9.1. Introduction 9.2. The principle activities of marketing

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Chapter 9: International Marketing
Zubair Hassan (2013). International Marketing. International Business
9.1.
Introduction
This chapter covers two major components of learning objectives/outcomes that are
likely to examine via coursework or examination. This chapter will enable students to
build their knowledge on variation of marketing activities in different countries in
terms of marketing mix.
This chapter will cover the following topics:
The principal activities of marketing
International marketing
Decision-making and international marketing
Market selection
Market-entry strategies
International marketing mix
International marketing planning
9.2.
The principle activities of marketing
The Charted Institute of Marketing (CIM) defines marketing as ‘the management
process responsible for identifying customer needs profitability’.
American
Marketing Association (AMA) defines marketing as a ‘process of planning and
executing the conception, pricing, promotion and distribution of ideas, goods and
services to create exchanges that satisfy individual and organisational goals’
According to Wall et al (2010) there are three major elements are involved in
marketing roles
1. Customer orientation. Focus on customer requirements or needs
2. Integrated effort. Building bridge between the requirements of the customer and
the capabilities of the organisation.
3. Goal focus. Marketers may play a part in keeping these longer-term strategic aims
in focus.
Therefore marketing activities can be break down into the following
9.2.1. Analysis
There are three key elements
1. Environmental analysis. This may involve scanning the environment for risk and
opportunities and seeking to identify factors outside the firm’s control (Political,
Economical and Technological, Social and Ecological factors)
2. Buyer behaviour. Firms need to have a profile of their existing and potential
customer base, and to know how and why their customer purchases. Marketing
seeks to identify the buyers, their potential motivation for purchase, their
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educational levels, income, class, age and many other factors which might
influence the decision to purchase.
3. Market research. This is the process by which much of the information about the
firms’s customers and its environment is collected without such market research,
organisations would have to make guesses about their customers. Such research
may involve using data which already exist (secondary data) or using surveys and
other methods to collect entirely new data (primary data).
9.2.2. Strategy
Once the environment analysis has been done, then organisation must develop a
marketing strategy to give a sense of direction for marketing activity. There are two
key marketing concepts involves in marketing strategy:
1. Market Segmentation
2. Marketing Mix
Market Segmentation
Market segmentation is the process of dividing the market into similar groups with
common characteristics.
‘Market segmentation’ is a technique based on the recognition that every market
consists of potential buyers with different needs, and different buying behaviour.
Market segmentation proves to be difficult or inappropriate in any of the following
situation:
1. If the total market is so small as to make segmentation unprofitable.
2. Sometimes consumer differences may exist, but it may be difficult to analyse
them into segments.
3. A total market may occasionally be homogeneous but this is likely to occur
only rarely.
The purpose of segmentation is to identify target markets, segments must be:
1. Measurable/identifiable. Here, the base(s) used should preferably lead to
ease of identification in terms of who is in each segment. It should also be
capable of measurement in terms of the potential customers in each segment
2. Accessible. Here, the base(s) used should ideally lead to the company being
able to reach selected market targets with their individual marketing efforts
3. Meaningful. The base(s) used must lead to segments, which have different
preferences or needs and show clear variations in market behaviour, and
response to individually designed marketing mixes
4. Substantial. The base(s) used should lead to segments, which are sufficiently
large to be economically and practically worthwhile serving as discrete market
targets with a distinctive marketing mix
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Basis of segments
Sometimes market research uncovers segments that are global. Global segments are
made up of customers with similar needs regardless of their country. For example,
consumers throughout the world have a need and preference for reliable, convenient,
and accessible communication. For example Nokia as the largest cell-phone
manufacturer in the world, Nokia offers its products in Europe, Africa, the Middle
East, Asia Pacific, Greater China, and North, South, and Latin America.
Market research can also reveal regional segments where customer needs and
preferences are similar within regions that cross several countries. For example,
Aafia, the Saudi Arabian food company, has capitalized on consistent preferences for
its products across Persian regions (Cullen and Parboteeah, 2010).
On occasion, market research reveals that segments are unique by country: that is,
customer preferences are so diverse that cross-border grouping is not possible. When
segments are global or regional, it is possible to take advantage of standardized
marketing programs. However, when segments are unique within a country,
offerings must be adapted especially for those unique local needs.
Marketing Mix
Marketing strategy also involves selecting a suitable marketing mix, which will take
into account the following factors:
1. Product: defining characteristics
2. Price: various pricing strategies
3. Promotion: Communication of product information to the target market
4. Place: availability of the product to the target market
Three more marketing mix was introduced with the emergence of service industry.
These include:
5. Physical evidence
6. Process
7. People
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Marketing
Mix elements
Explanation
Decisions/strategy
Product
The product is the physical product
or service offered to the consumer.
In the case of physical products, it
also refers to any services or
conveniences that are part of the
offering.
Product decisions include aspects
such as, functionality,
appearance, quality, packaging,
brand, warranty, guarantees, and
service/support
Price
Pricing decisions should take into
account profit margins and the
probable pricing response of
competitors
Pricing decision includes, list
price, discounts, allowances,
financing and leasing options
Promotion
Promotion decisions are those
related to communicating and
selling to potential consumers.
Since these costs can be large in
proportion to the product price, a
break-even analysis should be
performed when making promotion
decisions. It is useful to know the
value of a customer in order to
determine whether additional
customers are worth the cost of
acquiring them.
Promotional decisions include
advertising, personal selling,
public relations, message, media
and budget.
Place
Place (or placement) decisions are
those associated with channels of
distribution that serve as the means
for getting the product to the target
customers. The distribution system
performs transactional, logistical,
and facilitating functions
Decision related to place includes,
channel members, channel
motivation, market coverage,
locations, logistics and service
levels
Physical
evidence
In a manufacturing or retail outlet
has its physical layout of production
system, presentation of products in
racks, cleanliness of store,
arrangement of tables or shelves
etc.
In services industry, it is intangible
by nature it cannot (unlike a
product) be experienced before it is
delivered. This means that potential
customers may perceive greater
risk.
Decision needs to be taken how to
display the products, what
uniform to wear by staffs, how to
arrange the tables etc.
Systems involved in providing a
service focused upon ‘identifying,
Decision about processes for
handling customer complaints,
Process
To overcome these feelings
service organisations can give
reassurance by way of
testimonials and references from
past satisfied customers as a
substitute for physical evidence
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anticipating and satisfying customer
requirements.
processes for identifying
customer needs and requirements,
processes for handling order
needs to be taken carefully.
Also decisions regarding process
such as wating time in ques, how
customers kept infomed and, how
services provision can be kept
efficiently must be considered
People
Include both staff and customers.
An organisation’s people come into
contact with customers and can
have a massive impact on customer
satisfaction levels. This implies the
need for well-trained, motivated
workforce mindful of the adage ‘the
customer is always right’.
Corporate investment in their most
valuable asset, employees, through
training and development supports
the processes of creating and
defending competitive advantages.
Decision needs to be taken
regarding to who to train, what
training programs must be
conducted. How much will be
spend on training and
development of staff.
Decisions also needs to be taken
regarding how to cerate loyalty
(loyalty cards), what information
needs to be collected and stored
about customer
The marketing mix can be used a marketing strategy based on the product life cycle
stages. The product life cycle can thus be applied to the industry as a whole (which
will include a summation of all manufacturers’ sales that are marketing that particular
product) or it can apply only to the sales of a specific product for an individual
company. For example, for a product in the world economy as a whole, by individual
country, by industry, by product type, product form or even by individual brand.. It is
now acknowledged that different categories of life cycle exist.
Marketing responses to each stages of product life cycle is explained in detailed
below using marketing mix strategies ( see page 6)
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Introduction
In this stage, the
firm seeks to build
product awareness
and develop a
market for the
product
Product
strategy
Promotion
strategy
Pricing strategy
Place strategy
Product
branding and
quality level is
established, and
intellectual
property
protection such
as patents and
trademarks are
obtained.
Promotion is
aimed at
innovators and
early adopters.
Marketing
communications
seeks to build
product
awareness and to
educate potential
consumers about
the product.
Pricing may be
low penetration
pricing to build
market share
rapidly, or high
skim pricing to
recover
development
costs.
Distribution/pla
ce is selective
until consumers
show
acceptance of
the product.
Pricing is
maintained as the
firm enjoys
increasing
demand with little
competition
Distribution
channels are
added as
demand
increases and
customers
accept the
product.
Introduce basic
products
Advertising and
sales promotion
to end users and
dealers
Growth
Firm seeks to build
brand preference
and increase market
share
Product quality
is maintained
and additional
features and
support services
may be added.
Improve
features of basic
products
Maturity
At maturity, the
strong growth in
sales diminishes.
Competition may
appear with similar
products. The
primary objective at
this point is to
defend market share
while maximizing
profit.
Product
features may be
enhanced to
differentiate the
product from
that of
competitors
Design product
versions for
different
segments
Decline
As sales decline.
Firms has many
option:
-Maintain the
product
-Harvest the product
Concentrate
upon
developing new
product lines.
Rationalise the
product range
-Discontinue the
product
Promotion is
aimed at a
broader
audience.
This means mass
media adverting
to establish
brand image
Promotion
emphasizes
product
differentiation.
Or
Reduce the price
enough to expand
and establish
market share
Pricing may be
lower because of
the new
competition.
Distribution
becomes more
intensive and
incentives may
be offered to
encourage
preference over
competing
products.
The phase is
characterised by
competitive
intensity and
price-cutting and
sales falling
continuously
Many producers
decide to
abandon the
marketplace, or
are forced to
abandon
because of
financial
difficulties.
This means
emphasising
brand strength to
different
segments
Reduce the
spending on
promotional
activities.
Minimal level of
spending to
retain loyal
customers
Rationalise
outlets to
minimise
distribution cost
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9.3.
International Marketing
International marketing can be defined as involving marketing activities that cross
national borders (Wall et al, 2010, p.343).
9.3.1. Different level of international marketing
1. Firms exporting to international markets but which have the majority of their
sales in the domestic market. Here the international markets is considered
secondary to the domestic market.
2. Multinational enterprises which have operations and sales worldwide and which
regard the home or host country as but one of many equally important market
environments
3. MNEs seeks to adopt global marketing strategies. The basis of global marketing is
to identify products or services for which similarities across several markets
enable a single, global, marketing strategy to be pursued. Example include Coca
Cola, Heinz, Kellogg’s, McDonalds, Marlboro etc. Global market exist in areas
such as telecommunications, computers, pharmaceuticals, construction
machinery, bio-engineering etc.
9.3.2. Reasons for international marketing
1. Increasing the size of the market. Developing new markets abroad may permit
the firm to fully exploit scale economies, which is particularly important when
these are substantial for that product. This means firm’s average costs can be
reduced to their lowest level by finding extra sales in overseas market.
2. Extending the product life cycle. Finding new markets abroad may help extended
the maturity stage of the product life cycle. This can be particularly important
when domestic markets have reached ‘saturation point’ for a product.
3. Supporting international specialisation. In an attempt to reduce overall
production costs, separate elements of an overall product may be produced in
large scale in geographical locations worldwide. For example, labour intensive
components will often be produced in low cost labour locations, whereas capitalintensive components will often be produced in high technology locations. The
final product, once assembled, must by definition be marketed internationally to
achieve the huge sales volumes which are pre-requisite for international
specialisation.
4. Establishing first mover advantages. Being the first entrant within an overseas
market may be an advantage. By becoming a ‘first mover’ a firm may make
difficult for new entrants to compete. For example, advantages include established
customer loyalty, greater choice in terms of supplier and experience that comes
with being the first entrant. For example Cable and Wireless entered Maldives as
a joint venture with Dhiraagu (local company) as a sole provider of
telecommunication services. Later in early mid 2000, an Arabian Company
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(Wataniya) entered Maldivian market, although failed to capture the market as
most of the mobile phone users are using Dhiraagu’s network. This switching cost
high for new users.
5. Helping reduce investment payback-periods. Finding overseas markets helps
achieve high volume sales early in the product life cycle, thereby reducing the pay
back period needed to return the initial capital outlay and making many
investments projects more attractive. This may help to compensate for modern
trends towards shorter product life cycles which are tending to inhibit investment
expenditure.
6. Reduce stock-holding costs. Overseas markets may provide new sales outlets for
surplus stocks (inventories), thereby reducing warehousing and other stockholding costs.
9.4.
Decision making and international marketing
According to Wall et al (2010, p.346) there are at least five decisions that MNCs must
potentially be made as they involves in the international marketing process:
1.
2.
3.
4.
5.
Whether to internationalise
Which foreign market(s) to enter
How to enter these foreign markets (market-entry strategies)
What international marketing mix to adopt
How to implement, coordinate and control the international marketing
programme.
9.4.1. International Marketing Research
The key aim of market research is to reduce the risk involved in taking effective
decisions in these five phases mentioned above. Market research can be divided into
two categories. These include
1. Desk research: which means using information which has already been gathered
for another purposes (secondary data)
2. Field research: which involves obtaining information specifically directed towards
a particular marketing issue and which is usually original (primary data).
Desk Research
Sources of secondary data available to the international marketers are
1. International organisations such as OECD, UN, EU, IMF, World Bank all collects
large volumes of mainly macro data on annual basis for both developing and
developed countries.
2. National publications: For example UK National Statistics
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3.
4.
5.
6.
National Trade Associations and Chambers of Commerce or equivalent
Trade Journals
Financial Press
Internet
Field Research
Primary data may be obtained from a variety of sources. The main advantage of field
research is that it is customised to the firm and is unavailable to competitors.
Research agencies: In most countries there are many enterprises that are specialist in
research. Companies can specify the type of data they are interested in an the agency
will carry out the research on their behalf.
Company network: Original data may be obtained from company networks (e.g.
suppliers who also work for rival firms). Sometimes members of a company are sent
to investigate the nature of specified markets through ‘shopping trips’ which can help
the organisation ‘get a feel’ for the types of markets they may enter.
9.5.
Market Selection
Most of the international marketing decision involves in deciding whether or not to
internationalise and decisions on which markets to enter.
Segmentation and Targeting
Segmentation is dividing the whole market into different groups based on similar
characteristics.
Targeting is the process of selecting the most lucrative market segments for its
service product.
Positioning involves developing marketing ‘mix’ for aligning services and products
to the target market.
In addition to measurability, accessibility and being substantial the market segments
selected for a leadership position would ideally:
1. Have potential for future growth
2. Show a distinctive customer need for ‘exploitation’
3. Be without a direct competitor of similar size.
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It would be impossible to enter any market without acting a direct competitor. This
means organisation needs to formulate strategies in positioning the business or
products against competitors.
Some of the positioning/targeting strategies are:
1. Make its product ‘different’ by creating some form of differentiated feature
(real or imagined) as part of the marketing mix.
2. Undifferentiated positioning involves a targeting of the entire market with a
single marketing mix. The undifferentiated policy is based on the hope that as
many customers as possible to buy it. (In essence this approach ignores
segmentation possibilities entirely). ‘Mass’ marketing may be ‘sufficient’ if
the market is largely homogeneous (e.g. the market for safety matches).
3. Differentiated targeting involves targeting certain market segments and then
applying distinct marketing mix to each. This can be complex and time
consuming but should be ultimately rewarding. The company may attempt to
introduce several product versions, each aimed at a different group of
potential customers (e.g. the manufacture of different styles of the some
article of clothing adapted to different world climates and national cultural
tastes). The major disadvantage of a differentiated marketing strategy is the
additional costs of marketing and production (more product design and
development costs, the loss of economies of scale in production and storage,
additional promotion costs and administrative costs, etc.). Some firms have
tried to overcome this problem by selling the same product to two market
segments. For example, Johnson’s baby powder and Heinz baby apple food is
sold to many adults for their own use.
4. Concentrated positioning involves a targeting of a single market segment
with an ideal product for that one segment of the market (e.g. Rolls-Royce
cars). This would possibly be the best approach for a small player within the
market place. The major disadvantage of concentrated marketing is the
business risk of relying on a single segment of a single market. On the other
hand, specialisation in a particular market segment can give a firm a profi
table, although perhaps temporary, competitive edge over rival firm
Choosing an appropriate strategy is sometimes difficult. However decisions are
generally made on:
1. The relative attractiveness of segments
2. The capability of the organisation itself
3. The positioning of competitors
4. The product must be sufficiently advanced in its ‘life cycle’ to have attracted a
substantial total market. Without such a substantial market, segmentation and
target marketing is unlikely to be profitable
5. PEST analysis
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9.6.
Market-entry strategies
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9.7.
International Marketing Mix
The fourth decision involves the international marketing mix. Marketing mix can
varies significantly in different countries. The four basic marketing mix include
product, price, promotion and place.
9.7.1. Product
A product provides a set of benefits that satisfy needs for the consumer. It consists of
all the physical or tangible components, such as color, as well as all intangible
components, such as service, reputation, prestige, and other elements that the
customer cannot feel and see.
In international marketing, a key issue is the extent to which a standard or
differentiated product should be provided.
Standardization means that the product is uniform and consistent from country to
country. Sometimes standardized products can be extended directly to only one or a
few countries when there are regional segments. Direct extension works when
consumers have highly common needs and common conditions of use and purchase
in many countries. In such cases, the MNC’s existing product can fill needs with little
or no change. For example, the French luxury bag marketer Louis Vuitton directly
extends its product offering with no modifications to consumers throughout the
world. You can buy the same bag in New York, Paris, or Tokyo. When the MNC’s
product meets the needs of customers in foreign markets with little or no change,
marketers say it can be extended directly. Direct extension may involve only
language changes on the label or instructions, as with soft drinks or bicycles, for
example. However, sometimes even that is not necessary and a completely
standardized product can be offered. The most famous example of direct extension is
Coke. In many markets, it is not even necessary for Coke to change the language in
product labeling.
Adaptation/customization or differentiation of products means that the MNC
customizes and adapts its products to local wants, needs, and conditions. Adaptation
is rarely a question of “yes” or “no,” but instead it involves questions of what features
to customize, how much and in which ways to customize them for which countries.
Too much customization is costly and may not necessarily better serve consumer
needs. Too little customization may ignore important differences in needs from
country to country, and cost the MNC sales and market share.
The table below shows factors supporting product standardization or product
differentiation/adaptation.
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Factors supporting standardization
Factors supporting product differentiation
Rapid technological change, reducing
product life cycles (place a premium on
rapid global penetration)
Slow technological change, lengthening
product life cycle
Substantial scale economies
Few scale economies
International product standards
Local product standard
Short cultural distance to overseas
market
Large cultural distance to overseas
market
Strong and favourable brand image
Weak and /or unfavourable brand image
Homogenous consumer preferences
Heterogeneous consumer preference
(within a given group characteristic, e.g.
high income)
(with a given group characteristics, e.g.
high income)
Global competition
Local competition
Centralised management of MNE
operations
Decentralised management of MNE
operations
Source: Wall et al (2010, p.355).
Three factors will be discussed in detail in explaining the way each factors influences
product attributes in international markets.
Cultural differences
Cultural difference arises among the countries due to the difference in social
structure, language, religion, and education (Hill et al, 2003).
For example, “hamburgers” do not sell well in Islamic countries as the consumption
of ham is forbidden by Islamic law. Also due to the traditional differences, product
attributes may need to be change in different countries. For example, reflecting
differences in traditional eating habits, Findus frozen food division of Nestle’, the
Swiss food giant, markets fish cakes and fish fingers in Great Britain, but beef
bourguignon and coq au vin in France and vitello con fungi and braviolo in Italy. In
addition to the normal range of products, Coca Cola in Japan markets Georgia, cold
coffee in a can, and Aquarius, a tonic drink, both of which appeal to traditional
Japanese tastes.
Similarly McDonald customized/adapted the product attributes due to the religion
factors in India. For example McDonald emphasis on lamb based ‘Maharajah Mac’
to meet Hindu aversion of beef and Muslim aversion to pork (Wall et al, 2010).
Taste and preferences are becoming more cosmopolitan. Coffee is gaining ground
against tea in Japan and Great Britain, while American style frozen dinners have
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become popular in Europe. Taking advantage of these trends, Nestle’ has found that
it can market its instant coffee, spaghetti Bolognese, and Lean Cuisine frozen dinners
in essentially the same manner in North America and Western Europe. Also
McDonald adapted or customized its product offerings in order to meet differ
customer tastes. Fro example USA portion sizes larger, French menu includes
traditional snacks such as Croque Monsieur, French pastries, stronger coffee, Chinese
New Year menu includes authentic cultural dishes and packages, ‘McCafe’s’ used in
mature markets such as Australia, the USA and the UK, with lattes, cappuccinos and
other specialty drinks (Wall et al, 2010).
Economic Development
Consumer behaviour is influence by the level of economic development of a country.
Firms based in highly developed countries such as the USA tend to build a lot of extra
performance attributes into their products. These extra attributes are not usually
demanded by the consumers in less developed nations, where consumer demand for
more basic products.
This could be due to the high income earned by those who live in more developed
countries than less developed countries. Therefore these customers in more developed
countries are willing to pay more for products that have traditional features and
attributes customized to their tastes and preferences. For example, demand for top-ofthe-four-wheel-drive sport utility vehicles, such as Chrysler’s Jeep, Ford’s Explorer,
and Toyota Land Cruiser, is almost totally restricted to the USA. This is due to the
combination of factors including high income, low cost of gasoline etc.
Product and technical standards
Differing government-mandated product standards can rule out mass production and
marketing of a standardized product. For example, Caterpillar, the U.S. construction
equipment firm, manufacturers backhoe-loaders for all Europe in Great Britain. These
tractor-type machines have a bucket in front and a digger at the back. Several
specialist parts must be built into backhoe-loaders that will be sold in Germany: a
separate brake attached to the rear axle, a special locking mechanism on the backhoe
operating valve, specially positioned valves in the steering system, and a lock on the
bucket for travelling.
Differences in technical standards also constrain the globalization of markets. Some
of these differences result from idiosyncratic decisions made long ago, rather than
from government actions, but their long-term effects are nonetheless profound (Hill,
2003). For example, video equipment manufactured for sales in the USA will not
play videotapes recorded on equipments manufactured for sales in Great Britain,
Germany, and France (and vice versa). Differing technical standards for frequency of
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television signals emerged in the 1950s that require television and video equipment to
be customized to prevailing standards. RCA stumbled in the 1970s when it failed to
account for this in its marketing of TVs in Asia.
Similary Czinkota et al (2011, p. 488) illustrate the factors that influences product
adaptation as given the figure below
Figure 9.1: Factors influencing product adaptation
Source: Czinkota et al (2011, p. 488)
Branding
Brand image may depend not so much on actual product differences but on consumer
perceptions of product differences, created and reinforced by extensive advertising.
The brand is the identity of a product. It includes the name, logo, symbols, terms,
song, colors, special packaging characteristics, product appearance, words, or
anything else used to establish our association with the product and identify the
product. For example, the Nike brand is based on the “swoosh” symbol, the “Just do
it” slogan, as well as an array of other things that establish the image of Nike products
and our positive association with them (Cullen and Parboteeah, 2010).
In branding strategies and decisions, the MNC again faces the global–local dilemma.
Whether extending an existing product or developing a new product for foreign
markets, the MNC must decide whether to use one brand across all markets or a
separate brand for regional markets or even a separate brand for each country market.
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When a product has a global identity, when there is a single brand for the product
throughout the world, it is called a global brand. A global brand has a consistent
identity with customers in all markets. A global brand has the same product benefits
and characteristics, the same brand name, logos, and slogans, all with the same
meaning for consumers throughout the world.
There are very few truly global brands. The table below shows the top 25 brands in
the world.
Source: ‘‘BestGlobalBrands,’’ BusinessWeek,September28,2009
Potential benefits of branding
1. Brand image influence the product characteristics sought at the introduction stage
of the product life cycle or the modifications considered during the growth or
maturity stages of the product life cycle. For example may be modified in order to
reposition it and/or extend the reach of the brand at the maturity stage of the
product life cycle. This only appeals large corporations
2. Helps to distinguish the product of a particular supplier, the image of the supplier
itself. When attempting to set-up brands, organisation need to consider whether
the brand should be local, regional or global.
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3. Branding can sometimes extend into communication that is separate from the
product itself. Because of the difficulties of translation into words, the unutterable
brands often work best at international level.
4. Successful brands allows high organisations to charge higher price. They also
allows to charge over and above compared to non-brand products or generic
products. These higher prices helps create what is often called “brand value”.
Global or Local brand
According to Cullen and Parboteeah (2010) advantages of global brands
(standardized brands)
1. Economies of scale: A major part of the advantage of global brands comes from
economies of scale. The development and marketing costs for a global brand can
be spread over large sales volumes in many markets.
2. Global brands are much more visible than local brands because of their consistent
identity. When customers travel around, they see the product in other countries as
well as their own.
3. In addition, global brands gain from media overlap. Potential customers in the US
can view many Canadian TV channel and listen to many Canadian radio stations.
With the advanced communications technology making satellite TV and radio
more and more common, this media overlap will become commonplace and even
more beneficial to global brands.
According to Cullen and Parboteeah (2010) advantages of local brands (adaptation)
1. Local branding strategies may be necessary because the brand name may have
some undesirable associations or offensive meanings in the local culture.
Likewise, certain terms may have a specific meaning that is not consistent across
cultures. For example, product brand names do not contain the term “diet” in
association with caloric content in France because diet is a specific medical term
requiring sale in a pharmacy. Brands like Diet Coke must be sold as Coke Light.
In Japan, the diet is the national legislature. There are many examples of brand
names that have restricted global use. For example, the Chevy Nova translates
into “no go” in Spanish. The IB Strategic Insight below gives another recent
example.
2. Local brands can be a great asset. Local branding can signal that the company is
sensitive to cultural differences and committed to serving the local market.
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Customers may feel resentment toward a certain country or toward big MNCs in
general. In such cases, local brands are preferable.
3. Local brands can sometimes enjoy more support from local retailers when they
advise customers on product choices.
4. Local brands may also have wider distribution with more local retailers. This
means that after-sales services, such as product repair and maintenance, are more
available and easier for customers.
5. Finally, even though it may not always be true, buyers may believe that global or
regional brands offered by well-known MNCs are more expensive than local
offerings. Customers in local markets may see local brands as better value for
their money. For example, in Turkey consumers see appliances produced by the
Turkish company Arcelik as providing better value for their money than the better
known, more prestigious brands from Western MNCs.
9.7.2. Price
Price in any marketing context is governed by competition, production costs and
company objectives (Wall et al, 2010, p.361).
There are many strategic pricing initiatives. Some of these are explained by Wall et
al (2010, p.361-362) as follows
1. Penetration pricing: here price for a new product may even be set below the cost
in order to capture market share. The expectation is that price can be raised and
profit margins restored later on in the growth/maturity stages, helped by the fact
that average costs may themselves be falling in those stages via the various
economies of scale. For example Proton Berhad (a Malaysian car manufacturer)
initially charged very low price (lower than the cost) of sterling pound of 8000
per car in UK market in order to capture the market share in 2004 and 2005. Also
Samsung charged a very low price for its Coby 2 phone when they entered foreign
markets compared to other products available in the market.
2. Price-skimming: Here a price is set for a new product in the introduction/early
growth stage which ‘skim off’ a small but lucrative part of the market. Producers
of fashion products, which a short-life and high innovative values such as long as
only few people own them, often adopt a skimming systems over time. Bosch
used a successful skimming policy, supported by patents, its launch of fuel
injection and antilock braking systems. Similarly when Apple introduced its
iPhone in 2007 it charged a very high price of US$499, and later it reduced the
price to US$ 399 and then later it reduced the price to US$ 200 to attract more
customers (West and Mace, 2010).
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3. Loss leader(bait) pricing : where a limited number of products are priced at or
below cost to entice customers who may then pay full price on other purchases
(e.g. for selected products in supermarkets). There are certain characteristics of
loss leader pricing items as follows:
a. A loss leader may be placed in an inconvenient part of the store, so that
purchasers must walk past other goods which have higher profit margins.
b. A loss leader is usually a product that customers purchase frequently—
thus they are aware that its unusually low price is a bargain.
c. Loss leaders are often scarce, to discourage stockpiling. The seller must
use this technique regularly if he expects his customers to come back.
d. The retailer will often limit how much a customer can buy.
e. Some loss leader items are perishable, and thus can't be stockpiled
Some examples of typical loss leaders include milk, eggs, rice, and other
inexpensive items that grocers wouldn't want to sell without other purchases.
4. Clearance pricing: where stock-bottom prices are charged to clear stock and
make resources available for alternative use.
5. Transfer pricing: here the price (at least notionally) of a product or part of a
product is set with regard to the tax regimes which exist in different countries.
Four main transfer-pricing possibilities have emerged overtime:
(1) Transfer at direct cost;
(2) Transfer at direct cost plus additional expenses;
(3) Transfer at a price derived from end-market prices; and
(4) Transfer at an arm’s length price, or the price that unrelated parties would
have reached on the same transaction.
Doing business overseas requires coping with complexities of environmental
peculiarities, the effect of which can be alleviated by manipulating transfer prices.
Factors that call for adjustments include taxes, import duties, inflationary
tendencies, unstable governments ,and other regulations.
For example, high transfer prices on goods shipped to a subsidiary and low ones
on goods imported from it will result in minimizing the tax liability of a
subsidiary operating in a country with a high income tax. Tax liability thus results
not only from the absolute tax rate but also from differences in how income is
computed. On the other hand, a higher transfer price may have an effect on the
import duty, especially if it is assessed on an advalorem basis. Exceeding a certain
threshold may boost the duty substantially and thus have a negative impact on the
subsidiary’s posture.
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6. Parallel pricing: where several firms change prices in the same direction and by
broadly the same amount.
7. Product line pricing: where the pricing of one item is related to that of
complementary items, with a view of maximizing the return on the whole product
line. For example, the price of a ‘core’ product might be set at a low level to
encourage sales and then the ‘accessories’ priced at high levels.
8. Prestige pricing: where high prices are associated with high quality (Veblen
effect). The prestige price is set to be maintained through the whole product life
cycle because of quality and prestige which are added to the product features.
The high price itself could be the key factor for consumers' motivation for buying
certain products. The buyers of luxurious cars, cameras, perfumes, watches and
other products have satisfaction because of the prestige they acquired by using
these expensive products.
The business history of a number of enterprises showed that the price reductions
for certain prestige products have resulted in the sales decrease. For some
population categories, a lower price has the same effect as the prestige image
removing, which could be an instrument for providing specific products buying.
Therefore, the lower prices could interfere in buying instead of increasing it.
Examples include Rolex and Starbucks.
In a broader sense, the prestige and quality often become two basic motifs for
buying a product and using a service. Therefore, in practice, besides using the
term "prestige pricing setting," the term "quality pricing" is simultaneously used.
This term has a positive meaning and explains the relationship between realized
buyers satisfaction and a product and its pricing structure. The consumers'
attention is drawn to the ways in which products and services could, to certain
extent, meet their expectations and needs
9. Competitor pricing: Where firms follow the prices set by the market leader or
engage in price warfare under oligopoly market structure. Examples McDonad
and KFC.
10. Price discrimination: Price discrimination exist whenever consumers in different
countries are charged different prices for the same product. Price discrimination
involves charging whatever the market will bear. In a competitive market, price
may have to be lower than in a market where the firm has a monopoly.
Price discrimination can help a company maximise its profits. It makes economic
sense to different prices in different countries.
Three conditions were necessary for profitable price discriminations.
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First, the firm must be able to keep its national markets separate. If it cannot do
this, individuals or business may undercut its attempt at price discrimination by
engaging in arbitrage. Arbitrage occurs when an individual or business capitalizes
on a price differential for a firm’s product between two countries by purchasing
the product in the country where the prices are lower and re-selling it in the
country where the prices are higher. For example, many automobile firms have
long practices price discrimination in Europe. A Ford Escort once cost $2000
more in Germany than it did in Belgium (Hill, 2003, p.587). Ford still practices
price discrimination between UK and Belgium. A Ford car can cost up to $3000
more in UK than in Belgium. In this case arbitrage has not been able to equalise
the price, because right-hand-drive cars are sold in UK and left-hand –drive cars
in the rest of the Europe. Because there is no market for –left-hand –drive cars in
UK, Ford has been able to keep the market separate.
Second necessary condition for profitable price discrimination is different price
elasticities of demand in different countries. The price elasticities of demand is
the measure of the responsiveness of demand for a product to change in price.
Demand is said to be elastic when small changes in price causes large change in
demand. Demand is said to be inelastic when large change in price causes small
changes in demand.
Elastic and Inelastic Demand
Curves
Inelastic
Demand Curve
$
Elastic
Demand Curve
Output
Figure 9.2: Elasticity of demand
Source: Hill (2003, p.588).
The figure above (9.2) indicated that firms can charge higher prices in a country
where demand is inelastic. However there are certain factors that influence the
price elasticity of demand.
1. Income level. Price elasticity tends to be greater (more elastic) in low income
countries such as Maldives, India, Pakistan and Bangladesh. Consumers with
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limited incomes tends to be very price conscious; they have less to spend, so
they look much more closely at the price. Thus , price elasticities for
television sets are greater in countries such as India, where a television set is
still luxury item, then in the United States (America) where it is considered a
necessity.
2. More competitors increase consumer bargaining power and more likely
consumers will be to buy from the firm that charges the lowest price. Thus ,
many competitors causes high elasticity of demand. If firm rises its price
above those competitors, consumers will switch to the competitors products.
This means firms may charge higher price in countries where there are less
competition.
Similarly market differences in terms of population size, standard of living (real
GNP per head), age profile, purchasing patterns etc influences price setting in
international markets. Price discrimination is possible if there are barriers
preventing purchase in one country at the lower price and resale in another
country at a higher price (transport costs, tariff barriers etc). For this to be
profitable , there must be different ‘price elasticities of demand’ in different
geographical markets.
Third Profit maximising condition: MC for whole output = MR in each separate
market allows price discrimination.
Price Discrimination
United
States
90 -
100 -
80 -
80 -
70 -
70 -
70 -
60 -
60 -
60 -
50 -
50 -
40 -
40 -
Output
MR
10 0
50 -


40 -
0
MR
30 -

10 -
MC
20 -
D
50 -
50 -
Output
40 -
30 -
20 -
10 -
0
20 -
40 -
MR
10 -
+
u
30 -
30 -

D
40 -
20 -
20 -
50 -
30 -
D
80 -
43.58
10 -
30 -
World
90 -
Output
+
u
70 -
100 -
Japan
90 -
110 -
60 -
110 -
20 -
110 -
100 -
Revenue
and Costs
Revenue
and Costs
10 -
Revenue
and Costs
Figure 9.3: Price discrimination
Source: Hill (2003, p.589).
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To maximize the profits, firms must produce at the output where MR=MC. In the
figure 9.3, this implies an output of 55 units. If the firm does not practice
discrimination, it will charge a price of $43.58 to sell an output of 55 units. Thus,
without price discrimination, the firm’s total revenues are $43.58 x 55 =
$2,396.90.
Look at what happens when firms decides to engage in price discrimination. It
will still produce 55 units, since that is where MR=MC. However, the firm must
now allocate this output between two countries to take advantage of differences in
demand elasticity. Price discrimination occurs in practice is well illustrated in
table below, which shows considerable differences in US$ price of ‘Big Mac’
across a range of countries using current exchange rate.
Country
Price (US$)
Malaysia
1.7
USA
3.57
Hong Kong
1.71
China
1.83
Thailand
1.86
Indonesia
2.04
South Africa
2.24
Egypt
2.45
Taiwan
2.47
Russia
2.54
Japan
2.62
Saudi Arabia
2.67
Mexico
3.15
New Zealand
3.72
Canada
4.08
Turkey
4.32
UK
4.57
Hungary
4.64
Brazil
4.73
Denmark
5.34
Switzerland
6.36
Sweden
6.37
Norway
7.88
Source: Wall et al (2010, p.365)
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Factors influencing global pricing
Figure 9.4: factors influencing pricing
Source: Cullen and Parboteeah (2010, p.293)
1. Competitors: First, the number of competitors can vary greatly from country to
country. In some countries there are only a few competing products, while in
other foreign markets there may be many others competing for the same
customers second, the form or type of competitors can be quite different in
various local and regional markets. Some competitors may be small, others may
be state-owned, and still others may be large MNCs. Third, the support
competitors enjoy can differ greatly across the various foreign markets. Even if
competitors are not state-owned, they may enjoy preferential treatment from the
local governments. They may get cheap loans, subsidies, better access to land and
materials needed. For example in Malaysia Proton Berhad gets tax subsidies over
Toyota and other MNCs.
2. Distribution channels in the foreign market are another important factor in
pricing decisions. The margins demanded by wholesalers, distributors, or retailers
are often higher in foreign markets than in the home country market. Yet, if the
MNC wants to compete, it must pay the margins and pass as much of the costs as
possible on to the consumer in the price. Complex distribution channels with
more layers can also increase costs. For example, as noted above, in Japan,
products must pass through several wholesalers before they finally reach the
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retailer, where the customer may purchase them. The retailer in turn must offer
more services than would a similar store in the US. The result is that similar
goods sold in the US and Japan are often more expensive in Japan, even when
they are Japanese goods. For example, the most expensive Toyota Camry would
cost about $32,500 before taxes in Japan but only $27,500 in the US (Czinkota et
al, 2011).
3. Government regulations and policies influence pricing. Some governments,
even those that are seemingly friendly, find ways to keep foreign products off the
shelves, and they often do this through pricing. Some countries are openly
protectionist, with steep taxes on foreign products and heavy red tape and
bureaucracy meant to bog down and limit market access to foreign products. For
example, because China is trying to develop its own wine industry, foreign wines
there are heavily taxed and heavily burdened with forms and bureaucratic red
tape. This greatly inhibits the ability to market wines in China. Some countries
directly regulate the price of foreign products through price controls. Sometimes
these controls can force foreign companies to price their products so low that they
cannot make a reasonable return. Some governments are even quite tolerant of
knock-off or counterfeit products that can be priced to undercut foreign products
4. Foreign Exchange rate : Price may have to be adjusted to cover adverse
exchange rate movements. To reduce the impact of such problems currencies may
be purchased on future markets, or products may be priced in harder , more stable
currencies. When pound plunged in value against the euro, falling from Pound
Sterling 1:1.44 Euros in 2007 to Pound Sterling 1: 1.03 Euros made a significant
difference to the pricing of the same products expressed in sterling between two
times periods as indicated the table below:
Product
2007
2008
Meal for 2 in a Paris bistro (€80)
£58.40
£72.27
Beer in a Spanish bar (€3)
£2.19
£2.71
Admission to Van Gogh Museum,
Amsterdam (€12.50)
£9.13
£11.74
2 tickets to watch AC Milan (€140)
£102.20
£126.47
£73
£90.33
£18.25
£22.58
Hotel room in Berlin (€100)
Danube cruise in Vienna (€25)
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5. Tariffs and others taxes: Increase in tariffs (purchase taxes) or raw materials
used in production or overseas sales can force a firm to raise the quoted price of
its exports in order to retain its profit margin. In 2008 L’Oreal was faced with
rise in costs of its raw materials when the EU imposed a 7.8% duty on a chemical
imported from India and used in several of its cosmetics lines (Wall et al, 2010, p.
368).
6. Strategic objectives: overseas price setting, may be influence by the strategic
objectives of the firm. For example, where market share or revenue maximization
is primary objectives, then prices will tend to be lower (penetration pricing) then
they might be under profit maximization objective.
9.7.3. Promotion
Promotional activities include personal selling, sales promotions, direct marketing,
advertising, and sponsorship etc. The international marketer must choose a proper
combination of the various promotional tools—advertising, personal selling, sales
promotion, and publicity—to create images among the intended target audience. The
choice will depend on the target audience, company objectives, the product or service
marketed the resources available for the endeavor, and the availability of promotional
tools in a particular market.
1. Advertising: Advertising in the mass media may be the most visible component
of the MNC’s promotional mix. The MNC’s biggest problems often happen with
language. It is more than a matter of simple translation. For example, marketing
experts note that there are five different Spanish words for “tire.”9 Often, words,
phrases, or terms have subtle meanings that are unique to the culture. For
example, in Quebecois French, ma blonde means “girlfriend,” not “my blond,” as
it would in the US, and ma chum means “boyfriend,” not “buddy.” It is wise to
remember that words do not always translate directly and can have meanings that
the MNC never intended. Also, animal sounds vary by culture. In the US a pig
says oink. In Japan a pig says ruff-ruff.
In advertising, there are strong cultural taboos that must be avoided, especially
when dealing with religion and gender issues. The use of images and drawings of
religious deities is strictly forbidden in Islam, for example. Appeals to women and
girls are greatly restricted in Arab countries. In Turkey, L’Oréal recently used
naked female body images in ads for its cellulite treatment products. The
conservative Turkish government banned the ads and imposed heavy penalties on
the company.
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In addition to language and cultural differences, advertising regulations and
access to advertising media, such as TV, radio, newspapers, and magazines, differ
widely from country to country. In some countries, media are not available
because they do not exist, while in others they are less developed. For example,
the postal system in China is highly limited when compared to the US, so the
international manager must allow for this in any advertising that depends on
postal delivery. Even when media for advertising are abundant, some countries
limit the use and access. In Germany, for example, TV advertisements can appear
only at certain times. The content of advertisements is highly controlled in certain
countries such as Malaysia
The table above shows how spending on the major forms of advertising varies
from country to country and reflects how MNCs must adapt marketing
communications to local contexts.
Regardless of all these differences in the existence and use of mass media for
advertising, advancements in communication technologies are bringing great
changes. Satellite TV and radio are blurring national boundaries at an astounding
rate. These technologies have resulted in worldwide spillover of advertising
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messages. A message designed and intended for a local or even regional audience
can be viewed all over the world.
Another great equalizing force in the communication mix is the Internet. MNCs
can use banner advertisements placed on popular sites to attract and inform
potential customers. These potential customers can then seek additional product
information from the MNC’s dedicated websites.
In many countries, local advertising agencies are quite rare. This may explain
why, in the last decade or so, global or world advertising agencies such as Densu
or J. Walter Thompson Co. have become increasingly important. These MNCs
establish local operations, with local personnel and in-depth understanding of
local conditions from country to country. While, they can be expensive, they may
be worth the cost if they can prevent costly mistakes. Importantly, because of
their global perspective these agencies can help develop and coordinate
standardized advertising programs where possible and appropriate.
Arguments for standardized advertising
According to Hill (2003, p.586) the following arguments are in favour of
standardized advertisements
First, it has significant economic advantages. Standardized advertising lowers
the costs of value creation by spending the fixed costs of developing the
advertisements over many countries. For example, Levi Strauss paid an
advertising agency US $550,000 to produce a series of TV commercials. By
reusing this series in many countries, rather than developing a series for each
country, the company enjoyed significant cost saving. Similarly, Coca-Cola’s
advertising agency, McCann-Erickson, claims to have saved Coca-Cola US
$90 million over 20 years by using certain elements of its campaign globally.
Second, there is the concern that creative talent is scarce and so one large
effort to develop a campaign will produce better results than 40 or 50 smaller
efforts .
Third justification for a standardized approach is that many brand names are
global. With the substantial amount of international travel today and
considerable overlap in media across national borders, many international
firms want to project a single brand image to avoid confusion caused by local
campaigns.
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Argument against standardization of global advertising
According to Hill (2003, p.586) the following arguments against standardizing
advertisements are
First, cultural differences in between nations such that a message works in one
nation are such that a message that works in one nation can fail miserably in
another. Due to cultural diversity, it is extremely difficult to develop a single
advertising theme that is effective worldwide. Message directed at the culture
of a given country maybe more effective than global message.
Second, advertising regulations may block implementation of standardized
advertising. For example, Kellogg could not use a television commercial it
produce in UK to promote its cornflakes in many other European countries. A
reference to the iron and vitamin content of its cornflakes was not permissible
in Netherlands, where claims relating to health and medical benefits are
outlawed. A child wearing a Kellogg T-shirt had to be edited out of
commercial before it could be used in France, because France law forbids the
use of children in product endorsements. The key line “ Kellogg’s make their
cornflakes the best they have ever been” was disallowed in Germany because
of prohibition against competitive claims.
2. Sales promotions: devices such as coupons, contests, or point-of-purchase
displays, are generally growing in popularity in markets. Point-of-purchase
displays are displays or signs that are set up in the retail store, often at the end of
the aisle. The use of point-of-purchase displays has greatly increased in China as
the size of retail establishments has grown. In other countries, where many stores
are still smaller, e.g. Japan and France, point-of-purchase displays are not
appropriate
The use of coupons, probably the most common promotional device in the US,
varies greatly from country to country. Some countries, such as Germany and
Austria, currently have laws forbidding the use of coupons. In France, Sweden,
and Great Britain, for example, any promotional devices that involve or hint at
games of chance, such as lotteries, sweepstakes, or contests, are greatly restricted
or forbidden. In addition to the laws, infrastructures and cultural acceptance of
promotions vary. For example, as mentioned earlier, though it is rapidly
improving the postal service in China is still not well developed, making the
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delivery of coupons by mail impractical. In addition, Chinese consumers are
somewhat embarrassed to use coupons.
In terms of the global–local dilemma, sales promotions are much more effective
when managed locally. Given the vast differences in laws and regulations, as well
as cultural acceptance of various sales promotions, there are few opportunities for
global programs. Sponsorship of high-profile world sporting events may be the
most compelling exception. For example, sponsorship of the Olympic Games
offers such an opportunity. The table below shows the sponsors of some recent
Games. It is probably no accident that several of these sponsors are found on the
list of top global brands. Such sponsorship, while highly effective in building the
MNCs’ brands and communicating/promoting the MNCs’ products, is extremely
costly.
Because marketing communications/promotional practices and local country laws
vary so greatly, it is especially important to have local guidance and information,
and this often comes in the form of an advertising agency. Advertising agencies
design print, television, and radio advertisements and buy spots in media so that
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the ads are aired on television and radio programs and placed in magazines and
newspapers.
3. Personal Selling: where the MNC’s representative interacts one-on-one with
customers to sell the MNC’s product, is an expensive but powerful
communication tool for the MNC. It is often used for selling large and complex
products such as airplanes or steel plants. For example, when Boeing signed the
contract for $6 billion in airplanes to six Chinese airlines late in 2005, no doubt a
lion’s share of the work in that deal involved various elements of personal selling
(Cullen and Parboteeah, 2010).
For the most part, personal selling efforts for MNCs take place within countries.
The MNC hires local sales representatives because they are invaluable in bridging
cultural differences. In working with Korean companies, for example, the sales
directors of a Northwest semiconductor design company noted how important it is
to “have someone on the ground” so that the company has a full understanding of
the customer, their needs, and the local situation. This extends beyond language
differences into understanding laws, regulations, local infrastructure, and cultural
traditions.
Cross-cultural negotiation is one of the biggest challenges in global selling. Even
with a strong local representative, managers from local buying companies and
foreign selling companies often must get together to negotiate agreements.
Successful negotiations depend on how well the international managers adjust and
accommodate cultural differences.
9.7.4. Place/Distribution
This is one of the major challenges for the international marketers, and mastery of
this aspect can give the firm an edge over its competitors. A common problem in
international marketing is for the firm to concentrate too much on the channels to
closest to the producer rather than channels closest to the customers.
The following aspects will influence the type of channels selected


The value and type of products
Cost and speed of alternative types of transport


The ease with which channel can be managed
What the competitors are doing
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It is more difficult to control these channels from outside the overseas country itself.
The type of distribution channels selected will also depend on type of market entry a
company has pursued. If it is operating from subsidiaries in that country
(internationalization) then the subsidiary itself will often handle the distribution. If
products are simply being imported, then a third party such as a local be employed to
ensure that the quickest, cheapest and fastest method is used. The company must
adapt itself to local conditions, using strategies such as employing local distributors
or buying such distributors and using them as part of the firm’s internal operations, as
appropriate to each circumstances.
The three main differences between distribution systems are retail concentration,
channel length/design and channel exclusivity (Hill, 2003, p.578).
Retail concentration/fragmentation
In some countries, the retail system is very concentrated, but fragmented in others.
In a concentrated system, a few retailers supply most of the markets. Many
differences in concentration are rooted in history and tradition. In the USA, the
importance of automobile and relative youth of many urban areas have resulted in
retail system centered around large stores or shopping malls to which people can
drive. This has facilitated system concentration.
On the other hand, a fragmented system is one in which there are many retailers, no
one of which has a major share of the market. For example Japan’s much greater
population density together with large number of urban centers that grew up before
the automobile have yielded a more fragmented retail system of many small stores
that serve local neighborhoods and to which people frequently walk. In addition, the
Japanese legal system protects small retailers. Small retailers can block the
establishment of a large retail outlet by petitioning their local government.
There is a tendency for greater retail concentration in developed countries. Three (3)
factors that contribute to this are
1. Increase in car ownership
2. Number of households with refrigerators and freezers, and
3. Number of two-income household.
All these factors have changed shopping habits and facilitated the growth of large
retail establishment sited away from traditional shopping areas. During the last
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decade there has been a tendency for consolidation in global retail industry, with
companies such as Wal-Mart and Carrefour attempting to become global retailers by
acquiring retailers in different countries. This has increased retail concentration.
In contrast, retail systems are very fragmented in many developing countries, which
can make for interesting distribution challenges. For example in India, Unilever has to
sell to retailers in 600,000 rural villages, many of which cannot be accessed via paved
roads, which means that products can reach their destination only by bullock, bicycle,
or cart (Hill, 2003, p.579). In Nepal, the terrain is so rugged that even bicycles and
carts are not practical, and business rely on yak trains and human back to deliver
products to thousands of small retailers (Hill, 2003, p.579).
Channel Length
Channel length refers to the number of intermediaries between the producers (or
manufacturer) and the consumer. If the producer sells directly to the consumer , the
channel is very short. If the producer sells through import agents, a wholesaler, and a
retailer, a long channel exists.
The most important determinant of channel length is the degree to which retail system
is fragmented. Fragmented retail systems tend to promote the growth of the
wholesalers to serve retailers , which lengthens channels. The more fragmented the
retail system, the more expensive it is for a firm to make contact with each individual
retailer. For example if a firm that sells toothpaste in a country where there are over
million small retailers, as in rural India and China may require to build a huge sales
force to sell directly to retailers. This would be very expensive, because each sales
call would yield a very small order. Therefore it may be advisable to sell the products
directly to wholesalers and through wholesalers, firms must reach retailers to be more
competitive.
Because of such factors, countries with fragmented retail system also tend to have
long channels of distribution, sometimes with multiple layers. The classic example is
Japan, where there are often two or three layers of wholesalers between the firm and
retail outlets. In countries such as Great Britain, Germany, and the United States
where the retail system is far more concentrated, channels are much shorter. When
the retail sector is very concentrated, it makes sense for the firm to deal directly with
retailers sectors is very concentrated, it makes sense for them to directly with
retailers, cutting out wholesalers. A relatively small sales force is required to deal
with a concentrated retail sector, and the orders generated from each sales call can be
Notes compiled by Zubair
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Zubair Hassan (2013). International Marketing. International Business
large. Such circumstances tend to prevail in USA, where large food companies sells
directly to supermarkets rather than going through wholesale distributors.
The rapid growth of the Internet in recent years has helped to shorten channel length.
For example, Seattle-based outdoor equipment retailer REI sells its products in Japan
via Japanese-language website, thereby cutting out the need for retail presence on the
ground in Japan, which obviously shortens the channel length between REI and its
customers. However there are obvious drawbacks with such a strategy. In case of
REI, it is not possible to offer consumers the same level of advise over the web as it is
in physical retail stores, where sales people can help customers to choose right gear
given their needs.
Figure 9.5: Distribution Channels
Cullen and Parboteeah (2010, p.293)
Channel exclusivity
An exclusive distribution channel is one that is difficult for outsiders to access. For
example, it is often difficult for a new firm to get access to shelf space in
supermarkets. This occurs because retailers tend to prefer to carry the products of
long established manufacturers of foodstuffs with national reputation rather than
gamble of the products of unknown firms.
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The exclusivity of distribution system varies between countries. Japan’s system is
often held up as an example of a very exclusive system. In Japan relationships
between manufacturers, wholesalers, and retailers often go back decades. Many of
these relationships are based on the understanding that distributors will not carry the
products of the competing firms. In return, the distributors are guaranteed an
attractive mark-up manufacturer.
9.8.
International Marketing Planning
The last stage of international marketing involves implementation, coordination and
control (Hill, 2003). Implementation of marketing plan will depend in part on the
corporate structure of the firm s in questions. For example when a firm grows from
export into international alliances such as those involving joint ventures, licensing,
or the establishment of subsidiaries it will often create an international division. This
can be organised by geographical area or by product and can even take the form of an
independent subsidiary.
International marketing planning, coordination, and control face a number of
problems such as
1. Despite technological advances, the market intelligence available for many
international operations may be poor quality and incomplete, especially in the
developing/transitional economies (Wall et al, 2010, p. 380).
2. Few tried and tested models of international marketing exist and those that do are
often based on North American constructs which may have little relevance to
many international markets (Wall et al, 2010, p.380).
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