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Chap 3 Marketing

3.1 – Marketing, Competition and the Customer
A market consists of all buyers and sellers of a particular good.
What is marketing?
Marketing is the management process responsible for identifying, anticipating and
satisfying consumers’ requirements profitably.
The role of marketing in a business is as follows:
Identifying customer needs through market research
Satisfying customer needs by producing and selling goods and services
Maintaining customer loyalty: building customer relationships through a variety of
methods that encourage customers to keep buying one firm’s products instead of their
rivals’. For example, loyalty card schemes, discounts for continuous purchases, after-sales
services, messages that inform past customers of new products and offers etc.
Gain information on customers: by understanding why customers buy their products, a
firm can develop and sell better products in the future
Anticipate changes in customer needs: the business will need to keep looking for any
changes in customer spending patterns and see if they can produce goods that customers
want that are not currently available in the market.
Some objectives the marketing department in a firm may have:
Raise awareness of their product(s)
Increase sales revenue and profits
Increase or maintain market share (this is the proportion of sales a company has in the
overall market sales. For example, if in a market, $1 million worth of toys were sold in a year
and company A’s total sales was $30,000 in that year, company A’s market share for the year
is ($300,000/ $1000000) *100 = 30%)
Enter new markets at home or abroad
Develop new products or improve existing products.
Why customer spending patterns may change:
change in their tastes and preferences
change in technology: as new technology becomes available, the old versions of products
become outdated and people want more sophisticated features on products
change in income: the higher the income, the more expensive goods consumers will buy
and vice versa
Ageing population: in many countries, the proportion of older people is increasing and so
demand for products for seniors are increasing (such as anti-ageing creams, medical
assistance etc.)
The power and importance of changing customer needs:
Firms need to always know what their consumers want (and they will need to undertake
lots of research and development to do so) in order to stay ahead of competitors and stay
profitable. If they don’t produce and sell what customers want, they will buy competitors’
products and the firm will fail to survive.
Why some markets have become more competitive:
Globalization: products are being sold in markets all over the world, so there are more
competitors in the market
Improvement in transportation infrastructures: better transport systems means that it
is easier and cheaper to distribute and sell products everywhere
Internet/E-Commerce: customers can now buy products over the internet form anywhere
in the world, making the market more competitive
How business can respond to changing spending patterns and increased
A business has to ensure that it maintains its market share and remains competitive in the
market. It can ensure this by:
Maintaining good customer relationships: by ensuring that customers keep buying from
their business only, they can keep up their market share. By doing so, they can also get
information about their spending patterns and respond to their wants and needs to
increase market share
Keep improving its existing products, so that sales is maintained.
introduce new products to keep customers coming back, and drive them away from
competitors’ products
Keep costs low to maintain profitability: low costs means the firm can afford to charge low
prices. And low prices generally means more demand and sales, and thus market share.
Niche Marketing: identifying and exploiting a small segment of a larger market by
developing products to suit it. For example, Versace designs and Clique perfumes have
niche markets- the rich, high-status consumer group.
Small firms can thrive in niche markets where large forms have not yet been established
If there are no or very few competitors, firms can sell products at a high price and gain
high profit margins because customers will be willing be willing to pay more for exclusive
Firms can focus on the needs of just one customer group, thereby giving them an
advantage over large firms who only sell to the mass market
Lack of economies of scale (can’t benefit from the lower costs that arise from a larger
Risk of over-dependence on a single product or market: if the demand for the product
falls, the firm won’t have a mass product they can fall back on
Likely to attract competition if successful
Mass Marketing: selling the same product to the whole market with no attempt to target
groups with in it. For example, the iPhone sold is the same everywhere, there are no
variations in design over location or income.
Larger amount of sales when compared to a niche market
Can benefit from economies of scale: a large volume of products are produced and so the
average costs will be low when compared to a niche market
Risks are spread, unlike in a niche market. If the product isn’t successful in one market, it’s
fine as there are several other markets
More chances for the business to grow since there is a large market. In niche markets, this
is difficult as the product is only targeted towards a particular group.
They will have to face more competition
Can’t charge a higher price than competition because they’re all selling similar products
A market segment is an identifiable sub-group of a larger market in which consumers have
similar characteristics and preferences
Market segmentation is the process of dividing a market of potential customers into
groups, or segments, based on different characteristics. For example, PepsiCo identified the
health-conscious market segment and targeted/marketed the Diet Coke towards them.
Markets can be segmented on the basis of socio-economic
groups (income), age, location, gender, lifestyle, use of the product (home/
work/ leisure/ business) etc.
Each segment will require different methods of promotion and distribution. For example,
products aimed towards kids would be distributed through popular retail stores and
products for businessmen would be advertised in exclusive business magazines.
Makes marketing cost-effective, as it only targets a specific segment and meets their needs.
The above leads to higher sales and profitability
Increased opportunities to increase sales
3.2 – Market Research
Market research is the process of collecting, analysing and interpreting information about
a product.
Product-oriented business: such firms produce the product first and then tries to find a
market for it. Their concentration is on the product – its quality and price. Firms producing
electrical and digital goods such as refrigerators and computers are examples of productoriented businesses.
Market-oriented businesses: such firms will conduct market research to see what
consumers want and then produce goods and services to satisfy them. They will set a
marketing budget and undertake the different methods of researching consumer tastes and
spending patterns, as well as market conditions. Example, mobile phone markets.
Why is market research important/needed?
Firms need to conduct market research in order to ensure that they are producing goods
and services that will sell successfully in the market and generate profits. If they don’t, they
could lose a lot of money and fail to survive. Market research will answer a lot of the
business’s questions prior to product development such as ‘will customers be willing to
buy this product?’, ‘what is the biggest factor that influences customers’ buying
preferences- price or quality?’, ‘what is the competition in the market like?’ and so on.
Market research data can be quantitative (numerical-what percentage of teenagers in the
city have internet access) or qualitative (opinion/ judgement- why do more women buy
the company’s product than men?)
Market research methods can be categorized into two: primary and secondary market
Primary Market Research (Field Research)
The collection of original data. It involves directly collecting information from existing or
potential customers. First-hand data is collected by people who want to use the data (i.e.
the firm). Examples of primary market research methods include questionnaires, focus
groups, interviews, observation, and online surveys and so on.
The process of primary research:
1. Establish the purpose of the market research
2. Decide on the most suitable market research method
3. Decide the size of the sample (customers to conduct research on) and identify the sample
4. Carry out the research
5. Collate and analyse the data
6. Produce a report of the findings
Sample is a subset of a population that is used to represent the entire group as a whole.
When doing research, it is often impractical to survey every member of a particular
population because the number of people is simply too large. Selecting a sample is
called sampling. A random sampling occurs when people are selected at random for
research, while quota sampling is when people are selected on the basis of certain
characteristics (age, gender, location etc.) for research.
1. Questionnaires: Can be done face-to-face, through telephone, post or the
internet. Online surveys can also be conducted whereby researchers will email the sample
members to go onto a particular website and fill out a questionnaire posted there. These
questions need to be unbiased, clear and easy to answer to ensure that reliable and
accurate answers are logged in.
Advantages of Questionnaires:
Detailed information can be collected
Customer’s opinions about the product can be obtained
Online surveys will be cheaper and easier to collate and analyse
Can be linked to prize draws and prize draw websites to encourage customers to fill out
Disadvantages Questionnaires:
If questions are not clear or are misleading, then unreliable answers will be given
Time-consuming and expensive to carry out research, collate and analyse them.
2. Interviews: interviewer will have ready-made questions for the interviewee.
Advantages of interviews:
Interviewer is able to explain questions that the interviewee doesn’t understand and
can also ask follow-up questions
Can gather detailed responses and interpret body-language, allowing interviewer to
come to accurate conclusions about the customer’s opinions.
Disadvantages of interviews:
The interviewer could lead and influence the interviewee to answer a certain way. For
example, by rephrasing a question such as ‘Would you buy this product’ to ‘But, you
would definitely buy this product, right?’ to which the customer in order to appear
polite would say yes when in actuality they wouldn’t buy the product.
Time-consuming and expensive to interview everyone in the sample
3. Focus Groups: A group of people representative of the target market (a focus group)
agree to provide information about a particular product or general spending patterns over
time. They can also test the company’s products and give opinions on them.
Advantage of Focus Groups:
They can provide detailed information about the consumer’s opinions
Disadvantages of Focus Groups:
Opinions could be influenced by others in the group.
4. Observation: This can take the form of recording (eg: meters fitted to TV screens to see
what channels are being watched), watching (eg: counting how many people enter a shop),
auditing (e.g.: counting of stock in shops to see which products sold well).
Advantage of Observation:
Disadvantage of Observation:
Only gives basic figures. Does not tell the firm why consumer buys them.
The collection of information that has already been made available by others. Second-hand
data about consumers and markets is collected from already published sources.
Internal sources of information:
Sales department’s sales records, pricing data, customer records, sales reports
Opinions of distributors and public relations officers
Finance department
Customer Services department
External sources of information:
Government statistics: will have information about populations and age structures in the
Newspapers: articles about economic conditions and forecast spending patterns.
Trade associations: if there is a trade association for a particular industry, it will have
several reports on that industry’s markets.
Market research agencies: these agencies carry out market research on behalf of the
company and provide detailed reports.
Internet: will have a wide range of articles about companies, government statistics,
newspapers and blogs.
The reliability and accuracy of market research depends upon a large number of factors:
How carefully the sample was drawn up, its size, the types of people selected etc.
How questions were phrased in questionnaires and surveys
Who carried out the research: secondary research is likely to be less reliable since it was
drawn up by others for different purpose at an earlier time.
Bias: newspaper articles are often biased and may leave out crucial information deliberately.
Age of information: researched data shouldn’t be too outdated. Customer tastes, fashions,
economic conditions, technology all move fast and the old data will be of no use now.
Different data handling methods can be used to present data from market research. This will
1. Tally Tables: used to record data in its original form. The tally table below shows the
number and type of vehicles passing by a shop at different times of the day:
2. Charts: show the total figures for each piece of data (bar/ column charts) or the
proportion of each piece of data in terms of the total number (pie charts). For example the
above tally table data can be recorded in a bar chart as shown below:
The pie chart above could show a company’s market share in different countries.
3. Graphs: used to show the relationship between two sets of data. For example how
average temperature varied across the year.
Marketing mix refers to the different elements involved in the marketing of a good or
service- the 4 P’s- Product, Price, Promotion and Place.
Product is the good or service being produced and sold in the market. This includes all
the features of the product as well as its final packaging.
Types of products include: consumer goods, consumer services, producer goods, producer
What makes a successful product?
It satisfies existing needs and wants of the customers
It is able to stimulate new wants from the consumers
Its design – performance, reliability, quality etc. should all be consistent with the product’s
brand image
It is distinctive from its competitors and stands out
It is not too expensive to produce, and the price will be able to cover the costs
Development of a new product by a business. The process:
1. Generate ideas: the firm brainstorms new product concepts, using customer suggestions,
competitors’ products, employees’ ideas, sales department data and the information
provided by the research and development department
2. Select the best ideas for further research: the firm decides which ideas to abandon and
which to research further. If the product is too costly or may not sell well, it will be
3. Decide if the firm will be able to sell enough units for the product to be a success: this
research includes looking into forecast sales, size of market share, cost-benefit analysis etc.
for each product idea, undertaken by the marketing department
4. Develop a prototype: by making a prototype of the new product, the operations
department can see how the product can be manufactured, any problems arising from it
and how to fix them. Computer simulations are usually used to produce 3D prototypes on
5. Test launch: the developed product is sold to one section of the market to see how well it
sells, before producing more, and to identify what changes need to be made to increase
sales. Today a lot of digital products like apps and software run beta versions, which is
basically a market test
6. Full launch of the product: the product is launched to the entire market
Advantages of new product development
Can create a Unique Selling Point (USP) by developing a new innovative product for the
first time in the market. This USP can be used to charge a high price for the product as well
as be used in advertising.
Charge higher prices for new products (price skimming as explained later)
Increase potential sales, revenue and profit
Helps spreads risks because having more products mean that even if one fails, the other
will keep generating a profit for the company
Disadvantages of new product development
Market research is expensive and time consuming
Investment can be very expensive
Why is brand image important?
Brand image is an identity given to a product that differentiates it from competitors’
Brand loyalty is the tendency of customers to keep buying the same brand continuously
instead of switching over to competitors’ products.
Consumers recognize the firm’s product more easily when looking at similar productshelps differentiate the company’s product from another.
Their product can be charged higher than less well-known brands – if there is an
established high brand image, then it is easier to charge high prices because customers will
buy it nonetheless.
Easier to launch new products into the market if the brand image is already established.
Apple is one such company- their brand image is so reputed that new products that they
launch now become an immediate success.
Why is packaging important?
It protects the product
It provide information about the product (its ingredients, price, manufacturing and expiry
dates etc.)
To help consumers recognize the product (the brand name and logo on the packaging will
help identify what product it is)
It keeps the product fresh
The product life cycle refers to the stages a product goes through from it’s introduction to
it’s retirement in terms of sales.
At these different stages, the product will need different marketing decisions/strategies in
terms of the 4Ps.
introduction stage This is the stage in which the product has been introduced first time in
the market and the sales of the product starts to grow slowly and gradually and the profit
received from the product is nominal and non-attained.
Growth stage In the growth stage, the product is visibly present in the market, the
product has habitual consumers, and there is quick growth in product sales. More new
customers are becoming aware of the product and trying it. The customers are becoming
satisfied with the product and are buying it again and again.
Maturity stage In maturity stage, the cost of the product has been decreased because of
the increased volume of the product and the product started to experience the curve
effects. This is the most profitable stage.
Saturation and decline stage In this stage, the profit as well as the sales of the product
has started to decline because of the deletion of the product from the market. The market
for the product in this stage started to show negative rate of growth and corroding cash
Marketing techniques used to extend the maturity stage of a product (to keep the product
in the market):
Finding new markets for the product
Finding new uses for the product
Redesigning the product or the packaging to improve its appeal to consumers
Increasing advertising and other promotional activities
The effect on the PLC of a product of a successful extension strategy:
Price is the amount of money producers are willing to sell or consumer are willing to buy
the product for.
Different methods of pricing:
1. Market skimming: Setting a high price for a new product that is unique or very different
from other products on the market.
Advantages of market skimming:
Profit earned is very high
Helps recover/compensate research and development costs
Disadvantage of market skimming:
It may backfire if competitors produce similar products at a lower price
2. Penetration pricing: Setting a very low price to attract customers to buy a new product
Advantages of Penetration pricing
Attracts customers more quickly
Can increase market share quickly
Disadvantages of Penetration pricing:
Low revenue due to lower prices
Cannot recover development costs quickly
3. Competitive pricing: Setting a price similar to that of competitors’ products which are
already available in the market
Advantage of Competitive pricing
Business can compete on other matters such as service and quality
Disadvantage of Competitive pricing
Still need to find ways of competing to attract sales.
4. Cost plus pricing: Setting price by adding a fixed amount to the cost of making the
Advantages of Cost plus pricing
Quick and easy to work out the price
Makes sure that the price covers all of the costs
Disadvantage of Cost plus pricing
Price might be set higher than competitors or more than customers are willing to pay,
which reduces sales and profits
5. Loss leader pricing/Promotional pricing: Setting the price of a few products at below
cost to attract customers into the shop in the hope that they will buy other products as well
Advantages of Promotional pricing
Helps to sell off unwanted stock before it becomes out of date
A good way of increasing short term sales and market share
Disadvantage of Promotional pricing
Revenue on each item is lower so profits may also be lower
Factors that affect what pricing method should be used:
Is it a new or existing product?
If it’s new, then price skimming or penetration pricing will be most suitable. If it’s an
existing product, competitive pricing or promotional pricing will be appropriate.
Is the product unique?
If yes, then price skimming will be beneficial, otherwise competitive or promotional
Is there a lot of competition in the market?
If yes, competitive pricing will need to be used.
Does the business have a well-known brand image?
If yes, price skimming will be highly successful.
What are the costs of producing and supplying the product?
If there are high costs, costs plus pricing will be needed to cover the costs. If costs are low,
market penetration and promotional pricing will be appropriate.
What are the marketing objectives of the business?
If the business objective is to quickly gain a market share and customer base, then
penetration pricing could be used. If the objective is to simply maintain sales, competitive
pricing will be appropriate.
The PED of a product refers to the responsiveness of the quantity demanded for it to
changes in its price.
PED (of a product) = % change in quantity demanded / % change in price
When the PED is >1, that is there is a higher % change in demand in response to a change in
price, the PED is said to be elastic.
When the PED is <1, that is there is a lower % change in demand in response to a change in
price, the PED is said to be inelastic.
Producers can calculate the PED of their product and take suitable action to make the
product more profitable.
If the product is found to have an elastic demand, the producer can lower prices to
increase profitability. The law of demand states that a fall in price increases the demand.
And since it is an elastic product (change in demand is higher than change in price), the
demand of the product will increase highly. The producers get more profit.
If the product is found to have an inelastic demand, the producer can raise prices to
increase profitability. Since quantity demanded wouldn’t fall much as it is inelastic, the
high prices will make way for higher revenue and thus higher profits.
For a detailed explanation about PED, click here
Place refers to how the product is distributed from the producer to the final consumer.
There are different distribution channels that a product can be sold through.
to Consumer
to Retailer
to Consumer
The product is sold to
the consumer straight
from the
manufacturer. A good
example is a factory
outlet where products
directly arrive at their
own shop from the
factory and are sold to
The manufacturer will
sell its products to a
retailer (who will
have stocks of
products from other
manufacturers as
well) who will then
sell them to
customers who visit
the shop. For
example, brands like
Sony, Canon and
Panasonic sell their
products to various
– All of the profit is
earned by the producer
– The producer controls
all parts of the
marketing mix
– Quickest method of
getting the product to
the consumer
– Delivery costs
may be high if
there are
customers over
a wide area
– All storage
costs must be
paid for by the
– All
activities must
be carried out
and financed by
the producer
– The cost of holding
inventories of the
product is paid by the
– The retailer will pay
for advertising and
other promotional
– Retailers are more
conveniently located
for consumers
– The retailer
takes some of
the profit away
from the
– The producer
loses some
control of the
marketing mix
– The producer
must pay for
delivery of
products to the
– Retailers
usually sell
products as well
to Wholesaler
to Retailer
to Consumer
The manufacturer will
sell large volumes of
its products to a
(wholesalers will have
stocks from different
Retailer will buy small
quantities of the
product from the
wholesaler and sell it
to the consumers. One
good example is the
distribution of
medicinal drugs.
to Agent
to Wholesaler
to Retailer
to Consumer
The manufacturer will
sell their products to
an agent who has
information about the
market and will know
the best wholesalers
to sell them to. This is
common when firms
are exporting their
products to a foreign
country. They will
need a knowledgeable
agent to take care of
the products’
distribution in
another country
– Wholesalers will
advertise and promote
the product to retailers
– Wholesalers pay for
transport and storage
– Another
middleman is
added so more
profit is taken
away from the
– The producer
loses even more
control of the
marketing mix
– Another
middleman is added
so even more profit
is taken away from
the producer
– The agent has
specialised knowledge
What affects place decisions?
The type of product it is: if it’s sold to producers of other goods, distribution would either
be direct (specialist machinery) or wholesaler (nuts, bolts, screws etc.).
The technicality of the product: as lots of technical information needs to be passed to the
customer, direct selling is usually preferred.
How often the product is purchased: if the product is bought on a daily basis, it should be
sold through retail stores that customers can easily access.
The price of the product: if the products is an expensive, luxury good, it would only be
sold through a few specialist, high-end outlets For example, luxury watches and jewellery.
The durability of the product: if it’s an easily perishable product like fruits, it will need to
be sold through a wide amount of retailers to be sold quickly.
Location of customers: the products should be easily accessible by its customers. If
customers are located over the world, e-commerce (explained below) will be required.
Where competitors sell their product: in order to directly compete with competitors, the
products need to be sold where competitors are selling too.
Promotion: marketing activities used to communicate with customers and potential
customers to inform and persuade them to buy a business’s products.
Aims of promotion:
Inform customers about a new product
Persuade customers to buy the product
Create a brand image
Increase sales and market share
Types Of Promotion
Advertising: Paid-for communication with consumers which uses printed and visual
media like television, radio, newspapers, magazines, billboards, flyers, cinema etc. This can
be informative (create product awareness) or persuasive (persuade consumers to buy the
product). The process of advertising:
Sales Promotion: using techniques such as ‘buy one get one free’, occasional price
reductions, free after-sales services, gifts, competitions, point-of–sale displays (a special
display stand for a product in a shop), free samples etc. to encourage sales.
Below-the-line promotion: promotion that is not paid for communication but uses
incentives to encourage consumers to buy. Incentives include money-off coupons or
vouchers, loyalty reward schemes, competitions and games with cash or other prizes.
Personal selling: sales staff communicate directly with consumer to achieve a sale and
form a long-term relationship between the firm and consumer.
Direct mail: also known as mailshots, printed materials like flyers, newsletters and
brochures which are sent directly to the addresses of customers.
Sponsorship: payment by a business to have its name or products associated with a
particular event. For example Emirates is Spanish football club Real Madrid’s jersey
sponsor- Emirates pays the club to be its sponsor and gains a high customer awareness and
brand image in return.
What Affects Promotional Decisions?
Stage of product on the PLC: different stages of the PLC will require different promotional
strategies; see above.
The nature of the product: If it’s a consumer good, a firm could use persuasive advertising
and use billboards and TV commercials. Producer goods would have bulk-buy-discounts to
encourage more sales. The kind of product it is can affect the type of advertising, the media
of advertising and the method of sales promotion.
The nature of the target market: a local market would only need small amounts of
advertising while national markets will need TV and billboard advertising. If the product is
sold to a mass market, extensive advertising would be needed. But niche market products
such as water skis would only need advertising in special sports and lifestyle magazines.
Cost-effectiveness: the amount of money put into promotion (out of the total marketing
budget) should be not too much that it fails to bring in the sales revenue enough to cover
those costs at least. Promotional activities are highly dependent on the budget.
It is also worth noting that the internet/ e-commerce is now widely used to distribute
products. E-Commerce is the use of the internet and other technologies used by businesses
to market and sell goods and services to customers. Examples of e-commerce include
online shopping, internet banking, online ticket-booking, online hotel reservations etc.
Websites like Amazon and e-Bay act as online retailers.
Online selling is favoured by producers because it is cheaper in the long-run and they
can sell products to a larger customer base/ market. However there will be increased
competition from lots of producers.
Consumers prefer online shopping because there are wider choices of detailed products
that are also cheaper and they can buy things at their own convenience 24×7. However,
there is no personal communication with the producer and online security issues may
However, e-commerce means an entire new type of marketing strategy is also required
– online promotions, new channel of distribution, new pricing strategies (since price
competition in e-commerce is very high and demand is very price elastic). It requires a lot
of money to set up – online websites, promotions, web developers and technicians to run
and maintain the system etc.
The internet is also used for promotion and advertising of products in the form of
paid social media ads and sponsors, pop-ups, email newsletters etc. It helps reach target
customers, is relatively cheap and helps the firm respond to market changes
quicker (since online ads can be easily altered/updated rather than billboards and TV
ads). But it can alienate and chase customers away if they see it too frequently and find it
annoying. There is also the risk of the adverts being publicised negatively if it has
annoying or offensive content that customers quickly criticise (since content is more easily
shareable online).
3.4 – Marketing Strategy
Marketing Strategy
A marketing strategy is a plan to combine the right combination of the four elements of
the marketing mix for a product to achieve its marketing objectives. Marketing objectives
could include maintaining market shares, increasing sales in a niche market, increasing sale
of an existing product by using extension strategies etc.
Factors that affect the marketing strategy:
Legal Controls on Marketing
There are various laws that can affect marketing decisions on quality, price and the
contents of advertisements.
laws that protect consumers from being sold faulty and dangerous goods
laws that prevent the firms from using misleading information in
advertising Example: Volkswagen falsely advertised environmentally friendly diesel cars
and were legally forced to pull all cars from the market
laws that protect consumers from being exploited in industries where there is little or
no competition, known as monopolising.
Entering New Markets
Growing business in other countries can increase sales, revenue and profits. This is
because the business is now available to a wider group of people, which increases
potential customers. If the home markets have saturated (product is in maturity stage),
firms take their products to international markets. Trade barriers and restrictions have
also reduced significantly over the years, along with new transport infrastructures, so it is
now cheaper and easier to export products to other countries.
Problems of entering foreign markets:
Difference in language and culture: It may be difficult to communicate with people in
other countries because of language barriers and as for culture, different images, colors and
symbols have different meanings and importance in different places. For example,
McDonald’s had to make its menu more vegetarian in Indian markets
Lack of market knowledge: The business won’t know much about the market it is
entering and the customers won’t be familiar with the new business brand, and so getting
established in the market will be difficult and expensive
Economic differences: The cost and prices may be lower or higher in different countries
so businesses may not be able to sell the product at the price which will give them a profit
High transport costs
Social differences: Different people will have different needs and wants from people in
other countries, and so the product may not be successful in all countries
Difference in legal controls to protect consumers: The business may have to spend
more money on producing the products in a way that complies with that country’s laws.
How to overcome such problems:
1. Joint venture: an agreement between two or more businesses to work together on
a project. The foreign business will work with a domestic business in the same industry.
Eg: Japan’s Suzuki Motor Corporation created a joint venture with India’s Maruti Udyog
Limited to form Maruti Suzuki, a highly successful car manufacturing project in India.
Advantages of Joint venture:
Reduces risks and cuts costs
Each business brings different expertise to the joint venture
The market potential for all the businesses in the joint venture is increased
Market and product knowledge can be shared to the benefit of the businesses
Disadvantages of Joint venture:
Any mistakes made will reflect on all parties in the joint venture, which may damage
their reputations
The decision-making process may be ineffective due to different business culture or
different styles of leadership
2. Franchise/License: the owner of a business (the franchisor) grants a licence to
another person or business (the franchisee) to use their business idea – often in a
specific geographical area. Fast food companies such as McDonald’s and Subway operate
around the globe through lots of franchises in different countries.
Rapid, low cost method of
business expansion
Gets an income from
franchisee in the form of
franchise fees and
Profits from the franchise
needs to be shared with the
Loss of control over
running of business
Franchisee will better
understand the local tastes
and so can advertise and
sell appropriately
Franchisee may not be as
Can access ideas and
suggestions from
If one franchise fails, it can
affect the reputation of the
entire brand
Need to supply raw
material/product and
provide support and
Franchisee will run the
Cost of setting up business
No full control over
business- need to strictly
follow franchisor’s
standards and rules
Working with an
established brand means
chance of business failing
is low
Franchisor will give
technical and managerial
Franchisor will supply the
raw materials/products
Profits have to be shared
with franchisor
Need to pay franchisor
franchise fees and royalties
Need to advertise and
promote the business in the
region themselves