International Marketing
21 April 2008
The Plan for Today:
• Merck Case study: Final Discussion &
Action Plan
Marketing Program elements
• Product Decisions
• International Distribution Decisions
• Pricing Decisions in International Context
Influential factors in global supply chain
• Strategic benefits: Cost – Quality – Lead times
• Factors of influence
– Country
•
•
•
•
Endowment factors (Nike, Reebok – Asia, low cost labor)
Cultural variations
Arbitrage and leverage
Government incentives and regulations
– Industry
•
•
•
•
The labor content of the products
The amount of raw materials and their respective scarcity
Value and cost of the components
Perishability of the products
– International strategy - to consider:
•
•
•
•
•
Nature of the markets (change, growth, relative size)
Infrastructure for transportation
Level of technology
Financial management (i.e., exchange rate volatility)
Organization behavior and human resources
International Marketing
Programme
Standardization and adaptation of the international
marketing mix
Analysis of a company’s standardization potential
Source: adapted from Kreutzer,
1988. Reproduced with kind
permission from Emerald Group
Publishing Ltd.
Product decisions
• Dimensions of Product Offer
• The Product Life Cycle
• Product Positioning – Targeting Right
Customers in the Right Markets
– Baltika example
• Branding decisions
Before deciding on international
marketing research strategy…
• Some main decision factors:
– Consumer products
– Industrial products
– Services
Core product, packaging and service adaptation
for international markets
Service
Delivery
Packaging
Pricing
Core product
Quality
platform
design
function
Legal
Brand
name
Trade
mark
Spare
parts
Warranty
Package
Maintenance
& repair
The product life cycle
Theory of international product life cycle (IPLC)
(0) – Local innovation, (1) – Overseas innovation, (2) – Maturity,
(3) – Worldwide imitation, (4) - Reversal
Exporting
Other advanced nations
LDCs
1
0
2
3
4
USA (initiating country)
Importing
Source: Sak Onkvist and John J, Shaw, “An Examination of the International
Product Life Cycle and Its Application within Marketing”, Columbia Journal of
World Business 18 (Fall, 1983): 74
IPLC stages and characteristics
Stage
Import/
Export
Target
market
Competitors
Production
costs
(0) Local
Innovation
None
USA
Few: local firms Initially high
(1)Overseas
Innovation
Increasing
export
USA,
advanced
nations
Few: local firms Decline due
to economies
of scale
(2)Maturity
Stable
export
Advanced
nations,
LDCs
Advanced
nations
Stable
(3)Worldwide
imitation
Declining
export
LDCs
Advanced
nations
Increase due
to lower
economies of
scale
(4)Reversal
Increasing
export
USA
Advanced
nations, LCDs
Increase due
to competitive
disadvantage
Different degrees of product
newness
Increasing
risk
High
New to
home
country
Reposition
Existing
products
Newness
to
International
Market
New to
International
markets
New to
company
Cost
reductions
Low
Low
Line
extensions/
improvements
Newness to Company
High
Product/ communication mode
Product
Standard
Standard
Adapt
Straight
extension
Product
adaptation
Product
invention
Promotion
Adapt
Source: Source: adapted from Keegan, 1995.
New
Promotion
adaptation
Dual
adaptation
Product innovation and differentiation
• Nokia vs. Samsung
• P&G – unlike Coca-Cola, P&G has changed
its Tide detergent 30 times in the past 50
years
“We live or die by product innovation, we
know that if we don’t have it, we can’t grow
the business in North America. Nor can we
succeed in China or Russia the way we
need to (John Pepper)”
Consumer products as competitive
platforms
• A product platform refers to the
development of a set of subsystems and
interfaces that form a common product
structure
• Markets consolidation vs. fragmentation
– Renault: from 34 to 10 platforms by 2010,
emphasis on brand, design, styling
The industrial products firm
• Industrial firm involves a network of influences
• The level of economic development in a country is a
major determinant of the demand for industrial products
• Culture has less impact (usage patterns, product
features, specifications, negotiations)
• Customer-bound nature of industrial products
(collaborative internationalization decisions)
• Derived nature of demand
– Chrysler/Daimler-Benz - $80 bln on parts
– Renault-Nissan merger – new jointly developed
vehicles are likely to be designed to share some
components, increasing leverage
Routes to international markets for the
industrial products firm
Follow customers
abroad
Routes to
international
markets
Company integrates
into supply chain
Member of a business
system
Internationalise as
independent company
The service firm: internationalization
• A service can be described as any activity or benefit that
a supplier offers a customer that is usually intangible and
does not results in the ownership of anything
• According to the International Standard Industrial
Classification (ISIC):
– Wholesale, retail trade, restaurants, hotels, transport,
storage and communications, financial, insurance and
real estate and business services, personal,
community and social services, government services
• Intangibility, Inseparability, Perishibility, Heterogeneity
The service firm: internationalization (2)
• Only those services that are embedded in goods can be
directly exported
– Software, videos, CDs…
• The involvement of people is crucial
• Critical role of customer contact as the physical
presence of the customer in the system
– High contact – customized nature of each delivery,
customer can affect the time of demand, the exact
nature of service and the quality of service
• The closer the contact – the richer the customer
relationship
• Delivered by technology - do not require high contact
• Scale and culture effects
Contact and customers served
High
Professional
services
Service Shops
Personal
contact
Mass Services
Low
Few
Many
Customers
Standardization vs customization in
services
• Customer contact dictates the extent to which services
may be standardized or should be customized
• Core services that are sold globally are more likely to be
standardized
• The criteria: is a service people-based or equipmentbased?
– Automatic car-wash
• Investments in people and training as a mean of
standardization,
• Standardization and customization simultaneously
possible by using local nationals as providers the
‘foreignness’ of a standard service may be overcome
(local cabin crews by international airlines).
Contact and tangibility in international
marketing of services
High
Personal
Contact
Location bound
(engineering,
long-term
consulting)
Location free
(market research,
Insurance)
Value added
Services
(technical support)
Standardised
(service-product
bundle)
Low
Pure services
Bundled services
Tangibility
Source: adapted from Vandermerwe, S. and Chadwick, M. (1989) ‘The internationalization of
services’, The Services Industries Journal, January, p. 85, and Patterson, P. G. and Cicic, M.
(1995) ‘A typology of services firms in international markets: an empirical investigation’,
Journal of International Marketing, 3 (4), 57–83
Brand equity refers to the premium a
customer would pay for the branded
product compared to an identical
unbranded version of the same
product?
The role of branding
•To distinguish a company’s offering and differentiate one
particular product from its competitors
•To create identification and brand awareness
•To guarantee a certain level of quality and satisfaction
•To help with promotion of the product
Branding decisions
Source: Source: adapted from Onkvisit and Shaw, 1993, p. 534.
Pricing decisions in International
Context
• Comparison with domestic pricing
strategies
• Factors influencing pricing
• International pricing strategies
• Terms of sale/delivery terms
• Export financing
Pricing
• A product can not exist without price
• Price should never be isolated from the other parts of
the marketing mix!
• Consumers do not object to price; they object to is a lack
of relationship between the perceived value of the
product and price
• Only area of global marketing mix where policy can be
changed rapidly without large direct cost implications
• Decisions in global markets are affected by complexity
of influential factors
Should price be uniform worldwide?
1. There is no reason for an export price to differ
from the home price
 EU example:
 due to free movement of goods, elimination of customs
barriers, and harmonization of VAT rates
 internationally recognized consumer goods with wide
European distribution are likely to have more uniform
pricing system
2. Prices across multiple markets should be
coordinated
 without violating national law
 Nintendo case: price cartel 1991-1998 with 7 European
distributors and allowed the companies to keep prices for its
games artificially high in certain countries, resulting in
extraordinarily wide differences in prices among countries
Influences on international pricing
Technology
and competition
International
pricing
influences
Exchange rate
movements
Price coordination
across markets
Distribution
channels and
price escalation
options to consider the cost factor
1. Export price should be lower than home price
 overhead expenses are spread over an expanded production
volume
 low price may be necessary to penetrate the foreign market
2. Cost-plus method (i.e., full cost)
 all costs (including domestic marketing costs and fixed costs
must be paid for by all other countries)
 domestic price plus various overseas costs (freight, packing,
insurance, customs duties, etc)
 ethnocentric practice – the same price prevails everywhere
 it is easy for the price to end up being to high
Example
Mercedez-Benz - cost-plus method lead to
engineers insensitivity to costs! The company found
that its costs were 30% higher above Lexus!
Now engineers and plant managers are required to
meet the market-driven target price.
options to consider the cost factor (2)
• Marginal-cost pricing
– represents a more polycentric approach
– is based upon an assumption that some of the product costs, such
as administration costs and advertising at home are irrelevant
overseas
• research and development costs, engineering costs have already been
accounted for in the home market and thus should not be factored in
again by extending them to other countries
– the actual production costs plus foreign marketing costs are used as
the floor price below which the prices cannot be set
 the method is sensitive to local conditions
 full costs may not be adequately taken into account by
overseas subsidiaries
Japanese firms use this method to penetrate foreign markets;
and to maintain the market share. Break even is regarded as a
success. The profits, thus, are sacrificed to keep factories
going.
the factor of elasticity
• To be competitive does not mean that a
company’s price must be at or below the market
– Desirable image
• SONY strategy: price above the market on the base of the
image; though when the price gap between it and
competitors has widened too far, SONY had to decrease
prices
• Cartier takes full advantage from its reputation. A watch
made by its subcontractor for $125 is sold by almost 5 times
above it.
• More then 2/3 of BMW owners are repeat buyers – because
of brand loyalty, BMW was able to price its cars 10-30%
above competitors comparable models
• Country’s per capita income can be a good
indicator of market’s ability to pay (and indirectly
determine a product’s elasticity of demand)
• Exceptions: Levi’s 501’s example shows that a high price can
succeed in countries with low per capita income
factor exchange rate
exchange rate has no impact in domestic
marketing, but is crucial in international marketing
– since 1985 a sharp drop in the dollar value against
major currencies caused earnings of US MNCs to
jump;
factor market share
• high market share provides pricing flexibility
– ability to be above market
– economies of scale advantage
– important for late entrants (as an entry barrier)
• can be bought with a very low price
– Compaq shocked the Japanese market in 1992 by selling desktop PCs
for less than a half the price of Japanese manufacturers
culture
• all buyers – the same price?
• flexible (negotiated) price?
– tradition of haggling around price – superior
negotiating skills are required to get a better
price
Skimming is a price strategy that
involves charging a high price at the top
end of the market with the objective of
achieving the highest possible
contribution in a short time.
Problems with skimming
• Having a small market share makes the firm
vulnerable to aggressive local competition
• Maintenance of a high-quality product requires a
lot of resources
• If product is sold more cheaply at home or in
another country grey marketing is likely
Market pricing is a price strategy
involves charging a final price based on
competitive prices.
Penetration pricing is a price strategy
that involves charging a low price with
the objective of achieving the highest
possible sales.
Intensive local competition
Lower income levels of locals
View of exporting as marginal activity
Structural factors of standardized
versus differentiated pricing
Source: Reprinted from European Management Journal, Vol. 12, No. 2, Diller. H. and Bukhari, I. (1994) ‘Pricing conditions in the European Common Market’, p. 168, Copyright 1994, with permission from Elsevier.
Preparedness for
internationalization
A taxonomy of international pricing practices
High
Low
3 Multilocal
price setter
4 Global
price leader
1 Local
price follower
2 Global
price follower
Multilocal markets
Global markets
Industry globalism
Source: Adapted from Solberg et al., 2006, p. 31. In the original article Solberg has used the concept ‘Globality’ instead of ‘Globalism’.
alternative pricing strategies
• Pricing involves more than simply marking up or
down
• Alternative strategies include:
–
–
–
–
–
–
Timing of the price change
Number of price changes
Time interval to which price change applies
Number of items to change
Use of discount and credit
Bundling and unbundling
Ex: US car makers – price changes by small
amounts a number of times over the year
alternative pricing strategies (2)
• The effect of price can be masked and greatly
moderated by financing or credit terms
• Discounts may be used to adjust prices indirectly
– Large vs smaller middlemen
• To bundle or unbundle the product
– Bundling adds value and increases prices a little or not at all for
added value
• Japanese car makers in USA
– US car makers – a base price plus extra cost for each option
– Ford – experiment with bundling approach (3 levels of bundling)
+ simplified production and assembly system, cut costs, speeded up
delivery time, clearer market image for the brand, simplified
marketing activities
- the price can be made more affordable when unblundling the
product
dumping strategies
• Dumping – a form of price discrimination, the practice of
charging different prices for the same product in similar
markets
– Boeing accused Airbus of receiving $9 bln in subsidies enabling the
company to price each airplane at some $15 to 20 million less than the
true cost
• Types of dumping
– Sporadic dumping (manufacturer with unsold inventories wants to get
rid of distressed or excess merchandise)
– Predatory dumping involves selling at a loss to gain access to a
market and perhaps to drive out competition and achieve monopolistic
position
– Persistent dumping is the most permanent mode of dumping,
requiring consistent selling at lower prices in one market than in
others (maybe due to recognition that the market are different in
terms of overhead costs and demand characteristics)
• Japan – home prices for consumer electronics are higher (no
foreign competition)
dumping strategies (2)
• Whether or not dumping is illegal depends on whether
the practice is tolerated in a particular country
– Switzerland has no specific antidumping laws
• Most countries have laws specifying a minimum price or
a floor on prices that can be charged in the market
Ex. Melex golf carts in US
Ex. Mitsui – the largest dumping case (falsifying
documents, hiding the origin of products, backdated
invoices, rebates, claims about damaged goods, etc)
• Dumping thus is a controversial practice; economists
argue that the widely used antidumping measures have
been abused for protectionist purposes
how to dump?
• Dumping is a risky strategy
• Preferable strategy is to use other means to
legally overcome dumping laws
– To differentiate the exported item from the item being
sold in the home market
• Japanese car makers market their automobiles under new or
different names in the USA
– Provide financing terms that can have the same effect
as price reduction
– Produce the product in a host country
• Japanese producers facing higher prices at home and lower
prices in foreign markets; solution – to manufacture the sets
in the USA and importing the components and parts from
Japan
Transfer pricing describes the prices
charged for intracompany movement of
goods and services.
Transfer at cost
Transfer at arm’s length
Transfer at cost plus
terms of sale
• Incoterms (International Chamber of Commerce)
– Defining responsibility of buyers and sellers for
delivery of goods under sales contracts
• Incoterms 2000 (i.e. FOB London Incoterms
2000)
• 4 categories:
– E terms - the seller will make goods available to the
buyer on the seller’s own premises
– F terms - the seller is required to deliver goods to a
carrier appointed by the buyer
– C terms – the seller will be required to contract for
carriage but will not take risk of loss or damage to
goods
– D terms – the seller is required to bear all costs and
risks needed to bring goods to the place of
destination
Delivery terms
• EXW Ex-works
• FAS Free alongside
ship
• FOB Free on board
• CFR Cost and freight
• CIF Cost, insurance,
and freight
• DAF Delivered at
frontier
• DES Delivered exship
• DEQ Delivered exquay
• DDP Delivered duty
paid
terms of sale
EXW FAS
Supplier’s
warehouse
Export
dock
On board
vessel
FOB
CFR
CIF
X
X
X
DEQ
X
X
Import
dock
X
Buyer’s
warehouse
Main
transit
insurance
risk on
DDP
X
Buyer Buyer Buyer
Buyer
Seller
Seller
Seller
Global pricing contract is requested
when a customer requires one global
price per product from the supplier for
all its foreign SBUs and subsidiaries.
Customer
Advantages
• Lower prices worldwide
• Higher levels of service
• Standardization of
products
• Efficiency of processes
• Faster diffusion of
innovations
Disadvantages
• Less adaptability to
market changes
• Potential for quality
inconsistencies
• Dependence upon
supplier could result in
higher prices
• Resistance to GPCs
among local managers
• Monitoring costs
Supplier advantages and
disadvantages of GPCs
Advantages
• Access to new markets
• Economies of scale
• Influence over market
development through
association with industry
leaders
• Strong relationships
developed
• Solve price and service
anomalies across
countries
Source: Source: adapted from Narayandas, Quelch and Swartz, 2000, pp. 61–70.
Disadvantages
• Resistance to change
• Loss of customers
• Risk of failing to deliver
on promises
• Inappropriate use of cost
information
• Over dependence on one
customer
• Conflict in distribution
channels
Different terms of payment
Source: Chase Manhattan Bank, 1984, p. 5.
Characteristics of
letters of credit
• An arrangement by banks for settling
international commercial transactions
• Provide a form of security for parties
involved
• Ensure payment, provided that terms and
conditions of credit have been fulfilled
• Payment based on documents only and
not on merchandise or services involved
The process for handling letters of credit
Source: Phillips et al., 1994, p. 454, with permission from ITBP Ltd.
Letter of credit forms
Revocable L/C
Irrevocable but unconfirmed L/C
Confirmed irrevocable L/C
Export financing
• Commercial banks
• Export credit
insurance
• Factoring
• Counter-trade
– Barter
– Buy-back agreement