side or secretly, which makes distribution overly difficult. Also, distribution is done on a small scale, whereas developed countries are often characterized by the extremely large middlemen. The poor nations live on a subsistence level. They are not so dependent on trade as developed countries are. Therefore, the importance of distributors is low. Distribution is slow and inefficient in underdeveloped countries because the population is widely scattered, inventories are low (high cost of capital), the middleman is very small, and margins are high. The developed nations are generally of opposite character.

16. “One of the first things companies discover about international channel of distribution patterns is that in most countries it is nearly impossible to gain adequate market coverage through a simple channel of distribution plan.” Discuss.

A single channel of distribution is often unavailable in foreign countries. One reason is that the channels used may be very unfamiliar to the producer and only seem to be complicated. More realistic reasons may be true in financial arrangements or the unavailability of middlemen. In many countries, middlemen may be specialists in either product or market area or both. If this is the case, several different middlemen are needed to distribute a single product in a country or to distribute several products within a single contiguous area.

17. Discuss the various methods of overcoming blocked channels.

Buying equity in the middlemen and thereby gaining entrance to the channel. Buying distribution through wide margins, contract bonuses, and other forms of cash settlements will unblock the channel.

Seeking alternative channels or new channels can get around the dilemma. The most expensive means is for the company to build its own channel.

 

18. What strategy might be employed to distribute goods effectively in the dichotomous small-large middleman pattern which characterizes merchant middlemen in most countries?

The strategy in this situation is no different than it would be in the United States in that selection of wholesaler middlemen should be based on at least two criteria. One, to whom the wholesaler sells or distributes, i.e., selects a wholesaler to reach a specific target market and the cost efficiency of a particular wholesaler middleman. In most countries if complete distribution of your goods is to be achieved, both small and large middlemen must be utilized to effectively reach all segments of the market. However, the smaller middlemen may be sufficiently inefficient to increase the cost of distribution thereby increasing the cost of the product to a point that it is no longer priced competitively.

19. Discuss the economic implications of charging termination penalties or restricting the termination of middlemen. Do you foresee such restrictions in the United States?

Termination penalties restrict the freedom of marketers to adjust to changing needs of the market and therefore reduce market efficiency. Such restrictions may stultify company growth and restrict its flexibility. Risk taking and experimentation are minimized because the marketer has a difficult time terminating experimental channels that fail.

There are indicators and a few legal precedents restricting manufacturer’s middleman termination in the United States but growth of such restriction has been slow and cautious.

20. Discuss why Japanese distribution channels can be the epitome of blocked channels.

Distribution in Japan has long been considered the most effective non-tariff barrier to the Japanese market. The distribution system is different enough from U.S. or European countertrades to give an advantage to domestic competitors. The Japanese system has three layers (1) a structure dominated by small wholesalers dealing with small retailers, (2) unique trade customs, and, (3) a philosophy shaped by unique culture. It is not unusual for consumer goods to go through three or four intermediaries before reaching the consumer producer—the primary, secondary, regional and local wholesaler, and finally to retailers and consumers. The high degree of fragmentation and specialization makes it difficult to go direct and thus forces a manufacturer to rely on middlemen with an elaborate set of trade customs. Traditions unknown to the U.S. marketer make these channels the epitome of blocked channels.

21. What are the two most important provisions of the Export Trading Act of 1982?

The two most important provisions of the Export Trading Act of 1982 are that companies are exempt from Sherman Antitrust violations for their activities as an export trading company for sales of products outside the United States. This exemption is given by the Department of Commerce as a certificate which enables the export trading company to have the added assurance that the export program in which they are engaging will not be challenged by the courts. The second provisions of the Export Trading Act is that financial institutions, i.e., banks, can be owners of export trading companies. Prior to the ETC act, banks were not permitted to own commercial enterprises.

 

22. You are the sales manager of a small company with sales in the United States. About 30 percent of your business is mail order and the remainder from your two retail stores. You have recently created an e-store on the Web and a few days later received an order from a potential customer from a city near Paris, France. The shipping charges listed on the Web are all for locations in the United States. You don’t want to lose this $350 order. You know you can use the postal service but the customer indicated she wanted the item in about a week. Air Express seems logical but how much will it cost? Consult both the FedEx homepage http://www.fedex.com and the UPS homepage http://www.ups.com and get some estimates on shipping costs. Here are some details you will need: Value $350, total weight of the package, 2.5 pounds, package dimensions, height: 4 inches, and length: 6 inches width: 4.5 inches. U.S. zip code: 97035 and French zip code: 91400. (Note: It’s not fair to call UPS or FedEx – use the Internet)

FedEx charge for delivery of the package is $56.70 and UPS is $53.30. These calculations can easily be made by consulting the Web pages of each of the companies.

23. Based on the information collected in Question 22, how practical would it be to encourage foreign sales? Your average order ranges from about $250 to $800. All prices are quoted plus shipping and handling. You handle a fairly exclusive line of Southwestern Indian jewelry that sells for about 15 to 20 percent higher in Europe than in the United States. The products are light weight and high in value.

Using the data above, it would seem that for $250 dollar items a French customer would about breakeven from buying via e-commerce versus buying in France. However, for a higher value item, assuming that the weight would not increase substantially, the French customer would benefit buying from e-commerce.

Chapter 16 — Integrated Marketing Communications and International Advertising

 

Teaching Objectives

The debate on the merits of standardization compared to modification of international advertising has always seemed to be a fallacious issue—it seems obvious that it is best to standardize any marketing activity whenever possible but, on the other hand, if there is any activity in marketing that is culture specific, it is advertising. After all, advertising is communications and to be understood and to communicate effectively you must express yourself in the cultural language of your audience. So, how can the idea of global advertising ever be anything other than standardize when feasible and adapt where culturally necessary. In any case, since this issue continues to be debated and because there is often confusion about global advertising, these topics need to be discussed. In most cases, actual practice is to standardize parts of the message and to localize other parts. The teaching objectives are to:

1) Present a complete coverage of the issue of global advertising covering specifically global advertising, world brands, pattern advertising and the relationship of global market segmentation an promotional strategy.

2) Detail the creative challenges confronting the international advertiser.

3) Examine the effects of panEuropean advertising.

4) Review the communications process as a way of better understanding the diversity that exists in developing an international promotional program.

Suggestions and Comments

1. The international communications process, Exhibit 16-4, is useful in bringing the discussion of international advertising together. It is a good way to illustrate the many ways a promotional campaign can go awry. Examples of misfires are legion and there are many to choose from for examples. The transparency, Misfires in Advertising, offers a few more. Some recent reports of problems are: A highly successful ad campaign which had boosted sales in the U.S., Canada, Europe and Australia for a brand of toothpaste for children was not well-received in Bangkok. “Too American” and the French and U.K. versions were rejected as well. The problem had to do with the “pat on the head” mnemonic device which was at the center of all the executions. That scene, which closed all commercials in the campaign, was designed to express the parent’s appreciation for the good brushing the child had done with the toothpaste. But one does not touch the head of another person in many Asian countries.

 

2. I like to approach the problems created by differences in laws, language, culture, etc. as creative challenges in that it takes real creativity to overcome some of these road blocs and still present an effective promotional program. There are several examples in the text that can be used as illustrations. A case in point is that product information other than the name cannot be given in advertisements. To get through the censors, one billboard for an Iranian brand of women’s lingerie displayed no women, no lingerie and no mention of the unmentionable product at all. The ad’s sole image was of the underwear’s plain green box with the words “soft and delicate” written alongside. “No one had a clue what it meant.”

 

Lecture Outline

I. Global Perspective

II. Sales Promotions in International Markets

A. International Public Relations

B. International Advertising

III. Advertising Strategy and Goals

A. Product Attribute and Benefit Segmentation

B. Regional Segmentation

IV. The Message: Creative Challenges

A. The Communications Process

B. Legal Constraints

C. Linguistic Limitations

D. Media Limitations

E. Production and Cost Limitations

V. Media Planning and Analysis

A. Tactical Considerations

B. Specific Media Information

VI. Campaign Execution and Advertising Agencies

VII. International Control of Advertising: Broader Issues

 

Discussion Questions

1.	Define:
	Advertising
	Public relations Sales promotion
	Integrated marketing communications Noise

 

2. “Perhaps advertising is the side of international marketing with the greatest similarities from country to country throughout the world. Paradoxically, despite its many similarities, it may also be credited with the greatest number of unique problems in international marketing.” Discuss.

The paradox lies in the fact that advertising methodology is similar from country to country but that the unique problems of company policy limitations, legal aspects, linguistics, media limitations, all pose a distinct problem to the international advertiser. Advertising must be related to the basic and existing motivation patterns. The unique problem is to find this motivation and orient your campaign to the stimuli which must make the majority of the people buy the product. But these problems are generally mechanical and can be easily overcome by long-range research.

3. Someone once commented that advertising is America’s greatest export. Discuss.

This comment portrays the fact that America was first to realize that advertising is a crucial element in the integrated marketing plan. Since the American “philosophy” of advertising has penetrated the foreign market, it is said to have been “exported.” Many of America’s largest advertising agencies successfully operate in the foreign market. World advertising is generally patterned after the American advertising approach and system.

4. With satellite TV able to reach many countries, discuss how a company can use satellite TV and deal effectively with different languages, different cultures, and different legal systems.

The reality of satellite TV provides the means to have truly global advertising. This raises the question of the effectiveness of standardized advertising versus locally produced ads. Problems of different languages and laws raise doubts about the effectiveness of pan-European ads. In European satellite broadcasting, English is the preferred language for programming since the satellites must cover a territory with 12 languages and 17 national borders. A study done on Sky Channel viewers indicated that the English language programs are unacceptable for many. Germans watch the English language programs for about a minute before deciding they have the wrong station. European programming is developing, but slowly. One of the reasons for using U.S. made programming is that producing quality programs for each country is too costly. One approach to language differences and the production costs of programming is a six-part series called “Eurocops.” It is a police series in which each country produces one episode based in the country with their own police, in their own style and with their own problems. Each broadcaster provides the episode produced in his country to the other five. The five are then dubbed into the local language and broadcast locally. The idea is to produce European programming but at a much lower cost per country than if each country had to produce all six shows. There is no question that cable, satellites, privatization and the advent of Europe 1992 will revolutionize broadcasting and create greater demand for global advertising.

 

5. Outline some of the major problems confronting an international advertiser.

Of all the elements of the marketing mix, decisions involving advertising are the ones most often affected by cultural differences among country markets. Consumers reflect their culture, its style, feelings, value systems, attitudes, beliefs, and perceptions. Since advertising’s function is to “interpret or translate the need/want satisfying qualities of product and services in terms of consumer needs, wants, desires, and aspirations,” the emotional appeals, symbols, persuasive approaches and other characteristics of an advertisement must coincide with cultural norms to be effective.

Reconciling international advertising and sales promotion effort with cultural uniqueness of markets is the challenge confronting the international or global marketer. The global advertiser is confronted with legal and tax considerations, language limitations, media limitation and production and cost limitations. These limitations must all be dealt with effectively if a company is to have an effective advertisement.

6. Defend either side of the proposition that advertising can be standardized for all countries.

Yes, the basic theme, objectives, and philosophy of international advertising can be standardized; but the vast mechanical problems most certainly cannot be solved through international standardization. The ad man can adapt his basic skills to all countries. If buying motives and company objectives are the same for various countries, then the advertising approach may be the same. If they vary, then customizing your approach to each country is a must.

7. Review the basic areas of advertising regulation. Are such regulations purely foreign phenomena?

a. The basic areas of advertising regulation are (1) the legal type such as Germany’s Comparative Terminology and Direct Comparison Laws, and (2) taxation on advertising, prevalent in Britain, France, and Austria.

b. No, these regulations are not purely foreign. Here in the United States there are certain advertising codes and standards that one must follow. These are generally enforced by the advertising industry itself—but the FCC also imposes strict standards of “truth in advertising.”

8. How can advertisers overcome the problems of low literacy in their market?

They can overcome low literacy by making use of ads that are self-explanatory, and extensive use of radio which doesn’t have written words.

9. What special media problems confront the international advertiser?

Special problems in media—availability, cost, and coverage—confront the international advertiser. Local variations and lack of market data are also great headaches.

Availability of media varies from country to country due to government restrictions. Countries have either too many or too few media to adequately cover the majority of the population. As far as price goes, the United States ad man must be prepared to haggle greatly over costs. Most media costs are subject to negotiation. Agency discounts are often split with the client to bring costs down. Coverage problems generally arise when trying to reach certain sections of the population. There are many uneconomical media divisions which do not permit enough regionality. Underlying all these problems is the lack of market information which hampers a good communication mix in foreign markets and causes much waste in ad campaigns.

 

10. After reading the section in this chapter on direct mail, develop guidelines to be used by a company when developing a direct mail program.

Guideline for direct mail should be the same as for any advertising program, i.e., identify the target market, select a medium that reaches the target market, develop a message that communicates how the attributes of your product fit the needs of the target market. On this last point is the issue of translation. You want to avoid the mistake a catalog producer, R.R. Donnelley, made when a collection of a dozen American catalogs sent to Japanese consumers received only modest responses and orders. Failure to receive sufficient response may have reflected more on the American Showcase package than on the success of direct mail in the Japanese market. Even though the covering letter and brochure describing the catalogs were in Japanese, the catalogs were all in English. This error was further amplified by the fact that the mailing list did not target English-speaking Japanese. In addition to these general issues, special attention needs to give to characteristics of mail. Are mailing lists that include your target market without excessive coverage of non-target market recipients? Does the mailing system impose some additional burden on the recipient? For example, the situation in Chile where the person receiving mail must pay a portion of the postage.

11. Will the ability to broadcast advertisements over TV satellites increase or decrease the need for standardization of advertisements? What are the problems associated with satellite broadcasting? Comment.

The ability to broadcast advertising over TV satellites will increase the need for standardization of advertisements. The problems associated with satellite broadcasting will focus on creating an advertisement that will be culturally acceptable in all the countries receiving the BC satellite broadcast and created in such a manner that language differences that may exist within the countries will not affect the message sent. There are those, however, who feel that such an advertisement would be so bland that it would be relatively ineffective.

12. In many of the world’s marketplaces, a broad variety of media must be utilized to reach the majority of the market. Explain.

Due to the uneconomical division of media coverage, a large amount of media must be engaged to cover a majority of the market. If an advertiser wants to reach his total market, the expenditure he will have to incur in using a broad variety of media is great. The media competitors have segmented the market so that one must employ most of them in a successful campaign.

13. Cinema advertising is unimportant in the United States but a major media in such countries as Austria. Why?

Austria has 20 percent of all advertising in cinema as a solution to its huge taxes against the other media; and the effectiveness of this type of advertising is reflected by its dollar expenditure in this medium—11 percent of the total ad expenditure in the country per year.

14. “Foreign newspapers obviously cannot be considered as homogeneous advertising entities.” Explain.

Literacy rates vary, and this results in coverage not being constant (selective rather than intensive). Many countries have too many papers to run an effective campaign because one must utilize all of them if one desires to cover large geographic areas. Even then, it is not known if effective readership exists. Political position of the newspaper in which you decide to run an ad may have a bad effect on the reputation of the product.

15. Borrow a foreign magazine from the library. Compare the foreign advertising to that in an American magazine.

Library project.

 

16. What is sales promotion and how is it used in international marketing?

Sales promotions include all marketing activities other than advertising, personal selling, and publicity that stimulate consumer purchases and improve retailer or middleman effectiveness and cooperation. Sales promotions include such items as cents-off, in store demonstrations, samples, coupons, product tie-ins, contests, sweepstakes, sponsorship of special events, and point-of-purchase displays. Sales promotions are used as short-term efforts directed at consumer and/or retailer to achieve such specific objectives as (1) consumer product trial and/or immediate purchase, (2) consumer introduction to the store, (3) gaining retail point-of-purchase displays, (4) encouraging stores to stock a product, and (5) supporting and augmenting the advertising, personal sales efforts.

17. Show how the communications process can help an international marketer avoid problems in international advertising.

Since promotional activities are basically communications processes, all the attendant problems in developing an effective promotional strategy is domestic marketing plus all the cultural problems discussed in the chapter must be overcome to have a successful international promotional program. A major consideration for a foreign marketer is to ascertain that cultural diversity, media limitations, legal problems and constraints, or control of the message can be communicated properly. International advertising and promotional communications fail for a variety of reasons: (1) the message may not get through because of media inadequacy, (2) the message may be received by the intended audience but not be understood because of different cultural interpretations, and (3) the message may be received by the intended audience and be understood but have no effect because the marketer did not correctly assess the needs and wants of the target market. Because of the many different influences that may jeopardize the success of a promotional strategy, those international executives who understand the communications process will probably be better equipped to manage that diversity since the communications process forces the international advertiser to examine all of those areas where problems in promotion may surface.

18. Take each of the steps in the communications process and give an example of how culture differences can affect the final message received.

The information source may create a problem because the marketer does not truly understand the needs and wants of the target market. This is especially important if the marketer relies on the self-reference criterion and makes the naive assumption that “if it sells in one country it would sell in another.” An example would be bicycles designed and sold in the United States to consumers fulfilling recreational, exercise needs which cannot be successfully sold for the same reasons in a market where the primary use of the bicycle is transportation. The encoding step of the communications process can also cause problems because such factors as colors, values, beliefs, tastes and other symbols utilized by the international marketer do not correctly symbolize the message intended. For example, “Body by Fisher” which decoded meant “Corpse by Fisher” was not General Motors’ intended message. The message channel may create problems because of the difficulty of effectively reaching target markets in many countries. Problems, such as illiteracy, the availability and types of media, create problems at this level. Decoding problems are generally created by improper encoding. The decoding process is one in which the receiver interprets the message in terms of one’s own culture, thereby receiving an incorrect message. For example, Pepsi’s “Come Alive” was decoded by many as “Come Out Of The Grave.” Sometimes decoding can create problems even when the encoder purposely attempted to develop a message with no symbolism. An example was the toothpaste CUE which was decoded as a pornographic word. Finally, the feedback step can create problems in the sense that companies do not use feedback to effectively measure their communications efforts and attempt to correct any problems that may have been created by the other steps.

 

19. Discuss the problems created because the communications process is initiated in one cultural context and ends in another.

The major problem here is that the encoder is in one culture using one’s own SRC and the message is decoded in another culture where the decoders are using their own SRC. The challenge is that the encoder needs to be certain that the message is being encoded in such a manner that it will be decoded in the other culture in a manner in which it is intended. Thus, cultural decoding misinterpretations can be avoided.

20. What is the importance of feedback in the communications process? Of noise?

The importance of feedback is to provide the marketers who are generally in one cultural context with an immediate interpretation of the message sent so that any problems created by errors in the communications process or errors created by the different cultural contexts can be adjusted before significant harm occurs. The importance of noise in the system is that such things as competitive activity and other types of confusion can detract from the communications process and affect any or all of the six steps. The most important factor about noise is that it is generally uncontrollable and unpredictable, yet it can influence the outcome. Noise is also a significant reason why feedback in any communications process is so very important.

Chapter 18 – Pricing for International Markets

 

Teaching Objectives

Basic pricing policy questions that arise from the special cost, market, and competitive factors in foreign markets are the focus of this chapter. The additional costs of international marketing that lead to price escalation and ways to minimize these costs and countertrades as a special pricing problem should all be stressed. The teaching objectives are to:

1) Review pricing policies as they are affected by the differences in international marketing and especially parallel imports.

2) Explore fully the problem of price escalation and ways to lessen price escalation.

3) Examine foreign trade zones as an important means of controlling and possibly lessening some of the costs associated with price escalation.

4) Discuss countertrades as an important tool in international pricing and the importance of taking a proactive countertrade strategy.

Comments and Suggestions

1. With the continuing unification of the European Union, fluctuating exchange rates, the general globalization of markets, and increasingly versatile technologies, parallel imports are a growing problem. A discussion of this topic can be built around Crossing Borders 18-1.

2. When products are moved across borders, additional costs are incurred. Some can be attributed to the extra cost of the physical movement of goods and others to tariffs and non-tariff barriers. Until that time when there is truly free trade, international marketers will always be confronted with price escalation. Greater profit and the ability to be more price competitive can be gained by the company that controls, if not eliminate, many of the costs associated with price escalation. Exhibit 18-2, Sample Causes and Effects of Price Escalation, is a hypothetical illustration of three different situations of price escalation. As a side note, there have been many comments by business people on this illustration and the unanimous response is that it is too conservative, i.e., the problem of price escalation is often worse than illustrated.

3. Of the three ways of lessening price escalation, lowering tariffs either through reclassification or, better yet, the elimination of a tariff often has the greatest impact. Also, lowering manufacturing costs and distribution costs can be very effective if a company has had a tendency to overlook these costs. Lessening Price Escalation, is a list of the different approaches that a company may use in lessening prices escalation. A side note on marginal-cost pricing—a dumping charge is always lurking in the background when using marginal cost pricing.

4. Foreign trade zones can be very useful in helping a company lessen the costs of exporting and importing. Achieving the benefits of the steps for lessening price escalation can be aided by effectively using a FTZ. FTZs are not always available in all countries but in those where they are, their use should be evaluated carefully.

 

5. Countertrading continues to be important in many of the growth markets today. It is important to stress that companies need to include countertrading as one of its pricing tools and to be proactive rather than reactive. Cash is always preferred but those companies that plan ahead for the possibility of being asked to accept some form of countertrade in order to consummate a sale have the most success with this pricing issue.

Lecture Outline

I. Global Perspective

II. Pricing Policy

A. Pricing Objectives

B. Parallel Imports

III. Approaches to International Pricing

A. Full-Cost versus Variable-Cost Pricing

B. Skimming versus Penetration Pricing

IV. Price Escalation

A. Costs of Exporting

1. Taxes

2. Tariffs and Administrative Costs

3. Inflation

4. Deflation

5. Exchange-Rate Fluctuations

6 Varying Currency Values

7. Middleman and Transportation Costs

B. Sample Effects of Price Escalation

C. Approaches to Lessening Price Escalation

1. Lower Cost of Goods

2. Lower Tariffs

3. Lower Distribution Costs

D. Using Foreign-Trade Zones to Lessen Price Escalation

E. Dumping

V. Leasing in International Markets

VI. Countertrade as a Pricing Tool

A. Types of Countertrade

B. Problems of Countertrading

C. The Internet and Countertrade

D. Proactive Countertrade Strategy

VII. Transfer Pricing Strategy

VIII. Price Quotations

 

IX. Administered Pricing

A. Cartels

B. Government Influenced Pricing

X. Getting Paid

A. Letters of Credit

B. Bills of Exchange

C. Cash in Advance

D. Open Accounts

E. Forfaiting

 

Discussion Questions

1.	Define:
	Dumping	Skimming
	Countervailing duty	Countertrade
	Parallel market Gray Market	Variable-cost pricing Penetration pricing
	Price Escalation	Full-cost pricing
	Exclusive distribution	Barter
	Cartel Forfaiting	Letter of Credit Bills of Exchange
	Administered pricing

 

2. Discuss the causes and solutions of parallel imports and their effect on price.

Parallel imports develop when importers buy products from distributors in one country and sell them in another to distributors who are not part of the manufacturer’s regular distribution system. This practice is lucrative when wide margins exist between prices for the same products in different countries. There are a variety of conditions that can create the profitable opportunity for a parallel market.

Pricing policies that permit large price differentials between country markets is another condition conducive to the creation of parallel markets. Japanese merchants have long maintained very high prices for consumer products sold within the Japanese market. As a result, prices for Japanese products sold in other countries are often lower than they are in Japan. For example, Japanese can buy Cannon Cameras from New York catalogue retailers and have them shipped to Japan for a price below that of the camera purchased in Japan. In addition to the higher prices for products at home, the rising value of the yen makes these price differentials even wider.

 

Foreign companies doing business in Japan generally follow the same pattern of high prices for the products they sell in Japan, thus creating an opportunity for parallel markets in their products also. Eastman Kodak prices its film higher in Japan than in other parts of Asia. Coca-Cola syrup imported from Los Angeles is cheaper than that purchased through normal channels in Japan.

The possibility of parallel market occurs whenever price differences are greater than the cost of transportation between two markets. In Europe, because of differing taxes and competitive price structures, prices for the same product vary between countries. When this occurs, it is not unusual for companies to find themselves competing in one country with their own products imported from a lower priced country.

Perfume and designer brands like Gucci and Cartier are especially prone to gray markets. To maintain the image of quality and exclusivity, prices for such products traditionally include high profit margins at each level of distribution, differential prices among markets, limited quantities, and distribution that is restricted to upscale retailers. In the U.S., wholesale prices for exclusive brands of fragrances are often 25% more than wholesale prices in other countries. These are the ideal conditions for a lucrative gray market for unauthorized dealers in other countries who buy more than they need at wholesale prices lower than U.S. wholesalers pay. They then sell the excess at a profit to unauthorized U.S. retailers, but at a lower price than the retailer would have to pay to an authorized U.S. distributor.

To prevent parallel markets from developing when such marketing and pricing strategies are used, companies must maintain strong control systems. These control systems are difficult to maintain and there remains the suspicion that some companies are less concerned with controlling gray markets than they claim.

3. Why is it so difficult to control consumer prices when selling overseas?

There are many variables which must be considered when attempting to control consumer prices overseas. Among these are: tariffs on imports, “dumping” tariffs, sales taxes, distributive channel costs, added middlemen costs, and shipping costs. It is very difficult to control consumer prices when selling overseas. Price escalation is one of the main reasons, as prices escalate differently. Some profiteering is also found in some countries, thus upsetting any consumer price control. Dumping, being defined differently, is treated differently under various laws making for more varied prices. Firms operating overseas have less ways to protect themselves from price variations and fluctuating exchange rates also tend to increase price fluctuations. In addition, many retailers overseas don’t like price competition and avoid it if possible by raising or lowering their prices.

4. Explain the concept of “price escalation” and tell why it can mislead an international marketer.

Price escalation is price increases due to added costs produced by such things as tariffs, taxes, longer lines of distribution, etc. It can mislead many international marketers into thinking that exorbitant prices that are charged in foreign countries for goods that are relatively reasonable in the domestic market can increase profits in the foreign market. This is just the opposite of the real case in many situations where the effects for price escalation, not added profit, account for the high prices.

 

5. What are the causes of price escalation? Do they differ for exports and goods produced and sold in a foreign country?

Some of the causes of price escalation are:

a. profiteering

b. shipping costs

c. longer channels of distribution

d. larger middlemen margins

e. special taxes

Exports may be subject to all of the above, but many times goods produced and sold in a foreign country may have reduced shipping costs, lower tariffs, and are subject to fewer special taxes.

6. Why is it seldom feasible for a company to absorb the high cost of international transportation and reduce the net price received?

A company can seldom reduce their price to an overseas market (by absorbing transportation costs, for example) because if the prices are lower than competition in the country of origin or lower than normal export prices, “dumping tariffs will just raise the price back up by inducing a new cost on the manufacturer.”

7. Price escalation is a major pricing problem for the international marketer. How can this problem be counteracted? Discuss.

The key to counteracting the problem of price escalation centers on any method that will reduce the price of the product, tariffs, or any other cost in marketing the product. Some of the more frequently used methods are: (1) offsetting tariffs and transportation charges by the net price for goods sold in foreign markets. A problem which may arise here however is the possibility that the importing country will consider this move as dumping. (2) Modify the product in a way that tariffs are reduced. For example, assemble in the foreign country which may lower the tariff and transportation costs. The foreign trade zone is especially useful in this process. (3) Manufacture within the country thereby eliminating tariffs and perhaps also benefiting from lower labor costs. (4) Shorten the channels of distribution especially in those countries that have value added taxes or turnover taxes. (5) Eliminate costly functional features on the product thereby reducing the overall cost and price. For U.S. products this is a reasonable alternative since for many markets U.S. products have unwanted or unnecessary functional features. In addition, depending on market needs, the overall quality of the product may also be lessened in order to lower the cost of goods.

In all of these situations the main thrust is to lower entry cost of the product thereby lowering the tariffs and the transportation cost which are the two major contributors to price escalation.

 

8. Changing currency values have an impact on export strategies. Discuss.

In addition to the risks from exchange rate variations other risks result from changing values of a country’s currency relative to other currencies. A strong dollar produces price resistance since it takes a large quantity of local currency to buy a U.S. dollar. Conversely, when the U.S. dollar is weak, demand for U.S. goods increases since fewer units of foreign currency are needed to buy a U.S. dollar. Each additional market in which a company operates adds to the problem. Currency-exchange rate swings are considered by many global companies to be a major trade barrier. For a company whose long range plans call for continued operation in foreign markets and who wants to remain price competitive, price strategies need to reflect variations in currency values. When the value of the dollar is weak relative to the buyer’s currency (i.e., it takes fewer units of the foreign currency to buy a dollar), companies generally employ cost plus pricing. To remain price competitive when the dollar is strong (i.e., when it takes more units of the foreign currency to buy a dollar), companies must find ways to offset the higher price caused by currency values.

9. “Regardless of the strategic factors involved and the company’s orientation to market pricing, every price must be set with cost considerations in mind.” Discuss.

This statement is true, as all products must be priced with cost considerations in mind. However, most firms overplay this aspect of pricing and don’t rely enough on pricing to the market. The latter is usually a higher price; therefore, manufacturers lose by not taking advantage of market pricing.

10. “Price fixing by business is not generally viewed as an acceptable procedure (at least in the domestic market); but when governments enter the field of price administration, they presume to do it for the general welfare to lessen the effects of `destructive’ competition.” Discuss.

This statement typifies the general viewpoint of the public (unknowledgeable public), but the statement’s implications are invalid. The statement implies that price setting is good if done by the government and bad otherwise. This is not always the case. Companies are forever entering into some form of price setting which affects the economy either positively or negatively. Governmental price setting can also be either good or bad. However, government knowledge and research usually results in better forms of action.

11. Do value added taxes discriminate against imported goods?

Typically, value added taxes are applied within the country to all products. As a consequence these taxes do not directly discriminate against imported goods. However, imported goods frequently have a higher cost due to tariffs and additional transportation costs and thus may have to pay higher value added taxes. When compared with the lower amount charged to locally produced and nonimported goods, the value added tax may increase the price to the point that the market will not buy the product. However, relatively speaking, value added taxes do not discriminate against imported goods.

12. Explain specific tariffs, ad valorem tariffs, and combination tariffs.

Specific tariffs are fees charged at a flat rate per physical unit imported. Ad valorem tariffs are duties levied as a percentage of the value of the goods. Combination tariffs include both of the above.

13. Suggest an approach a marketer may follow in adjusting prices to accommodate exchange-rate fluctuations.

Prices may be quoted in the currency of the home country or in terms of some stable monetary unit, such as the U.S. dollar.

Hedging (the process of selling or buying foreign currencies in such a manner as to offset exchange fluctuations) may be employed.

 

14. Explain the effects of indirect competition and how it may be overcome.

Indirect competition is competition from goods which are substitutes for a certain product but which are not exactly the same. For example, indirect competition for coffee might come not only from other coffee manufacturers but also from tea manufacturers. This type of competition may be overcome by the same processes that overcome any type of competition: good advertising, fair prices, good services rendered, and achieving a strategic position in the market.

15. Why has dumping become such an issue in recent years?

The growing importance of world trade to individual companies has combined with saturated domestic markets, overproduction and increased competition to encourage dumping in many product areas. Procedures are looking to the marginal revenue contribution which can be gained when products are sold above direct cost into markets not normally sold. In recent years the number of dumping complaints in the United States has exploded and interest in antidumping enforcement and legislation has grown apace.

16. Cartels seem to rise phoenix-like after they have been destroyed. Why are they so appealing to business?

Cartels are appealing to business because they allow participating companies greater power by taking over the selling function (pricing, types of goods produced, licensing agreements.) Cartels put industry in a position to promote rationalization and specialization; consequently, technical progress results. Cartels are similar to monopolies in that they benefit at the expense of consumers. Thus, wherever it is politically acceptable, cartels tend to spring up.

17. Discuss the different pricing problems that result from inflation versus deflation in a county.

Inflation causes consumer prices to escalate and the consumer is faced with ever rising prices that eventually exclude many consumers from the market. On the other hand, deflation results in ever decreasing prices creating a positive result for consumers but both put pressure to lower costs on everyone in the supply chain.

 

The Japanese economy has been in a deflationary spiral for a number of years. In a country better known for $10 melons and $100 steaks, McDonald’s now sells hamburgers for 52 cents down from $1.09, a flat screen 32 inch color television down from $4000 to $2400[footnoteRef:1] and clothing stores compete to sell fleece jackets for $8, down from $25 two years earlier. Prices have dropped to a point that consumer prices are similar to those they once found only on overseas shopping trips. The high prices prevalent in Japan before deflation allowed substantial margins for everyone in the distribution chain. As prices continued to drop over several years, those less able to adjust costs to allow some margin with deflated prices, fell by the way side. Entirely new retail categories – 100-yen discount shops, clothing chains selling low-cost imported products from China, and warehouse-style department stores have become the norm. Sales at discount stores grew by 78% from 1995 to 2000. Discounting is the way to prosper in Japan, which again helps fuel deflation. While those in the distribution chain adjusted to a different competitive environment or gave up, Japanese consumers were reveling in their newfound spending power. Japanese tourists used to travel to the U.S. to buy things at much cheaper prices, but, as one consumer commented, “Nowadays, I feel prices in Japan are going down and America is no longer cheaper”. When she used bring back suitcases of bargains on trips to U.S., on her last trip she returned from a two-week vacation and limited her purchases to one fanny pack. [1: Brian Bremner and Irene M. Kunii, “Deflation Nation,” BusinessWeek, May 26, 2003, . 22.]

In a deflationary market, it is essential for a company to keep prices low and raise brand value to win the trust of consumers. [footnoteRef:2] Whether deflation or inflation, an exporter has to place emphasis on controlling price escalation. [2: Kenichi Murakami, “Nippon Lever Gains Ground Through Focus On Strong Brands,” Nikkei Report April 15, 2003.]

18. Discuss the various ways in which governments set prices. Why do they engage in such activities?

Governments set prices in various ways:

a. By requiring middlemen to mark up their goods by a governmentally dictated margin. Some manufacturers may have margins governmentally controlled.

b. Setting price limits (floor and ceiling) on actual prices.

c. Restrict price changes—government allows no deviation from original price settings unless officially requested.

d. Governments may compete in the market to control prices.

e. Governments grant subsidies to companies if they lower their prices.

f. Government monopolies and monopsonies.

g. Governments are now forming international agreements in relation to pricing.

Governments engaged in such activities to better control the economic standards of their countries. They can combat inflation or deflation to some extent through price setting and can also control monopolizing situations or economically unhealthy ones.

 

19. Discuss the alternative objectives possible in setting prices for intracompany sales.

Maximizing profits for the corporation as a whole. Facilitating parent-company control. Offering management at all levels, both in the product divisions and in the international divisions, an adequate basis for maintaining, developing, and receiving credit for their own profitability.

The problem of pricing is complex and awareness of the variations in local conditions should be taken into account when determining a strategy. Maintaining market initiative of the international divisions is a prerequisite of the pricing strategy.

20. Why do governments so carefully scrutinize intracompany pricing arrangements?

The tax and financial manipulation possibilities of transfer pricing have not been overlooked by governmental authorities. As multinational firms gain increasing prominence in the world marketing scene, national governments are becoming increasingly restrictive and paying special attention to transfer pricing in tax audits.

21. Why are costs so difficult to assess in marketing internationally?

Elements complicating international cost assessment:

a. Taxes and tariffs

b. Middleman costs

c. Transportation costs

d. Financing and risk costs

These elements vary greatly in the international marketplace and due to the additional problem of currency conversion are complicating the cost assessment of the international firm.

22. Discuss why countertrading is on the increase.

There has been a significant increase in countertrading transactions during the late 1960’s and 1970’s. This is primarily the result of shortages of hard currency available to industrializing nations. For Communist countries, purchase from non-Communist suppliers must be made with monies earned from Western nations; in less developed countries (LDCs), inflation ridden or weak currencies are reserved for top priority purchases while an increasing dollar volume of goods of less importance are being purchased through some form of countertrading.

23. Discuss the major problems facing a company that is countertrading.

The critical problems confronting the seller in a countertrade negotiation is having the expertise to determine the value and the potential demand of the goods offered. Frequently, there is inadequate time to conduct a market analysis. In fact, it is not unusual to have sales negotiations almost completed before countertrade is introduced as a requirement. Barter houses, specialized in trading goods acquired through barter arrangement, are the primary outside source of aid for companies beset by the uncertainty of a countertrade. Barter houses, most of which are found in Europe, can find a market for bartered goods, but the time it may take can put a financial strain on a company which has to have its capital tied up for a longer period than normal. In the long run, if companies are going to be involved in countertrades, they should establish personnel who can effectively evaluate the products to be traded.

 

24. If a country you are trading with has a shortage of hard currency, how should you prepare to negotiate price?

If a customer you are trading with is in a country with a shortage of hard currency an astute marketer should have an understanding of countertrade methods. The request for countertrade is increasing in both developing and developed countries. Every international marketer should include in his/her pricing skills some knowledge of countertrade. This is especially important if there is any indication that countertrades are a part to trade with customers in that country. One of the difficulties firms have in countertrade is not being prepared when a countertrade offer is made. If a country’s trade practices are studied, you can determine what products typically are offered for countertrade. Then you can determine the market price of the products offered and also get some idea of how the products can be disposed of. Such information will enable the marketer to reach a more profitable countertrade agreement should it arise.

25. Of the four types of countertrade discussed in the text, which is the most beneficial to the seller? Explain.

Of the four types, the buyback may be the most beneficial since the seller receives products that can be sold in the seller’s regular marketing program. In a buyback arrangement, the seller agrees to take back the goods produced by the process as total or partial payment. However, a problem arises if the goods in the buyback arrangement are in competition with the marketer’s own produced merchandise. Of the other three, the counterpurchase is probably the most beneficial to the seller. The advantage of the counterpurchase is that the seller gets payment up front but then agrees to offset or counterpurchase other goods from the country over a period. Generally, there is a list of goods the seller can select from. The seller has time to seek markets for the goods on the list. The seller is then in a better position to effectively plan for the disposition of goods received in a counterpurchase.

26. Why should a “knowledge of countertrades” be part of an international marketers pricing tool kit? Discuss.

This is important because countertrades are a growing part of international business and if the marketer does not have any knowledge of countertrade and is confronted with a countertrade proposal, he/she may be dissuaded from consummating the deal or make costly mistakes. The biggest problems in a countertrade transaction are knowing how to place value on the goods received and successful disposition of the goods received. Without knowledge of countertrades, these two decisions are difficult to make during a price negotiation that includes countertrade.

27. Discuss the various reasons purchasers impose countertrade obligations on buyers.

There are a variety of reasons purchasers impose countertrade obligations on the seller. The most important being a shortage of hard currencies. This is the most prevalent, however, when a country produces a product in large quantities in which there is a low market demand, the country may offer products in counterpurchases as a means of getting rid of excess supply. Generally speaking, goods are offered for countertrade when there is a low or minimal market for the goods. Another reason that products may be offered in countertrade is because the country does not have an established international market in which to dispose of the goods. There may be a world market for the goods but the country does not have the ability or access to the market and thus may force products in countertrade.

 

28. Discuss how FTZ’s can be used to help reduce price escalation.

A common use for foreign trade zone or free trade zone is to reduce price escalation. A foreign trade zone allows a marketer to store products in quantity for later distribution and forgo import taxes while goods are within the FTZ. This obviously allows the marketer to save part of the cost of financing the import taxes that would be required if the goods had to be kept in storage and taxes paid while in storage. Another more common use of the FTZ to help reduce price escalation is to import unassembled goods for assembly in the foreign trade zone using lower cost labor. This can result in lower tariffs as well since unassembled goods frequently are subject to lower tariffs than are assembled goods. The result is that import tariffs are reduced and the final cost of the product is also reduced by using the foreign trade zone. In addition, there may be savings that are derived from shipping costs since typically it is more costly to ship fully assembled goods than unassembled goods since shipping rates are determined on weight plus volume. This too may enable the marketer to reduce the cost basis for the product and thereby reduce price escalation.

29. Why is a proactive countertrade policy good business in some countries?

A proactive countertrade strategy probably will be most effective for global companies that market to exchange poor countries. Economic development plans in Eastern European countries, the Commonwealth of Independent States (CIS), and much of Latin America will put unusual stress on their ability to generate sufficient capital to finance their growth. To be competitive, companies must be willing to include some countertraded goods in their market planning. Companies with a proactive strategy make a commitment to use countertrade aggressively as a marketing and pricing tool. They see countertrades as an opportunity to expand markets rather than as an inconvenient reaction to market demands.

Capital poor countries striving to industrialize will account for much of the future demand for goods companies not prepared to seek this business with a proactive countertrade strategy will miss important market opportunities.

30. Differentiate between a proactive and reactive countertrade policy.

A company that waits until a customer suggests a countertrade has a reactive countertrade policy. Whereas, the company that enters the marketplace with countertrading as part of its pricing toolbox and has planned to make a countertrading offer as part of the price is practicing a proactive countertrade policy.

31. One free trade zone is ZFM of Montevideo. Visit http://www.transcargozfm.com/TC-Free-Trade-Zones/ and discuss how it might be used to help solve the price escalation problem of a product being exported from the United States to one of the Mercosur countries.

The following was excerpted from the ZFM Web site in 2001.

The many advantages offered by ZFM, its infrastructure, services, or its advanced technology, make it an exclusive promotional tool, born to become an ideal Distribution Center.

Its strategic location in the very heart of the Mercosur makes it even more attractive. After the World’s latest historical changes, the present trend to group regional economies has obtained favorable results, to the point that today, the most important multinational corporations are looking at these markets with great interest.

In order to understand the attraction of the Mercosur for these companies, we only need to remember that it groups over 200 million consumers.

 

ZFM’s particular location in a country such as Uruguay, with its natural attributes and its stability known internationally and historically—add even more incentives for the great investors. On its path to political and economic consolidation, Uruguay has conquered many achievements, and it is today a very interesting financial market due to its advantages.

Among these advantages, we must mention the following:

· its natural port with exceptional characteristics, and efficient services offered by private companies.

· its modern and agile banking system, permanently updated according to the trends in the main financial centers.

· deregulation of insurance monopolies, and free competition among international companies.

· its tradition of respect and fulfillment of local and international commitments.

The country’s legislation on free trade zones is another pillar on which ZFM bases its many benefits. As an example, let us mention the following:

· 100% tax and Customs exemption

· deregulation of state monopolies

· exemption of social security payments for foreign personnel for companies with 25% or less foreign personnel.

32. Visit Global Trading, Inc. (a division of Minnesota Mining and Manufacturing Company) at http://solutions.3m.com/wps/portal/3M/en_US/GlobalTrading/Inc/ and select “who are we,” and write a short report on how Global Trading, Inc. could assist a small company that anticipates having merchandise from a countertrade.

The following was excerpted from the 3M Web site. The competitive Edge:

Companies of every size are looking for ways to capitalize on opportunities in international trade and expand their business across borders.

If these are your company’s objectives, then 3M Global Trading offers the solutions to your needs. As an international trading company backed by 3M’s financial strength and worldwide business expertise, we offer importers a broad range of sourcing and financial services. For companies interested in purchasing products from developing countries, we also provide an attractive alternative to traditional banks and trading companies by offering flexible programs that are custom-designed to meet your specific requirements.

3M Global Trading offers the following advantages to meet your company’s business needs and sharpen your competitive edge.

 

We offer you:

Global Strength and Expertise: A Full Range of Services

If you’re looking for a reliable business partner with extensive international expertise who can offer a broad range of services, look to 3M Global Trading.

Services

As an international trading company backed by 3M’s financial strength and worldwide business expertise, 3M Global Trading, Inc. offers importers a broad range of sourcing and financial services. Our programs are flexible and custom-designed to meet your specific requirements. We offer the following services:

· Credit Services

· Customs Clearance

· Financing for Buyers

· Financing for Suppliers

· Sales and Marketing Services

· Sourcing

· State-of-the-Art Communications Network

· Transportation and Competitive Freight Rates

Credit Services

Using the services of 3M’s credit professionals, we can provide you with additional sources of credit information and analysis on your potential customers.

Customs Clearance

We can provide customs clearance as needed to save you time and money.

Financing for Buyers

We will work with you to develop the best financing program for your company. For creditworthy buyers, we offer payment terms of 30 days up to 120 days.

If you have a relatively new or smaller company that is selling to major accounts, it may be possible to base our credit decisions on bona fide orders from these major accounts. We can also issue Letters of Credit to suppliers on your behalf or make other forms of payment to suppliers as required.

By eliminating the need for you to open Letters of Credit, your banking costs will be reduced and bank credit lines will be freed up for other purposes. Import costs, including the cost of the product, freight, and duty, can be financed, allowing you to purchase on a “landed, duty paid” basis.

Financing for Suppliers

Our involvement in the import transaction also benefits your suppliers. It may be possible to arrange for financing to qualified suppliers through one of 3m’s local subsidiaries at terms that are competitive with their local banks. In some instances, preshipment payments can be made to suppliers to allow them to purchase needed raw materials and components for your order.

 

 

 

12-44

© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.