Khon Kaen University International College
International Product and Pricing Strategy
Course number 052 201 - First semester 2012
Monday 10:40 room 732
Friday 10:40 room 823
Lecturer: Michael Cooke
office room 817
Quiz: Pass/Fail = 50%
1.
The effect of tariffs on rice imported to Japan
A) raises prices to consumers
B) protects the Japanese farm industry
C) neither
D) both
2.
3.
4.
A company can market products abroad by:
A) Exporting from the home country
B) Investing in foreign production
C) Contracting with a foreign producer
D) All of the above
The best measure for disposable income is:
A) Average per capita income
B) Average income per capita at purchasing power parity
C) Consider income and cost of living variations within a country
D) Total alcohol consumption
The Apple Iphone is assembled in China because of:
A) A large pool of cheap unskilled labor
B) Responsive local supply chains
C) A large pool of skilled technical labor
D) Both B and C
Ans: 1: D 2:D 3:C (or B) 4:D
Top 10 Exporters and Importers in
World Merchandise Trade, 2008
Copyright (c) 2009 John Wiley & Sons, Inc.
Financial Environments
Trade data from: https://www.cia.gov/library/publications/the-world-factbook/rankorder/rankorderguide.html
• Intra-company trade far exceeds international trade
– Multinationals produce in the local country
– Close to markets, fewer import barriers, less currency risk
• Exports and imports very important to some economies
– Singapore exports (14) $409bb=$77.2K per capita (134% gdp)
– Thailand exports (25) $204bb=$3.0K per capita (72% gdp)
• Differing economic strategies among countries
– For USA and Japan international trade smaller % of GDP
• Role of overseas subsidiaries
• Global reach versus exports
– China and Germany have export driven economies
• German mid-sized companies drive exports (high skill)
• China’s exports evolving to higher skills content
– India ($0.25K per capita, < 1% gdp) and Brazil ($1.2K per capita, < 1%
gdp) rely relatively little on exports or overseas subsidiaries
Foreign Direct Investment (FDI)
• A firm invests in facilities in a foreign country
–
–
–
–
An alternative to exporting (global reach)
Often because of incentives from governments
Foreign direct investment may be reciprocal
We will return to FDI in the political context
• Foreign direct investment has been rapidly increasing
and in 2007, the inflow of FDI peaked at over $1.83
(note Japanese FDI in Thailand since 1985)
• As populations age in some developed countries, FDI is
a means of tapping into pools of working age labor
Major World Currencies
• The US dollar is the most common reserve currency
– Oil and many other commodities traded in dollars
– Easily converted nearly anywhere in the world
– An artifact from post WWII when US dollar was the only
strong currency
• Euro is relatively new, sometimes considered an
alternative to the dollar
• Japanese yen is important because of Japan’s role in
the world economy
• Chinese yuan is not widely used outside China due to
restrictions - this could quickly change
Fixed or variable exchange rates
– In a fixed exchange system the local currency is pegged to another currency
• Hong Kong Dollar pegged to US dollar
• No exchange risk in trade between the two countries
• Requires intervention by Hong Kong government
– Basket of currencies approach
• Singapore Dollar managed against several currencies
• Chinese Yuan thought to be managed against a basket
• Not tied to the fortunes of one foreign currency
– Variable (floating) exchange rates
• Pose risks for importers and exporters
• Rates are an extremely important factor for international trade
• Difficult or impossible to predict
• Governments may intervene in the float without warning to protect
exports
• Marketing coordinates with finance to manage the trade risks
– Barter might be used where countries impose rigid FX controls (USSR) or
where local currencies are worthless
Implications of variable exchange rates
When US dollar weakens versus the Japanese yen
– Goods imported from Japan to USA become more
expensive in USA
• Company purchasing equipment made in Japan would
pay more in US dollars for the same product
• Banks will agree to a forward rate, locking in the
current rate to a future period
– Japanese companies might choose to relocate
manufacturing facilities to USA as the yen rises
• Profits of US subsidiaries lower in yen terms
• Foreign exchange losses on parts imported from Japan
The Thailand example, 1997-1998
Nominal Exchange Rate (to the US Dollar). Period average
Korea
Indonesia
Malaysia
Phillippines
Singapore
Thailand
Hong Kong
China
Taiwan
1994
1995
1996
1997
803
2160.8
2.62
26.42
1.53
25.15
7.73
8.62
26.46
771
2248.6
2.5
25.71
1.42
24.91
7.74
8.35
26.49
804
2342.3
2.52
26.22
1.41
25.34
7.73
8.31
27.46
951
2909.4
2.81
29.47
1.48
31.36
7.74
8.29
28.7
Sources: Columbia University and IMF
1997f
1695
4650
3.89
39.98
1.68
47.25
7.75
8.28
32.64
Effects of the Devaluation
•
Exports became cost competitive in world markets
– How would a Japanese manufacturer with operations in Thailand and Japan respond to a 50%
devaluation of the baht?
– Products from Thailand became cheaper relative to currencies that did not devalue
•
Imports and foreign travel for Thai people became more expensive
•
Thailand’s tourism industry gained
– Airlines chose to base fares to and from BKK in Thai baht
– Tourists perceived ‘value for money’ in Thailand, with services and local products in Thai baht
•
Multinational in-country company response to the crisis
– Emphasize product value
– Change the product mix or package size (cheaper, smaller)
– Increase local procurement (use Thai goods rather than use imports)
•
Inflow of foreign currencies caused baht to gain
PPP (Purchasing Power Parity)
• Currency can be under or overvalued relative to
another
• PPP is an estimate of real purchasing power
– When Thai baht were officially 55-1 dollar
•
•
•
•
Currency undervalued
Thai economy looked small in dollar terms
But Thai people could buy Thai products and services
In PPP terms the Thai economy was larger than in $ terms
– In theory, currency nominal value will eventually = PPP
• Currently, W Europe overvalued, many Asian currencies
(excl Japan) undervalued
Worlds largest economies (2011)
Source: https://www.cia.gov/library/publications/the-world-factbook/rankorder/rankorderguide.html
GDP (purchasing power parity)
GDP (nominal exchange rates)
•
•
•
•
•
•
•
•
•
•
•
1 European Union$ 15,390,000,000,000
2 United States $ 15,040,000,000,000
3 China
$ 11,290,000,000,000
4 India
$ 4,463,000,000,000
5 Japan
$ 4,389,000,000,000
6 Germany
$ 3,085,000,000,000
7 Russia
$ 2,380,000,000,000
8 Brazil
$ 2,282,000,000,000
9 United Kingdom $ 2,250,000,000,000
10 France
$ 2,214,000,000,000
11 Italy
$ 1,822,000,000,000
•
•
•
•
•
•
•
•
•
•
•
1 European Union
2 United States
3 China
4 Japan
5 Germany
6 France
7 Brazil
8 UK
9 Italy
10 India
11 Russia
$ 17,720,000,000,000
$ 15,040,000,000,000
$ 6,989,000,000,000
$ 5,855,000,000,000
$ 3,629,000,000,000
$ 2,808,000,000,000
$ 2,517,000,000,000
$ 2,481,000,000,000
$ 2,246,000,000,000
$ 1,843,000,000,000
$ 1,791,000,000,000
•
•
25 Thailand
26 South Africa
•
•
30 South Africa
33Thailand
$
$
$ 601,400,000,000
$ 554,600,000,000
422,000,000,000
339,000,000,000
Leading Emerging Economies in 2008
Chapter 2
Copyright (c) 2009 John Wiley & Sons,
Inc.
BRICS Countries
• Acronym BRIC is a recent term
– Developing countries Brazil, Russia, India, China
– Economist at Goldman Sacs invented the term in 2001
• Prediction that the BRIC countries would overtake Western
economies by 2032
• Based on relatively high GDP and growth rates
• South Africa added in 2010 to create BRICS
•
•
•
•
BRIC summit meeting in 2009
SA lobbied to join the grouping
Far smaller GDP and population than the others
Why not Turkey?
– High GDP (17th in the world) and 17th biggest population
– High GDP growth rate (5% in 2011) and growing population
Will the BRICS concept endure?
• Russia has natural resources based economy and declining population
• South Africa has low GDP growth rate and declining population
• Brazil’s growth rate is slowing, roughly equal to developed countries (note
the nominal vs ppp relationship due to strong currency)
• China’s working age population will start to decline in 2015
• Japan’s economy looked invincible in 1989
– Working age population peaked around 1991
– Japan’s lost 2 decades largely due to demographics (fewer workers relative to
total population)
• Have to assume future opportunities will differ from today
• SE Asian countries have 620MM people
– Bigger population and faster growing than Russia, Brazil, and SA combined
– ASEAN has two of the world’s wealthiest per capita countries as well as several
of the poorest
– Will political stability last?
Cultural Issues and Buying Behavior
• Buyer behavior and consumer needs are largely
driven by cultural norms.
• Global business means dealing with consumers,
strategic partners, distributors, and competitors
with different cultural mindsets.
• Within a given culture, consumption processes
can include access, buying behavior, consumption
characteristics, and disposal (Exhibit 4-1).
• Each of these stages is heavily influenced by the
culture in which the consumer lives.
Exhibit 4-1: The A-B-C-D Paradigm
Copyright (c) 2009 John Wiley & Sons, Inc.
Elements of Culture
• Culture consists of many interrelated components.
Knowledge of a culture requires an understanding of its
different parts. Following are the elements of culture:
– Material life (technologies that are used to
produce, distribute, and consume goods and
services)
– Language (language has two parts: the spoken
and the silent language)
• Blunders of translation are common either direction
• Back-translation can help avoid problems (MCC: This is
useful even among native speakers.)
Chapter 4
Copyright (c) 2009 John Wiley & Sons,
Inc.
2. Elements of Culture
– Social Interaction (social interactions among people;
nuclear family, extended family; reference groups)
– Aesthetics (ideas and perceptions that a culture upholds
in terms of beauty and good taste)
– Religion (community’s set of beliefs relating to a reality
that cannot be verified empirically)
– Education (One of the major vehicles to channel from one
generation to the next)
– Value System (values shape people’s norms and
standards)
Chapter 4
Copyright (c) 2009 John Wiley & Sons,
Inc.
Exhibit 4-2: Dentsu Lifestyle Survey
Chapter 4
Copyright (c) 2007 John Wiley & Sons,
Inc.
3. Cross-Cultural Comparisons
•
Cultures usually share certain characteristics. Differences may exist within a
nation or a city (urban versus rural cultures, etc.) while similarities might cross
national borders:
•
At a very deep level, high and low context cultures affect how people reason and
perceive:
– In high-context cultures people look at the context of a thing or a message.
Asked to look at fish in an aquarium, the person will recall the setting. Far
East.
– In low-context cultures people focus on the object, tending to ignore the
surroundings. Asked to look at fish in an aquarium, they recall the fish only.
Emphasis on words. USA, parts of Europe.
– High versus low context may apply to evaluation of behavior: Western
societies often judge a person in absolute terms. High context societies tend
to perceive behavior as situational.
•
Attitudes about self and community vary from self-absorbed to self as part of a
community or extended family.
•
Levels of abstraction vary: Traditional versus developed economies.
Cross-Cultural Comparisons
Japanese
High context
IMPLICIT
Arabian
Latin American
Spanish
Italian
English (UK)
French
English (US)
Scandinavian
Low context
German
Swiss
Chapter 4
EXPLICIT
Copyright (c) 2009 John Wiley & Sons,
Inc.
Common misunderstandings
• The Westerner speaks directly and quickly
• Asians may perceive this as blunt
• Often perceived as rude or even angry
• The Asian conveys meaning through context
• The person from the West may perceive this as evasive
• The Westerner might completely miss the point
• Differing attitudes surrounding negotiations
• A handshake seals a deal in some countries
• In other countries anything done without a binding contract can be
reneged and often is
• When in doubt be humble
Adaptation to Cultures
• Global marketers need to become sensitive to
cultural biases that influence their thinking,
behavior, and decision making.
• Self-reference criterion (SRC): Refers to the people’s
unconscious tendency to resort to their own cultural
experience and value systems to interpret a given
business situation.
• Ethnocentrism refers to the feeling of one’s own
cultural superiority.
Chapter 4
Copyright (c) 2009 John Wiley & Sons,
Inc.
Culture and the Marketing Mix
•
•
Culture is a key pillar of the marketplace.
Product Policy: Certain products are more culturebound than other products. Food, beverages, and
clothing products tend to be very culture-bound.
• Pricing: Pricing policies are driven by four Cs:
– Customers
– Company (costs, objectives, strategy)
– Competition
– Collaborators (e.g., distributors)
Chapter 4
Copyright (c) 2009 John Wiley & Sons,
Inc.
Culture and the Marketing Mix
•
•
Chapter 4
Distribution: Cultural variables may also dictate
distribution strategies (direct sales or distributor?).
Promotion: Promotion is the most visible element
of the marketing mix. Culture will typically have a
major influence on a firm’s communication
strategy. Local cultural taboos and norms also
influence advertising styles.
Copyright (c) 2009 John Wiley & Sons,
Inc.
For next session
• Skim M&H chapter 5
• Read at least one of the articles cited in the
syllabus or the chapter in Diamond