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CONTENTS Unit No. Page No.

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/ TITLE Introduction to International Marketing 1.1 Introduction 1.2 The Nature and Scope of International Marketing 1 . 3 International Marketing Environment 1 .4 Avenues of Entry into Foreign Markets 1.5 Foreign Marketing Involvement 1.6 Market Entry and Operation Decision 1.7 Summary 1.8 Keywords 1.9 Self-assessment Questions

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Challenges of Globalisation 2.1 Introduction 2.2 Operation in Foreign Countries 2 . 3 Strategic Marketing Orientation 2.4 Implications of Globalisation on International Marketing 2 . 5 The Indian Context 2.6 Summary 2.7 2.8 Keywords Self-assessment Questions

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Why Firms Go International 3.1 Introduction 3.2 Motivating Factors 3 . 3 International Marketing vs . Domestic Marketing 3.4 Evolution from Domestic Marketing to Global Marketing 3 . 5 The Driving Forces

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Unit
No. a)

TITLE

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b) c) d)

Successful Principles of International Marketing-oriented Companies Summary Keywords Self-assessment Questions

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The Task of International Marketing e) Introduction f) Steps in the Marketing Process g) International Orientation h) International Marketing Considerations in SME Sector i) Stages in Market Development j) Income and Purchasing Power Parity k) Summary l) Keywords m) Self-assessment Questions Environmental Factors Affecting International Marketing n) Introduction o) International Marketing Environment p) International Trading Environment q) Cultural factors r) GATTandWTO s) Intellectual Property Issues t) Regional Trade Groups u) Levels of Economic Integration v) Dumping w) Summary x) Keywords y) Self-assessment Questions

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Page No. z) Introduction

TITLE

Page No. 105

Foreign M arket Entry Strategy


aa) Elements of Foreign Market Entry Strategy bb) Export Management Companies 6.4 Entering Foreign Markets through Licensing and Other ; Contractual Arrangements cc) Entering Foreign Markets through Investment in Local Production dd) Emerging Markets ee) Planning and Organising Market Entry ff) Summary gg) Key Words hh) Self-assessment Questions

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International Product Strategy


ii) Introduction Product Lines Product Adaptation

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jj) ll)

kk) Product Planning for Exports mm)Issues in Consumer Product Strategy nn) Product Elements for Adaptation oo) Issues in Industrial Product Strategy pp) Summary qq) Keywords rr) Self-assessment Questions

8.

International Distribution Strategy


ss) Introduction tt) Importance of International Distribution

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Unit

TITLE 8.3 International Channel System 8.4 Direct Exporting 8.5 Indirect Channels 8.6 Factors Affecting Channel Choice 8 .7 Selecting and Motivating Overseas Agents and Agency Agreements 8.8 Export Agency Agreement 8.9 Importance of Physical Distribution 8.10 The Internet as a Channel 8.11 Summary 8.12 Keywords 8.13 Self-assessment Questions

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International Promotion Strategy 9.1 Introduction 9.2 Advertising and Promotion 9.3 9.4 9.5 9.6 9.7 International Advertising Issues Sales Promotion Telemarketing The Internet Public Relations

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9 . 8 Corporate Advertising 9.9 Summary 9.10 Keywords 9.11 Self-assessment Questions

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IM.llte ..

L I| i II II U 1 1 I m

10.

International Pricing Strategy


10.1 Introduction 10.2 Pricing Aspects

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U nit N o.
10.3 Pricing Orientation uu) Types of Pricing

TITLE

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vv) Elements of Costs for Export Price Quotation ww) International Pricing Issues xx) Environmental Influences on Pricing yy) Counter Trade zz) Dumping aaa) Pricing Approaches bbb) Summary ccc) Keywords ddd) Self-assessment Questions 77

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Outsourcing and Strategic Relationships eee) Introduction fff) Forms of Outsourcing ggg) Evaluating Products for Offshore Sourcing hhh) Procurement Process iii) Reasons for International Strategic Partnership jjj) Advantages of Outsourcing kkk) Disadvantages of Outsourcing lll) IT Outsourcing mmm)Strategic Relationships in IT Outsourcing nnn) Summary ooo)Keywords ppp) Self-assessment Questions International Marketing Research qqq) Introduction
rrr) Marketing Research for Export Import Trade

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TITL E

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sss) Estimating Market Potential ttt) Market Access uuu) Factors Affecting Demand vvv) Research Process and planning www)Gathering Information xxx) Field Research yyy)Contents of a Report zzz) Scope of IMR aaaa)Primary Data Collection bbbb)Marketing Research on the Internet cccc)Summary dddd)Keywords eeee)Self-assessment Questions e-M arketing and e-Commerce ffff) Introduction gggg)Impact of e-Marketing hhhh)Relationship Marketing

iiii) eC o m m er ce jjjj) Po pu lar ity of eC o m m er ce

kkkk)S Keywords tat nnnn)Self-assessment Questions e of eRe ad in es s llll) Su m m ar y mmm

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271
Unit No.

TITLE Future Trends 14.1 Introduction 14.2 Changes in the Future 14.3 1 4.4 14.5 14.6 Guidelines for Companies Seeking Export Markets A Bilateral Partnership Moves Ahead The Inf osy s Formula Summary

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Page No. 287

14.7 Key Words 14.8 Self-assessment Questions

15.

Case Studies Case Study 1 Case Study 2

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Appendix

International Marketing

1.1 INTRODUCTION This unit introduces the reader to the basic concepts in international marketing. The methods and procedures of international trading have undergone qualitative and quantitative changes over the last two decades; multinational trading practices are growing more complex with the growth of competition among MNCs and among nations; the growth of the internet economy and the sharp growth of emerging markets such as India and China have also contributed to the transformation. The first section deals with the dimensions of the international marketing environment, and some of the important factors related to the foreign environment are covered. When a domestic company decides to enter foreign markets, it has several options and the more significant ones are reviewed. In the subsequent section, the degree of involvement in foreign markets are reviewed since they can vary from zero involvement to total involvement. The means of entry and the kind of involvement the firm wishes to have in its presence in foreign countries are two principal decisions required as part of the set of international marketing decisions. The last section presents a brief discussion on the four 8's related to international marketing decisions. 1.2 THE NATURE AND SCOPE OF INTERNATIONAL MARKETING Trading among nations is a historical phenomenon. For thousands of years trading of goods has been taking place among nations. The content, structure, methods and procedures of trading have, however, undergone qualitative and structural changes from age to age and region to region. To appreciate the nature of the change and challenges of international marketing in the context of existing and emerging trading relationships among countries and groups of countries representing different marketing systems, it is necessary to understand the historical perspective of the evolution of international trading pattern. Most of its characteristics today have their roots in the political and economic past of the trading nations. Post-war developments, in the fields of science and technology, political and economic aspirations of the erstwhile colonial countries, emergence of international, economic and social institutions, formation of regional economic and trading groups, growing complexities and competitiveness of multinational trading practices, and a host of other factors have added new dimensions to and brought about far-reaching changes in international trade policy. The scope and task of international marketing management from the standpoint of individual enterprises is to be viewed against the backdrop of the world trading environment, marketing systems and characteristics, and political and economic relationships among the nations of the world.

d)

Ma
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Introduction to International Marketing

Definition
International Marketing is the performance of business activities to plan, price, promote and direct the flow of a company's goods and services or users in more than one nation for profit.

1.3 INTERNATIONAL MARKETING ENVIRONMENT

___________

Marketing in the modern context goes beyond its immediate role as a process through which exchange of goods and services takes place and is viewed as an integral part of the total socio-economic system which provides the framework within which activities take place. It is, therefore, necessary to understand the total structure of the society, including its political, legal, social, economic and cultural institutions and the marketing system and behaviour and response pattern. Let us first understand the concept of International Marketing. This can be defined as follows: oooo)Marketing involves the performance of operations in a Business System: In a manufacturing enterprise these operations usually include-research and development, production, distribution, finance purchasing and personnel. pppp)Marketing includes those operations that determine existing and sustained change in the market: In order to determine the market opportunity, it is necessary to study the customer market needs and characteristics, through the performance of activities such as market research, demand analysis and forecasting. qqqq)Marketing includes those operations that influence existing and potential demand: In order to influence the demand pattern of customers, the marketing operations include activities such as product development, branding and packaging, pricing, advertising, sales promotion, public relations, etc. rrrr) Marketing includes those operations that activate the supply of goods and services: Marketing is concerned with all activities that are connected with the physical distribution of goods and their exchange in the market place, including channel selection, transportation, shipping, warehousing, storage, inventory control and so on. Marketing thus covers a wide range of inter-related business activities that enlarge the role of a marketer from one of selling what has been produced, to one of influencing what is to be produced. In other words, the primary concern of marketing management is to identify and satisfy specific customer needs by means of specific products or services, wherein lies the key to profit. From this point of view marketing has been defined as a need satisfying

International Marketing

process which places the custom er at the pivotal position around w hich all m arketing activities revolve. Custom er orientation is thus at base of the modern m arketing concept and 'integrated' m arketing is the means of translating this concept into practice. In domestic m arketing, an enterprise usually participates in nearly all the functional areas of marketing, namely, product line policy, pricing policy, distribution and promotional policy. In International marketing, a firm can limit its activities nearly to the shipment of its products to foreign buyers or it can partly participate in all the marketing activities abroad, depending on the nature and degree of its involvement in foreign and management marketing functions. Although the basic marketing function could be the same for both national and transnational m arketing, the im plem entation of the firm 's m arketing program m es and the factors that influence such program mes are often considerably different from one market situation to another. These differences can create additional m anagem ent problem s of planning, coordination control, supervision and financing of international marketing activities of a firm. The environm ental dim ensions of international marketing are to be reckoned with by a firm , irrespective of its techniques of foreign m arket entry or the kind of its involvem ent. These are 'given' factors which affect all aspects international marketing activities, but over which the firm has no control. International marketing is therefore characterised by problems of diversities, complexities and the uncertain and changing nature of environmental conditions and the variety of approaches, techniques, strategies and tactics that are required on the part of the firm to cope with these problems. In domestic marketing, the firm has to contend with the elem ents of national environm ent only, whereas international m arketing has to cope with the variables of both national and international environm ent. Environm ental differences are therefore at the root of problems, complexities and uncertainties inhernet in international marketing operations. The dimensions of international m arketing environment can broadly be classified into (a) Dom estic environm ent and (b) Foreign environment.
a) Domestic Environment

cl d< si se ai si

The main aspects of domestic environment within the limitation of which a firm has to carry out its foreign marketing activities, consist of a large variety of factors, the relative importance of which keeps on changing from country to country and from one point of time to another. These factors are broadly related to domestic, economic and political conditions, including the country's existing and potential resources endowm ent and prospects of augm enting resources from external sources, level and brand of econom ic growth, industrial base and structure, marketing infrastructure and logistics system and existence of facilitating and

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Introduction to International Marketing

supporting agencies for the conduct of foreign trade, size and trend of domestic demand and availability of surpluses for export. Government polices and plans, monetary and fiscal policy, and foreign exchange regulations, import-export policies and procedures and several other allied matters have a direct bearing on the conduct of foreign marketing by an enterprise.

b) Foreign Environment
Home-based export expansion-measures are necessarily related to the conditions prevailing in possible markets abroad. A firm has to overcome various constraints and adapt its plant and operations to suit foreign environmental conditions to gain initial market access and to carry on its marketing activities efficiently within the framework of the marketing system in the chosen foreign markets.

Factors related to the foreign environment


Just as there are the uncontrollable factors in the domestic environment, there are the uncontrollable factors in the international environment. Some of these factors that are critical to the decision making process are: political stability, class structure and economic climate. China has moved away from a communist legal system in which all business was done with the state, to a system that embraces the model of the free-market economies such as the USA and the UK. India has moved away from the statedominated public sector economy of the eighties, to a system that has opened up new markets to the private and public-private partnerships similar to that of the developed economies. The more significant elements in the uncontrollable international environment are depicted in fig. 1.1.

id id Political/ Legal forces

Fig 1.1 :

Uncontrollable forces of Foreign Environment

International Marketing

The main elements include: i) Political/legal forces

i) Level of technology iii) Economic forces iv) Competitive forces v) Distribution structure vi) Geography and infrastructure vii) Cultural forces

i)

Political / legal forces


Political / legal forces face a business, whether it operates in domestic or in international markets. This is often accentuated by the 'foreign' status accorded to the company, which increases the difficulty of properly assessing and forecasting the dynamic international business climate. It is not merely the fact that 'foreigners' control the business but they receive biased treatment at the hands of politicians or legal authorities. The fact remains that a foreign company is foreign and thus, always subject to the political whims of the local government to a greater degree than a domestic firm is.

ii)

Level of technology Vast differences that exist between the developed and developing countries can often lead to wrong assessments by the foreign company. This is particularly applicable in the case of industrial products such as items of machinery. The concepts of preventive maintenance in a cement manufacturing plant in the USA can be very different from those understood in India or Vietnam. Technical expertise may not be available at a level necessary for product support, and the average worker/supervisor may not have the necessary technical knowledge to maintain the machinery or equipment according to prescribed procedures. Special training procedures have to be developed by the foreign company to provide the necessary support services in the host country.

iii) Economic forces The world economy has changed dramatically since the time when the world was far less integrated than it is today. Today there is global economic growth. Markets in

Unit 1

Introduction to International Marketing

every region of the world are potential targets for almost every company from high technology to low technology and across the spectrum of products from basic to luxury. The economic dimensions of the world market environment are of great importance. There have been several changes in the world economy, which have important implications for the companies intending to enter foreign shores. The new relatives of the world economy are the result of some significant developments such as: Increased volume of capital movements The world economy is the dominant economic unit Growth of ecommerce has diminished the importance of national barriers

iv) Competitive Forces


The nature of competition for any industry varies from country to country and often decides the mode of entry into foreign markets. It is often spelt out by many authors that competition works to drive down the rate of return on invested capital. Rates of returns that are projected to be lower than the competitive rate will not prove to be beneficial to the company that is thinking of entry into a new market. Lower rates of return will result in withdrawal from the market and a decline in the levels of activity and competition. However, if the competitive rates of return show an increasing trend over the last few years, there is scope for new market entrants. The Porter's five forces model of competition analysis is one of the most widely accepted models and is useful in analysing foreign markets also. Analysing competition in foreign markets requires special focus on one of the forces mentioned i.e. Rivalry among competitors. To the extent that the rivalry among firms forces companies to innovate and/or reduce costs, it can be a positive force. To the extent that it drives down prices and therefore, profitability, it creates instability and has a negative influence on the attractiveness of the industry. Several factors can create strong rivalry: Once an industry becomes mature, firms focus on market share and how it can be gained at the expense of others. Industries characteri sed by high fixed costs are always under pressure to keep production running at full capacity. Once the industry accumulates excess capacity, the drive to fill capacity will push prices (and hence the profits) down. A lack of differentiation or absence of switching costs encourages the buyers to treat the products as commodities and look deeper for the best prices. This again puts pressure on prices and profitability. Hence, the need to analyse the

International Marketing

competition at the time of entry into foreign countries is critical to the development of marketing strategies for the firm. One of the consequences of expansion of global marketing activity is the growth of competition on a global basis. Global competition is a critical factor affecting success. In some industries, global companies have virtually excluded all other companies from their markets. In the detergent industry, Colgate, Unilever and P&G dominate the industry on a worldwide basis. The marketing skills and the market 'push' strategies of these three companies have become the source of competitive advantage by achieving global brand status. A similar story can be seen unfolding in the global automotive industry. According to Porter's theory, the presence or absence of particular attributes in individual countries influences industry development. These attributes are factor conditions, demand conditions, related and supporting industry and firm structure and rivalry. The relative importance of these attributes shapes the environment in which the firms compete in their global industries.

v) Distribution structure
Distribution channels in markets around the world are among the most highly differentiated aspects of a nation's marketing system. The diversity of channels and the wide range of possible distribution strategies can present challenging problems to any firm designing an international marketing program. Smaller companies are often blocked by their inability to establish effective channel arrangements. In large companies operating via country subsidiaries, channel strategy is one element that headquarters do not easily understand. To a large extent, channels are an aspect of the marketing program that is locally led through the discretion of the in-country marketing management group. It is important for managers responsible for international marketing programs to understand the distribution structure including the status of the infrastructure development necessary for satisfactory functioning. Channels and physical distribution are an integral part of the international marketing mix and must be appropriate to the product design, price and communication aspects of the total marketing program.

vi) Geography and infrastructure


The climate and physical terrain of a country are important environmental considerations when appraising a foreign market. The effects of these geographic features on marketing, ranges from the influences on product adaptation to more lasting influences on the development of marketing systems.
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International Marketing

in which it is operating and by the growing provisions of international law. The international legal environment has three dimensions: Local domestic laws: Finding a route through the legal maze across markets requires the services of experts on the separate legal systems and laws pertaining to each market targeted. International Laws: There are a number of international laws that can affect the firm's activity. Domestic Laws: In the home country, a firm will have to abide by its own national laws in all activities, whether domestic or international. Laws will affect the marketing mix in terms of products, price, distribution and promotional activities quite dramatically.

Business Dimensions
These include business customs and practices, distributive structure and channel network, competitions pattern, means and methods of marketing communication and all other factors related to the conduct of marketing activities.

$ Activity A;
a) Two ways in which international marketing is different from domestic marketing are: 1.__________________________________ _ __________________________________

2.
b) Three types of uncontrollable forces in the foreign environment are:

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1 __________________________________________________ 2.

3 .

1.4 AVE NUES OF ENTR Y INTO FORE IGN MAR KETS ___________________________________________________________________
When a domest ic compa ny decide s to enter into interna tional busine ss, it has several

Unit 1

Introduction to International Marketing

options, not necessarily naturally exclusive, to do so, depending, however, on the nature and degree of involvement the company wishes to have in foreign business. These avenues are briefly discussed below : (a) Exporting The domestic company can sell its products to foreign buyers directly or indirectly. For direct exports, it establishes direct contact with foreign customers (actual users or importers-distributors) and ships the goods according to the customers' orders and requirements. The exporting firm takes upon itself the entire responsibility concerning packing, documentation, shipment, credit and exchange risks, Government regulations, customs clearance, etc. In direct exporting the company may have home-based export department or subsidiary, foreign-based sales branch or subsidiary; or foreign-based sole distributors or agents. In case of indirect exporting, the firm can use a variety of independent middlemen operating in the international market. He can use for example: (i) home-based export merchant who buys the firm's product and sells it abroad on his own account taking all exporting risks and tasks upon himself; (ii) home-based export agent whose primary responsibility is to locate foreign customers for the firm's product for a commission and render certain services without taking title to the product, (iii) resident agent or representative of foreign buyers; (iv) cooperative marketing organisation that undertakes exporting on behalf of the member firms which partly controls the activities of such an organisation: (v) combination export manager (CEMP) who acts as overseas selling agent for non-competitive number of principals and practically acts as the 'export department' for the firms he represents. The existence of the these variants, their trading activities, business norms and practices may differ from country to country and market to market. The exporting firm has the choice of using the various combinations of channels network for the same product in different markets or for different products in the same markets or for different products in different markets. (b) Licensing Arrangement Licensing arrangements represent signing of an agreement with a foreign-based enterprise, which is granted under the terms of agreement of right to use the patents, processing know-how or trademarks of the licenser-company usually in exchange for a fee or royalty. Through this arrangement, the licenser can enter the foreign market at little risk and gets the benefit of gaining the manufacturing technology and marketing of a well-known product

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International Marketing

or brand. Licensing does not involve foreign investment risk since the licensee sets up its own production and marketing facilities. If the cost of production is comparatively lower in the licensee's country, the licenser can import the product from the licensee to improve its competitive position in its own market or a third country, thus opening up a new avenue of export for the licensee.

(c) Joint Venture


Joint ventures involve setting up of an enterprise in collaboration with a foreign-based company, for the manufacture and marketing of specific product lines. Such collaborations can take various forms covering such areas as managerial and technical know-how and technology transfer, equity participation, R&D activities, manufacturing and marketing facilities or a combination thereof. For political or economic reasons, joint ventures may become the only technique of entering a potential export market, particularly in those countries that have restrictions on the inflow of foreign capital. Joint ventures set up in the developing host countries could be an important means of import substitution process and of helping local industries benefit from the industrial and technological progress of advanced countries and accelerate the process of expansion and diversification of industrial base and product range, subject however to various political and economic implications that are normally associated with ventures.

(d) Contract Manufacturing


Contract manufacturing represents various kinds of tie-up of manufacturing facilities and arrangements agreed upon between two or more manufacturers located in different countries. Such manufacturing activities could be carried on under subcontracting arrangements for the fabrication of components and accessories and even finished products in a foreign country. The international sub-contractors perform similar functions as the domestic ancillary industries do for end-user industries. International sub-contracting for economic and marketing reasons could be an effective technique of foreign market entry for those developing countries which have adequate technological expertise, manufacturing base and facilities, relatively cheaper raw materials for labour and other infrastructural and comparative advantages.

(e) Foreign Investment


Direct and unilateral investment abroad involves establishment of assembly, processing, packaging or even complete manufacturing, distributing, and marketing facilities in foreign markets, usually under the financial and management control of the holding company. Such a subsidiary established in the host country abroad becomes part of the country's

Unit 1

Introduction to International Marketing

economic life and industrial complex and contributes in a variety of ways to the rate of economic development of the host country as well as enlarges the profit base of the investing company. It is the crux of global involvement in foreign business in which both long-term benefits and risks could be equally high because of social, economic or political reasons. (f) Management Contracts Entry into foreign markets can be made by offering various kinds of consulting services to the foreign customers, government or private, doing feasibility studies and eventually entering into contract for setting up turnkey projects. Project exports could open up yet another avenue not only for supplying machinery, components and equipment for the initial installation of the project but also continued supply of spares and replacements over a long period. There could, however be numerous versions and combinations of the arrangements and techniques for entering and conducting foreign business, with corresponding financial and investments risk, managerial and organisational responsibilities. The choice of a particular technique for doing foreign business by a company will depend on a number of factors, both external and internal, and in the kind of involvement the company wants to have in international marketing operations.

$ Activity B;
a) Two advantages to a firm setting up a joint venture in a foreign country are:

b) Two types of intermediaries operating for firms in international markets are:

1.5 FOREIGN MARKETING INVOLVEMENT Foreign Marketing involvement of a manufacturing company may widely vary from a state of indirect involvement to a state of total involvement; several types of involvement are

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International Marketing

generally observed, although those are not mutually exclusive nor sequentially progressive. A firm may choose to have all kinds of involvement simultaneously for different products in different markets. The involvement decision is conditioned by a variety of internal and external factors such as the firm's export policy and programme, size & resources and product range, volume of export business, regulatory and procedural conditions to be fulfilled both from exporting and importing angles-for gaining entry into a particular export market segment and several other factors having a bearing on this decision. For example: (a) firm's product may find its way to a foreign market without any active effort or involvement on the part of the manufacturing firm. This could happen through the initiative of foreign buyers or domestic export-merchant houses. In such cases the product is bought rather than sold and the manufacturing firm may not even be aware of the destination of its product, not to speak of active market promotion or involvement; (b) a firm may try to find out temporary foreign outlets for its product, if it faces a situation of over production or recession in home market or for some other similar reason. The primary motive under these circumstances is to dispose of surplus stock which the domestic market cannot absorb. The firm's involvement in foreign business is purely temporary and remains confined to locating perspective foreign customers for the product; (c) a firm may have built-in facilities for producing, for the selling in foreign markets a part of the entire produce by adopting one or more techniques of foreign market entry; (d) a firm may become international in character by creating both producing and marketing facilities around the world for serving transnational markets through a complex and integrated system of investing, manufacturing, processing and distributive network. Their marketing activities are planned and carried out on a global basis. Depending on the kind and degree of its involvement in foreign marketing, a firm has to reorient and re-organise its activities to cope with the different levels of operational responsibilities inherent in such involvement. To throw some light on this issue, some guidelines are available from what is called the EPRG orientation. The EPRG frame-work attempts to identify four broad types of orientation of the firm towards internationalisation of its operations. These are: Ethnocentrism, Polycentrism, Regiocentrism and Geocentrism (EPRG).

Ethnocentric orientation
The ethnocentric orientation of a firm considers that the products, marketing strategies and techniques applicable in the home market are equally so in the overseas markets as well. Foreign markets are looked upon merely as an extension of the home market. In such a firm all foreign marketing operations are planned and carried out from the home base, with little or no difference in product formulation and specification, pricing strategy,

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distribution and promotional measures as between the home and overseas markets. The firm generally depends on its foreign agents and export-import merchants for its export sales.

Polycentric orientation
When a firm adopts polycentric approach to overseas marketing, it attempts to organise its international marketing activities on a country-by-country basis. Each country is treated as a separate entity, and individual strategies are worked out accordingly. Local assembly or production facilities and marketing organisations are created for serving the market needs in each country. Polycentrism could be most suitable for firms seriously committed to international marketing and have the resources for investing abroad for fuller and long-term penetration into chosen overseas markets.

Regiocentric orientation
When a company views regions as unique and seeks to develop an integrated regional strategy, it is said to display regiocentric orientation. For example, an Indian company that focuses on the countries included in the SAARC (South Asian Association for Regional Cooperation) region or in the EU (European Union) region is regiocentric. The term 'transnational company' is also used to describe such an orientation. The company sees similarities and differences in a particular region. It can be ethnocentric or polycentric hi its view of the rest of the world markets. As an example, Fedders Lloyd of US A was among the first few companies to decide that Asia represented a good opportunity for its range of air-conditioners outside the USA. Initially, China was selected followed by India and Indonesia. As it expands into other markets and makes other commitments internationally, it continues to evolve as an international company or an MNC.

Geocentric orientation
In geocentric orientation, the firm adopts a world-wide approach to marketing and its operations become truly global in character. In a global enterprise, the management establishes manufacturing and processing facilities around the world in order to serve the various national or regional markets through a complicated but well-coordinated system of distributive network. There are close similarities between regio-centric and geocentric approaches to international marketing, except perhaps that the geocentric orientation calls

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International Marketing

for a much greater scale of operation, coordination and organisational set-up in order to cater to markets of heterogeneous characteristics. From the foregoing discussion it will be evident that the scope of international marketing for a firm will be determined by its decisions to the means of entry into foreign markets as well as by the kind of involvement the firm wishes to have in international marketing operations. It cannot be said that one kind of orientation is better than the other, as each has its own advantages and limitations, depending on a variety of factors, some of which are within the control of the firm and some beyond.

International Marketing Task


ssss) International marketing decision tttt) Market selection decision 3 . Market entry and operating decision 4. Marketing mix decision

5 . Marketing organisation decision

International marketing decision


A firm's decision to go international and get involved in foreign marketing is conditioned by various considerations, which are often linked with the company's own policies and programmes as well as with the national compulsion for export expansion. The latter is particularly true for developing economies where exports are a national obligation of utmost importance. The problem of developing countries is not only of exporting, but of formulating export expansion policies and strategies in such a manner as will fetch optimum returns in foreign exchange. It is therefore of vital importance to decide the processing stage at which the product will be placed on export markets, whether, for example, in primary produce form, raw materials form, or in bulk in packaged and branded form. Marketing implications and procedures are qualitatively different between commodity marketing and what is called strategic marketing where product standardisation channel and promotion varieties play a crucial role in market access or failure of the product. International marketing decision of a firm in developing countries in particular, is therefore too closely link with and, often influenced by, government policy and programme for export expansion in terms of products and markets. Within the limitations of national export promotion priority and strategy, the company decides in accordance with its own resources and attractiveness for foreign market opportunities.
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Market selection decision


The market selection decision process consists of a planned and systematic search for relevant information in order to identify potential markets and measure market opportunities. Information gap is one of the critical factors that confront exporters, specially in the context of rapidly changing character of foreign markets and marketing conditions. No one can possibly sell all products in all markets, nor do all markets offer equal opportunities for all products. For economic, legal, geographic or technological reasons certain foreign markets, even though potential, may be closed to export from a country. In some markets, potential may be low. Distance and lack of shipping facilities may preclude certain markets. Through the process of preliminary screening on the basis of available published data or other better sources of information, the exporting firms can select a group of countries which appear as potential markets, for do company's products. The company's search for export opportunities would necessarily be limited by its production and supply capacity. Hence it is always a good strategy to concentrate in those markets which offer the highest potential for company's products and which the company can supply and service with maximum efficiency. The target market selected on the basis of elaborate research analysis, should also be examined from the point of view of potential profitability, so that the selected markets and market segments offer the best opportunities for the company's products.

J8$ A ctivity C ;
EPRG framework stands for:

1.6 MARKET ENTRY AND OPERATION DECISION_____________________


The various means of foreign market entry have been discussed earlier in this paper. The firm's task is to determine the best possible mode of entering a foreign market segment keeping in view its international marketing objectives. Depending on the nature of constraints or convenience for gaining access to foreign markets, the company may decide to choose more than one means of entry in different markets or market segments. Entry and operating decisions also depend on the marketing involvement decision of the firm as well as on its effect on the expected rate of return. 17

International Marketing

Marketing-mix decision The marketing-mix decision relates to the following aspects of marketing tasks, namely: uuuu)Product mix decision vvvv)Pricing decision wwww)Distribution channel mix decision xxxx)Promotion mix decision 1. Product-mix decision

The decision on product mix involves product line policy and product adaptation and presentation to suit the buying and consumption pattern in the chosen market segments. By offering a suitable range of product lines and combinations of product attributes mixsizes, design, formulation, style, packages, brands, etc, the exporting firm can bring about distributive product differentiation and 'position' the product in specific market segments. The content of product adaptation and planning needed for foreign markets depends on a number of considerations including market characteristics, climatic and socio-economic conditions, government regulations, competitive product specialties, distribution and selling outlets, packaging etc. and expected profit contribution to each product adaptation. 2. Pricing Decision

3.

Pricing is an important tool of marketing and one of the means of achieving the sales objectives. There are several approaches to the formulation of pricing strategy for a product in a given market segment during a given period taking into consideration the characteristics of selected market segments and existing or potential competition. The pricing decision process should ideally start from the 'base price', which the final buyer pays for the product. In a competitive market situation, the exporter is usually obliged to sell his products at a competitive price commanding a premium over other similar products. Such distmctiveness usually results not only from the product specialty but also from the 'subjective association' and image attributed to the product by its consumers. Having determined the expected base price, the exporting firm can work back the discount structure and other marketing and producing costs with the objective of maximising profit realisation or achieving other marketing goals. An illustrative range of considerations entering export pricing decision process is given below:

4.

18

Unit 1

Introduction to International Marketing

What should be the role of price in the overall export marketing strategy and what degree of pricing discretion does the firm have in the target market? What is the probable life cycle of the product and what is the present stage of the cycle? How should the product be priced-above, below or at par with competitive products? How is competition likely to react to the price? Should there be the same or differentiated pricing strategy for different markets or market segments?

3.

Distribution Channel-mix Decision

The distribution channel decision is again dependent on market entry and the involvement decision. For an exporter there are several options to move its product into the distribution pipeline of the importing market, which consists of a wide variety of middlemen performing various kinds of buying and selling functions as well as facilitating activities. The shortest channel of distribution is to establish direct relationship with the final buyer; in case of the consumer the final buyer is the retail outlets and for industrial product or raw materials, the actual users. The direct exporting to final buyers and indirect exporting through intermediaries have their own merits and limitations, subject to the firm's export strategy and foreign market and marketing conditions. The guiding principle in the channel decision is to come closer to the final buyer and have maximum economy and efficiency in the management of distribution, as well as to have continued feedback on market response to the product. Proper selection and management of distribution is of crucial importance for marketing success of the product both in terms of sales and profit. The firm, therefore, needs to select the most appropriate and efficient channels and work in close cooperation with the channel members.

4.

Promotion-mix Decision

Market promotion for export includes basically the elements of marketing communications, either face-to-face or through other means of attracting customer attention to, and creating interest in, the product. There are numerous means and techniques of market promotional activities aimed at the trade level in order to put the product into the distributive pipeline and into the customer homes. The importing firm has to carefully select the most effective combination of the promotion of the promotion-mix, keeping in mind the customer characteristics, nature of product, information and communicational effectiveness of different

19

International Marketing

media, cost and other variables. Advertising, sales promotion, publicity, public relations, exhibitions, trade fairs, personal selling-all individually and collectively contribute towards communication effectiveness. The marketing-mix decision of an exporting firm is the core of export management task. The export success depends on the efficiency of the firm to formulate the most appropriate blending of the different elements of the marketing mix, i.e. product, price, distribution and promotion and translate into the strategic plan of action and break it down into sub-plans in respect of each product and market segment. The marketing mix elements are the ingredients for fulfilling the different marketing objectives, as shown below:

Marketing tasks
1. 2. What does the market need?

Marketing Techniques
Marketing information and research.

By what means can the need be satisfied? Product planning, packaging, and Pricing. Distribution, transportation, warehousing, retailing, etc. Publicity, advertising, sales promotion.

yyyy)How does the product reach the buyer? zzzz)How does the customer know about the product and is influenced to buy it?

Marketing organisation decision


The marketing organisation decision of an exporting firm is determined by its decision as to how the firm wishes to conduct its international marketing activities and also by the degree of involvement and control the firm wants to have on the marketing of its product in foreign countries. It also depends on the international marketing objectives of the firm and the kind and range of product and number of markets and market regions it wishes to serve. The firm may start with an export department within its domestic organisation or it can have a broad-based international division or even a separate export subsidiary for planning and conducting its foreign operations from the home base. When a firm decides to be international, a significant change takes place in its organisational orientation with no operative distinction between domestic and foreign markets. The multinational firm plans its activities on a global basis and all manufacturing facilities, marketing and distribution policies become integrated into a consolidated process of planning and executing marketing operations.

Unit 1

Introduction to International Marketing

JS$ A ctivity D ;
a) Two considerations for product adaptation in a foreign market are:

b) The marketing tasks related to the international marketing mix decision are:

1.7 SUMMARY This unit has covered some of the basic concepts in international marketing and introduced to the reader the trading practices in the current environment. The scope and task of international marketing are to be viewed against the backdrop of the world trading environment, marketing systems and political and economic relationships among the nations of the world. Some of the factors that are different for marketing in domestic and foreign markets have been covered. A firm has to overcome various constraints and adapt its manufacturing operations to suit the environmental factors in different countries. It also needs to carry on its marketing activities efficiently within the framework of the marketing system in the chosen country. The main elements of the foreign environment affecting marketing activities have been discussed in some detail. Some of the more significant macro factors related to the foreign environments have also been discussed. These include factors that are critical to the marketing decision-making process. The important avenues available to a company that decides to operate in foreign markets, are reviewed and discussed. These options are also covered in some detail in a subsequent unit The issues that govern a firm's decision in foreign marketing involvement have been described. The involvement decision is conditional by a number of internal and external factors such as the firm's export policy and program, size resources and product range regulatory and

International Marketing

procedural conditions to be fulfilled from the angles of both exporting and importing. The EPRG framework attempts to identify four types of firm orientation towards internationalisation of its operations. The marketing decision process along with operational decisions that are required for target markets have been outli ned in the last section.

International marketing : It is the performance of business activities to plan, price, promote and direct the flow of a company's goods and services to consumers or users in more than one nation for a profit. Licensing arrangement : It represents the agreement with the foreign-based enterprise in which the licensee is granted the right to use the patents, processing know-how, technology or brands of the licensor company, usually in exchange for a fee or royalty payment. Joint venture : It concerns the setting up of an enterprise in collaboration with a foreign company for the manufacture and marketing of specific product lines. Such collaborations can cover areas such as managerial and technical know-how, technology transfer, equity participation, research and development, manufacturing and marketing facilities or a combination thereof. Contract manufacturing : It refers to various kinds of tie-ups of manufacturing facilities and arrangements agreed upon between two or more manufacturers located in different countries.

1.9 SELF-ASSESSMENT QUESTIONS


Q 1 . Define the terms: international marketing and domestic marketing. Q2 . Bring out the key issues that make international marketing different from domestic marketing. Q3 . Explain some of the reasons why Indian firms are currently interested in international markets. Q5 . Describe and differentiate between three major uncontrollable macro-level forces in the foreign environment. Q6. Describe some of the obstacles that can come in the way of small and medium Indian companies that want to export. Q7 . What are differences between a 'Joint Venture' and 'Foreign Investment'?

International Marketing

2.1 INTRODUCTION The firm exporting its products deals with a variety of issues and problems when operating in foreign environments; among other things, international marketing involves dealing with different cultures, history and different sets of government policies. The term globalisation has come to mean many things to many people. The effects of globalisation have been wide-ranging and need to be understood with special reference to the international marketing subject and its scope. This unit covers some of the elementary aspects of globalisation and its effects on international business processes. The trading environments have undergone a number of developments since the establishment of the WTO, unification of Germany and the collapse of the USSR. The role of the trading blocs has been highlighted since globalisation needs to be viewed through many perspectives. The most important aspect concerns the implications and the effects of globalisation on international marketing as well as on international marketing managers. This has been covered in the last section so that the learners get to know the degree of impact. 2.2 OPERATION IN FOREIGN COUNTRIES International marketing is reckoned as a dynamic aspect of the corporate strategy for survival and generation of business opportunities. It involves operating in foreign environments and dealing with unknown people wanting altogether different products. Every country has a separate export/import (or exim) policy reflecting its economic compulsions and growth requirements. Further, relations among countries are governed by national governments. Then, there are problems of language, culture, social background, tariff regulations and currency fluctuations. Mindset Selling abroad is a complex task. It requires a different mindset and high sense of commitment. In fact, the whole thing should be meticulously planned and executed like a mission. Temperamental decisions have no place in overseas marketing. The decision to enter export market should be final and it does not call for a roll-back. This is possible when export is recognised as an integral part of corporate activity. People enter export markets for a variety of reasons, which may include recession in the domestic market, higher profitability, utilisation of available export incentives, need for imported inputs and increased productivity. Whatever be the reason for selling overseas, the exporter must provide for the required level of commitment.

Unit 2

Challenges of Globalisation

Enlarged Scope
Over the years, the scope of international marketing has been enlarged to cover activities like joint ventures, licensing, franchising and establishment of a production unit abroad. In fact, people are now talking about globalisation, which means transnational operations characterised by free flow of trade and factors of production across national borders. As purt in information technology and greater use of telecommunications have given a boost to this phenomenon. This process started with OPEC and floatation of dollar during the 70s. Theodore Levitt of Harvard mentioned this concept in 1983, the main emphasis of this syndrome being on developing a global outlook for working. With this development, trading in merchandise has lost its significance. Money flows and global sourcing of inputs are important factors. Among factors of production, management holds the key position.

C ost-E fficiency
The basic objective of globalisation is to concentrate on a few business functions in different markets or territories in such a manner that the ultimate product/service enjoys the available comparative advantage and thus becomes the most cost-efficient and hence competitive. Implicitly, this means interdependence of world markets. The basic philosophy of this exercise is to think "globally and act locally". The reason for this is very simple. We still live in an incredibly diverse planet, inhabited by individuals who believe in different ideologies, speak different languages, practice different life styles and rely on different approaches in business. Various forces affecting globalisation as pointed out by Michael Porter in his book entitled, "Competitive Advantage of Nations" are: (i) Growing similarity of countries in terms of available infrastructure, distribution channels and marketing approaches. (if) Fluid global capital markets: National capital markets are growing into global capital markets because of the large flow of funds between countries. (iii) Technological restructuring: The reshaping of competition globally as a result of technological revolutions such as in micro electronics. (iv) Integrating role of technology: Reduced cost and increased impact of products have made them accessible to more global consumers. (v) New global competitors: A shift in competition from traditional country competitors to emerging global competitors.

International Marketing

Developments
The current international trading environment is characterised by a number of developments, such as, the establishment of WTO, the emergence of trading blocs, the unification of Germany and the collapse of US SR. Further, as a result of the G ATT Accord, although a number of benefits are now expected in the areas of agriculture, textiles and pharmaceuticals, several problems relating to trade policy changes and legal enactments are yet to be resolved. The multilateral trading system which has become a reality calls for strict adherence to the rules of international trade among member countries. Again, there are apprehensions regarding sovereignty, poverty alleviation, economic growth etc., with the implementation of Uruguay Round Agreement.

Trading Blocs
The trading blocs, while accelerating the process of growth and social change within a particular group, are discouraging the inflow of goods from outside through manipulation of import tariffs in favour of member countries. Further, in the name of growing unemployment and unchecked imports at prices lower than their domestic products, many of the developed countries are now coming up with a number of inconceivable tariff and non-tariff barriers. The range, scale and application of particularly non-tariff barriers are very complex and include such aspects as procurement policies, dumping measures, method of assessing duties, administrative procedures and packing regulations. These countries are also planning to introduce new trade restrictions like labour standards, environmental conditions and sanitary regulations to ward off import of several items into their markets.

SWOT Analysis
Viewed against this background, it is necessary to attempt a SWOT analysis of India's export capabilities and extract the maximum out of our existing product and market positioning. Over the years, we have depended on a small basket of traditional items for generation of Indian exports. The number of competitors for these items has grown and some of them have outperformed us. Another problem of our export is that we have focused on low value and simple items for which there is not much scope now. Further, we have failed to take advantage of the global sourcing. There are a number of technologyintensive products like automated data equipment, telecom equipment and electronic items for which there is a large market in developed countries. Nearly, 50 per cent of such items are imported from developing countries like China, Indonesia, Malaysia and Thailand. In the past, we have lost this opportunity. We must now get out of this trap by speeding up the ongoing process of change. This involves several steps:

Unit 2

Challenges of Globalisation

a) Vision
The most significant part of this change is to have a vision supported by long-term policy. And this vision should be reflected in the creation of something unique and different, which cannot be imitated. Procter & Gamble took advantage of its mass merchandising skills to become a world leader in soaps and detergents. This could not be matched by others in the market. On the other hand, General Electric Company developed a computerised x-ray machine which was immediately imitated and out-priced by Toshiba. The responsibility forgiving such a direction and support lies with the top management. As of now, we have very few companies in India with a long-term strategy and this has been mainly due to the lack of stable government policies for business development. In the changed scenario, it should be possible for individual units to work with greater confidence for their development and growth. In order to achieve sustainable growth in export markets, it is necessary to expand the existing product line either by increasing one's own production capacity, or acquiring another company in the same product line. Dominance achieved in this manner would also help in attracting additional talent and capital, resulting in further growth of the company. The focus on existing line of production is necessary to exploit the available expertise in a particular field.

b) Q uality
Improvement in quality is yet another component of globalisation. Over the years, Indian companies have operated in a sheltered home market where the customers are less demanding and the inflow of quality products at low prices was blocked through imposition of high customs tariff. With the opening up of the Indian economy, we can no longer be complacent and wait for outsiders to come and dislodge us in our own country. To be successful in the international market, one has to be a 'world-size player' with matching international quality standards, and fight out the profit sanctuaries of foreigners right in their home countries. After the unification of Europe, ISO 9000 was the 'mantra' for successful operation abroad, and unless we qualify for this standard, the wider choice available with the customers will simply keep us at bay. Customers all over the world have become increasingly sophisticated and few will accept anything less than the best. One should, therefore, offer the same level of quality both in emerging as well as mature markets.

c) Advantage
Identification of products with competitive advantage is yet another aspect of globalisation. It is an established fact that every firm or country cannot market several products abroad. Different countries have competitive advantage in different industries. For instance, Japan is successful in electronics, the USA in computers and aircrafts, Germany in fine chemicals

29

International Marketing

and Italy in leather products. To achieve success in overseas markets, it is desirable to combine both country and product-specific advantages. Viewed in this context, it would be necessary for Indian players to concentrate on such products as textiles, jewellery, leather, software, engineering, air-conditioning and movie production in the international market. Recently, some of the Indian herbal products have also been very popular in the Western countries. Cheap labour should not be viewed as an enduring advantage in international markets. There are many industries in India where we have comparative cost advantage because of cheap labour. But with gradual induction of foreign technology in some of these areas, and the product becoming more sophisticated, these advantages are becoming redundant. Further, the cost variation in different sectors also gets narrowed down with higher levels of automation. This fact is amply demonstrated by the J apanese experience where the labour cost is 20 times higher than that of India. With a labour market reform in India, the situation will definitely improve in the country.

1.
2.

b)

d) Alliances
Another area of change relates to product adaptation. This requires continuous upgradation of technology and a huge investment in brands. Indian companies have lagged behind in this area. There are several reasons for this. One, our export basket mainly comprised bulk commodities where the value addition was minimal. Second, India's share in world exports has been low and the only domain of competition was pricing. And thirdly, we were obsessed with the socialist pattern of working where advertising is considered a wasteful expenditure. Excellence in international marketing requires heavy expenditure on product development and brand building. It is understood that establishment of brand in a market like USA or Europe takes about four to five years and during this period, one has to spend about Rs. 160 crore on advertising and publicity. Once a brand backed by continuous product improvement is established, it will generate a kind of faith and credibility in the product, which will sell automatically. Indian companies selling abroad should also be prepared for a strategic alliance with a multinational company. Such a strategy is very important in the present context where multinationals are going global very fast by joining hands with even rivals. In the process, many of the Indian companies will graduate into multinational and global companies. It is heartening to know that a few Indian companies like Parle Agro, Mohan Meakins, Koparan Ltd. and Hero Motors have entered into franchising/licensing arrangements for manufacturer of their products in selected countries. e) Reforms

Acceleration of economic reforms is essential for pushing through the ongoing process of globalisation. We have yet to decide on several problems relating to foreign investment, level playing field, privatisation, land ceiling act, public sector disinvestment and liberalisation

Unit 2

Challenges of Globalisation

in the import of consumer products. Once these issues are settled, the tempo of integrating Indian economy with the world will be built up further. & $ Activity A; a) Two examples of foreign companies operating in India that have adopted the principle of 'Think global, act local' are: 1._____________________________________________________________ 2. b) D Econom ic reforms in India are helping the cause of globalisation and increasing the pace of integrating the Indian econom y with the world True False

2.3 STR AT EG IC M A RK ET IN G O R IENTA TIO N The degree of marketing involvement (described in Unit 1) does not necessarily correspond to the strategic thinking and orientation of the firm. Often companies stray into international m arkets because of a sudden spurt in dem and. Strategic marketing planning m ay be of secondary importance in the rush to 'fill up the tank' with orders. Three distinct approaches to strategic marketing orientation are prevalent in firms involved in international markets: aaaaa) xtension of domestic marketing orientation E bbbbb) ulti-country marketing orientation M ccccc) lobal marketing orientation G 1. Extension of dom estic m arketing concept The firm seeking extension of domestic sales into foreign markets is representing one type of strategic marketing orientation. It views its international operations as secondary to, and an extension of, its domestic production. Domestic business is its priority but foreign sales are seen as a profitable extension of its dom estic operations. Firm s believe that is their products can sell in their own country, they should sell elsewhere too. Minimal efforts

International Marketing

are made, if any, to adapt the marketing mix to international markets. In this strategic orientation the aim is to market to foreign customers in the same manner as that to domestic customers. It seeks markets that are similar to the home market and those that accept its domestic products. This domestic market extension strategy can be very profitable and firms with this approach are 'ethnocentric'.

2.

Multi-country marketing orientation

When a company recognises the differences between overseas and domestic markets and the importance of offshore business, its orientation may shift to a multi-country marketing strategy. This firm is guided by the concept that markets in different countries need independent marketing programs. Firms adopting this orientation have clear and separate marketing strategies for each country that they wish to involve themselves in. Subsidiary companies operate independently of one another in establishing their marketing objectives, goals and plans. The parent country uses separate marketing mix elements with little interaction among themselves. Products are adapted for each market with very little co-ordination with other country markets; advertising campaigns, pricing, and distribution decisions are localised. The firm that applies this concept does not look for similarity among elements of the marketing mix that might yield better results through standardisation. On the contrary, it aims for adaptation to local country markets. Control is decentralised while recognising the exclusivity of each market through local inputs. Firms with this type of orientation are generally 'polycentric'. Some of the Korean companies operating in India such as LG Electronics and Samsung fit in this category.

3.

Global Marketing Orientation

The global marketing concept views an entire set of country markets including the home market as one unit, identifying group of prospects with similar needs as a global segment. The firm then develops a marketing plan that strives for standardisation wherever it is possible, and cost-effective. Its marketing activity is global and its market coverage extends across all continents. The company employing a global marketing outlook keeps aiming for efficiencies of scale and cost by developing a marketing mix applicable across national boundaries. Ford Motor Co., Intel and Microsoft are some of the companies that can be described as global companies. The marketing plan of such firms may imply a standardised product with country-specific advertising or has a standardised theme in all countries with cultural-specific appeals to a

Unit 2

Challenges of Globalisation

unique market characteristic, or has a standardised brand or image but has adapted products to meet specific country needs and so on. E.g. Mc'Donald's standardises its processes, logo, most of its advertising, and interior decor and layouts whenever and wherever possible. However, it is possible to find wine in the menu in France, beer in Germany, pork burgers in Thailand and the 'Maharaja Mac' Veggie burger in India. Being global is a mindset and a way of looking at commonalities that can be standardised across regions or country-market groups. The global marketing orientation has proved to be successful for many export-dominant firms and MNCs. There is bound to be widespread adoption of this concept among the newer companies that have big ambitions to enter new countries and new continents. In fact the similarities of customer needs across countries have forced companies like Sony Corp. (Video games) and Microsoft Windows (operating systems) to launch new products almost simultaneously (or with very little time lag) in multiple countries around the world. However, the 3 types of strategic marketing orientation described above need not be mutually exclusive. Depending on the product and the market, other orientations may be present and may make more sense in certain concepts; for example, Unilever may follow a global marketing strategy for disposable diapers but a multi country strategy in Asian markets for soaps and detergents.

JS$ A ctivity B ;
a) Identify two Indian Companies that have multi-country market orientation.

b) Identify two Indian Companies that have global marketing orientation.

International Marketing

2.4 IMPLICATIONS OF GLOBALISATION ON INTERNATIONAL MARKETING ______________________________________________________________ Globalisation offers marketers the opportunity of reaching a much wider range of consumers than has been the case in the past. This makes some aspects of marketing easier and others more difficult. Basic tools and techniques of marketing In an increasingly integrated business environment the emphasis moves from an individual to a collaborative marketing platform. The essence of changes in tools and techniques of the market is in the response to national/regional aspects that remain during the processes of transition - different aspects of corporate activity mature and globalise at different rates, and national/regional legal requirements and product standards change very slowly. This has led to Sony's concept of "global localisation" and this drives the company's marketing worldwide. The basics are globalised-core technology, design, branding - and the final product specification mix, promotion, customer support are undertaken just as if Sony were acting as a national/regional company. Behaviours are converging, but slowly. The influence of history and culture difference will remain significant. However the impact of the information revolution is such that there is convergence and it is beginning to accelerate. Levi's are as much in demand in developing countries like China, India and Brazil, as in the USA. The basic marketing messages aimed at young, well-informed consumers work in Beijing and Delhi as in San Francisco; the percentage of localisation will slowly decline over time. Working out the physical channels to markets is not enough; marketers now need to understand the informational channels to market. Supply-chain marketing Marketing is based increasingly on three interacting supply chains : product/service, information and money. Transfers of information and money are relatively easy, since these are two elements of business that became globalised most easily and most rapidly. The product/service supply chain is more difficult because it is less homogeneous and remains subject to local (mainly cultural) variances. Because of (a) constant migration of value under conditions of competitive supply and (b) decision-making under conditions of asymmetrical information, the scope of the concept of marketing is moving gradually beyond the classical 4Ps (product, price, promotion, place) that have framed the discipline for so long.

34

Unit 2

Challenges of Globalisation

What is happening, quite simply, is that customer value can be derived from any element or combination of elements in the total supply chain, not just on the final product package. Marketing is about identifying (a) where value-adding conversions can take place and (b) how and why customers develop and change their views as to what constitutes value. This takes place against a background of increasingly collaborative relationships rather than the traditional 'arm's length' dealings. It can be usefully summarised as a holistic and integrated business process, as follows. Technology / Systems Finance Logistic Sustained Customer Satisfaction

Valueadding

R&D Learning

Structure/cultur

Marketing via the concept, tools and techniques of supply chain management

Fig. 2.1: Integrated Business Process


When the above concept of the full business process is considered, it is not difficult to see how the decoupling of value creation from the country of location of the resources and activities that are restricted to the 4P's necessitates a redefinition of the activity we term 'marketing'. Globalisation accentuates this tendency. Knowledge-based marketing It follows from the two sub-sections above that international marketing is essentially rooted in knowledge acquisition, processing and application. The nature of market research and marketing is changing to take this into account. How we discover what brings a buyer (consumer or business/industrial) to a choice is increasingly complex. It is no longer sufficient to build a brand and promote it on the basis of techniques and propositions that made an impact twenty to thirty years ago in an American/ European demand context. The basis of a brand now involves commonality and consistency of key factors in the product package, coupled with local details in final specification that appeal to the experience sought by the target buyer group(s).

International Marketing

Globalisation cannot remove the aspects of the marketing mix that are set to remain internationally heterogeneous. Therefore the question of managing the information supply chain is becoming more critical in marketing as business becomes increasingly global. Asymmetry of information is often the critical factor that gives rise to competitive advantage, at least over the short-term period. We also bear in mind that "time compression" is a fact of marketing life- in terms of product life-cycle, innovation, time-to-market and other potential order qualifiers and order winners. The quantity and quality of information and the speed and creativity with which such information can be processed are central to 21st -century marketing. Market research is responding to this challenge by developing and refining costeffective techniques of data mining and data manipulation- increasingly on a global basis. What we are seeing is a new "currency" of marketing that is part of the essence of globalisation. The true differentiators are increasingly located in "intellectual" rather than "physical" capital. Thus high-value work gets done in locations where access to intellectual capital is most favourable (the high-cost developed world) and manufacturing/assembly gets done where raw materials, physical capital and labour are most favourably accessed (the low-cost developing world). Order winners are found in the former; order qualifiers are shifting increasingly to the latter. It is, in the long run, pointless to interfere in this rational economic process.

Cohesiveness and consistency


If globalisation affects organisations, then it varies by function within a business. The final challenge is to maintain cohesiveness and consistency in presenting a company and its offerings to the world. It is unlikely that markets will converge entirely because of differences in history, sociology, culture, physical and legal environments, and many other micro aspects. This makes issues such as branding more, not less, important. But the concept and purpose of a brand is changing; it serves only to make a statement about a company's core values and position. The ability of a customer to reach a "segment of one" (or realistically a "segment of few") on the basis of a cohesive and consistent marketing platform, will be the key to global success. This is the true nature of Sony's principle of "global localisation". Competencies in the new market environment The new market environment is characterised by significantly greater organisational
36

fluidity.

Unit 2

Challenges of Globalisation

All this gives rise to an additional set of challenges that are faced by business leaders generally, but especially in the marketing function, these translate readily into a comparison of core competences, as follows. Competences that are declining Getting ahead Individual self Personal space, status Personality-driven Subject expertise Initial qualifications Lifetime commitment Project management Predominantly deductive thinking Competence that are growing Adding value Team working Interpersonal effectiveness Process-driven Multidisciplinary Continuous updating/extending Cohesive but mobile career Business management Increasingly inductive thinking

The move towards globalisation requires marketing (and other) managers to abandon national allegiances and this can happen only when top company management modifies its own views and installs a set of processes and structures that relate to the emerging reality of the business and not to past practice. Globalisation extends choice-on both the supply and demand sides of business relationships. It not only opens up more markets to us, it simultaneously opens our markets to more competitors. This provides a more fluid marketing environment in which an organisation can "hedge" its markets and customers in order to maximise returns and minimize risk and uncertainty. This is why globalisation can never be about selling in each region of the world. It is why the global company will be distinguished by its capabilities not simply by the number of markets it serves or the number of countries from which it sources its inputs. Properly managed at inter-governmental level, globalisation will level the playing field to a very significant extent and will change the nature of opportunity and competition. This constitutes the true and emerging essence of globalisation. It will challenge and alter our concepts and practices in marketing, and more generally, in strategic and operational management.

2.5 THE INDIAN CONTEXT_________________________________________


Business across borders is increasingly becoming commonplace. The business economies of many nations are witnessing upturn and downturn cycles. This is forcing most local
37

International Marketing

- . .

companies to look for business outside their national borders. This aspect is also being facilitated by the growth of the Internet and its associated worldwide usage. Quite a few countries have decided to reduce trade barriers or opened up markets that were once prohibited to private commercial enterprises. This is evident in many parts of Europe, Latin America and Asia including India. The ongoing economic reforms in India such as tariff reductions, deregulation of industries and allowing private sector participation in government-owned companies (e.g. VSNL now partnering with TATA Group in telecommunications, Reliance group's involvement in oil exploration) are attracting the entry of global companies and multinational companies (MNCs). Significant differences in labour costs in developing countries like India and China create a strong reason for MNCs to locate or shift their manufacturing bases there and use the facilities to supply market demand across the world. Both Hyundai Motors Company, South Korea, and Ford Motor Company, USA are making automobiles in their plants in Chennai (in South India) and marketing them to countries in Europe and Asia. MNCs drive considerable cost advantages through economies of scale by concentrating on world-scale volumes as opposed to national-scale volumes. This gives them substantial advantages over local competitors who concentrate only on domestic markets. In certain industries, MNCs have the ability to transfer their production, marketing and management know-how from country to country at very low cost. Globalised operations are therefore considered essential now for companies to get maximum advantage in driving down costs. Globalisation can be seen making deep inroads into industries such as motor vehicles, telecommunications (Mobile and long-distance services), Internet services, petroleum products and energy. Indian firms are also in the forefront with leading companies like Mahindra & Mahindra, Bharat Forge, Bajaj Auto setting up units or having joint ventures with foreign companies in markets outside India.

2.6 SUMMARY
In this unit, an attempt has been made to introduce the concepts of globalisation and the challenges that companies face as a result of its spread. International marketing is reckoned as a dynamic aspect of corporate strategy for generation of business opportunities. The issues and problems involved with companies operating in foreign environments have been brought to the forefront in the initial sections. The ways by

Unit 2

Challenges of Globalisation

which globalisation is throwing up new opportunities for companies have been discussed. The necessity of having a long term vision for companies operating in foreign markets has been stressed. It is not possible to deal with the topic of globalisation in isolation and without making reference to the emergence of global companies and therefore, global competition. The implications and effects of globalisation on international marketing have been covered in a later section and given due prominence. The international marketing manager can no longer afford to ignore the impact of globalisation on the company he/she is associated with. In the units that follow, the more detailed aspects of globalisation will become clearer. 2.7 KEY WORDS_____________________________________________________ Trading blocs : A term used to refer to a group of nations within a certain region to promote trade and business within themselves. This group may also discourage the inflow of goods from outside the region through manipulation of import tariffs in favour of member countries. Global marketing: In this stage, the company treats the world, including their home market as one market. Market segmentation decisions are no longer focused on national borders. Globalisation: This is a term that refers to increasing global connectivity integration and interdependence in the economic, social, technological, cultural, political and ecological spheres. It is the process by which the experience of everyday life is becoming standardised around the world. 2.8 SELF-ASSESSMENT QUESTIONS__________________________________ Q1. What are the main issues faced by a company operating in a foreign country? Q2. Why is the study on the effects of globalisation important? Q3. Discuss the ways in which globalisation is affecting the Indian auto component industry. Q4. How is the multi-country marketing orientation different from the global marketing orientation?

39

International Marketing

3.1 INTRODUCTION There are various factors that motivate a company to operate and market on foreign shores. Some of these factors are the 'pull' type and some belong to the 'push' type. It is necessary to understand some of these factors in detail since they provide us with answers to some basic questions of the existence of companies in foreign countries. There are similarities and differences between domestic marketing and international marketing. In a separate section an attempt has been made to highlight the various factors in simple terms. The progression of the company's involvement in foreign countries proceeds from export marketing to global marketing. A global marketing strategy involves the creation of a single strategy for a product server or company for the entire global market. Although Unit 2 introduced the concept of global marketing briefly, this section takes the concept forward. This concept has assumed great importance in India with the emergence of Indian companies that have become international in outlook and performance, as well as those with global ambitions. This is followed by a section on the main driving forces that are creating new multinational companies (MNCs). The importance of international marketing is derived from the fact that driving forces have a much greater influence on companies than the restraining forces. hi the last section, some of the successful principles that have guided companies to succeed in international markets have been presented in a condensed form. 3.2 MOTIVATING FACTORS The factors which motivate firms to go international may be broadly divided into two groups, vis., the pull factors and push factors. pull factors, The most of which are proactive reasons, are those forces of attraction which pull the business to the foreign markets. In other words, companies are motivated to internationalise because of the attractiveness of the foreign market. The attractiveness includes, broadly, the relative profitability and growth prospect. The push factorsrefer to the compulsions of the domestic market, like saturation of the market, which prompts companies to internationalise. Most of the push factors are reactive reasons. Important reasons for firms involved in exports and imports are discussed below: 1. Profit Motive One of the most important reasons of internationalisation of business is to earn profit.

Unit 3

Why Firms Go International

Often it has been found that International business could be more profitable than selling in the domestic market. One of the important motivation for foreign investment is to reduce the cost of production by taking advantage of cheap labor input or raw material.

2.

Growth Opportunities
The growth potential of many foreign markets is a strong attraction for foreign companies. In a number of developing countries both the population and income are growing fast. It may be noted that the several developing countries, the newly industrialising countries (NICs) and the Peoples' Republic of China in particular have been growing much faster than the developed countries.

3.

Domestic Market Constraints


Domestic demand constraints drive many companies to expand the market beyond the national border. The market for a number of products tends to saturate or decline in the advanced countries. This often happens when the market potential has been almost fully tapped. Another type of domestic market constraint arises from the scale economies. The technological advances have increased the size of the optimum scale of operation substantially in many industries making it necessary to have foreign market in addition to the domestic market, to take advantage of the economies of scale. It is the thrust given to exports that enabled certain countries like South Korea to set up economic size plants. Domestic recession often provides companies to explore foreign markets.

4. C o m petitio n
Competition may become a driving force behind internationalisation. A protected market does not normally motivate companies to seek business outside the home market. The economic liberalisation in India since 1991 has increased competition from foreign firms. Hence many Indian companies are now going international in a big way.

5. Government Policies and Regulation


Many governments give number of incentives and other positive support to domestic companies to export and to invest in foreign countries. Sometimes 45 companies may be obliged to earn foreign exchange to finance their imports and to meet certain other

Internationa] Marketing

foreign exchange requirements like payment of import bill, payment of royalty and dividend and debt. Some companies (particularly in developed countries) move to foreign countries because of certain regulations like the environmental laws.

6.

Spin-off Benefits
International business helps the company to improve its image. International marketing may have pay-off for the internal market too by giving the domestic market better product. Further the foreign exchange earnings may enable a company to import capital goods technology etc. Another attraction of exports is the economic incentives offered by the government.

7.

Strategic Vision The systematic and growing internationalisation of many companies is essentially a part of their business policy or strategic management.

JgT Activity A;
Two main motivating factors for companies to go international are:
IV.

2.

3.3 INTERNATIONAL MARKETING VS DOMESTIC MARKETING


There are three basic points of similarities between domestic marketing and international marketing: ddddd)Both in domestic marketing and in international marketing, success depends upon satisfying the basic requirements of the consumers. This necessarily involves finding out what the buyers want and meeting their needs accordingly. eeeee)It is necessary to build goodwill both in the domestic market as well as in the international market.
46

fffff)Research and development of product improvement and adaptation is necessary both for international marketing and domestic marketing.

Unit 3

Why Firms Go International

However, there are some salient features of difference between international marketing and domestic marketing.

Sovereign Political Entities


Each country is a sovereign political entity and goods and services have to move across national boundaries. As a result, they may have to face a number of restrictions. They may fall in any one of the following categories: i. Tariffs or Custom Duties - These only make the goods expensive and are not intended to ban foreign goods entirely. i Quantitative restrictions - These are mainly intended to restrict trade in the specific commodities subject to restrictions, the major objective being protection of domestic industries. ffi. Exchange Controls - In some cases though the entry of goods is not banned, importers may not be allowed the necessary foreign exchange for payment of the goods due to the existence of exchange controls. iv. Local Taxes - One of the objectives is to make the foreign goods comparatively costlier than domestic goods.

D ifferent Legal System s


Each country has its own legal systems and very often the legal systems operated by different countries differ from each other. The existence of different legal systems makes the task of businessmen more difficult as they are not sure as to which particular system will apply to their transactions. However attempts are being made to bring about uniformity in some specific areas.

D ifferent M onetary System s


Each country has its own monetary system and the exchange value of each country's currency is different from that of the other.

Lower M obility of Factors of Production


Factors of production are less mobile as between nations than in the country itself.

47

International Marketing

Differences in Market Characteristics


Each country is a separate market having its own demand pattern, channels of distribution, methods of promotion, etc. These differences are accentuated due to the existence of government controls and regulations.

Differences in Procedures and Documentation


Each country has its own procedures and documentary requirements and traders have to comply with these regulations if they want to export to or import goods from foreign countries.

Greater Degree of Risks


There is a greater degree of risk involved in international marketing than in domestic marketing due to: i. Larger volume of transactions and the higher value of these transactions.

ii. Longer time period involved in these transactions due to longer time in transit and the longer credit period involved. iiL Comparatively less knowledge about the parties' reputation and credibility. In addition, as stated earlier, there are the exchange fluctuation risks. Cultural Differences Exporting means operating in a cross-cultural environment. This makes the task of marketing more complex because the marketer must appreciate how different is the foreign culture from his own and how the difference has to be reflected in shaping his behavior pattern as well as his export marketing strategy.

Differences Domestic Marketing


ggggg)Business laws and regulations are defined and understood hhhhh)Business is carried out in single currency

i International Marketing
Foreign laws and regulations may not be clear Many currencies are involved with wide exchange rate fluctuations.

48

Unit 3

Why Firms Go International

Domestic Marketing
iiiii) Business risks can usually be identified and assessed. jjjjj) Research data is available in single language and is easily accessible. kkkkk)Promotional message need to consider a single national culture. lllll) Market segmentation occurs within a single country. mmmmm)Communication and control are immediate and direct. nnnnn)Functional specialisation within a marketing department is possible. ooooo)Selling and delivery documentation can be standardised. ppppp)Distribution channels are easy to monitor and control. qqqqq)New product development can be geared to the needs of the home market.

International Marketing
Environments can be so unstable that is becomes extremely difficult to identify and assess risks Research data is in foreign language and may be extremely difficult to obtain. Numerous cultural differences need to be taken in to account. Market segments might be defined across the same type of consumer in many different countries. International communication & difficult International marketing managers require a wide range marketing skills. Documentation is often drivers and complicated due to meeting different border regulations. Distribution is often carried out by intermediaries hence much harder to monitor. New product development must take into account all the markets the products will be sold in.

x g f A c tiv ity B ;
a) Two main advantages the company having international markets over one that operates only in the domestic market are: 1. ____________________________________________________________

2.
b) In international marketing, the foreign laws and regulation are usually. D Clear D Not Clear
49

International Marketing

3.4 EVOLUTION FROM DOMESTIC MARKETING TO GLOBAL MARKETING The term global marketing has been in use since the early 1980s. It began to assume widespread use in 1983 with the seminal article by Ted Levitt. Prior to that, international marketing or multinational marketing was the term used most often to describe international marketing activities. However, global marketing is not just a new term for an old phenomenon; there are real differences between international marketing and global marketing. In many ways global marketing is a subcategory of international marketing with special importance in our present world. Domestic Marketing Marketing that is aimed at a single market, the firm's domestic market, is referred to as domestic marketing. In domestic marketing, the firm faces only one set of competitive, economic, and market issues and, essentially, must deal with only one set of customers, although the company may serve several segments in this one market. Export Marketing The field of export marketing covers all those marketing activities involved when a firm markets its products outside its main (domestic) base of operation and when products are physically shipped from one market or county to another. Although the domestic marketing operation remains of primary importance, the major challenges of export marketing are the selection of appropriate markets or countries through marketing research, the determination of appropriate product modifications to meet the demand requirements of export markets, and the development of export channels through which the county can market its products abroad. In this phase, the firm may concentrate mostly on the product modifications and run the export operations as welcome and profitable by-product of its domestic strategy. Because the movement of goods across national borders is a major part of an exporting strategy, the required skills include knowledge of shipping and export documentation. International Marketing When practicing international marketing, a company goes beyond exporting and becomes much more directly involved in the local marketing environment within a given country or market. The international marketer is likely to have its own sales subsidiaries and will participate in and develop entire marketing strategies for foreign markets. At this point, the necessary adaptations to the firm's domestic marketing strategies become the main concern.
50

Unit 3

Why Firms Go International

Companies going international now will have to find out how they must adjust an entire marketing strategy, including how they sell, advertise, and distribute, in order to fit new market demands. An important challenge for the international marketing phase of a firm becomes the need to understand the different environments the company needs to operate in. Understanding different cultural, economic, and political environments becomes necessary for success. This is generally described as part of a company's intemationalisation process, whereby a firm becomes more experienced to operate in various foreign markets. It is typical to find a considerable emphasis on the environmental component at this stage. Typically, much of the field of international marketing has been devoted to making the environment understandable and to assist managers in navigating through the differences. The development of the cultural/environmental approach to international marketing is an expression of this particular phase.

M ultinational M arketing
The focus on multinational marketing came as a result of the development of the multinational corporation. These companies are characterised by extensive development of assets abroad and operate in a number of foreign countries or markets as if they were local companies. Such development led to the creation of many domestic strategies, thus the name multidomestic strategy whereby a multinational firm competes with many strategies, each one tailored to a particular local market. The major challenge of the multinational marketer is to find the best possible adaptation of a complete marketing strategy to an individual country. This approach to international marketing leads to a maximum amount of localisation and to a large variety of marketing strategies. The attempt of multinational corporations to appear "local" wherever they compete, often results in the duplication of some key resources. The major benefits are the ability to completely tailor a marketing strategy to the local requirements.

P an-R egional M arketing


Given the diseconomies of scale of individualised marketing strategies, each tailored to a specific local environment, companies have begun to emphasise strategies for larger regions. These regional strategies encompass a number of markets such as Euro-strategies for Western Europe. Such integration is apparent in North America, where the United States, Canada and Mexico have signed a far-reaching trade pact, or in the Pacific Rim, where a number of counties have made great progress in their economic development. Companies considering regional strategies look to tie together operations in one region, rather than around the globe, the aim 51being increased efficiency, Many firms are presently working on

International Marketing

such solutions, moving from many multi-domestic strategies in Europe toward Pan-European strategies.

Global Marketing
Over the years, academics and international companies alike have become aware that opportunities for economies of scale and enhanced competitiveness are greater if they can manage to integrate and create marketing strategies on a global scale. A global marketing strategy involves the creation of a single strategy for a product, service, or company, for the entire global market, that encompasses many markets or countries simultaneously and is aimed at leveraging the commonalties across many markets. Rather than tailor a strategy perfectly to any individual market, the company aims at settling on one general strategy that can be applied throughout the world market. The management challenge is to design marketing strategies that work well across many markets. It is driven not only by the fact that markets appear increasingly similar in environmental and customer requirements, but, even more so, by the fact that large investments in technology, logistics, or other key functions force the companies to expand their market coverage. Thus global marketing is the last stage in the development of the field of international marketing. While global marketers face their own unique challenges that stem from finding marketing strategies that fit many countries, the skills and concepts of the earlier stages are very important and continue to be needed. In fact, companies that take a global marketing approach will be good exporters because they will include some exporting in their strategies. Such firms will also have to be good at understanding of the cultural, economic, and political environment of many countries. Furthermore, few global marketing strategies can exist without some local tailoring, which is the hallmark of multinational marketing. As a result, global marketing is but the last of series of skills, all included under the broad concept of international marketing.

$ Activity C:
Two differences between multinational marketing and global marketing are: 1.__________________________________________________________________

2.
3.5 THE DRIVING FORCES
52 The rapid growth of the world economy in the last three decades has been shaped by the

Unit 3

Why Firms Go International

/ard Pan-

various driving and restraining forces. During the 1990s, changes in the business environment have presented a number of challenges to the established methods of carrying out business. Today, the importance of international marketing is derived from the fact that driving forces have a much greater influence than the restraining forces. Although the driving forces can vary from industry to industry, typical driving forces can be converging market needs, technology transportation and communication improvements, product development costs, and quality improvement pressures.

ware that f they can marketing tipany, for ;ously and a strategy al strategy 5 to design by the fact nents,but, other key ernational om finding r stages are marketing r strategies, lomic, and ategies can ceting. As a r the broad

C onverging m arket needs


Markets around the world consist of cultural universal elements and culturally different elements. The common elements provide an underlying basis for the opportunity to create and serve international markets. The creation of international markets holds the key to the development of global markets. The soft-drink industry is one example of new pervasive the common elements are in virtually every country of the world. There is ample evidence to suggest that consumer needs and wants around the world are converging, thereby creating new international markets where none may existed before.

T ech n o lo g y
Technology is a universal factor that crosses national and cultural boundaries; no longer does it belong to a single nation. Once a technology is developed, it becomes available everywhere around the world. The emergence of a global village has been characterised by technological factors such as the Internet, growth in satellite communication and world wide TV networks such as CNN and BBC.

Transportation and com m unication im provem ents


The time and cost barrier associated with distance have fallen drastically over past few decades. The fit airplane ushered in new revolution by marketing it possible for people travel ground the world in less than 48 hours. Tourism has enabled people from many countries to see and experience the newest products being sold abroad. Without modern jet travel it is difficult to imagine one to one comrnunication among company employees and between the company and its consumers. Since the 1990s, communication technologies such as e-mail, fax teleconferencing and videoconferencing have allowed managers and executives to link up electronically from virtually any part of the world for a fraction of the cost of air travel.

taped by the

A similar revolution can be observed in transportation technology, physical distribution


5 3

International Marketing

UnitS

costs have declined and so has the time element. The per-unit cost of shipping automobile from Japan and Korea to the USA by specially designed auto-transport ships is less than the cost of overland shipping from Detroit to the West Coast of USA. Product development costs: When new products require major investments and long time periods, the pressure for globalisation becomes severe. In the pharmaceutical industry the cost of developing a new drug in 1976 was USD 54 mn. This rose to USD 359 mn. in 1993. Such costs have to be large enough to support investments of this size. It is therefore not surprising that new research in pharmaceuticals and basic research is shifting from the developed world to countries such as India which one of the largest in terms of scientific and technological manpower. The success of an IT company depends a great deal on innovation through R & D the top IT MNCs have been investing millions of dollars in R & D around the world. Since 2003, a number of these R & D centers have been set up in India, some of these companies have more than one centre, for example, IBM has two centers in Delhi and Bangalore, Microsoft has two in Hyderabad and Bangalore and Adobe India has two in Noida and Bangalore. In addition, R & D centers have been set up by yahoo, Google and INTEL. It is estimated that nearly 25 percent of fresh global reinvestments by IT MNCs are channelised towards their R & D centers in India. According to a senior official at olecrosoft Research India, India has a rich pool of research talent and provides opportunities to work on interesting problems, for examples, the number of languages in India makes it a good place to conduct research in multilingual systems India is an excellent place to do research in technologies that are suited to emerging economies.
Source: The Times of India

Quality Improvement Pressures: International marketing strategies can generate greater revenue and greater operating margins that can be reinvested to support design and improve quality. An international company and a domestic company may each spend 5 % of their sales on research and development, but the international company may have many times the revenue of the domestic company because it serves multiple national markets. This has brought into the open the concept of world class quality. International companies like Nissan, Toyota, Honda, Caterpillar & John Deere have raised their bench works on quality that is truly world class. When an international company establishes a benchmark in quality, competitors have to make their own improvements and come to its level. For products that are conceived on a global marketing level, uniformity can reduce engineering, design and production costs access business functions.

Unit 3

Why Firms Go International

Q u a lity , u n ifo rm ity la n d c o st re d u c tio n w e re a ll d riv in g fo rc e s b e h in d F o rd 's d e v e lo p m e n tf it s w o r ld c a r s o l d in th e U S A a s C o n t o u r a n d M e r c u r y M y s tiq u e , o a n d a s M o n d e oEinro p e a n d c e rta in o th e r c o u n trie s. u T h e r e c a n b e r e a s o n w h y e c o n o m ic g r o w th h a s b e e n a d r iv in g f o r c e in th e e x p a n s io n o f e in te rn a tio n a l e c o n o m y a n d th e g ro w th o f in te rn a tio n a l m a rk e tin g . th F irstly , g ro w th h as create d m ark et o p p o rtu n ities th at p ro v id e a m ajo r in cen tiv e fo r co m p an ieto e x p a n d in te r n a tio n a lly a t th e s a m e tim e , s lo w g r o w th in a c o m p a n y 's s d o m e s tic m a r kcean trig g e r th e n e ed to lo o k fo r o p p o rtu n itie s in fo reig n c o u n trie s t w ith h ig h ra tes o f g ro w th . S e c o n d , e c o n o m ic g ro w th h a s re d u c e d re s is ta n c e th a t m ig h t o th e rw is e h a v e d e v e lo p e d in re s p o n s e to th e e n try o f fo re ig n firm in to d o m e s tic e c o n o m ic s . T h ir d ly , th e w o r ld w id e m o v e m e n t to w a r d d e r e g u la tio n a n d p r iv a tis a tio n is o p e n in g u fpo r m e rly c lo s e d m a rk e ts s ig n if ic a n tly . P riv a tis a tio n o f te le p h o n e a n d te le c o m m u n ic a tioen o rk sy ste m s a ro u n d th e w o rld is c re a tin g o p p o rtu n itie s a n d n tw th re a ts fo r e v e ry c o m p a the industry. in n y L everage A n y in te rn a tio n a l c o m p a n y p o ss e ss e s th e u n iq u e o p p o rtu n ity to d e v e lo p le v e ra g e . L e v e ra g is a ty p e o f a d v a n ta g e th a t a c o m p a n y e n jo y s b y v irtu e o f th e fa c t th a t it e c o n d u c ts b u sin e n s m o r e t h a n o n e c o u n t r y . T h e r e a r e f o u r i m p o r t a n t t y p e s o f is l e v e r a g e a n i n t e r n a t i com lpany enjoys. ona i) E x p e rien c e tra n sfe rs ii) S c ale e co n o m ies in) R eso urce u tilisatio n iv) In te rn atio n a l o r g lo b a l stra te g y & A c tiv ity D : T w o ty p ic a l d riv in g fo rc e s th a t a re e x e rtin g a g re a t in flu e n c e o n c o m p a n ie s a re :

2.
55

International Marketing

3.6 SUCCESSFUL PRINCIPLES OF INTERNATIONAL MARKETING ORIENTED COMPANIES __________________ By now it is well accepted that the principles that governed success in domestic marketing are not readily acceptable in the international market place. In order to survive in international markets, companies need to adopt a different set of strategies and tools so that they can withstand more demanding customers, fierce competition and the external constraints thrown up by the environments in specific countries. Anew kind of response is needed from the company that seeks to make inroads in the international area. There are certain common principles in international marketing that have helped companies gain success. Some of the important principles are reviewed below: rrrrr)Marketing is a strategic business concept: The traditional concept of marketing has lost its adaptability in international regions. When companies are shatter up by external drivers such as technology, economy and market condition they have face internal organisational pressures within themselves shareholders, people culture. In such a scenario, marketing has to take centre stage and become a key strategic business concept within the organisation. This means that the top management should formulate the company's direction in the various countries and have long-term orientation. sssss)Marketing is everyone's business: All the employees within the firm form a community called a marketing community. In the community, every person is a marketer meaning the responsibilities of acquiring, satisfying and retaining customers lie on the shoulders of every person. The responsibility of creating customer loyalty becomes the central aspect of all internal operations. ttttt)Creating value: The third principle is the foundation of the internationally oriented company. It does not go after short term profits but creates customer value for long term relationships. By continuously and consistently creating value, the company generates profits. Successful companies have followed this very basic concept: value is the key to winning and creepily customers. uuuuu)Recognition of the diversify of customers: This principles is based on the premise that not all customers are created equal. Many companies are tempted to think that their customers have roughly similar needs and wants. This assumption only leads them to create average products of average value. The customers in various markets are quite different and their needs are diversified. In build customer loyalty, a company should concentrate on differences in need and wants.

Unit 3

cu st o vvvvv) eveloping a brand: D Taken in a broader context, a brand is a value-creator, m bran is er the equity of the firm that adds value to products and services it offers. It is an s asset an that creates value to consumers by enhancing satisfaction and recognising d quality. A th key price-driver for company that intends to go international is the brand. It e is the in brand that enables the company to avoid its products and services from ve being st commoditised. or wwwww) ervice as a paradigm: of the biggest value-enhancers is service. It co S One m is not just offering pre-sales service post sales services or even during sales service m u out of ni compulsion. It is the paradigm of the company to create, a lasting value to ty customers , through products and services. In create long lasting value and build b relationships with customers, the firms offer should provide constant value to customers. ut al The top so management has key role in creating, maintaining and developing the service be philosophy co the whole organisation. m e xxxxx) rocess as a value-enabler: refers to the process of creating value to P This th customers. It reflects the product quality, cost and delivery of a company to customers.e cr This principle emphasises the need foe the company to manage the supply-chain ed o process fo from raw material to finished products in a way that enhances value creating r activities and eliminates the value eroding activities within the company. It requires the in te firm to be the hub network organisations where it could establish relationships rn al with cu organisation that have the potential to add value. The term often used to st describe this o strategic alliance. Benchmarking, outsourcing, re-engineering, mergers and m acquisitions are examples of strategic actions to improve process. The value-creating er s drivers (i such as brand, service and process should not only create value to external
Why Firms Go International

e. the people). yyyyy) ifferentiation in content, context and infrastructure: D Differentiation is the act of designing a set of meaningful differences in the company' s offers with respect to competitors' offers. Different products are the core tactic of the company to support its positioning. Differentiation should create a truly different and unique product or offering for customers. The product not only has to be perceived differently by customers (positioning), it has to be really different in content, context and infrastructure (differentiation). A company can ideally create a unique offer by concentrating on three aspects ofdifferentiation: content, context and infrastructure. Content (what to offer) is the core benefit of the product itself.

57

International Marketing

Context (how to offer) refers to the way the company offers the product. Infrastructure (enabler) is the technology, facilities and people used to create the content and context.

When the positioning strategy is not supported by differentiation, the company may overproduce and under deliver to customers - an undesirable situation since it could damage the company's brand and reputation. On the other hand, if positioning is supported by differentiation the company will establish strong brand integrity. It means the brand image in the consumers' minds is similar to the brand identity communicated by companies. 9. Bring agility: In this principle, an agile company continually engages in three main activities. First, it constantly monitors competitors' movements and consumer behavior (WHAT). Second, it continuously uses and analyses the information gathered from the first activity to get a useful inference about the environment (WHY). Third, the collected information is incorporated in its strategy and tactic development process (HOW). The agile company monitors, scans and reviews the business and competitive environments continually. It responds in order to preempt the competitors movement. This principle allows the company to be not first a change agent and a change driver but also a 'change surprised. A 'change surpriser' is a company that is always agile. It is the company that can balance what, why and how. 10. Integrate present, future and gap activities: Successful companies generally achieve a balance in their activities present, future and gap. Present activities are about today's products that create profit by servicing today's customers. Future activities are about developing tomorrow's products that create sustainable growth by servicing tomorrow's different customers. Glap Activities are about enhancing capabilities of the technology and people, internally and externally, or by creating a strategic alliance or merger and acquisition in order to create activities for a risk free future. The above ten principles are first some of the important ones that have been adopted by companies seeking worldwide success. Together they signify the transformation from a marketing oriented company to a customer driven company.

Unit 3

Why Firms Go International

& Activity E:
a) Two common principles that have helped Indian companies market abroad are:

1.____________________________; _____________________________
2.
b) Presales services for a manufacturing company can be a big: D Value creator D Value enhancer D Value enabler

3.7 SU M M A R Y
This unit has attempted to answer some of the "Why's" of international marketing. This is necessary to make a solid foundation on which the rest of the units of this subject can be built. Some of the 'push' and 'pull' factors that motivate a company to go international were studied. The progression of the company's involvement in foreign countries was reviewed. It is necessary to understand the concepts of global marketingparticularly since more and more Indian companies are going international in the current business environment. The main driving forces that are creating new MNCs have been presented in a subsequent section. This section has been included so that the reader can understand the nature of the new face of international marketing and how companies are leveraging their strengths in foreign markets. This unit concludes with a section on some of the principles based on which companies have achieved success in international markets. This section is not comprehensive and the reader is advised to refer to additional literature to have a complete understanding.

3.8 K EY W O R DS _________________________________________________________ '


Domestic marketing: It refers to a term that describes the actions taken by a 59 company in the marketing area while operating in the home country.

International Marketing

Multinational marketing: A term used to describe the marketing activities by companies that are characterised by extensive development of assets abroad and extensive marketing operations in a number of countries. Value enabler: It refers to the process of creating value to customers and reflects the product quality, cost and delivery of a company to customers. Leverage: It refers to some type of advantage that a company enjoys by virtue of the fact that it conducts business in more than one country. Differentiation: It is used to describe the act of designing a set of meaningful differences in the company's offers with respect to competitors' offers. 3.9 SELF-ASSESSMENT QUESTIONS_________________________________ Q1. What are the specific advantages a firm can derive by going international? Q2. What are some of the important reasons why firms look for export markets? Q3. Identify six points of differences between domestic marketing and international marketing. Q4. Identify and explain three main driving forces that are creating new opportunities for companies in a foreign nation. Q5. Explain the concept of leverage a company possesses by entering foreign markets. Q6. Explain some of the principles that have helped Bharat Forge Ltd. to become the second largest forging company in the world.

International Marketing

4.1 INTRODUCTION Having gone through the introductory aspects of international marketing and the reasons why firms go international in the previous units, it is useful to focus our attention on the tasks of international marketing. The tasks of international marketing are rendered more complicated than domestic marketing since each foreign country adds its own unique set of uncontrollable elements. The adaptation of the marketing mix to the uncontrollable elements will ultimately determine the magnitude of the tasks and the outcome of the marketing efforts. The degree of involvement in international business by companies vary widely. The EPRG framework is a useful model in understanding the levels of involvement and orientation of firms towards international business. Depending on the ethnocentric orientation or polycentric orientation, the marketing strategy can be an extension strategy or adaptation strategy. In recent years, it is not only the large organisation that has taken giant steps in expert marketing but also the small and medium enterprise (SME) sector. The SME sector is equally important in the growth of the nations economy and promotion of exports. It is therefore appropriate to study some of the dimensions in export marketing that affect the growth of this sector. Another major task of the international marketer is the identification of the level of market development in each foreign country. The GNP per capital is generally used as the base for dividing the various countries. It is also useful in understanding the concepts and the importance of income and purchasing power parity (PPP) to compare the standards of living in various countries on a common platform. Some examples of GNP figures for a few countries have been included for the readers' benefit. 4.2 STEPS IN THE MARKETING PROCESS The first step obviously is the most crucial one, viz. the commitment to enter international business. Once the basic decision has been accepted as the organisation motto, the second step is to carry out the SWOT analysis. This analysis consists of evaluating the strengths, weaknesses, opportunities and threats of the company against the perspective of internal, external and international parameters. The result of this analysis will help in reaching a conclusion(the third step) with regard to: (a) which markets to enter (b) which particular segment (c) how to enter and (d) how to market.

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The Task of International Marketing

Once decisions have been taken on these, the company will be in a position to set the targets (the fourth step) in terms of market penetration, sales volume or product awareness relative to specified time horizons. The fifth step is to develop the organisational system to carry out the international marketing functions and to make adequate resources available to make the functioning effective. The sixth step involves the carrying out of the actual job of international marketing. The seventh and the final step is to review, identifying the mistakes if any, modify the system, if required, and set new targets for the succeeding period.

Fig. 4.1 summarises the critical steps and the task processes in international marketing. Commitment to Export

Internal Factors - Product

External Factors - Market

Target Market Market Segment Entry Method Marketing Strategy

Target Implement Organise Department Allocate Resources

Fig. 4.1 : Steps in international marketing


65

International Marketing

Activity A ; The inputs required for a decision on the target market are an analysis of:

4.3 INTERNATIONAL ORIENTATION The degree and nature of involvement in international business by companies varies widely. The Ethnocentric, Polycentric, Regio-centric, Geocentric (EPRG) scheme is helpful in understanding the levels of involvement of firms in international business. The EPRG framework identifies four types of attitude. Ethnocentric Orientation Strong orientation towards the home country. Overseas operation viewed as secondary to domestic operation, primarily as means of disposing of' 'surplus'' domestic production. Home base is used for production of standardised products for export in order to gain some marginal business. Plans for overseas markets are developed in home offices, using policies and procedures identical to those employed in domestic market. Overseas marketing is commonly administered by an export department. Overseas operation conducted from a home country base with strong reliance on export agent. Domestic product mix without major modifications for overseas market. Ethnocentrism in international marketing is characterised by "Extension Strategy". risk;

Appropriate for small companies-antering first-time in international oj companies with minimrflnternational commitmepts; entails minimum commitments to overseas-markets!

Pricing decisions are often taken from home market, which might not fit the local market.

Unit 4

The Task of International Marketing

No international investment.

Polycentric O rientation
A strong orientation to the host country. Polycentric attitude arises when company begins to recognise the importance of inherent differences in overseas market. The attitude places emphasis on differences between markets that are caused by variations within, such as income, culture, laws and politics. The assumption is that each market is unique. Personnel from the host country are often employed and allowed to have a great deal of discretion in market decision. Local personnel and techniques are best suited to deal with local market conditions. Subsidiaries established in overseas markets - each subsidiary operates independently and establishes own marketing objectives and plans. Environment of each market is considered while formulating marketing strategy. Market segmentation is done on a country basis. Emphasis is put on local laws, custom and culture and great care is taken to understand the local way of doing business. Results in maximum degree of geographic decentralisation. Marketing is characterised by Adaptation Strategy. The most important merit of polycentrism is the adaptation of the marketing strategies to the local conditions. A significant degree of decentralisation.

re ga rd ed as a si ng le m ar ke t.

Regiocentric orientation
Companies view different regions as different markets. . ,,... ._ A particular region with a certain important common marketing characteristic is

67

International Marketing

Given the dis-economies of scale of individualised marketing strategies each tailored to a specific local environment, companies have begun to emphasise strategies for large regions. Strategy integration and product policy, are implemented at regional level.

Geocentric orientation Companies view the entire world as a single market and develop standardised marketing mix projecting uniform image of the company and its products for the global market, common R&D, inventory management & training. Provide improved co-ordination and control etc.

JS$ Activity B : zzzzz)A significant degree of decentralisation refers to a characteristic of the firm having ______________orientation. aaaaaa)Two characteristics of companies having regiocentric orientation are: 1.______________________________________________ 2._____________________________________________ 4.4 INTERNATIONAL MARKETING CONSIDERATIONS IN SME SECTOR________________________________________________________ International marketing is not necessarily confined to the large organisations and MNCs. The small and medium enterprise (SME Sector) is equally, if not more, important in the growth of the nation's economy and promotion of exports. The SME sector comprises firms ranging from a single person business to sophisticated businesses employing 250300 persons that might have a strong domestic market abroad. In the current business scenario, the SME sector is one of the fastest growing sectors particularly those that are operating in developing countries. Lsed because there has been widespread tf the SME sector theworkforce in large organisatior^. These townsising of organisations are increasingly outsourcing thelFlion-core fun^tionsTncluding design and manufacturing to SMEs. Employment in the public sector has been decreasing due to extensive privatisation of public sector owned utilities and agencies such as gas, electricity, water, telecommunications

Unit 4

The Task of International Marketing

and railways. In countries such as Philippines, Vietnam, India and Malaysia, the SME sector is not on the agenda for economic growth while recognising its importance in the modernisation process. The export potential and the tasks before the SMEs need to be reviewed against this background. The alternative approaches for international market development that an SME can follow are: bbbbbb)Exporting - is primarily concerned with selling domestically developed and domestically produced good and services in foreign countries. cccccc)International niche marketing - is concerned with marketing a differentiated product or service overseas using the full range of market entry and the options available in the marketing mix. dddddd)Domestically developed niche services - deals with international marketing based on what has worked domestically. eeeeee)Direct marketing - allows firms to market products and services in international markets from a domestic location (including e-commerce). ffffff)Participation in the international supply chain of MNCs - involves piggy backing by the SME on the MNC's international initiatives; this may involve either domestic production or establishing a facility close to where the MNC's locations are established in other countires. 1. Exporting: This is one of the early stages in international marketing strategy and usually involves intermediaries such as agents and distributors. Exporting provides the advantage of expanding the foreign market with relatively little commitment and limited associated risk. Many firms, both large and small, do not progress beyond the stage of relatively limited involvement in international markets. The range of motivations in exporting include government subsidies, attractive profit apostrophe and growth opportunities, economics resulting from supplementing the order book, and the possession of unique products. A weakness in exporting concerns the limited involvement of exporters in the

fo re ig n m ar k et s. T hi s of te n re s ul ts in a la c k of in fo r m at io n a n d k n o w le d g e of th e

market demand and the dynamic nature that can result in loss of business to a competitor. Many companies

69

International Marketing '

with export potential may never get involved in international marketing themselves for varied reasons such as show payment by buyers, too much red tape, lack of competition by priced products, danger of payment defaults, a lack of trained personnel and language barriers. However, there are sufficient examples of cases of SMEs that have overcome these barriers by training staff and the intermediaries as well as by seeking expert assistance. When SMEs put the onus of international marketing on agents and distributors they appear to overlook the alternative market entry strategies. This approach may meet the immediate objective of seeking offload excess production capacity, but it may not provide them with a sound footing for increasing their international presence. 2. International niche marketing: This alternative occurs where firms become a strong force in a narrow specialised market of one or too segments across foreign markets. The segments are usually too small or service must be highly differentiated, have clear positioning and be recognised by other participants in the international supply chain. To succeed or develop the niche market, the firm must: have a clear understanding of the segmentation criteria, have exhaustive information on the niche customer needs, provide superior levels of service, carry out innovations and products adaptations, apply appropriate marketing mix strategies to build market share in each country in which it wishes to be involved.

3.

70

Domestically developed niche services: With increased international travel and improved access to communications, a much more sophisticated package and wider range of services to visiting foreign customers can be offered. Examples include specialised training, healthcare and telemedicine, sports, cultural and leisure events, specialist retailing such as handicrafts and luxury goods. These activities lead to wealth and jobs being generated in the local economy in

w ay s si m ila r to ex p or ti n g an d ni ch e m ar ke ti n g. T he ad di ti o na l ch all en ge is th at th e be ne fit s o

btained from the service provided must be unique and superior and outweigh the benefits the consumer derives from locally available services.

Unit 4

The Task of International Marketing

In addition to the services designed to be offered to individuals in both consumer and industrial markets, a whole range of additional services which fall in this category are concerned with developing solutions for opportunities or problems identified abroad. These can include technology developments, clinical trial facilities for pharma companies, software development and product and packaging design services. 4. Direct marketing: Direct marketing offers the substantial benefits of eliminating distribution channel partners such as importers, distributors, wholesalers and retailers by using a variety of communication media including telephone, television and networked computers. Borders can be crossed relatively easily and at fairly reasonable costs without the SME having to face many barriers. Direct marketing represents a growing area of international business conducted by SMEs that also makes extensive use of e-commerce. This alternative also has its own disadvantages: communication can still be a problem despite having a number of media, and the danger of cultural insensitivity in the communication persists. It is necessary to use customer databases that should be updated, accurate and capable of dealing in foreign languages. Even an incorrectly spelt name can be embarrassing to the SME. Different cultures have different levels of acceptance of the internet and ebusiness. 5. Participation in the international supply chain of MNCs: Many SMEs are part of the supply chain of large international companies or service providers. This may imply domestic marketing of supplies and subsequent exporting by a large company. Sona Keys Systems is a supplier of steering gear assemblies to Maruti Suzuki, which exports its automobiles to some countries in Europe. Compared with other domestic marketers, the difference is that supply chain members might 'piggyback' on the internationalisation of their major customers, following them to a new country to supply their operation there. Failure to do this might result in a competitor being

cr ea te d, w ho wi ll su pp ly th e pr od uc ts an d se rvi ce s in th e ne w m ar ke t an d po ssi bl y bi d fo r bu si ne ss in

the original market too.

& > A ctiv ity C ;


a) According to you, the importance of export marketing in SMEs in India will D Increase D Decrease D Remain the same as before

71

International Marketing

b) For an SME to succeed in a niche market overseas, two things that the firm must do are: 1.______________________________________________________________

2.
c) Two disadvantages of a direct marketing approach by a SME are: 1.____________________________________________________ 2.____________________________________________________ 4.5 STAGES IN MARKET DEVELOPMENT International markets are going through cyclic changes and different levels of development. Amongst the major tasks of the international marketer, is the identification of the level of market development in each foreign country. One of the permanent measures used for grouping these countries is GNP (gross national product) per capita. Using GNP as a base, international markets can be divided into four groups:

i) i) iii) iv)

Low income countries Lower-middle income countries Upper-middle income countries High income countries

Measure used (GNP per capita in USD) <785 785 and < 3,125 3,125 and < 9,655 9,655 (Base year considered 2000)

72

i) Low - income countries: Low income countries are those countries with GNP per capita of less than USD 785. They constitute 37 percent of the world population but less than 3 percent of GNP. Low-income countries are

ch ar ac ter is ed by th e fo

llowing: Limited industrialisation and high percentage of the population engaged in agriculture and subsistence farming

Low literacy among the population High birth rates Heavy reliance on foreign aid Political instability and unrest

Unit 4

The Task of International Marketing

'If

Concentration in Africa (South of Sahara)

In general, these countries represent limited markets for all products and are not important locations for high competition levels. ii) Lower-middle income countries: These are also known as less developed countries or LDC. Their GNP per capita figures are much higher than the low income countries but less than USD 3,125. These countries constitute 39 % of the population but only 11 % of GNP. These countries are in the early stages of industrialisation. They are locations for the production of standardised or mature products such as clothing for export markets. Consumer markets in these countries are growing. LDCs represent a competitive threat as they mobilise their cheap labor to serve major advantage in mature, standardised, labour intensive products such as athletic shoes. iii) Upper-middle income countries: These are also known as industrialising countries. Their GNP per capita lies in the region between USD 3,125 and 9,655. These countries account for 7 % of the world population and 7% of world GNP. In these countries, the percentage of population engaged in the agriculture sector drops sharply as people move to the industrial and the service sectors, and the degree of urbanisation increases. They have wages that are rising, have high rates of literacy and higher education, but they still have lower wage costs than the high income (or advanced) countries. Countries in this stage of development become competitors and experience rapid, export-driven economic growth. iv) High-income Countries: These countries are also known as advanced, developed industrialised, post industrial or first world countries with GNP per capita exceeding USD 9,655. If the oil-rich countries in the Gulf region are excluded, the countries in this category have reached their present level through a process of sustained economic growth. These countries account for only 16 percent of the world population but 82 percent of the world GNP. Some of the characteristics of these countries are:

Th e im po

rtance of the service sector in the GNP (>50%) The importance of information processing and exchange The importance of knowledge over capital as the key strategic resource An orientation towards the future
7 3

International Marketing

A strong culture of innovation

"

,.j

Product and market opportunities in a post industrial society are more heavily dependent on new products and innovations than in industrialising societies.

Basket Cases: A basket case is a country that is in a stage of perennial turmoil and the economic, political and social problems are so huge that companies do not find it attractive for investment and marketing operations. Some basket cases are lowincome, no growth countries such as Ethiopia and Mosambique. Other cases may include countries that were once successful but over the last few years have become divided by political struggles. JS$ Activity D : a) The primary measure that separates lower middle income countries and upper middle income countries is:

b) A basket case refers to a country that is:

4.6 INCOME AND PURCHASING POWER PARITY______________________ Income is the single most valuable economic variable. This is the surmise on which a company plans its international expansion. For some products with very low unit cost, population is more appropriate as a variable, but for the vast majority of consumer and industrial products in international markets today, the most important indicator of potential is income. In an ideal situation GNP and other measures of national income converted to US dollars (USD) should be calculated on the basis of purchasing power parities (i.e. what the currency will buy in the country of issue) or through direct comparison of the standards of living in the countries of the world. However, such data are not easily available in regular statistical

74

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The Task of International Marketing

reports. The alternate method of conversion of local currency measured at the year-end USD foreign exchange rate could be used. It needs to be remembered that exchange rates often bear little relationship to the prices of those goods and services not traded internationally, which form the bulk of the gross national product (GNP) in countries. The use of exchange rates tends to exaggerate differences in real income between countries at different stages of economic development. Table 4.1 : Top 10 Nations ranked by GNP per capita and PPP 2000 GNP Per Capita Income USD 1 . Luxembourg 2. Norway 3. Singapore 4. Switserland 5. Kuwait 6. Japan 7. Denmark 8. USA 9. Hong Kong 10. Austria 2000 GNP Income adjusted forPurchasing Power Parity (PPP) USD 35,708 29,953 28,648 25,807 24,602 24,222 23,555 23,353 22,765 21,787
75

38,587 38,070 36,484 36,479 35,242 34,796 33,984 20,463 27,463 25,854

1. Luxembourg 2. USA 3. Singapore 4. Norway 5. Hong Kong 6. Switzerland 7. Denmark 8. Japan 9. Belgium 10. Austria

International Marketing

Table 4.1 ranks in the top 10 countries in terms of 2000 GNP per capita. Although the USA ranks 8th in income, its standard of living as measured by what money can buy is second only to Luxembourg. The concentration of wealth in a handful of large, developed countries is the most striking element in the global economic environment. The USA is without doubt, a giant amongst the countries in all continents as for as GNP is concerned. In 2000, the USA accounted for 90 percent of the North American region's GNP. In western Europe, four countries namely Germany, France, the UK and Italy accounted for almost 73 percent of western Europe's GNP. Japan accounted for 62 percent of Asia's GDP. In Latin America, Argentina, Brazil and Mexico accounted for 73 percent of LAFTA (Latin America Free Trade Area) GDP. At the early stages of the development process, economic development works to the relative disadvantage of the lowest income groups. Brazil, for example has become one of the world's most unequal societies with the top 20 percent of the country's population earning 65 percent of national income while the bottom 20 percent earns less than 3 percent. China is experiencing a similar type of income inequality. According to a report by Keystone India, India is set to become the worlds third largest economy by equalling or surpassing Japan some time before 2008 much earlier than previously projected. Only the USA and China will posses larger economies. The Indian expansion is riding on 'significant accelerations in economic growth since 2003, especially the liberalisation in strategic sectors such as telecom, banking, aviation and real estate. India's growth is coming mostly from the areas of mobile telecom (where it is the fastest growing) in the world), motor vehicle sales and the housing market. However, in real terms, India remains the world's 12th largest economy and its one billion plus population makes it one of the poorer nations in terms of per capita income.

J& Z A ctivity E ;
In international markets today, the most important indicator of market potential is:

76

I-

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The Task of International Marketing

International Marketing Decision Areas


There are a number of challenges that exist for companies wishing to establish their presence in international markets. The foremost among these is how they can leverage their resources to: Respond faster to the changing basis of global competitive advantage. Increase their global appeal by building their global brand. Create an international presence by achieving international reach, often in partnership with others. Manage diverse and complex activities across a range of sometimes similar but often disparate markets and cultures. Manage the higher risk associated with entering emerging markets.

4.7 SUMMARY
In this unit, the attention is focused on the tasks of international marketing. Their scope and dimensions have been examined. The various steps involved in the marketing forces have been presented in the initial section. It has been stated that the degree of involvement in international business is largely dependent upon the company's orientation towards business abroad. The ethnocentric, polycentric, regiocentric and geocentric (EPRG) framework gives us guidance on the levels of involvement and orientation of firms. The marketing strategy will depend a great deal on the company's orientation. International marketing is not necessarily the prerogative of large firms, and MNCs sector is equally important in the growth of the nation's economy. A separate section has dealt with some of the issues in export marketing that affect the growth of this sector. International markets are going through cyclic changes and different levels of

develo pment. Amon g the major

tasks is the identification of the level of market development in each foreign country. The GNP for capita is the base figure upon which the groups of countries are divided into low-income, lower middle income, upper middle income and high income countries. This may be considered as the initial step in international market segmentation. In another section the concept of purchasing power parity (PPP) has also been explained

7 7

International Marketing

5.1 INTRODUCTION The rapid growth of war-affected economies and previously less developed countries have led companies to international shores with the creation of new global opportunities. It is necessary to understand how the new economic environment has been created and what are its effects on internationally oriented companies. For an easier analysis, the environment has been divided into economic, social, demographic, political and technological areas. As an example, differences in the technological environment may call for product modifications. International trade accounts for the major part of international business. It is necessary to analyse the important factors that affect international business transaction such as trade barriers, trade negotiations. In particular the proliferation of trade barriers has the maximum impact on firms that carry out international business. The two broad types of barriers, namely tariff and non tariff barriers have been discussed. There is a variety of cultural factors that have shaped societies in all the countries of the world. Income levels also affect consumer behaviour differently around the world. The basic principles and framework for international trade have been laid down by GATT and later on by WTO. Those principles lay down the ways in which international trade should be conducted. International marketers need to ensure the registration of trademarks and patents in each country where business is conducted. Some of the common issues relating to intellectual property and intellectual property rights (IRC) are presented. To promote easier trade within regions, different regional trade groups have been formed across the world. These are broadly divided into five regions covering most of the active trading nations. In the last section, five levels of economic cooperation are identified and discussed. 5.2 INTERNATIONAL MARKETING ENVIRONMENT ____________________________________________________________________ A brief account of the important environmental factors relevant to international business is given below. Economic Environment The economic environment has much to do with the scope of business, business prospects

Unit 5

Environmental Factors Affecting International Marketing

and business strategy. The nature and level of development of the economy, economic resources, size of the economy, economic system and economic policies, economic conditions, trends in the GNP growth rate and per capita income, nature of and trends in foreign trade, domestic supply and demand conditions are all factors relevant to business. The differences in the levels of development and income have implications for the business. In the developing countries, particularly in the low income economies, the demand for many categories of goods and services is limited because of the low levels of income. Many developing countries suffer from severe balance of payments problems. Therefore, their import policies, in general, are very restrictive. A number of developing countries, however, hold out very good prospects for business in future because of three reasons, viz.: i Increase in income iil Growing democratisation and individual freedom The developed economies are characterised by high levels of income and consumption and business competition. Foreign trade is more liberal in comparison with that of most of the developing countries. Import restrictions are confined, by and large, to import competing i industries. The markets for many products in these economies are nearing saturation or I have already saturated or are even declining mostly because of the population trends. While the advanced economies are characterised by high level of competition in 1he industrial sector and fast technological changes and innovation, most developing countries lag behind in these respects. The differences in the income levels may necessitate product and price modifications. This difference in the nature of demand has important implications for marketing. A steady increase in population i

Social E nvironm ent


The social or cultural environment encompassing the religious aspects, language, customs, traditions and beliefs; tastes and preferences; social stratification; social institutions; buying and consumption habits etc. are all very important factors for business. What is liked by people of one culture may not be liked by those of some other culture. One of the most important reasons for the failure of a number of companies in foreign markets is their 11 failure to understand the cultural environment of these markets and to suitably formulate their business strategies.

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International Marketing

Many companies modify their products and/or promotion strategies to suit the tastes and preferences or other characteristics of the population of the different countries. For a business to be successful, its strategy should be the one that is appropriate in the sociocultural environment. Even when people of different cultures use the same basic product, the mode of consumption, conditions of use, purpose of use or the perceptions of the product attributes may vary so much so that the product attributes, method of presentation, positioning, or method of promoting the product may have to be varied to suit the characteristics of different markets. In short, the social environment of different markets differs vastly. Even within a nation, cultural diversity may be very significant. It is essential to understand these differences to formulate successful business strategies. Demographic Environment Demographic factors such as size of the population, growth rates, age composition, family size, nature of the family, income levels etc. have very significant implications for business. Advanced countries, particularly with a large population, are generally attractive markets. The major part of the international trade and foreign investments naturally takes place between these nations. Because of the large potential of these markets, competition is generally strong in them. Political and Government Environment The political environment including the characteristics and policies of the political parties, the nature of the Constitution and government system and the government environment encompassing the economic and business polices and regulations are among the factors of utmost importance in the market selection and business strategy formulation. These factors may vary considerably among different nations. While there are no radical differences in the philosophies of major political parties in some countries, the situation is quite different in some others. The government system in a number of countries, including several countries which are making rapid economic progress and having liberal policies towards foreign capital and technology, is not very democratic. There are also wide variations in the policies and regulations regarding the conduct of the business. For example, certain trade practices or promotional methods/strategies allowed in some countries may be regarded as unfair by the laws of some other countries. Many governments specify standards for products to be marketed in the country. Marketing of

Unit 5

Environmental Factors Affecting International Marketing

certain products are even banned in some countries. Policies or regulations regarding quality control and inspection vary considerably between nations. Such is the case with packaging and labelling. Regulation of the quality, prices, packaging, labeling etc. is also very common.

Technological Environment
The type of technology in use, the level of technological developments, the speed with which new technologies are adopted and diffused, the type of technologies that are appropriate, the technology policy etc. are important to business. Advances in technology may also cause relocation of production. For example, several companies in the advanced countries shifted the T.V. production to developing countries to take advantage of the cheap labour. Technological environment of the use of facilities etc. also have very important implications for business. For examples, advances in the technologies of food processing, packaging and preservation, transportation etc. have facilitated product improvements and introduction and have considerably improved the marketability of products. The advent of micro-wave ovens has given a new dimension to food marketing. Differences in the technological environment may call for product modifications.

x g T A ctiv ity A :
In developing countries, the demand for luxury cars is limited because:

5.3 IN TER N A TIO NA L TRA D IN G ENV IR O N M EN T ___________.


International trade accounts for the major part of international business. Certain other forms of international business, like international investment, may also be affected by international trade. The international trading environment is, therefore, a very important factor affecting international business. The international trading environment includes important factors such as trade barriers, trade agreements, trading blocs, cartels and multinational trade negotiations.

International Marketing

One of the most important features of the international uauul& of the trade barriers. The main objectives of imposing trade barriers are to protect domestic industries from foreign competition, to promote indigenous research and development, to conserve the foreign exchange resources of the country, to make the balance of payments position favorable, to curb conspicuous consumption, to mobilise revenue for the government and to discriminate against certain countries. There are, broadly, two types of trade barriers, viz., tariff barriers and non-tariff barriers.

Tariff and Non-tariff barriers There is a world of tariff and non-tariff barriers that is designed to protect a country's markets from intrusion by foreign companies. Nations utilise legal barriers, exchange barriers and psychological barriers to limit the entry of foreign goods. Businesses work together to establish private market barriers while the market structure itself may provide strong barriers to imported goods. The complex distribution system in Japan is one example of how the market structure can create a barrier to trade. However, in a legal sense, it cannot be viewed as a trade barrier.
There are numerous reasons for the governments to maintain restrictions on trade. Afew of these are presented here: gggggg)Protection of an industry that has the potential to grow really big hhhhhh)Protection of the home market iiiiii)Need to keep sources of revenue within the borders jjjjjj)Maintenance of the standard of living and real kkkkkk)Maintenance of employment and reduction of unemployment llllll)Industrialisation of a low-wage nation mmmmmm)National defence measure nnnnnn)Increase of business size 9. Retaliation and bargaining

10. Conservation of natural resources

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Environmental Factors Affecting International Marketing

To encourage development of domestic industry and protect existing industry, governments may establish such barriers to trade as tariffs, quotas, monetary barriers, non-tariff barriers, and market barriers. Barriers are imposed against imports and against foreign businesses. Tariff Barriers: A tariff is a tax imposed by the government on goods entering its borders. Tariffs may be used as a revenue-generating measure or to discourage import of goods, or for both reasons. In general, tariffs: increase inflationary pressures, government control and political considerations in economic matters; increase weaker balance of payments positions, supply and demand patterns, international relations restrict manufacturers supply sources, choices available to consumers, competition

Tariffs are more often discriminatory, arbitrary and require constant administration and supervision. Non tariff barriers: There are a variety of non-tariff barriers exercised by countries to restrict the inflow of goods. Some of these are listed below: Quotas Import licensing requirements Proportional restriction of foreign to domestic goods Embargoes Antidumping practices Tariff classifications Documentation requirements Quotas: A quota is a specific unit of rupee or rupee limit applied to a particular type of goods. There is a limit on the value of imported TV sets in Britain, there are quotas on ballbearings from Japan in Germany, Italian restrictions on Japanese motorcycles. Voluntary Export Restraint(VER) The VER is an agreement between the importing country and the exporting country for a restriction on the volume of exports. Japan has a VER on automobiles to the 87 USA. Government procurement policies Export subsidies Countervailing duties Prior import deposit requirements Variable levies Voluntary export restraints (VER) Orderly marketing agreements (OMA)

International Marketing

OMA: The OMA (Orderly Marketing Agreements) is also a similar type of agreement between two countries. The OMA involves negotiation between two governments to specify export management rules and monitoring of trade volumes. Boycotts and embargoes: A government boycott is an absolute restriction against the purchase and import of certain goods from other countries. An embargo is a refusal to sell to a specific country.

Activity B ;
a) A tariff is a tax imported by the government on:

b) Expand the following: VER OMA :_________

5.4 CULTURAL FACTORS


'Ways of living' is how anthropologists define culture. They are certain tenets built by a group, transmitted from one generation to another. A culture exists in the context of many social institutions such as family, educational, religious, governmental and business institutions. Culture includes both conscious and unconscious values, ideas, attitudes and symbols that shape human behaviour. It does not include one-time solutions to unique problems or passing fads or styles. Since culture represents responses governed by traditional values to recurring situations, they are difficult to change, even a simple aspect like colour preference is influenced by culture, and consumer behaviour can vary widely from country to country. Green is a highly respected colour in Muslim countries, but associated with disease in some Asian countries. White is usually associated with purity and cleanliness in western countries, but signifies death in some Asian countries. There are differences in attitudes towards classes of the products, suggesting that they are shaped by culture.' The use and throw away' attitude towards small gadgets like the

Unit 5

Environmental Factors Affecting International Marketing

electric toothbrush and other items like mobile phones or simple electronic calculators is predominant in western, developed countries. In the developing countries, expectations from consumers are high in terms of life and length of usage. The average consumer in the USA or Europe believes that a self-owned family car should be replaced with a new model within three to five years, whereas the average customer in India believes in retention of a car for at least ten years. Income levels also influence consumer behaviour and attitudes around the world. There are certain product classes that have universal appeal and do not require adaptations when marketed in various countries. Some of these are convenience foods, electronic products, software programs, soft drinks. As communications continue to shrink the world, more and more products will reach out to more and more international markets. However, this does not suggest that company differences can make or break the success of a product when marketed internationally. Increasing travel and improving communications have precipitated many cultural changes in many nations resulting in a convergence of attitudes towards clothing, music, food and drink. The globalisation of culture has been capitalised upon and significantly accelerated by companies such as IBM, Coca-Cola, McDonalds, Levi Strauss, Nike, Heimeten and BMG entertainment. These are only some companies that have broken down cultural barriers as they expand into new markets with their products. Similarly, new opportunities for financial services have been provided by American Express, HSBC, Visa and Mastercard. ^ Activity C; To ensure the success of a consumer product in the Gulf Region, the company: D Must recognise D Need not recognise the cultural aspects of that country. (Put a tick mark on the right answer) 5.5 GATTANDWTQ _____________________________________________ ^ ^ ^ _ _ _ ^ ^ ^ _ _ In 1957, a treaty was signed among 123 nations whose governments agreed in principle to prompt trade among members. This was called the GATT (General Agreement on Trade and Tariffs). It was intended to be a multilateral, global initiative and the negotiators did succeed in literalising world trade in merchandise. GATT itself had no powers of enforcements since the losing party in a dispute was not bound to implement the ruling. The process of dispute 89 settlement could drag on for several years.

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The four basic principles of GATT were: oooooo)Member countries will consult each other concerning trade problems. pppppp)The agreement provides a framework for negotiation and embodies results of negotiations in legal instruments. qqqqqq)Countries should protect domestic industries only through tariffs when needed and if permitted. There should be no other restrictive devices such as quotas prohibiting imports. rrrrrr)Trade should be conducted on anon discriminatory basis. It was expected that reduction of barriers would be mutual and reciprocal because any country's import increase caused by such reduction would be offset by export increases caused by the other country's reduction of restrictions. This concept was the basis of the principle of MFN (Most Favoured Nation). It was then decided in 1995 to replace GATT with the WTO (World Trade Organisation). The WTO being more permanent and legally secure has more authority to settle trade disputes, and along with the IMF and the World Bank, serves to monitor trade, and resolve disputes. The WTO's strengthened dispute settlement system was expected to be better able to limit the scope for unilateral and bilateral actions outside the multilateral system. Some important changes under the new settlement mechanism included: ssssss)Fixed time limits for each stage of the dispute settlement process. tttttt)Automatic adoption of dispute settlements reports. uuuuuu)Automatic authority to retaliate on request if recommendations are not implemented. vvvvvv)Creation of a new appellate body to review travel interpretation of WTO agreements. wwwwww)Improved procedure transparency and access to information in the dispute settlement process. The WTO had 148 members in 2003 when Nepal became the 148* member. Supporters of the WTO have long agreed that a reduction of trade barriers will boost global trade. However, there is hardly any empirical investigation of whether the WTO has an impact on trade policy.

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Trade ministers representing the WTO member countries meet annually to work on improving world trade. At the 1996 meeting in Singapore, an agreement was reached concerning tariffs on information technology products. It remains to be seen whether WTO will live up to the expectation regarding major policies initiative on such issues like competition of foreign investments. Whereas GATT mainly dealt with trade in goods, the WTO and its agreements now cover trade in services, traded inventions, creations and designs (intellectual property).

Table 5.1: GDP and merchandise trade by region. 2004-06 (Annual percentage change at constant prices)

GDP E xports Im ports 2004 2005 20062004 2005 2006 2 004 2005 2006 N orth A m erica U nited States South and C entral Am erica (a) iurope European U nion(25) 3.9 3.9 6.9 2.4 2.3 3.2 3.2 5.2 1.8 1.6 6.7 5.5 4.1 1.9 8.5 3.2 3.4 3.4 8.0 8.5 6.0 8.0 8.5 2.0 7.5 7.5 10.5 6.5 6.5 5.5 10.5 11.0 6.0

5.2 1 3 .0 8.0 2.8 2.8 7.0 7.0 4.0 4.0

18.5 1 4 .0 1 0 .5 7.0 6.5 4.0 3.5 7.0 6.5

Com m on W ealth of 8.0 Independent States (C IS) A frica and M iddle East 6.0 Asia 4.8 China Japan(b) India World 2.7 8.0 3.9

7.5 1 2 .0 3.5

3.0 1 6 .0 1 8 .0 2 0 .0 8.5 8.5 2.0

5.4 8.0 5.0 1.0 1 4 .0 1 3 .0 4.4 15.5 11.5 13 .5 14 .5 8.0 2.2 13 .5 5.0 1 0 .0 6.5 2.0

10.1 9.9 1 0 .7 2 4 .0 2 5 . 0 2 2 .0 2 1 .5 11.5 1 6 .5 8.3 15.5 2 0 .5 11.5 1 6 .0 2 0 .5 12 .0 3.7 1 0 .0 6.5 8.0 ... ... ...

x x x x x xn c lu d e s th e C a rib b e a n . I) y y y y y y )r a d e v o lu m e d a t a a r e d e r i v e d f r o m c u s to m s v a l u e s d e f l a te d b y s ta n d a r d u n i t T v a lu e s a n d a n a d ju s te d p ric e in d e x fo r e le c tro n ic g o o d s. S o urce : W T O

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Activity D ;
Two basic principles of GATT are: 1 2 . _ _ _ _

5.6 INTELLECTUAL PROPERTY ISSUES


International marketers need to ensure the registration of trademarks and patents in each country where business is conducted. This is necessary since patents and trademarks that are protected in one country are not necessarily protected in another. In the USA, the patent holder retains all rights for the life of the patent even if the product is not produced or sold. Trademark and patent protection in the USA is very strong and American law relies on the precedent of previously decided court cases for guidance.
jr ,

There are numerous companies around the world that find ways to exploit loopholes or other unique opportunities offered by patent and trademark laws in individual nations. Infringement of trademark and copyright is a critical issue in international marketing and it can take a variety of forms. Counterfeiting is the unauthorised copying and production of a product. An alternate type of counterfeit (or imitation) uses a product name that differs slightly from a well known brand but is close enough that consumers will associate it with the genuine brand. Another type is piracy: the unauthorised publication or reproduction of original work or program (including electronic media). Piracy is particularly damaging to the entertainment and software industries: computer programs videotapes, cassettes and CDs are particularly easy to duplicate illegally. It is estimated that piracy costs the software industry about USD 1.5 bn. per year. The most important of the international patent agreements is the International Convention for the protection of Industrial Property. The convention, also known as the Paris union, dates to 1883 and is honoured by nearly 100 countries. This treaty facilitates multi country patent registration by ensuring that, once a company files in a signatory country, it will be afforded a right of priority in other countries for one year from the date of the original filing; beyond this period, the company risks a permanent loss of patent rights abroad. The failure to protect intellectual property rights (IPR) in the world can lead to the legal loss of rights in potentially profitable markets. Because patents, processes, trademarks and copyrights are valuable in all countries, some companies have found their assets appropriated and profitably exploited in foreign countries without license or royalty fees,.

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Environmental Factors Affecting International Marketing

They often learn that other firms are not only producing and selling their products or using their trademarks but that the foreign companies are the rightful owners in the countries in which they operate. Many businesses fail to take proper steps to legally protect their intellectual property. They fail to understand that registration and legal ownership in one country does not mean ownership in another.

& Activity E;
Illegal recording and marketing of CDs will fall under the following category of infringement:

5.7 REGIONAL TRADE GROUPS


Although the WTO remains the principal organisation for multilateral initiatives in trade countries in each of the world's region are looking to easier trade within their regions. The trade groups of countries given in the following paragraphs are divided into the European, North American, Asian, South and Latin American, African and Middle Eastern trade groups.

1. The European Union


The European Union (EU) formerly known as the European Community (EC) was established in 1958 with six original members- Belgium, France, Holland, Italy, Luxembourg and West Germany, Subsequently new members were admitted- Britain, Denmark and Ireland in 1973; Greece in 1981 and Spain and Portugal in 1986; Finland, Sweden and Austria in 1995. The EU now represents 378 mn. people, a combined GNP of USD 8.3 billion and 28 percent of the world GNP. On 1 January 1999, the European Union adopted the Euro as its common currency. As the participating nations adopted the Euro, there was a transition cost in terms of the temporary loss of output and the possible increases in unemployment due to the required adjustment to the price stability and fiscal criteria laid out in the Maastricht Treaty. Banks in particular, had to bear the cost of USD 10 bn to 13 bn (about 2 percent of annual operating costs) over 93 a changeover period) with software changes

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accounting for half the cost. By 2002, the substitutions of Euro notes and coins were complete. European Economic Area (EEA) In 1 991 , the European Economic Community and the seven-nation European Free Trade Association (EFTA) reached an agreement on the creation of the European Economic Area (EEA) beginning 1 993 . Although the goal was to achieve the free movement of goods, services, capital and labour between the two groups, the EEA is a free trade area, not a customs union with common external tariffs. The EEA is the world's largest trading bloc with 383 mn. consumers and USD 8.5 billion combined GNP. Central European Free Trade Association (CEFTA) In 1992, Hungary, Poland and Czechoslovakia signed an agreement creating the Central European Free Trade Associations (CEFTA). Romania, Slovenia and the two countries created by the division of Czechoslovakia, Czech Republic and Slovakia - are also CEFTA members. 2. North American Free Trade agreement (NAFTA) In 1993 the three major countries in North America, namely the USA, Canada and Mexico agreed to form the North American Free Trade Agreement (NAFTA). The resulting free trade area had a population of 407 mn in 2000 and a combined GNP of USD 9.3 trillion. It is expected that the benefits of continental free trade will enable all three countries to meet the economic challenges of the decades to come. By 1998, the volume of trade within the NAFTAregion had risen considerably. US exports to Canada had increased by 37 percent and exports to Mexico by 55 percent. US imports from Canada were up by 34 percent while imports from Mexico jump by 91 percent. NAFTA progressively eliminates all US Mexico tariffs over a 10 year period and also phases out Mexico-Canada tariffs at the same time. Such barriers to trade as import licensing requirements and customs user fees are eliminated. The treaty establishes the principle of national treatment to ensure that NAFTA countries will treat NAFTA origin products in the same manner as domestic products. To protect foreign investors in the free trade area, NAFTA has established five principles.

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Environmental Factors Affecting International Marketing

a. b. c. d. e.

Non-discriminatory treatment Freedom from performance requirements Free transference of funds related to investments Expropriations only in conformity with international law The right to seek international arbitration for a violation of the agreements protections

3. Asia Pacific Economic Cooperation (APEC)


The 18 countries that make up the Asia Pacific Economic Cooperation (APEC) account for 38 percent of world population and 52 percent of world GNP. Much debate among APEC members has centered on whether all trade barriers in Asia can be eliminated by year 2020.

4. Association Of South East Asian Nations (ASEAN)


ASEAN is an organisation for economic, political and cultural cooperation among its 10 member countries: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. The countries have agreed to eliminate most tariffs by 2010. The ASEAN group has 495mn people and a gross GNP of USD 700 bn per capita GNPs among ASEAN member countries ranged from USD 34684 in Singapore to USD 290 in Cambodia in year 2000.

5. A nd ean G rou p
The Andean Group was formed in 1969 to accelerate the economic development of its members namely Bolivia, Colombia, Ecuador, Peru and Venezuela through economic and social integration. Beginning 1992, the Andean Pact signatories agreed to form Latin America's first operating sub-regional free trade zone. More than lOOmn consumers were affected by the pact that abolished all foreign exchange, financial and fiscal incentives and export subsidies. The Andean group with a population of 1 1.13 lakhs accounts for USD 284 mn in combined GNP. A summary of these and other groupings and their nations is given in Table 5.2.

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Table 5.2 : Regional Trade Blocs Trade bloc / group 1) AFTA (ASEAN Free Trade Area) 2) ASEAN Countries ASEAN Members Association of SouthEast Asian Nations: Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam Asia Pacific Economic Cooperation: Australia,Brunei, Canada, Chile, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Philippiness, Singapore, Chinese, Taipei (Taiwan), Thailand, USA. Central African Economic and Monetary Community: Cameroon, Central African Republic, Chad, Republic of Congo, Equatorial Guinea, Gaben. Caribbean Common Market: Antigua & Bermuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, Monteserrat, St. Christopher Nevis, Trindad, Tobago. Commonwealth of Independent States: Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kirgizstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan European Free Trade Association: Austria, Finland, Ireland, Leichenstein, Norway, Sweden, Switzerland. European Union: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy,Luxembourg,

3) APEC

4) CAEMC

5) CARICOM

6) CIS

7) EFTA

8) EU

96*

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Netherlands, Portugal, Spain, Sweden, UK(plus ten new members) 9) Mercosur Southern Common Market: Argentina, Brazil, Paraguay, Uruguay North America Free Trade Agreement: Canada, Mexico, USA. Organisation for Economic Cooperation and Development: Australia, Canada, Ireland, Japan, New Zealand, Norway, Switzerland, Turkey, USA and EU members.

10) NAFTA

11) OECD

^ A c tiv ity F : * . E x p an d th e fo llo w in g ab b rev iatio n s: | ASEAN: O ECD : C IS : E E A :5 .8 L E V E L S O F E C O N O M IC I N T E G R A T I O N T ra d e th e o rists h a v e id e n tifie d fiv e le v e ls o f e c o n o m ic c o o p e ra tio n . T h e y a re : z z z z z zF re e tr a d e a r e a ) aaaaaaa) u sto m s u n io n C b b b b b b b )o m m o n m a rk e t C c c c c c c c )c o n o m ic a n d m o n e ta ry u n io n E ddddddd) Political union 1) F ree T rade A rea In a free trad e area, th e co u n tries elim in ate d u ties am o n g th em selv es w h ile m ain tain in g 97

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separately their own tariffs against outsiders. The purpose of a FTA is to facilitate trade among member nations. The US A has an FTA with Singapore and Chile, while Mexico has one with the EU. Singapore also has an FTA with Australia and Japan. Countries forming a free trade area do not need to share joint boundaries.

2)

Customs Union
A customs union is an extension of the FTA in the sense that member countries must also agree on a common schedule of identical tariff rates. The objectives of the customs union are to harmonise trade regulations and to establish common barriers against outsiders. Uniform tariffs and a common commercial policy against non-members is necessary to prevent them from taking advantage of the situation by shipping goods initially to a member country that has the lowest joint boundaries. A recent example of the customs union is the one formed in 1996 between Turkey and the EU.

3)

Common Market
The level of economic integration here is more complex than either a free trade area or a custom union. In this alternative, countries remove all customs and other restrictions on the movement of the factors of production (such as services, raw materials, labour, capital) among the members of the common market. The tariff rates in member countries are uniform across countries within the common market. The point of entry is now determined by the members non-tariff barriers. The outsiders, strategy can then be to enter a member country that has the least non-tariff restrictions, because goods can be shipped freely once inside the common market. In 1993, the world's largest and most lucrative common market was formed by the EU and EFTA namely the European Economic Area (EEA). The EEA eliminates non-tariff barriers between the EFTA and the EU countries to create a free flow of goods services, capital and people in a market of more than 400 mn people.

4)

Economic and Monetary Union (EMU)


The EMU represents the next higher level of economic co-operation among countries. Some authorities distinguish between a monetary union and an economic union. The monetary union has the following characteristics:

total and irreversible convertibility of currencies; complete freedom of capital movements in fully integrated financial markets;

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irrevocably fixed exchange rates with no fluctuation of margins between member currencies, leading to a single currency.

The economic advantages of a single currency include the elimination of currency risk and lower transaction costs. In one European commission study, it was found that businesses were spending USD 1 208/on (or 0.4 percent of EU's GDP) a year on currency conversions before the euro came into force. The economic union represents a single market for goods, services, capital and labour, complemented by common policy and coordination in several economic and structural areas. The benefits are: the transaction costs associated with currency conversion are eliminated; the foreign exchange risk is eliminated, resulting in improved trade and capital mobility.

An example of an economic and monetary union is the unification of East Germany and West Germany. The EU is unique in the sense that it is the first time that advanced countries have agreed to cooperate economically on such a huge scale. 5) Political union The political union is the ultimate type of regional cooperation because it involves the integration of both economic and political policies. The EU has been moving towards social, political and economic integration. The EU's goal is to form a political union similar to that of the 50 states of the USA. The political union involves issues such as having common defence and foreign policies, strengthening the role of the EU parliament and adopting an EU- wide social policy. However it seems doubtful that pure forms of economic integration and political union can coexist in reality. Even if they did, they would not last long because different countries eventually have different goals and inflation rates. No country would be willing to surrender its sovereignty for economic reasons. The EU, despite great progress, has been plagued by infighting among member states with conflicting national interests. At the same time, it needs to deal with: i) redefinition of national sovereignty in the light of new economic alliances; iO combining national priorities with a single decision making process;

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in) ways to deregulate separate economies to induce competition among national monopolies. Marketers need to treat the EU as a single market rather than as numerous separate and fragmented markets. Firms external to the area are faced with overcoming trade barriers, perhaps through the establishment of local production facilities. For example Ireland tried to attract foreign investment by claiming its membership of the EU in its promotional campaigns. Nike was able to avoid the EU tariffs by opening a plant in Ireland. ^ Activity F; a) Two levels of economic cooperation identified by trade analysts are:

b) Two differences between an economic and monetary union and a political union are:

5.9 DUMPING Dumping refers to the sale of an imported product at a price lower than that normally charged in a domestic market or country of origin. Many countries have developed their own policies and legal systems to protect their domestic companies from dumping. The US Antidumping Act of 1921 that is enforced by the US Treasury, did not define dumping specifically, but referred to it as unfair competition. Some countries use dumping legislation as a legitimate device to protect local companies from predatory practices of foreign MNCs. In other nations, they represent protectionism - a device for limiting foreign competition in the market. The basis for legislation on antidumping is that dumping is harmful to the orderly development of enterprise within an economy. For a positive proof of dumping to occur in the USA, both price discrimination and injury must be demonstrated. The existence of either one without the other is insufficient ground for dumping. Companies that clash with antidumping legislation have developed a number of approaches to overcome the laws. One example is that of an auto accessory manufacturing company that packaged the product with a handtool and an instruction

Unit 5

Environmental Factors Affecting International Marketing

manual. The tariff rate in the export market was lower than that prevailing for tools, and the company enjoyed immunity because the package was not comparable to competing goods in the market. Another approach is to make non-price-competitive adjustments in arrangements with affiliates and distributors (eg. Extension of credit). & Activity G; Dumpingis:

5.10 SUMMARY______________________________________________________ The factors that govern the present economic environment have been discussed. The economic, social, demographic, political and technological environment has far-reaching implications for internationally oriented companies. As an example, differences in the technological environment may call for product modification by the firm. International trade accounts for the major part of international business. Some of the important factors that affect international business have been analysed-they include trade barriers, trade agreements, trade blocs and multinational trade negotiations. The two broad types of trade barriers: tariff and non-tariff barriers, have been described in detail. In the following section, the impact of cultural factors has been reviewed although this topic merits much more space. The framework for international trade laid down by GATT and WTO have also been covered. Registration of trademarks and patents has become vitally important in all countries where business is conducted. Some of the issues relating to intellectual property and intellectual property rights (IPR) have been reviewed. Economic cooperation between countries is carried out at five different levels that have been described in detail in the last.

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5.11 KEYWORDS Trade barriers: These refer to restrictive actions taken by countries to protect domestic industries from foreign competition with the objective of keeping the balance of payments position favourable. Tariff: A tariff is a tax imposed by the government on goods entering its borders. Non-tariff barriers: Restrictive methods adopted by a country using ways other than imposition of import duties and various forms of taxes. 5.12 SELF-ASSESSMENT QUESTIONS ______________............_________

Q1. How do the economic and political environments affect companies in the international marketing environment? Q2. What are the factors that affect the international trading environment? Q3. Describe the reasons why governments impose restrictions on trade? Q4. Mention and explain some of the significant non tariff barriers. Q5. Make a list of 10 products that do not require adaptations or modifications when marketed in different countries. Q6. What are the ways by which infringement of trademarks and patents can occur? Q7. What are the salient aspects of regional trade agreements? Q8. Analyse the marketing environment factors for the Indian auto component sector considering the EU as a region.

Unit 5 Environmental Factors Affecting International Marketing

NOTES

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6.1 INTRODUCTION When a company decides to enter international markets, it faces a number of tasks and challenging situations. This unit attempts to answer some of the main tasks involved while deciding to go international. The issues on which the basis of market entry is decided are presented in the initial sections, followed by the alternatives available for foreign market entry. The role and purpose of export management companies (EMCs) are briefly discussed. The considerations that govern the section of foreign distributors are listed. Companies may enter foreign markets under a wide variety of contractual arrangements such as licensing, franchising, contract manufacture etc. The advantages and disadvantages of the forms of entry need to be clearly understood so that their application can be conceived. Two forms of ownership related strategies are acquisition and joint ventures. The principal advantages and disadvantages have been discussed. More nations are seeking economic growth and improved standards of living as part of their efforts to embrace globalisation. China, South Korea, Poland, Argentina, Brazil, Mexico and India are some of the countries that are witnessing major economic changes and emerging as vast markets. In these countries there is an ever increasing and changing demand for goods and services. The various considerations for companies that need to be reviewed when entering big emerging markets (BEMs) have been presented. A brief section on planning and organising market entry strategies is included in the concluding section of this unit. v 6.2 ELEMENTS OF FOREIGN MARKET ENTRY STRATEGY A foreign market entry strategy is a comprehensive plan that lays down the objectives, resources, and policies that will guide a company's international business over a period of time long enough to achieve a sustainable growth in world markets. Market entry plans call for decisions on the following issues: eeeeeee)The target product and target foreign market fffffff)The company's objectives and goals in the target market ggggggg)The entry modes to penetrate the target foreign country

106

hhhhhhh)The marketing plan to penetrate the target market in the target country iiiiiii)The control system to monitor performance in the target country/market

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Foreign Market Entry Strategy

Foreign Market Entry Modes


Foreign market entry modes may be classified as follows; 1. Export Entry Modes a. b. c. d. Indirect Direct agent/distributor Direct branch/subsidiary Other

2. Contractual Entry Modes a. b. c. d. e. f. g. Licensing Franchising Technical Agreements Service Contracts Management Contracts Construction/Turnkey Contracts Contract Manufacture

h. Co-production Agreements i AssemblingArrangements 3. Investment Entry a. c. d. e. Sole Venture: new establishment Joint Venture: majority Joint Venture: 50-50 Joint Venture: minority b. Sole Venture: acquisition

Overseas market can be tapped in two ways: Basing production in home country Contract manufacturing in foreign country

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Export entry

Production in home country is possible in two ways - Indirect exports and direct exports. Indirect Exports Foreign visitors purchase goods- in the process add to foreign exchange earnings. Foreign department stores, foreign firms having branch offices locally or agents who buy on behalf of their parent offices abroad, though add foreign exchange it is not a result of any deliberate efforts on part of locals to promote exports. Merchant exporters/Export houses, where manufacturers entrust the job of selling his products abroad - normally do not engage in manufacturing.

Advantages of using Export H ouse/ M erchant Exporter Manufacturer avoids problems of direct exporting such as investment of resources in collecting market intelligence, setting up of export departments - served with foreign market knowledge. Operational cost of export house/merchant exporter spread over several partiesresults in saving in unit cost. Effecting consolidated shipment - possibility of reduction of unit freight. Reputation of export house enables manufacturers to get better representation.

Disadvantages May take too many unrelated lines resulting in producer neither getting expertise nor the attention he is looking for. Possibility of manufacturer continually depending on export house and not developing export expertise himself. Export house will push the product abroad on its own name and reputation - foreign customer may not associate the product with the manufacturer at all.

By using an indirect channel, a manufacturer can begin exporting with low start-up costs, modest risks, and the prospects of early profits on sales.

Unit 6

Foreign Market Entry Strategy

J & ZA c tiv ity A ; Two models of contractual entry are: 1. _______________________

2.__________;___________________

6.3 EXPORT MANAGEMENT COMPANIES An export management company (EMC) is a specialist in international marketing that acts as the export department for several manufacturers in non- competitive lines. EMCs vary greatly in size, product/market specialisation, services, and experience. The representative EMC is small (one or two individuals in management and sales), relies on foreign agentspr distributors rather than on its own foreign sales offices, takes title to its client's products and specialises in certain geographKrareasT Direct exporting '

While indirect exporting gives the manufacturer immediate access to foreign markets through the marketing network of EMCs and other export intermediaries. But the other side of the coin is a manufacturer's lack of control over its foreign sales. A manufacturer who wants to exploit foreign markets aggressively will move on to direct exporting after gaining his initial exposure through indirect.exporting. Direct exporting offers the manufacturer the following specific advantages: jjjjjjj)g reater control over the foreign-marketing plan (pricing, advertising, personal selling, distribution, product services, etc.) kkkkkkk) reater concentration of marketing effort on the manufacturer's own product g line lllllll) uicker information feedbacks on markets, competition and performances, and q mm mm m m m) better protection of the manufacturer's trademarks, patents, goodwill, and other intangible property. These advantages becom e actual, how ever, only w hen a manufacturer organises for exporting and commits the resources necessary for an active penetration of foreign markets. The higher start-up cost and risk of direct exporting compared to indirect exporting can only be justified by greater marketing effectiveness.

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The most common channel in direct exporting are those using foreign agents or distributorsand foreign branches or subsidiaries. A foreign agent is an independent middleman who represents the manufacturer in the target market. As an&gent, this middleman does not take title to the manufacturer's product but rather sells that product on a commission basis. Furthermore, an agent seldom holdsinventory beyond samples or extends credit to customers. Usually the manufacturer receives order from his agents andthen-shifts^irectly to the foreign buyer. In contrast, a forigbdistributpw<a merchant who buys the manufacturer's product for resale to other middlemen or to the final buyers. The distributors perform more functionsthan the agents (such as maintain inventories, extending credit, servicing orders and providingafter-sales services), and he also assumes the ownership risk. His compensation is his profit margin on resale of the manufacturer's product. Choosing a foreign agent or distributor : Finding good agents or distributors is a recurring problem for export managers. It is recommended that they begin the recruitmentprocesses by drawing up an agent (distributors) profile that lists all the desirable features an agent (distributors) in a particular foreign target market. of Manufacturer is well advised to make the final selection of a foreign agent or distributoronly after personal interviews with the best prospects. Interviews are "the most reliableway for manufacturers to gain a feel for a particular agent (distributor) and his organisation. interviews should come only after desk research has identified But the best candidates. time and expenses needed for a careful selection of an agent The or distributor is justified the critical importance of this decision. by Afinal point on export entry. The manufacturer's agreement with his foreign representative should be a written contract that clearly sets forth the rights and obligations of both parties. Provisions relating to sole and exclusive rights, competitive lines, the resolution of disputes contract termination are of particular importance. and

& Activity B :
Two advantages of direct exporting are: 1._________________________________________ .....-,______________

2.________________________________________________________________
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Foreign Market Entry Strategy

Profile for Evaluating Prospective Foreign Distributors lines handled experience with manufacturer's product line trading areas covered sizeoffirm sales organisation
f .

physical facilities willingness to carry inventories after-sales service knowledge and use of promotion reputation with suppliers, customers and banks record of sales performance cost of operations financial strengths and credit rating relation with local government knowledge of English and other relevant languages knowledge of business methods of manufacturer's country overall experience willingness to cooperate with manufacturer

6.4 ENTERING FOREIGN MARKETS THROUGH LICENSING AND OTHER CONTRACTUALARRANGEMENTS _ Companies may enter foreign markets under a wide variety of contractual arrangements: licensing, franchising, technical arrangements, service contract, construction/turnkey contracts, contract manufacture, co-production agreements and others. Licensing is by far the most common contractual arrangement.

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International Licensing The essence of an international licensing agreement is the transfer of industrial property rights (patents, trademarks, and/or propriety know-how) from a licenser in one country to a licensee in a second country. The usual practice is for the licenser to allow for the licensee to use the rights for a specified period of time in return for royalty compensation. Licensing may be viewed as simply a way of obtaining incremental income on "shelf technology that has already been written off against domestic sales. Or a manufacturer may agree to exchange technology with a foreign counterpart, a practice known as crosslicensing. Again, manufacturers may license abroad to get legal protection for their patents and trademarks in countries where they must be "worked" to remain valid or to guard against infringement. Advantages and disadvantages of licensing as a primary entry mode Licensing offers the manufacturer both advantages and disadvantages as a primary entry mode. Compared to export entry, the most evident advantage of licensing is the circumvention of import restrictions and transportation cost in penetrating foreign markets. Instead of transferring physical products to a target country, the manufacturer transfers intangible property rights and technology. In contrast to investment entry, the outstanding advantages of licensing are low entry cost and low direct risk. Although licensing incurs transfer cost, it requires no fixed investment by the manufacturer. For the same reason, licensing arrangements are exposed to far less political risk than foreign investments. The most critical disadvantage of licensing as an entry mode is the licenser's lack of control over the licensee's marketing program. Although the licenser ordinarily maintains quality control over the licensed product, he does not control the licensee's volume of production or marketing strategy. The market performance of the licensed product therefore, depends on the motivation and the ability of the licensee. A second disadvantage is the lower absolute size of returns from licensing, compared to return from export or investments. Licensing revenues take the form of running royalties over the life of the agreement. Today, royalty rates seldom exceed 5% of the licensee's net sales, and agreements seldom run beyond 5 to 10 years. Another disadvantage of licensing is its exclusivity. Ordinarily a licensing agreement grants to the licensee exclusive rights to use the technology or trademark in the manufacture and sale of specified products in the licensee's country. For the duration of the agreement therefore, the licenser is prevented from marketing those products in the licensee's country

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Foreign Market Entry Strategy

by using another entry mode, such as export or investment This opportunity lost is particularly irksome when the licensee fails to exploit market opportunity. Other Contractual Entry Modes International franchising: Unlike conventional licensing, the franchisor licenses a business system to an independent franchisee in a target foreign country. The franchisee carries on a business under the franchisor's trade name and in accordance with policies and practices laid down by the franchise agreements. Holiday Inn, McDonald's, Kentucky Fried Chicken, Avis, and many other US firms have become household names in scores of countries. The classic international franchisor, of course is Coca Cola. International franchising has become, therefore, a powerful entry mode for companies that have products and services that can be reproduced by independent franchisee. Contract manufacturing: In contract manufacturing, an international firm negotiates arrangements with a company in the foreign target country to manufacture a product for subsequent sale by the international firm. To get the product manufactured to its own specifications, the international firm usually transfers technology to the contract manufacturer. Contract manufacturing can offer several advantages to the manufacturers as a mode of foreign market entry. It requires only a modest commitment of capital and management resources compared to investment entry, avoids the political problem of local ownership, and allows the manufacturer to exercise full control over the foreign marketing program. On the other hand, the manufacturer may find it difficult or impossible to locate a good contract manufacturer (especially in developing countries); he must often provide substantial technical assistance to bring the contract manufacturer up to desired quality levels. Management contracts : Under an international management contract, a company undertakes the day-to-day management of an independent enterprise in a foreign target country. In return for its management services, the company ordinarily receives fees over the fixed life of the contract. Manufacturers usually enter management contracts only in conjunction with other agreements such as joint ventures or turnkey projects, because they seldom see themselves as primary suppliers of management services. Turnkey construction contracts : Under a turnkey project a company provides not only engineering and construction services but also the additional services needed to bring the project up to the point of operation before it is turned over to the owner. At times a company may also operate the project for a transition period, an arrangement called turnkey plus. In short, a turnkey contract calls for the international transfer of package of services -engineering, construction (often including financing), 113 training, and (possibly) management.

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Co production Agreements: Co production is a kind of non-equity joint venture. Under a long term contract a company (mainly in developed countries) provides technology, components and other inputs to an enterprise (mainly in developing country), in return for a share of the resulting production, which it then markets in its own country. A manufacturer in the developed country may gain several advantages from a co-production agreement including the sale of equipment and other products to the enterprise in a developing country, a low cost source of products for sale in the developed market. But these advantages must be weighed against certain possible disadvantages - the failure of the partner to maintain quality standards or meet delivery schedules. Co-production agreements are very attractive to developing countries because payments to the developed countries come out of production, rather than out of scarce foreign exchange.

^ Activity C;
Two differences between international licensing and international franchising are: 1.__________________________________

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6.5 ENTERING FOREIGN MARKETS THROUGH INVESTMENT IN LOCAL PRODUCTION _____________________________________________________________ Advantages and disadvantages of investment entries
Companies invest abroad in production for three fundamental reasons - to acquire minerals and other raw materials through exploitation of natural resources, to source manufactured products at a low cost for use or sale at home and in third countries, and to build a logistical base for the penetration of a local market in the target country. Through investment entry a company can establish a full function enterprise in the target country and thereby exploit its competitive advantages to a higher degree than is ordinarily possible through export or contractual entry modes. Investment entry allows a company to control the foreign marketing program and to gain logistical advantages that may arise from the circumvention of import barriers, saving in transportation costs or lower production costs. Because of its manifold advantages, investment entry has become the hallmark of the multinational corporations. Investment entry also poses certain disadvantages compared to other entry modes; it requires a far greater commitment of capital management and other company resources.

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Foreign Market Entry Strategy

This higher commitment, in turn, means a higher exposure to business and political risk. Substantial start-up costs, long payback periods and the cost of disinvestment in the event of failure must also be considered disadvantages of investment entry. Again, managers need more information to make good investment decisions than is true of export and licensing decisions. In particular investment becomes a high-risk entry mode when the investor has no prior experience in the target country. The Decision to Invest in a Target Country The investment entry decision is the outcome of a lengthy process that ordinarily involves several managers from different functions and at different levels of the company organisations. We can structure this process as a sequence of checkpoints that must be passed before the final approval of a foreign- investment proposal. nnnnnnn)Should we investigate the foreign - investment proposal? ooooooo)Is the present investment climate in the target country acceptable? ppppppp)Will the investment climate remain acceptable over our strategic planning period? qqqqqqq)Will the investment project meet return on investment and other objectives after taking account of business and political risks? 5. Have our entry negotiations with the host government reached a satisfactory

outcome? a) Investment entry through acquisition A foreign investment proposal may be a proposal to acquire a firm in the target country rather than start a venture from scratch.

Advantages and disadvantages of acquisition entry


Acquisition entry offers a company several potential advantages compared to new venture entry. They are only potential advantages because they depend critically on the choice of the acquired firm. A poor choice can transform a potential advantage into an actual disadvantage. The most evident advantage of acquisition entry is a faster start in the target country. The investor gains control over a going concern with a product line, manufacturing facilities, 115 managers, workers, and customers. To achieve the same market penetration through a new venture could take several years. For the same reason, acquisition entry promises a quicker return on investment.

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b)

Investment entry through joint ventures


Joint venture entry occurs when an international company invests in abusiness enterprise in a target country together with a local partner firm. The foreign investor may hold a majority, a minority, or half of the joint venture's equity. Joint ventures are usually started from scratch, but they may also result from the purchase of equity in an existing local firm.

Advantages of Joint Ventures


In many developing countries joint ventures may be the only investment entry mode available to international companies because host governments prohibit sole ventures. By contributing capital to the joint venture, the local partner reduces the foreign partners' investment outlay and risk exposure. But the local partner's most valuable contribution is his knowledge of the local business environment and his ongoing contacts with local customers, suppliers, bank, and government official. That is why joint ventures can be attractive to companies with little experience in foreign operations.

Disadvantages of Joint ventures


International managers commonly complain that joint ventures dilute their control over foreign operations. Even with majority joint ventures, international manager must accommodate the interest of local partners.

Choosing the right partner


After the managers have decided on a joint venture as the appropriate entry mode for a target country, the most critical decision is the choice of a local partner. Managers should first determine what they want the joint venture to accomplish in the target country over a strategic planning period, and how the joint venture fits into their overall international business strategy. Next, they need to find out the objectives and policies of the prospective local partner, as well as the resources he would bring to the joint venture. Only after agreement on the purpose of the joint venture should managers go on to negotiate specific issues-ownership share, the allocation of management responsibilities, profit reporting, dividend policy, the settlement of disputes, and others. Joint ventures will prosper only if the partners trust each other and continually support their common endeavour.

c)

Foreign direct investment (FDI)


Another form of ownership-related market entry strategy is foreign direct investment (FDI) i.e. investment within a foreign country. Company decides on this alternative to

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The naive rule is for managers to use the same entry mode such as agent/distributor exporting, for all target countries. Because country markets and entry conditions are heterogeneous, this rule leads managers to forsake promising market that cannot be penetrated with their single entry mode or to end up in markets with an inappropriate mode. The pragmatic rule is for managers to find an entry mode that "works". In most instances, managers start by assessing export entry, and only if such an entry is inf easible, do they go on to assess another mode. This rule avoids the two pitfalls of the naive rule, and it also saves management time and effort. But it fails to lead managers to the most appropriate mode. The strategy rule is for managers to decide on the right entry mode as a key element in a company's foreign-market-entry strategy. It is the most difficult rule to follow because managers must make systematic comparisons of alternative entry modes.

6.6 EMERGING MARKETS


The single most important element to which the foreign marketer must adjust the marketing tasks is the economic level of a country. A study of the aspects of economic development is necessary to gain insight into the economic climate along with an assessment of the economy's growth potential. According to the five stage model developed by Walt Rostow, there are five stages in economic growth as shown below:

Table 6.1: Rostov's 5 Stage Model


Stag e1 The traditional society Lack of capability to increase productive levels Low levels of literacy Low level of social infrastructure

Stage 2 Preconditions for take-off Societies approaching take- off stage to growth

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Small beginnings in transportation, communication, Power, education, health Stage 3 Take-off Level Countries achieve growth pattern Steady development of human resources and infrastructure Modernisation of industrial production

Stage 4 Maturity Level Sustained levels of growth are achieved Extension of modern technology to all economic fronts Ability to produce needed products through technological & entrepreneurial skills

Stage High mass consumption level Real income per capita rises Large production of population has discretionary income growth/by Walt

[Adaptedfrom: The stages of economic WRostow/Inded/Cambridge University Press (UK)]

Although there can be overlap of stages, the model provides the international marketer with some indication between economic development and the types of products a country needs and the levels of industrialisation reached. The United Nation classifies a country's stage of economic development based on its level of industrialisation. The 3 categories are: i) MDCs (More Developed Countries) - Industrialised countries with high per capita incomes such as Canada, UK, France, Germany, Japan and the USA.

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ii) LDCs (Less Developed Countries) - Industrially developing countries first entering international trade such as those in Asia and Latin America. in) LLDCs (Least Developed Countries) - Industrially underdeveloped, agrarian societies with extremely low per capita income levels and little world trade involved, such as parts of Central Africa and parts of Asia. Of late, a country's investment in information technology (IT) is an important key to economic growth. The cellular phone, the internet and other advances in IT have opened opportunities for emerging economies to catch up with the developed world. India's growth in the IT sector has created an economic revolution in the country and in the US A. 30 percent of the workforce in California's Silicon Valley is Indian. India's consistent GDP growth rate of 6 percent plus since 2002 has been largely driven by the IT industry. One indicator of economic development is the level of infrastructure development within the country. Infrastructure represents those types of capital goods that serve the activities of many industries- such as roads, ports, airports, telecommunications, communication networks, power, and energy supplies. These are all necessary to support the production and marketing of companies. The quality of infrastructure directly affects a country's economic growth potential and the ability of an enterprise to function effectively in business. For example, inadequate transportation facilities can increase the costs of distribution of companies to reach certain market segments. Business efficiency is affected by the presence or absence of financial and commercial service infrastructure such as advertising agencies, warehousing facilities, credit and banking facilities etc. existing within a country

Demand in Emerging Markets


Modern and traditional sector within the economy make the task of estimating demand in less developed countries very challenging. The modern sector is generally observed in the urban and semi-urban areas- that have airports, international hotels, high concentration of industries and an existing, western-culture oriented middle class; of course, this class represents the buying class and hence is of more significance to the international marketing companies of developed countries. There is also the traditional sector containing the I remainder of the country's position. Although the two sectors may be physically closeto I each other within the same country, they are poles apart in terms of production ami I consumption. This dual economy phenomena affects the size of the market and in man; | countries, creates two distinct economic and marketing levels.

Unit 6

Foreign Market Entry Strategy

Table 6,2 : Market indicators in selected countries

Country

Population GDP per (in inn) capita (USD) 285.3 59.2 82.3 127.0 58.8 41.1 43.2 38.6 1271.8 172.4 1032.4 30.7 31,592 30,492 32,813 44,458 22,592 17,595 4,068 3,716 878 4,633 477 325

Cars per 1000 persons (No.) 759 564 529 560 424 467 143 286 8 79 8 13

TV Sets per 1000 persons (No.) 835 632 586 731 950 598 152 401 312 349 83 26

PCs per 1000 persons (No.) 625 337 382 349 366 168 69 85 19 63 6

l.USA 2. France 3. Germany 4. Japan 5. UK 6. Spain 7. South Africa S.Poland 9. China 10. Brazil 11. India 12. Kenya

Source: World Bank report 2003 extract

The markets of the future will include expansion in industrialised countries and the development of the traditional sector in less developed countries. The traditional sector offers the greatest long term potential but profits are generally slow to come by. The companies that will benefit in the future emerging markets, will be the ones that invest when it is difficult and initially unprofitable. Table 6.2 gives some idea of comparison of potential in developing countries and the developed countries.

B ig em erging m arkets
Experts have predicted that imports to the countries identified as big emerging markets will be 50 percent of the industrial world by 2010. Presently they account for half the world population and 25 percent of the industrial world's GDP.

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Some of the key emerging markets have been identified below based on various reports including the world bank. Asia I.China 2. India 3. South Korea

Latin America
4. Argentina S.Brazil 6. Columbia 7. Mexico 8. Venezuela

Europe
9. Poland 10. Turkey

Africa
11. South Africa

Some of the important characteristics exhibited by the big emerging markets are: they are all very large with significant populations and population growth they represent huge markets for a wide range of products they have strong economic indicators of growth and are ' regional economic drivers' they have undertaken maj or economic reforms they are of political importance within regions they are capable of pushing growth in neighbouring countries as they grow

Since many of the above mentioned countries representing the emerging markets of the future lack modern infrastructure, much of the expected growth will be in those subsectors that are related and linked to infrastructure development such as environment;! technology, healthcare, telemedicine, biotechnology, transportation, IT Services, financki: services and energy.

Activity E ;
a) Expand the following terms: LDCs: LLDCs: MDCs:

Unit 6

Foreign Market Entry Strategy

b) Two big emerging markets in Asia are:

6.7 PLANNING AND ORGANISING M ARKET ENTRY _________________


Before carrying out business internationally through sourcing, exporting or investing or a combination of these strategies, the company needs to look at conditions in the potential country to analyse what the advantages, disadvantages and costs will be and whether the risk is worth taking. In choosing export markets, it is necessary to establish the key factors influencing sales and profitability of the product under consideration. The company's experience in the home market may or may not be relevant to the individual export markets being considered. The following nine questions need to be answered for a creating a product- market profile. rrrrrrr)Who buys our product? sssssss)Who does not buy our product? ttttttt)What problem does our product solve? uuuuuuu)What are customers now buying to satisfy the need? vvvvvvv)What need does our product serve? wwwwwww)What price is being paid for the products they are currently buying? xxxxxxx)When is our product purchased? yyyyyyy)Why is our product purchased? zzzzzzz)Where is our product purchased? Each answer to the above questions provides an input to the decisions concerning the four P's. In the current environment of ever increasing competition, companies can penetrate an existing market by offering more value than its competitors - better benefits, lower prices, or both; this applies as much to marketing in export country as to the home country.

I'M

International Marketing

Once a product-market profile has been created, six criteria should be assessed: aaaaaaaa)market potential bbbbbbbb)market access cccccccc)shipping costs dddddddd)potential competition eeeeeeee)service requirements ffffffff)product fit After the research findings have identified the potential markets, there is no substitute for a personal visit to size up the market firsthand and begin to develop the export marketing plan. A principal issue that an expanding firm must address is whether to export or produce locally. In many emerging markets, this issue is resolved by a national policy that requires local production. Any company that wishes to enter such a country is generally forced to produce locally. If the choice is to be made by the company, the trade off for local vs regional or global production cost, quality, delivery and customer value. Costs will include labour, materials, capital, land and transportation. Economies of scale are important in determining costs to justify the investment required to establish a production site. If the product is heavy, transportation costs are greater and provide an incentive to locate production closer to the customers. If a company decides to source locally, it has a choice of buying, building, or renting its own manufacturing plant or signing up a local company for contract manufacturing. A contract manufacturer may be in a position to add production to an existing plant with less investment than the manufacturer would require to achieve the same volume of production. If this condition prevails, then an attractive price can be obtained from the contract manufacturer. A summary of the steps in the decision criteria for market entry is given in table 6.3 Table 6.3 : Market Entry and Expansion Decision 1. Sourcing Home, third or host country? Cost, market access, country of origin factors

Unit 6

Foreign Market Entry Strategy

4
2. In-country or in-region marketing organisation 3. Selection and training 4. Marketing Mix strategy 5. Strategy implementation Cost, market impact assessment Distributors and sales agents Goals and objectives of sales, earnings and share of market; market positioning, marketing mix strategy Implementation, evaluation and control

J8 $A ctiv ity F ;
The choices available to a company to source locally in a foreign country are:

6.8 SU M M A R Y
This unit has turned its focus on the main tasks involved in entering foreign markets. Companies face a host of challenging tasks and the issues on which the basis of market entry is decided are put forward. The role and purpose of export management companies have been briefly discussed. There are a variety of contractual arrangements by which companies enter foreign markets. The advantages and disadvantages of the important modes of entry are reviewed. In addition two forms of ownership related strategies - namely acquisition and joint ventures - are briefly discussed. Numerous nations are seeking economic growth and involved standards of living such as China, Brazil, South Korea, Argentina and India. These nations are becoming the emerging markets of the future and clearly the developed nations are expanding into the big emerging markets (BEMs) to capitalise on the huge opportunities. The considerations that are applicable for these markets have been discussed in some detail. In the final section, the principles of planning and organising market entry strategies have been included.

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6.9 KEYWORDS Market entry: It refers to the action required by a company to commence marketing operations in a foreign country. Indirect export: This refers to the activities related to exports that involve routing of goods and/or services through intermediaries located in the home country or in the foreign country. International franchising: In this type of licensing, the franchisor licenses a business system to an independent franchisee in a target foreign country. Foreign direct investment (FDI): It refers to the investment by the company in a foreign country for the purpose of carrying out business including marketing activities. Emerging markets: Anew group of developing countries that is experiencing rapid growth rates, increased industrialisation and embracing technological developments creating new opportunities for domestic and international companies. 6.10 SELF-ASSESSMENT QUESTIONS_________________________________ Q1. What are the major issues based on which decisions for foreign market entry should be planned? Q2. Identify the main forms of foreign market entry. Q3. What is the role and purpose of export management companies? Q4. What are the options available to Chinese- based fast food chain to enter the Indian market? Q5. Describe the advantages and disadvantages of a licensing agreement. Q6. What are the specific advantages of investment entry for an India-based auto component company? Q7. Discus the reason why emerging markets are becoming important to MNCs? Q8. What are the main factors in planning and organising foreign market entry strategies? Q9. Describe the five-stage model for assessing the economic growth level of a specific country.

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7.1 INTRODUCTION International markets for both consumer products and industrial products are presenting new challenges and new opportunities. New consumers are coming up in markets that never existed before - such as emerging markets. They promise to be huge markets tomorrow, if not today. Consumers' tastes and requirements are changing and becoming more sophisticated in the developed countries. Whether the domestic products and services are suitable for export markets is a crucial question that needs to be answered by companies. Decisions about products involve such issues as what product lines to introduce in various countries. In addition, there is a need to determine whether a product should be adapted or modified to suit local customs and characteristics and whether a totally new product should be introduced. This unit reviews some of these critical questions and attempts to provide the framework for international product strategy. The reasons for product adaptation are many and these are examined in one of the sections here. Quality aspects have taken centre stage with the growth of competition in international markets and with the consumer demanding innovative products. Quality is just one of the many issues that are linked to success in foreign market. Similarly, the issues related to industrial product strategy also need to be examined since they can be different from those for consumer products. 7.2 PRODUCT LINES Decisions about product involve such issues as what product lines to introduce in various countries, to what extent a product should be adapted or modified to match local customs and characteristics, whether new products should be introduced; where the R&D effort should be concentrated, whether the firm should diversify into unrelated areas; which products should be eliminated; how product should be packaged; what brand policy to pursue; what after sales services to offer; and what guarantees the company should provide on various products. Products are a bundle of attributes put together to satisfy a customer need. The product' objectives for each country market should be defined separately and be based on overall corporate objectives on the one hand and on the concerns of the individual national governments on the other. Product planning decisions, both immediate and strategic are based on product objectives.

Unit?

International Product Strategy

Product design is a major strategic issue. A company can either offer a standard product worldwide or adapt it to local requirements. Adaptation can be physical (for example changes made in the electrical wiring system of a machine to match voltage requirements of a country) or cultural (for example colour change in response to a cultural preference). The decision to standardise or adapt is dictated by the nature of the product, market development, cost/benefit considerations, legal requirements, competition, support system, physical environment and market conditions. To operate overseas successfully, a periodic review of the product line is necessary. Product line development essentially involves three alternatives:

c a r r y t h o s e p r o d u c t s d o m e s t i c a l l y .

gggggggg)Extension of the domestic line (which refers to the introduction of iiiiiiii)A domestic products to overseas market). d hhhhhhhh)Adding additional products to the overseas market even if the company does not d i n

a tt ri I New products for b u international markets can t be either developed e d internationally or t o acquired. ^Activity A; a v The three alternatives for a ri product line development e are: t y o f r e a s 7.3 PRODUCT PLANNING FOR o EXPORTS_________________________________________________________ n s Product planning for li exports is a process for k selecting items for a e target market. It involves p determination of length h and depth of a product y line. Length related to a s number of products and i depth signifies variation c of a particular item. This a process is generally l confined to the existing c product line for which o the intending exporter n has the necessary d manufacturing it capabilities. Ethnic and i specialty items have no o problems. The difficulty n lies with manufactured s, products where the f requirements are u different. This is g new products.

nctional needs and method of product use. For instance large refrigerators are not preferred in Japan where the apartments are small.

8..

1 3 1

International Marketing |

In contrast, bigger appliances are liked in the US. In developing countries bicycles are used for transportation. Against this Americans require SLR bicycles for recreation. Further. Switzerland has sold the same watch in different sizes to USA and Japan due to variation in wrist size. Hand pumps for use by African farmer must have a sturdy handle for tying buffaloes. Likewise, there could be a number of examples where the same products are sold differently in different markets. The subject involves discussion on issues like product adaptation, standardisation, product life cycle, brands, packaging and support service. 7.4 PRODUCT ADAPTATION A product that is perfectly good for one market may have to be adapted for another. There can be many reasons for this. Physical conditions may be different. Functional requirements may vary from country to country. People in different places may use products differently or for different purposes. Product adaptation is changing the product either through value addition or by making it functionally different. Selection of features is the key element in product adaptation. This calls for areview of environmental factors affecting an export item. Robinson has identified a number of factors, which require change in product design for selling abroad. Major design changes in product adaptation are as follows:

Factors of Design Changes


This includes size, capacity and volume. For instance the United States follows non-metric size, but European dimensions products are based on metric system. In such a situation. simple translation of non-metric size into metric will not suffice. Thus intending exporter has to change the product physically to required metric standard. Climatic Conditions
t!

Climatic conditions also dictate product changes resulting in change of raw material. A leading manufacturer of industrial abrasives had to change the material for its supply to another country for reasons of different climate. A similar change was effected by a paint manufacturer for export to another country. Further, Sony's music system operating 1:1 India has a dust protection mechanism.

Product Use
This relates to product use and its performance. Mixer grinders in US A have power rating ranging between one to two minutes because of minimal/simple use of this equipment ^ against this, in India, Pakistan and Bangladesh, this appliance is used as a full fledged kitchen machine where it's rating goes up to 1/2 hour or more.
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C ultural V iew s
Products have to change with cultural values which are reflected in fashion, taste and preferences. For instance, red and white have happy a connotation, whereas black and white is a sign of grief. Green is associated with illness in Malaysia. Brighter colours are liked in Africa. These colours are extremely relevant for fabrics and packaging. Mattel Toys of USA wanted to sell their Barbie Doll in Japan. But the Japanese did not like the American favourite doll. Later the firm introduced a modified Barbie - slightly oriental eyes and a more girlish figure.

Q uality
Quality reflects end-issue values. If a nut or bolt is reckoned as a hardware item, its quality would be different when the same is used as an auto part.

S p ecific R eq u irem en ts
At times, an exporter may be required to change the product to make a specific requirement. This happens in the case of US market, where an Italian firm adjusted the fermentation process of wine against an established French product.

L evel of S op h istication
Design / functional use of items exported to different countries should match with the level of sophistication in target markets. Products designed in highly developed countries often exceed the required standards in developing countries. For instance Ray Ban glasses have been recently introduced in India. It will however take some time for the market to develop receptivity for it. Manufacturers in developing countries face the opposite challenge to upgrade the level of standard. Finally tastes, level of skills & technical development may be different and may dictate changes in product.

S trateg y
Product adaptation is also used as a strategy to enter a new market that is dominated by existing manufacturers. In such a situation some product differential will help the intending exporter to sell his product successfully in the target market. This is amply demonstrated by the recent entry of Hyundai small cars against Maruti in the Indian market. Not only this, Hyundai is planning to take on the existing luxury models sold by Japan and others in Switzerland. This is evident from Hyundai's participation in the recent Auto Shows in Detroit and Geneva. A similar syndrome is, however witnessed in the CTV market in India where some of the Japanese TV majors like Sony, AIWA, and Akai are virtually driving 133

International Marketing

Indian products out of the market. Both the cars and TVs sold by these companies have amasing features and are perceived by buyers as absolutely different products. Further, Tropicana (an American orange juice) which has hit the Indian market is likely to take a toll on 'Real' and 'Onjus'juices made by Dabur and Enkay Texofood respectively.

Standardisation
Standardisation is equally important in the planning of products for export. This is more relevant for consumer items. Major benefits of this strategy include economies of large scale production, R&D, and marketing. With international travel becoming very common, it is easier to win loyalty of customers through standardisation both at home and overseas. Further, "made in image" provides an additional premium when a country sells its products worldwide. Standardisation also helps in saving on technology as the same specifications are used for standardised products. To generate better marketing results it is desirable to mix up both product adaptation and standardisation for countries having similar segments. In the wake of globalisation, where a number of consumer products are being sold as items of World standard, this practice will be found extremely useful. International presence of brands like Sony, Pepsi, National, Me Donald's vindicates these arguments. The basic argument in favour of uniform multinational product strategy is that it is least costly in terms of both manufacturing and marketing.

Life Cycle
Understanding of product life cycle is another element of export planning. Longevity of product life is related to the level of economic development of a country. Compared to developing economies, a product sold in developed countries has shorter life. This is attributed to greater competition in developed markets. Aproduct has four stages in its life cycle. In the first stage a product is in the process of development, and sales pick up gradually. Having established acceptability, the product registers rapid growth during the second stage. In the third stage, the product reaches maturity. The fourth witnesses a decline in the sales. This development is related to life cycle of manufacturing technology which becomes obsolete with the passage of time. Kotler has explained this syndrome as "demand-technology life cycle". With the advent of new technology a new product is developed which replaces the old item. This transformation is not instant. It involves some time-lag between obsolescence of technology and elimination of products based on this. For instance, with the introduction of audio cassettes, the LPs were dumped by some people, but this process took some time. The same thing happened when the manual typewriter was replaced by electronic typewriters. Products sold worldwide do not command the same status in different countries. This difference has to

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Unit 7

International Product Strategy

be plugged by extending the life cycle of products through innovation. International companies like, Sony, 3M, Toyota and Cannon have done this by creating a regular stream of products which have been lapped up by customers over and over. This requires competence in product development, which has to be built up as a kind of corporate culture. Indian companies which are successfully following this track include Ranbaxy, Hero Honda, and Sundaram Fasteners. Branding Branding is yet another aspect of product planning for exports. It is an identity or value addition given to a product. In a market driven economy, this recognition is built up through provision of quality product and adequate back-up service. This identity is rooted in a language which would evoke similar emotions/associations world wide. Further it should not be misinterpreted. It should have universal appeal and be amenable to integrated international marketing strategy. The examples are Sony, Toyota and IBM. At times, it would be necessary to use a different brand for a particular market to reflect its local background. Again, some of the foreign buyers would ask for goods under private brands. This happens in the case of supplies made as original equipment. In this situation, the importer acts as a manufacturer of the exported item which is sold in the target market as a local product. This approach is good for making an entry into a new market but it does not serve long term interest to the exporter. A number of Japanese firms have adopted this strategy for exporting a variety of electronic products to USA and Europe. Some of the Indian machine tool manufacturers have also sold general purpose machines to USA under this arrangement. If necessary, the intending exporter should safeguard his interest through registration of his brands/trade marks in the target market. Packaging Packaging is also important for product planning. A change in marketing environment requires a different package to ensure adequate protection and shelf life for a product. Difference in climatic conditions also influences the packaging requirement. In a country like USA, which is characterised by a high degree of shelf merchandising, promotional appeal in consumer packaging is very important. This is not required in the case of developing . countries where over-the-counter service is in vogue. Further, distribution handling is not the same in all countries. In developed economies, packaging should not entail additional handling at a retail level. As against this there are a number of countries in the third world, where extra labour is used to supply individual orders from bulk packages at a retailing stage. Besides, there are special provisions in a number of countries. For instance the US has Food and Drug Regulations which must be

International Marketing

complied with for export of food products. Netherlands forbids use of straw in packages. South Korea and Australia expect a declaration that timber used in packaging is free from any diseases. Aleading cigarette company in the US Ahad to use more than 250 packs for meeting special requirements/satisfying customers in different countries. For instance, Australia wanted number of cigarettes to be written on individual pack. Canada requires bilingual language on the packages. To avoid errors in the printing of letters, basic art work in Arabic and Greek languages is prepared in the target markets. Other considerations which affect decisions on product packaging include size, shape, material and text. Customs and level of income also affect the packet size. For instance, razor blades in USA and Europe are sold in packs of 5 and 10. While in developing countries these are purchased in singles. The material used in packaging may also differ in foreign markets. Beer in cans is very popular in USA. But Europeans like it in glass bottles. The colour, text and design of packaging should integrate with national requirements. In Europe and Latin America where people travel too often, use of same colour will help in quick identification of a product.

Support Service
Support service is the last but crucial point in product planning for exports. These involve two components - warranty and after-sales-service. The intending exporter must have a clear policy with regard to product warranty. Based on its corporate strategy the exporter should either declare that his domestic warranty is valid worldwide or specify a separate policy in this context for different countries. Adoption of worldwide warranty with uniform performance standard may look simple but this may not work under different marketing conditions. For instance in a country like United States a computer related item may have thirty to sixty days of warranty but this may require one year in case of Europe or Japan. Time span and standard coverage apart, the intending exporter should examine the method of a product used in a particular country. For example in a developing country a product may be subjected to rough use causing frequent product failure. In such situation, it would be desirable to make local provisions for the required support service. This can be done either through establishment of a subsidiary or appointment of an independent sales distributor to perform the necessary function. In both the cases availability of trained stock with adequate stock of spares is important. This should be reckoned as an investment and not a recurring expenditure.

&$ Activity A:
a) Mention two aspects of branding that affects product planning for exports:

Unit?

International Product Strategy

1..

2. b) Two types of support services that are crucial for developing product strategy for export markets are:
L ____________________________________________ ' . ____________________________________________ _ . ____________________________________________ :

2.______________________________________________
7.5 ISSUES IN CONSUMER PRODUCT STRATEGY_____________________________________________
International competition is placing new emphasis on the basic principles of business. Product life cycles are becoming shorter, quality aspects are becoming paramount, prices are becoming increasingly competitive and consumers are demanding innovative products. The power in the market place in most mature markets and emerging markets is shifting from a seller's market to a customer's one. Today, with the explosion of information, the customer has a wide variety of choices and knows what is best, cheapest, and high quality. Quality is likely to remain the deciding factor in most international markets.

M a in ta in in g q u a lity

Maintaining quality is critical in consumer productsparticularly food-related ones and personal care items. A special problem for many international brands is that actual production is located far from the markets where they are consumed. This forces the manufacturers to lose control of the product with the lengthening of the distribution chain. Sometime back, Mars, Toblerone and Cadbury were the top selling brands in Russia for chocolates. Within five years, the Russian manufactured brands had overtaken these brands in the local market. Maintenance of quality becomes a major issue for such items. When the Russian market opened its doors to foreign trade, foreign companies rushed in with products that included out-ofdate quality products. Chocolates were smuggled in and sold in streets with the result that they were mishandled in the process. Moreover, it was found through the price research that the Russian brands appealed more to the Russian consumer in taste even though the price was higher than the international brands such as Cadbury and Toblerone. It is clear therefore that quality is not only essential and desirable, but the need for maintenance of quality is also supreme.

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Mandatory requirements

To meet the specific requirements of certain international markets, suitable product modification and adaptation may be necessary. These can range from simple changes in packaging to total redesign of the core product. , Homologation is a term used to describe the changes that are essential for compliance to local standards. It has been found that mandatory adaptations are more frequent than the need of adaptation for cultural reasons. There are specific legal, economic, political and climatic requirements in a country that dictate the need for product adaptation. During the eighties when the Indian government was against foreign investments, Pepsi changed its product name to 'Lehar Pepsi' to gain local acceptance. Subsequently, when the political climate became favourable, they reverted to the original brand name of 'Pepsi'. products sold abroad by international companies have their origin in Since most their "ts, the product require some form of modification without which the home markets,___^________, companies tin on a weak wicket. would remain on a weak wicket Green marketing Since the 1990s green marketing has become a quality issue particularly in Europe and USA. Europe has taken the lead in the 'green movement' with strong public opinion and legislation favouring environment friendly marketing and products. 'Green Marketing' is a term used to identify concern with the environmental consequences of a variety of marketing activities. The European commission (EC) issued guidelines for eco-labeling that became operational since the early 1990s. The product is evaluated on all significant environmental effects throughout its lifecycle from manufacturing to disposal. A detergent formulated to be biodegradable and non polluting is judged friendlier than one whose formulation is harmful when discharged into the environment. Laws that incorporate a system to control solid waste, while voluntary in one sense, do carry penalties. The EC law requires that packaging material through all channels of distribution from the manufacturer to the consumer, is recycled or reused. It is estimated that between 25 and 45 percent of the weight of packaging materials contained in packaging waste is recycled. There is growing public awareness and political pressure to control solid waste. Total compliance with these systems is only a matter of time.

Unit 7

International Product Strategy

X Activity C:
l\vo main issues that need to be considered for consumer product strategy are:
1._______________________________
2._________________________________________________ .-:

7.6 PRODUCT ELEMENTS FOR ADAPTATION ________________________________________________________________

In order to identify the possible w ays by which a product may be adapted to an international m arket. It is useful to view the various dim ensions into three distinct elem ents as show n in Fig. 7.1.

Delivery Warranty
-Spares

3. Support element
-Installation -Other related services - Instructions - Repair and maintenance

2. Packaging element

PriceQuality Packaging Styling


1. Core element
Product platform Design features Functional features Legal compliance

B rand T ra d e m a rk -L ab ellin g

Fig. 7.1: Product Elements Model 1. Core Element: The core element consists of the physical product that derives its shape and form from essential technology and all its design and functional features. It is in the product platform that product variation can be added or deleted to satisfy

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local references. Alterations in design formulations, functional features, flavours, colour and other aspects can be made to adapt the product to cultural variations. The Japanese traditionally eat fish and rice for breakfast. So Nestle developed cereals with familiar tastes- seaweed, carrots, coconuts and papaya. Nestle soon captured 12 percent of the market share in the breakfast cereal market. > In markets where hot water is not easily available, washing machines have heaters in the machines that make up the adaptation. 2. Packaging Element: This element includes style features, labelling, trademarks, packaging, quality price and all other aspects of a product package. The importance of each element in the eyes of the consumer depends on the need that the product is designed to serve. In packaging, sub-elements frequently require changes that are both discretionary and mandatory. Some countries require labels to be printed in more than one language while others require them only in the local language. Labelling laws create special problems for companies selling products in various markets with different labelling laws and small initial demand. 3. Support Element: This element includes repair and maintenance, instruction, installation, warranties, deliveries and the availability of spares. It generally includes all the service related areas without which consumer durables would find it hard to generate a foreign market. In some countries, the concept of routine maintenance or preventive maintenance is not a part of the culture. As a result, products may have to be adapted for less-frequent maintenance. The literacy levels in a country may require a firm to change the product's instructions or make them available in the local language. The product element model can be a useful guide in order to determine the adaptation requirements of products proposed for foreign markets. International Brands An International Brand is defined as the use of a name, term, sign or symbol design or a combination intended to identify goods and services of one seller in multiple geographic regions and differentiate them from those of competitors. A Global Brand is defined as an international brand that makes use of the same elements on a global basis.

Unit 7

International Product Strategy

The international brand is one of the most valuable resources a company possesses. It envelops years of advertising, goodwill, quality evaluation, product experience, and support elements that the market associates with the product. The value of brands like Kodak, Sony, Me Donald's, KFC, Coca-Cola, Ford, Citibank, HP Compaq, Microsoft run into billions of dollars. A global brand gives a company a uniform worldwide image and substantial cost savings when introducing products with the same brand name. Nestle, Proctor & Gamble and Gillette have some brands that are promoted worldwide while some are specific to certain countries. Nestle has around 7000 local brands in its family of brands. Among its largest global brands is 'Nescafe'.

J S $A c tiv ity D :
Price is an important sub-element of the following element for adaptation:j j e j l j e j m j e j n j t ) C _ o r e

k k k k k k k k ) P a c k a g i n g e l e m e n t _ , _ e l e m e n t

l l l l l l l l ) S u p p o r t _ _ _ ^

7.7 ISSUES IN INDUSTRIAL PRODUCT STRATEGY There are more similarities in marketing product and services to businesses across country markets than differences, unlike the case of consumer product marketing. For industrial products that are customised (eg. Special alloy steels, specific software for specific application needs), adaptation takes place for domestic as well as foreign markets. There are three factors that affect demand in international markets for industrial products: I. Volatile demand n. Stages of economic and industrial development III. Levels of technology and services I. Volatile demand The most striking difference between consumer and industrial marketing is the cyclical nature of demand for industrial products. The concept of derived demand is

fundamental to the marketing of capital, high-value industrial equipment and services.

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Other terms used for industrial products are business product and B2B (business to business) products. Derived demand can be defined as that demand that is dependent on some other source or development. The demand for passenger aircraft is derived from the worldwide consumer demand for air travel services. The demand for oil refinery equipment is dependent on the consumer demand for petrol, diesel, kerosene and other types of oil in specific countries and region. There was a sharp fall in passenger air traffic following the September 11 terrorist attack in USA that ultimately led to the cancellation of orders for commercial jet aircrafts from Boeing and Airbus Industry. Industrial firms adopt suitable measures to manage this volatility by:

raising prices faster and reducing advertising expenditures in times of economic boom

maintaining broad product lines having wide application possibilities focusing on stability becoming selective in their operations in certain markets and making market share a secondary strategic goal.

II. Stages of economic development


These five stages have already have been already reviewed in unit 6. They represent an important environmental factor affecting the international market for industrial goods and services. The degree of economic development is generally used as a rough measure of a country's industrial market.

III. Levels of technology and services


Technology is the key to economic growth, and for many industrial products, it provides the competitive edge to industrial companies. In the present world scenario, the expansion of demand for industrial products and services is being generated by the economic growth in Asia, the creation of market economies in Eastern Europe and the CIS and the privatisation of state owned enterprises in Latin America.

Industrial Services
For many industrial products the range of services often decides the selection of the suppliers. Businesses also buy a variety of services that are not associated with physical products.

Unit 7

International Product Strategy

Professional services are purchased from advertising and legal firms, transportation and insurance companies, engineering and tax consultancy firms. Effective competition in foreign companies not only requires product capability but effective service, prompt delivery and the ability to provide a range of post-sales services such as warranty and the ability to provide spares and replacement parts for a specific time period. GE medical system provides a wide range of post sales services for hospitals and clinics that purchase their equipment- training; IT related services, associated healthcare services and parts for replacement and accessories. Customer training is rapidly becoming a major postsales service when selling technically complex products and equipment in countries that demand the latest technology but do not always have the necessary trained personnel. Cisco Systems is just one company that has collaborated with the Government and a university in Singapore to establish the first Cisco Academy Training Centre to serve East and the Far East nations.

R elationship M arketing
In order to fulfill the needs of an industrial customer, the international markets must understand those needs as they exist today and how they will change as the buyer strives to compete in more international markets that call for special relationships. This type of marketing is called relationship marketing. The objective of the relationship marketing is to make the relationship an important attribute of the transaction, enabling the supplier to differentiate itself from its competitors. Industrial products fit into a business or manufacturing process and their contributions will be judged on how well they contribute to that process. Constant and close communication with customers is the single-most important source of information about the development of new industrial products and services. Relationship marketing shifts the focus away from price to service and long term benefits. The reward is loyal customers - that translates into long term profits. Relationship marketing holds the key to success in virtually all international industrial markets.

^ A c tiv itv D :
Three factors that affect demand in international markets for industrial products are:

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7.8 SUMMARY This unit focuses on one of the P's in marketing namely product, from an international strategic viewpoint. The size and potential of international markets for both consumer products and industrial products is constantly shifting. Decisions about the product for international usage and consumption involve such issues as what product lines to introduce, to what extent a product should be adapted or modified to suit local tastes and customs and specific export markets. . A separate section on product adaptation has examined the need and the methods. Products have to satisfy functional requirements that can vary from country to country. Some of these issues are product standardisation, product life cycles, brands, packaging and services. This is followed by a separate section on the major issues in consumer product strategy. They are three distinct elements that help us to view the various dimensions in product adaptation- Core, packaging and support elements. These elements have been explained in some detail. The issues related to industrial product strategy are also discussed in a following section since different dimensions apply to industrial products. 7.9 KEY WORDS Product adaptation: The process of making modifications in products (such as colour, taste, packaging, size, etc.) to make them suitable for marketing in specific countries. Homologation: A term used to describe the changes that are essential for compliance to local standards. Green marketing: A term used to identify concern with environmental consequences of a variety of marketing activities. 7.10 SELF-ASSESSMENT QUESTIONS
144

Q1. What are the factors to be considered while designing a product for the international market? Q2. Distinguish between product adaptation and product standardisation?

Q3. D i s c u s s t h e f a c t o r s n e c e s s a r y f o r m a k i n g a s u c c e s

sful domestic product successful in an international market with one specific example.

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8.1 INTRODUCTION
The distribution process for international marketing involves all those activities related to time, place and ownership utilities for consumer and industrial products. The selection, operation and motivation of effective channels of distribution are often crucial factors in gaining an advantage in international markets. The formulation of distribution strategies is characterised by diverse activities and culturally differentiated roles of intermediaries. These strategies pose a challenge for any firm entering international markets. There are many situations that are similar in international marketing distribution and domestic marketing distribution. However, the environmental influences can lead to substantially different policies and channel options. The international marketers need to understand how these influences affect the distribution policies and options in approaches. The structure of the distribution system available in a country is affected by the level of economic development, the personal disposal income of consumers and the quality of infrastructure. While environmental factors such as culture, physical environment and the legal/political system can also have wide ranging effects, marketers who develop distribution strategy must decide how to transport the goods from the manufacturing locations to the end-consumer. The initial sections in this unit introduce the aspects related to the importance of international distribution, the categories and types of channels and the roles of intermediaries in both direct and indirect channels. This is followed by a section on the various factors affecting the choice of channels. The selection of agents becomes a key aspect in distribution strategy. The advantages of having an export agent are enumerated. This is followed by a typical draft of an agency agreement. In the final sections of this unit, the importance of physical distribution and the development of the internet as a channel are explained.

8.2 IMPORTANCE OF INTERNATIONAL DISTRIBUTION


Distribution channels are the link between producers and customers. It is acknowledged that effectiveness of marketing depends, among other factors, on making the product available at the right places and at the right time at the minimum possible cost. A distribution channel is defined as "the path traced in the direct and indirect transfer of title to a product as it moves from a producer to the ultimate consumer or industrial users." A distribution channel, in other words, is a set of firms and individuals that take title, or assist in transferring title to the particular good or service as it moves from the producer to
i, , . 1 4 8

International Distribution Strategy

the consumers. Channels of distribution consist of two categories of intermediaries or middlemen, namely: i Merchants who take title to the goods i Agents who do not take title to the goods but assist in the transferring of the title Each member of a channel is a link in a distribution network of organisations that extends from the producer to the users of products and services. Though it is found that some firms perform all channel functions, typically several organisations are linked together in a distribution channel to carry out the various activities including storage, transportation, sales contract, service, sorting and re-packing. The channels of distribution available in a country depend on its stage of economic development. It can be concluded that: The more developed countries have more levels of distribution, more speciality stores and supermarkets, more department stores and more stores in the rural areas. The influence of the foreign agents declines with economic development. The manufacturer-wholesaler-retailer functions become separated with increasing economic development. Financing function of wholesalers declines and wholesale markets increase with increasing development. The number of small stores declines and the size of the average store increases with increasing development. Retail margins improve with increasing economic development. ^Activity A; The channels of distribution in a country depend on its:

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8.3 INTERNATIONAL CHANNEL SYSTEM


In international marketing two categories of channels are involved, namely, channels between the nations, and channels within the foreign market. , The international distribution system consists of two sub-systems, namely, the domestic system and the foreign system. There are two ways of exporting, namely, direct exporting and indirect exporting. When the export is direct, the producer himself takes the responsibility for the marketing job and makes direct sale to any or more of the foreign customers. The important kinds of foreign customers (here the word customer is used to refer to the firm/person who buys the product from the exporter) - are importers, distributors, government departments, industrial buyers, retailers and consumers. If any of these customers is not a final consumer, he is a marketing middleman or a channel member between the producer and the final consumer. Whether to sell directly to the customers or indirectly through agents or distributors will depend on the relative strengths of the various factors involved. Indirect Exporting The distinction between direct exporting and indirect exporting is on the basis of how the exporter carries out the transaction flow between himself and the foreign importer or buyer. In indirect exports, the manufacturer utilises the services of various types of independent marketing middlemen. In other words, when a manufacturer exports indirectly, he transfers the responsibility for the selling job to some other organisation. On the other hand, in direct export, the responsibility for performing international selling activities rests on the producers. These activities are carried out by organisations that are administratively a part of the manufacturer's company organisations. The indirect method is more popular with firms that are just beginning their exporting activities, and with those whose export business is not considerable. Indirect exporting has the following advantages: . i Standing in the market: A new exporter's name will be an unknown element ai therefore, even though the price and quality of the product may match those of the new companies, the new entrant will be at a disadvantageous position. In such a situation it would be easier to gain credibility in the market if a known distributor can be persuaded to handle the product, because the standing of the distributor will help in assuring the customers about the quality of the new merchandise.

150

U nit 8

International D istribution S trategy

111.

Economies of Scale: Customers of certain range of products generally purchase a set of complementary products rather than one. A distributor handling a complete line can therefore effectively economise on selling costs. A manufacturer-exporter, selling directly may not enjoy this economic advantage, unless it is a very large company manufacturing a complete line of complementary products. The firm does not have to build up an overseas marketing venture.

iv. The channel is simple and inexpensive. v. The risk involved is less. vl Little or no investment required to enter the international market place. vii. The manufacturer incurs no start-up costs for the channel and is relieved of the Ksnonsibilities for physically moving the goods overseas.

m Tftmtemt&T^^^^^ costs; the costs for moving the goods are further reduced.
k No company personnel are required to do the overseas business. x. The middleman may have an established network of sales offices and international marketing &. distribution knowledge.

This method is, therefore, advantageous for firms with small means and for those whose limited export business does not justify large investments in developing their own international marketing infrastructure. The main limitations of the indirect method of exporting are: i The manufacturer gives up control over the marketing of its products to another firm. This situation may adversely affect the product's success in the future. i If the chosen intermediary is not aggressive, the manufacturer may become vulnerable, especially in the case where competitors are careful about their distribution practices. I The indirect channels may not necessarily be permanent. Being in the business of handling products for profits, the intermediary can easily discontinue handling a manufacturer's product if there is no profit or if a competitive product offers a better profit potential.

151

International Marketing

iv. If the product has a long purchase cycle and requires a large amount of market development and education, then the export middlemen may not devote the necessary effort to penetrate into a new market.

J$ Activity B;
a) When a manufacturer exports indirectly, the responsibility of the selling job ( ( b) ) is transferred to the other organisation ) is not transferred

Two significant advantages of indirect exporting are: 1.______________________________________________'

2.
8.4 DIRECT EXPORTING
Direct export refers to the sale in the foreign market by the manufacturer. Instead of using an export agent or export merchant, the manufacturer makes the sale directly to the foreign buyers. The export is direct, as the manufacturer does not use any independent middlemen in the channel between the home country and the overseas market. Due to the complexity of trade regulations, customs documentation, insurance requirements and worldwide transportation alternatives, people with special training and experience are necessary to handle these tasks. Also the current or expected volume must be sufficient to support the in-house staff. The factors in favour of selling directly are: i. Control: The exporting company will have direct control over the marketing operatic and, therefore, can devise and implement the proper marketing strategy intunewit| the changing marketing conditions. Customer Satisfaction: Buyers of highly specialised equipments prefer to c directly with the manufacturers as they expect to be completely assured of their s

ii.

UnitS

International Distribution Strategy

and backup system. Distributors may not have highly qualified technical people on their pay-roll for conducting sales negotiation for such equipment. Hi. Profit: By selling directly, the exporting company can save the commission that becomes payable to the agent. If the volume of sales in fairly high, it may become more economical to establish its own sales office than paying commission calculated on a percentage basis of sales turnover. Other advantages in direct selling are active market exploitation since the manufacturer is more directly committed to its foreign markets. Another advantage is greater control. The channel improves communication because approval does not have to be given to a middleman before a transaction is completed. Direct selling has some limitations. It is a difficult channel to manage if the manufacturer is unfamiliar with the foreign market. Moreover, the channel is time consuming and expensive. Without a large

v ol u m e of b u si n es s, th e m a n uf a ct ur er m a y fi n d it to o c o st ly to m ai nt ai

n the channel. A number of organisational arrangements are available to a company for carrying on direct exporting. These are: i The export business may be conducted by a domestic export department or division. ii The company may establish overseas sales branches or subsidiaries in addition to domestic marketing department. As a part of overseas sales branch, the company may also establish storage or warehousing facilities. ii A company may employ travelling salesmen for the overseas market. These travelling salesmen may be home based or may be attached to the foreign branches or subsidiaries. Types of Intermediaries and their Functions There are several types of intermediaries associated with both direct and indirect channels. The figure below gives the broad channels that are available to a manufacturer.

1 5 3

Unit 8

International Distribution Strategy

Importers:Importers identify needs in their local market and find products from the world markets to satisfy these needs. The importers purchase goods in their own names and act independently of the manufacturers. As independent middlemen, these channel members use their own marketing strategies and keep in close contact with the markets they serve. Foreign Distributors: foreign distributor is a foreign firm that has exclusive A rights to carry out distribution for a manufacturer in an overseas country or specific area. The distributor purchases merchandise from the manufacturer at a discount and then resells distributes the merchandise to retailers and sometimes to or final consumers. In this regard, distributor's function in many countries may be a the combination of wholesaler and retailer. But in most cases, the distributor is usually considered as an importer or foreign wholesaler. There are a number of benefits in using a foreign distributor. Unlike agents, the distributoris a merchant who buys and maintains merchandise in its own name. This arrangement simplifies the credit and payment activities for the manufacturer. To carry out the distribution function, the foreign distributor is often required to warehouse adequate products, parts accessories and to have facilities and and personnel immediately available to service buyersusers. and Foreign Retailers: foreign retailers are used, the products in question are If consumerproducts rather than an industrial product. There are several means by which a manufacturer may contact the foreign retailers and may interest them in carrying a product, ranging from personal visit by the manufacturer's representative to a mailing of catalogues, brochures other literature to prospective retailers. Most and large retailers prefer to deal directly with manufacturers. Large food chains in the USA and Europe are mostly in direct contact with manufacturers in order to foreign obtain price concession. Department stores, supermarkets, specialty stores, discount stores; and hypermarkets are among the most important retailers directly that buy from supplying countries. Government Departments/State Owned Trading Companies: In some countries government departments buy large quantities of certain goods often on a long-term basis. These are generally essential goods of mass consumption or of use in Government Departments. End Users:Sometimes, a manufacturer may sell directly to foreign end users with no intermediary involved in the process. This direct channel is a logical and natural choice for costly industrial products.
155

International Marketing

JS$ Activity C ;
An importer is an example of: ( ) Direct channel ( ) indirect channel

8.5 INDIRECT CHANNELS

156

A manufacturer may often find it impractical to sell directly to the various foreign parlies (i.e., foreign distributors, foreign retailers, government department, state controlled trading companies, end users etc.). There are many intermediaries that come between these foreign buyers and the manufacturers.

The kinds of local sales intermediaries, all can be grouped under two broad categories: manuf acturer i. Domestic Agents deals iL Domestic with one or Merchants more domest The basic difference between the two is ownership (title) rather than just the physical possession of the merchandise. Domestic agents never take title to the ic middle goods, regardless of whether the agents take possession of the goods or not. men Domestic merchants, on the other hand, own the merchandise, regardless of whether who in the merchants take possession or not. turn Domestic Agents move and/or Agents can be classified according to the principal whom they represent. Some sell the agent intermediaries represent the buyer; others represent the interest of the product manufacturer. Those who work for the manufacturer include export brokers, to manufacturer's export agents, export management companies and co-operative foreign exporters. Agents who look after the interests of the buyer include purchasing middle agents and country controlled buying agents. These are discussed below. men or final Export Management Companies: In some countries, there are Export users. Management Companies (EMC), which manage under contract, the entire Althou export activities of a manufacturer. When compared with export agents, the gh EMC has greater freedom and authority. The EMC provides extensive service there ranging from promotion to shipping arrangement and documentation. In short, the are EMC is responsible for all the manufacturer's many

Unit 8

International Distribution Strategy

international activities. The EMCs' are compensated in forms of commission or retainers plus commission. Export Broker: The function of an export broker is to bring a buyer and a seller together for a fee. The broker may be assigned some or all foreign markets in seeking potential buyers. It negotiates the best terms for the seller (i.e., manufacturer) but cannot conclude the transaction without the principal's approval of the arrangement. For any action performed, the broker receives a fee or commission. An export broker does not take possession or title of the goods. In effect, it has no financial responsibility other than sometimes making an arrangement for credit. The export broker is useful because of its extensive knowledge of the market demand and foreign customers. This knowledge enables the broker to negotiate the most favourable terms for the principal. Manufacturer's Export Agent: Export agents are individual or firms that assist manufacturers in exporting goods. Unlike EMC's, export agents provide limited services. These agents focus more on the sale and handling of goods. The advantage of using an export agent is that the firm does not need to have an export manager to handle all the documentation and shipping tasks. The disadvantage is the export agent's limited market coverage, which requires the use of numerous export agents to cover different parts of the World. The manufacturer's export agent works on commission. Purchasing Agent: The purchasing agent represents the foreign buyer. By deciding and conducting business in the exporter's country the purchasing agent is in a favourable position to seek a product that matches the foreign principal's preferences and requirements. Operating on the overseas customer's behalf, the purchasing agent's acts in the interest of the buyer by seeking the best possible price. The purchasing agent's client pays a commission for the services rendered. The purchasing agent is also known as the commission agent and buying agent. Country Controlled Buying Agent: This kind of agent performs exactly the same function as the purchasing agent, the only distinction being that a Country Controlled Buying Agent is actually a foreign government's agency or a quasi-governmental firm. The country controlled buying agent is empowered to locate and purchase goods for its country. This agent may have a permanent office located in countries that are major suppliers. Resident Buyer: Another variation on the purchasing agent is the resident buyer. A resident buyer is an independent agent that is located near highly concentrated production centers. Although functioning much like a regular purchasing agent, the resident buyer is different because he is retained by the principal on a continuous basis to maintain a search for new products that may be 157 suitable. The long-term relationship makes it possible for the resident buyer to be compensated with a retainer and a commission for business transacted.

International Marketing

Export Merchant: The domestic based export merchant buys the manufacturer's product and sells it abroad on his own. When this type of middleman is used in an international marketing channel the marketing job of the manufacturer is reduced to essentially domestic marketing, and except for certain modifications in the product mix which are sometimes required to suit the international market, all aspects of the international marketing tasks are handled by the export merchants. Export Houses: In India, there are a number of export houses that export products produced by many manufacturers. Some companies have established their own export marketing subsidiaries. They take responsibility for the promotion of goods, marketing research, credit, physical handling of the products. They have good contacts with the overseas buyers and may also have an established network of sales offices. Trading Companies: Unlike an export house, which concentrates on exports, a trading company is active both in exports and imports. Japanese trading companies have been very successful in promoting Japan's exports. Like export houses, the trading companies offer a broad range of services from marketing research to financing and present a relatively inexpensive way for the small or medium size firms to do international business. The advantages of using trading companies are enumerated below: i iL They can avail themselves of the various economies of scale in transportation, warehousing, and other areas related to physical distribution. They can avail themselves of export finance available at concessional rates.

iii. They are in a position to employ qualified and specialised staff to look after the complicated work relating to customs, legal problems, procedure and documentation. iv. They can bargain with large trading companies in foreign countries on an equal footing. v. They can achieve economies in export promotion by using the most effective advertising and publicity media as also by participating in many trade fairs and exhibitions. vi. They are able to absorb many of the risks inherent in international trade because of the wide range of products handled by them. Small industrial units can derive significant advantages by availing themselves of the services of trading houses and export houses: i. Information on market opportunities abroad.

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il Ability to provide finance through trade credits, investments, direct loans and loan guarantees. E Ability to absorb many of the risks inherent in trade because of the wide range of products they handle. iv. Sales opportunities in otherwise out-of-the-way markets. Cooperative Exporter (Piggy Backing): When a company does not find any channel-partner with sufficient interest to pioneer new products, the practice of piggy backing may offer a way out of the situation. Piggy backing is an arrangement with another company, which sells to the same customer-segment to take on the new products as if it were the manufacturer. The products retain the name of the manufacturer and both partners normally sign a multi-year contract to provide for continuity. The new company is in essence 'piggybacking' its products on the shoulders of the established company's sales force. A Japanese manufacturer of soy sauce Kikkoman decided to piggy back on Del Monte's sales force for its entry into Mexico. The two companies have signed an earlier technical agreement allowing Kikkoman to sell Del Monte's tomato juice in Japan. Following Kikkoman's entry into the US market, the company planned to enter several South American countries. The company also wanted to use Del Monte's existing strong retail sales network. As a result of this move Kikkoman was in a position to gain immediate distribution, a process it would have taken years to develop on its own. Similarly, Colgate Palmolive Company has been distributing Wilkinson blades in many international markets. Sony Corporation serves as a distributor in Japan for different European and US companies. Through its Sony International Housewares, Sony distributes for such companies as Whirlpool, Schick, Regal Ware and Health Company. Likewise Pepsi and Smirnoff have such arrangements for distribution of Vodka and soft drinks in USA and Russia. The principal asset of the cooperative exporters is their experience in dealing overseas as manufacturers themselves. Therefore they are more aware of and sympathetic towards the problems of other manufacturers interested in developing export markets. Under a piggyback arrangement the manufacturer retains control over marketing strategy, particularly pricing, positioning and advertising. The partner acts as a 'rented' sales force only.

I g > A c tiv ity C :


: a) Two differences between a domestic agent and a domestic merchant are:

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1.______________________
2.________________________________ b) Two advantages of trading companies are: 1.________________________________ ' 2._____________________________ 8.6 FACTORS AFFECTING CHANNEL CHOICE The following are some factors that need to be considered before taking a decision whe to go for direct and indirect exports. Factors The market Indirect Dispersed Small potential sale Consumer market Non-technical product The product Marketing skill of the Company Degree of control Financial condition Following are some additional points to be considered for channel choice: 1. Characteristics of the Product i. Unit Value - In general, direct sales are preferred for items of high unit valu ii. Bulk and weight - If bulk transportation is possible, direct exporting is prefer iii. Technical nature - Technologically complex and specialised products are usu Consumer goods Company lacks marketing skill and experience Company desires little control Weak financial condition Direct Concentrated Large potential sale Industrial market Technical products Industrial goods Company possesses marketing skill and experience Company desires high degree of control Strong financial condition

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iv. Perishability - The more perishable the product, the shorter should be the channel. v. vi. Fashion goods are usually sold direct to retailers. Standardisation - Indirect channels are possible for standardised

products. vii. Stages of market development - New products are promoted by direct sales. Indirect channels may be adopted for established products. 2. Who Buys the Products? i. Government Departments - In some countries, government departments buy commodities directly, often on a long-term basis. i Industrial Buyers - Large industrial companies often buy direct from producers their requirements of raw materials, metals or components. iii. Distributors - A distributor buys and holds large stocks of a product in return for an exclusive right to sell the product in the area represented by him. iv. Wholesalers - Some large wholesalers may prefer to buy directly from producers or manufacturers. v. Large Retail Stores - Large departmental stores may prefer to buy directly. They send either buying delegations or have their buying offices in the exporting country. mmmmmmmm)Volume of Sales Expected, i.e., the existing and the potential future size of the market. nnnnnnnn)Finn's Own Resources - How much does the firm want to be involved - the time and attention the firm can devote to exporting? Criteria for Selection of Channels L Costs involved - How much investment is required on the part of the firm for a particular channel?
-

r e s p o n s e t o a n d a c c e p t a n c e o f t h e p r o d u c t.

i. The behaviour of the competitors, i.e., what are the firms in similar line doing? iii. Possibilities of getting appropriate feedback about customers, regarding the

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Activity D : Three factors that are to be considered for taking decision on direct or indirect exports are: 1 . _ _ _

3.

8.7

SELECTING AND MOTIVATING OVERSEAS AGENTS AND AGENCY AGREEMENTS _____________________________________________________________

Overseas Agents In order to appreciate the market characteristics of a particular territory and to exploit the full potential of the market, it is necessary for an exporting organisation to have its own office in that market. But for many smaller companies, it is not possible to open their own offices abroad. Commercial agents can perform the functions, which an overseas office of the parent body is supposed to do. Therefore, the role of commercial agents is extremely crucial from the standpoint of exporting firms. The agent being a local person is thoroughly conversant with the market. He is also likely to have contacts with important persons in the business and, therefore, is in a position to promote the interest of the exporting firm. The agents secure orders in the name of and on account of the principal. But he does not trade on his own. He gets commission on the basis of the orders that he has secured. Advantages of having Agents The basic advantages of having an agent in the export market are as follows: i In some countries there are legal stipulations that all imports/ tenders are to be handled through a local agent who is a resident and citizen of the country. In such cases, appointment of the agent becomes obligatory. ii. The agent is a local man and is, therefore, supposed to be knowledgeable of the marketing conditions and prospects of specific products in that market. in. He is likely to have good contacts with the decision-makers at various levels, which may be crucial in the case of large contacts.

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iv. He will have a set-up in the maj or commercial centers of the country and, therefore, will be in a position to call personally on main buyers at regular intervals. v. Commercial and trade information relevant to the principal's product line can be passed on by the agent with greater speed.

vi. The agent is paid on commission basis on the total value of the orders secured by him. There is, therefore, no fixed or overhead cost. vii An agent, if he is well established, may have warehousing facilities, which are crucial in the export marketing of certain types of products. viii. An agency firm also has specialised sales staff competent to handle sales of sophisticated items. ix. An agent can provide after sales service, which is an integral part of the total marketing function for manufacturing items.

Identifying Foreign Agents


There are various ways to identify agents in the foreign markets. One way is to contact the Indian Embassies and the High Commissions for a list of agents who are working for the specified product group. The international merchant banks also have good deal of information on commercial agents in various countries. The chambers of commerce in various countries also are in a position to provide information on agents. Import promotion centers established in various countries can also help in this matter. There is also an International Union of Commercial Agents and Brokers at Amsterdam. This is an organisation, which can provide information on agents in European countries and the United States. Another method of identifying agents is to visit fairs and exhibitions. Since a large number of agents also visit these fairs it is possible to contact them personally. The final method of identifying agents is to insert advertisements in trade journals. Once a list of potential agents is prepared on the basis of the various techniques mentioned above, the next step for an exporter is to decide on the particular agent whom he would like to appoint. Agents have to be selected with care. Selection of agents takes time and effort and calls for good judgment. There are essentially three qualities, which an exporter should look for in an agent. First is character, which means that the agent must have established his credibility in the particular business he is engaged in. The second quality is capital, i.e., he must have a sound financial base for his business operations. And lastly, he must have the capacity, i.e., he should 163 have contacts in the right places and possess adequate

International Marketing

marketing expertise to promote the products of the principal. These are the three 'Cs' that really make an agent successful. Before deciding on a particular agent, the exporter should decide as to what type of agent he would like to have. A question may arise as to whether a big agency house should be approached or a smaller one will be better. The answer to this question depends on the level of business that the exporter expects to generate in the first and subsequent years. If the initial level of business is not expected to be large, a big agency house will not be interested in taking up his product. In such a case, a medium size agency organisation will be better suited for the exporting firm. Similarly, there are both advantages and disadvantages in appointing a very small agency firm. The advantage is that the firm being small will make sincere attempts to get business and will devote more attention to the promotion of exporting company's products. The disadvantage is that such an organisation may not have adequate contacts. Once the firm has identified the qualities that it expects of the agent and the range of service, which he has to render, the firm should obtain the following information in order to find out the appropriateness of that agent. These are: i iL How long has the agent been in business? How many salesmen has he got? What is their age and experience?

iii. Names of the other accounts he is presently handling. Does he carry any lines that are directly competitive with or complementary to the firm's lines? iv. Total turnover during the last few years. v. What is the average turnover per account? vi. Has he got adequate working capital? On the basis of the answers to these queries the firm should be able to evaluate the potentialities of various agents and make a final choice. Motivating and Controlling the Agents The exporting firm must develop a system for motivating the agent. One way to motivate the agent is through granting exclusive agency rights in a particular territory. This means that he will be solely responsible for the development of particular market and will receive commission on all orders, which the firm gets from the market.

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Another method of providing incentives to the agent is to introduce variable commission rates. In the beginning of the year a target may be set. If the agent is able to surpass the target, he may be given the higher rate of commission. Supplying promptly the sample orders is also one way to keep the agent happy. Providing promotional and published materials is an important instrument to motivate the agent. It may also be desirable to invite the agent periodically to the head office so that he can see the company's operations first hand and also participate in the formulation of the marketing strategy. The export firm must also have a system to evaluate the performance of the agent. One criterion of evaluation can be the share of the market that the company has secured and how the market share is changing over time. The annual rate of growth in sales is another criterion. The number of new customers developed by the agent can be another factor in the evaluation process.

Payment of Agency Commission in India


Payment of commission to overseas agents is allowed either by remitting the amount or by deducting it from the invoice value. The application indicating the particulars, such as, exporter's code number, customs/shipping bill number and date, name of commodity, name and address of the buyer/agent and export value, should be submitted to the authorised dealer together with an attested copy of invoice and documentary evidence in support of the amount to be remitted. For remitting the agent's commission, the exporter will have to purchase foreign exchange from the free market. Alternatively, he can maintain a foreign exchange account to the extent of 50 per cent of the f.o.b. value of his export earnings.

JS $ A ctivity E :
Two advantages of having an agent in the export market are: 1. ________________________________________________________________ .

2.
8.8 EXPORT AGENCY AGREEMENT
* An Agency agreement is a legal document, which establishes the commercial relationship between the principal and the agent.

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It incorporates the conditions actually agreed upon by the concerned parties for the conduct of business. When negotiating an agency agreement, the Indian firm should be careful on certain points. These are: i ii. Parties to the contract Contractual products

iiL Contracted territory iv. International buying groups may like to contact the exporter directly. Exporters should reserve the right to negotiate directly with international buying groups in his own country for orders which ultimately will be executed in the agents territory - whether the agent will be eligible to commissions on such sales should be made explicit in the agreement. v. Acceptance or rej ection of order When credit terms are involved and the principal is not sure of the creditworthiness of the buyer, he should have the right to reject the order. vi. Payment of commission a. b. c. payable. vii Settlement of disputes viiL Renewal and termination of agency A specimen agency agreement is given below: AN AGREEMENT made this..............................day of................20 ............................................................................... BETWEEN............................................. Whose Registered office is situated at ..........................................................................................(hereinafter called "the Principal") of the one part and
..................................................................................................................................

Rate on which commission to be paid Calculated on percentage basis - the base for such calculation The time when commission becomes

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(Hereinafter called "the Agent") of the other part.

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WHEREBY IT IS AGREED as follows: . (for use by Sole Agent) The the Principal appoints the Agent to be as its and from Sole

.....................................................................

Agent in....................................................................(hereinafter called' 'the area") for the sale of..............................................manufactured by the Principal and such other goods and merchandise (all of which are hereinafter referred to as "the goods") as may hereafter be mutually agreed between them. OR (For use by Export Houses/ Exporter not being manufacturer) The Principal appoints the agent as and from the____ _______________________________________to be its Sole Agents/ Agent in.........................................................(hereinafter called "the area") for the sale of ......................................................................................................... manufactured in India or...................................................(hereinafter referred to as "the goods") as may hereafter be mutually agreed between them. 2. The Agent will during the term of.................................years (and thereafter until determined by either party giving.........months' previous notice in writing) diligently and faithfully serve the Principal as its Agent and will endeavour to extend to the sale of the Principal within the area and will not do anything that may prevent such sale of interfere with the development of the Principal's trade in the area. oooooooo)The Principal will from time to time furnish the Agent with a statement of the minimum prices and the terms at which the goods are to be sold and the Agent shall not sell below such minimum price but shall endeavour in each case to obtain the best price obtainable. pppppppp)The Agent shall not sell any of the goods to any person, company, or

fi r m r e si d i n g o u ts i d e t h e a r e a, n o r s h a ll h e k n o w i n g l y s e ll a n y

of the goods to any person, company, or firm residing within the area with a view to their exportation to any other country or area without the consent in writing of the Principal. qqqqqqqq)The Agent shall not during the continuance of the Agency hereby constituted sell goods of similar class of such as would/or might compete or interfere with sale of the Principal's goods whether on his own account or on behalf of any other person, company, or firm whatsoever.

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rrrrrrrr)Upon receipt by the Agent of any order for the goods the Agent will immediately transmit such order to the Principal who (if such order is accepted by the Principal) will execute the same by supplying the goods direct to the customer, or his order. ssssssss)Upon the execution of any such order the Principal shall forward to the Agent a duplicate copy of the invoice sent with the goods to the customer and in like manner shall from time to time inform the Agent when payment is made by the customer to the Principal. tttttttt)The Agent shall duly keep an account of all orders obtained by him and shall every three months send a copy of such account to the Principal. uuuuuuuu)The Principal shall allow the Agent the following commissions (based on f.o.b. India Rupee values) in respect of all orders obtained by the agent in the area, which have been accepted and executed by the Principal. The said commission shall be payable every........................months on the amounts actually received by the Principal from the customers. vvvvvvvv)The Agents shall be entitled to commission on the terms and conditions mentioned in the last preceding clause on all export orders for the goods received by the Principal, for export into the area. Export orders in this clause mentioned shall not include orders for the goods received by the Principal from and sole delivered to customer's principal place of business outside the area although such goods may subsequently be exported by such customer into the area, excepting where there is conclusive evidence that orders which may actually be transmitted via the Head Office in India are resultant from work by the Agent with the customers. wwwwwwww)Should any dispute arise as to the amount of commission payable by

168

th e Pr in ci pa l to th e A ge nt th e sa m e sh all be se ttl ed b y th e A u di to rs fo r th e ti m e be in g of th e Pr

incipal whose certificate shall be final and binding on both the Principal and the Agent. xxxxxxxx)The Agent shall not in any way pledge the credit of the Principal. yyyyyyyy)The Agent shall not give any warranty in respect of the goods without the authority in writing of the principal. zzzzzzzz)The Agent shall not without the authority of the Principal collect any moneys from customers. aaaaaaaaa)The Agent shall not give credit to or deal with any person, company, or firm, which the Principal shall from time to time direct him not to give credit to or deal with.

Unit 8

and potent ial are bbbbbbbbb)The Principal shall have the right to refuse to execute or accept any geogr order obtained aphica by the Agent or any part thereof and the Agent shall not be entitled to any lly commission locate in respect of any such refused order or part thereof so refused. d aroun ccccccccc)All disputes or differences whatsoever arising between the parties out of d the or relating world; to the construction, meaning and operation or effect of this contract or the what breach is the thereof shall be settled by arbitration in accordance with the Rules of patter Arbitration of n of the Indian Council of Arbitration and the aware made in pursuance thereof their shall be curren binding on the parties. t deman ddddddddd)This agreement shall in all respects be governed and interpreted in d and accordance with what the Laws of India. deman IN WITNESS whereof the parties hereto have subscribed their signature on the day d and year first herein before written. patter n is (Signatures) likely to 8.9 IMPORTANCE OF PHYSICAL DISTRIBUTION_______________________

International Distribution Strategy

International physical distribution encompasses the logistics or movements of goods across countries from the sources of supply to the centers of demand. In other words, it is concerned with getting the right product to the right place at the right time in a good condition at a reasonable cost. Warehousing, transportation and inventory control are the major components of physical distribution. The final purpose of physical distribution activity is to provide adequate service to their customer. This is an activity, which offers a great potential for increasing efficiency. In international distribution there are complexities of national borders, customs of trade, tariffs and duties, carrier performances, monetary exchange, and the necessity of filling out numerous documents. Management of International Physical Distribution As mentioned earlier, the three important aspects of physical distribution are warehousing, transportation and inventory management. The basic decisions to be made concerning warehousing are how many warehouses of what size does the company need and in which country they should be located. The decisions on warehousing require information such as where the firm's customers, both current

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International Marketing

emerge in the future; and what level of customer service should be followed. All this information is analysed before making the warehousing decision. The transportation decision mainly involves choice of a model of transportation for shipping the goods, both internationally and locally within a foreign nation. This decision is affected by such pre-factors as the availability of transportation, nature of product, size of shipment, distance to be travelled, and type of demand and costs of different shipping alternatives. Inventory management deals with stocking inventory to fill customer orders. It involves two decisions - how often to order in a given period and how much to order. For an integrated decision on international physical distribution, these three aspects should be considered simultaneously. This amounts to considering physical distribution as a system. The cost involved in administering warehousing, transportation and inventory functions are inter-related, and they must be considered simultaneously for effective decision-making. xgf Activity E; Three important components of international physical distribution are:

8.10 THE INTERNET AS A CHANNEL__________________________________

An important distribution channel has emerged as another distribution method since the advent of e-business. Computer hardware and software companies and large music and book retailers were the real adopters of this method of distribution and marketing. Technically, e-commerce is a form of direct selling. Consumer services, consumer and industrial products, B2B services are some of the products marketed through e-commerce. It involves direct marketing from a manufacturer, retailer, service provider or some other intermediary to final user. Some of the e-marketers with an international presence are: Dell Computers Cooperation that generates more than 50 percent of its sales online; Cisco Systems generates more than $ 1 billion in sales annually through e-commerce. Cisco website appears in 14 languages and has country specific content for 49 nations. Sun Micro Systems along with its after - marketing company Sun Express, have local language information on more than 3500 aftermarket products.

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Although e-commerce is more developed in the USA due to the high penetration of PCs and because of the lower cost of internet access than elsewhere, other countries are also moving ahead at a fast pace .The expansion of B2B transactions will be accelerated by the growth of industrial inputs, such as steel, chemicals and car components, transactions by smaller firms and an increased number of business services offered over the Internet. Small and medium enterprises (SMEs) are expected to generate substantial growth in internet transactions, as well as to pool their purchases through various internet exchanges for everything from telephone services and home furniture to electricity. Although each order is individually small, such purchases when combined account for 30 to 60 percent of the firms total non-labour costs and are usually brought inefficiently and expensively. Reduced prices by bulk purchasing through an online intermediary and the saving resulting from placing and processing orders online (that is cheaper and faster compared to the traditional ways) could reduce costs by 10 to 20 percent. Services are ideally suited for international sales on an online basis whether it is banking, education, consulting or retailing it can be marketed through a website that is globally accessible. Outsourcing of traditional in-house tasks like inventory management, quality control, accounting, tax calculation and legal services are on the increase not only within the USA but also internationally. B2B companies can cut operational costs through online tractions and e-commerce, There are three major benefits: eeeeeeeee)It reduces procurement costs; it is easier to find the cheapest supplier and processing costs of transactions are reduced. fffffffff)It allows better supply chain management. 75 percent of all Cisco orders are online and their linkups with the supply chain management system reduce order cycle time from 8 weeks leading to increased customer satisfaction. HI. Tighter inventory control is possible -the direct links between Wal-Mart's inventory systems and its suppliers, each automatically generates a replenishment request. An important advantage of selling direct is that the total costs can be lowered so that the final price overseas is considerably less than it would have been had the local intermediary been present. When intermediaries are eliminated either the seller or the buyer must assume the functions that they performed. The e-supplier needs to sort out the following issues for him to be a viable player

in the intern ationa l mark et space .

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ggggggggg) ulture:Some of the important factors have been furnished in unit 05. The C website and the product must be culturally neutral or adapted to fit the special characteristics of the market. For example, the different cultural reactions to colour can be a potential problem for websites designed for global markets. hhhhhhhhh) daptation:Ideally a website should be translated into the languages of A the target markets. This may not be financially viable for some companies but the most important pages should be translated when the company is making a long term commitment to sales in another country. Web pages should be designed for that market. It is the company's responsibility to bridge the language and cultural gap. As competition increases a country specific website may make the difference between success and failure. iiiiiiiii)Local contact: Companies fully committed to foreign markets are creating virtual offices abroad. Foreign customers are more likely to visit sites in their own country and in the local language. jjjjjjjjj) ayment:The consumer should be able to carry out credit card transactions P either by e-mail (from a secure page on the website), by fax or over the phone. kkkkkkkkk) elivery:Once sufficient volume in a country or region is reached, container D shipments to free trade zones or bonded warehouses can be used for distribution of individual orders via local delivery services with the region. The same location can also be used for post sales services such as spare parts, defective product returns and supplies. lllllllll)Promotion:Advertising the company's presence in e-commerce and the products or services should also be carried out. Local language advertising may become a necessity in certain countries. Search engine registration, press releases, local newsgroups and banner advertising are some traditional methods.

$ Activity F;
a) The internet as a distribution channel is suited to the requirements of SMEs because:

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International Distribution Strategy

b) Two major benefits of the internet as a distribution channel are: 1. 2.___________________________________


8.11 SUMMARY

Various factors affect the choice and selection of distribution systems in international marketing. This unit has reviewed the process of selection and how environmental influences affect distribution policies and approaches. These considerations enable the international company to structure an efficient channel for products and services on a country-by-country basis. The importance and elements of a channel system for international distribution have been explained in the initial sections. The relative merits and demerits of direct and indirect exporting have been analysed. In situations where the manufacturer finds it impractical to sell directly to the various foreign intermediaries, the option of indirect channels has been covered in a separate section. This is followed by a section on the factors that affect channel choice. The role of commercial agents is crucial to exporting firms and the advantages of having agents are given alongwith the factors that motivate the agents. In the final section, the development of the internet as a channel has been explained.
8.12 KEYWORDS__________________ ._____________________________

Export Management Company (EMC): a term used for a company that manages under contract the entire export activities of a manufacturer. Export House: a term that describes a company that exports products produced by many manufacturers. They take the responsibility for the promotion of goods, marketing research, credit and physical handling of the products. Piggy backing: refers to an arrangement with another company which sells to the same customer segment to take on the new products as part of its product range. International physical distribution: refers to the logistics or movement of goods across countries from the sources of supply to the centers of demand. Warehousing, transportation and inventory control are major components of physical distribution. 173

International Marketing

9.1 INTRODUCTION Integrated marketing communication (IMC) comprises advertising sales promotion trade shows, personal selling and public relations. In many foreign markets, the availability of appropriate communication channels to customers can determine entry decisions. Very often, different messages may be appropriate for different communication channels, and vice versa. This unit attempts to cover the broad elements and sub-elements of the communications mix with special reference to the international environment which can be dynamic. It is important to determine the merits and demerits of the various IMC elements since they will vary from country to country. While the focus is on advertising and sales promotion, a brief discussion on the other components has also been included. The initial section covers the principles behind successful advertising and advertising methods followed by the directions taken by leading companies in sales promotion. Two recent channels that have opened up recently and merit consideration are: telemarketing and the internet as a channel. The role of public relation (PR) managers needs to be defined by considering the effects of PR efforts on an international platform-although many of the principles may be applicable to the domestic environments also. A separate section on corporate advertising has been included as the concluding section of this unit since it is gaining in significance as a result of the expansion of more companies into more foreign markets. 9.2 ADVERTISING AND PROMOTION International promotion is essentially a cross cultural communication and should take into account the social customs, beliefs, attitudes etc. International promotion can take place in the following five ways:

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2.

Direct mailin Advertising is most susceptible to sociological difference. The task of advertising g is to communicate information and persuasive appeals effectively. Advertising in Two foreign markets a pretty expensive affair. Advertising on scale is meaningful for is distin large multinational corporations operating through their own subsidiaries in ctive several markets. For small enterprises advertising in overseas markets in a big way featur is out of question for reasons of cost. They can however, advertise in trade es directories or in some specialised journals. It would be desirable for them to of direct approach professional consultants regarding choice of message, etc. media, maili ng U nified or Diversified Advertising Strategy meth It is sometimes argued that within certain geographical areas, not necessarily, od political national boundaries, the custom, culture and demand structuresare are increasingly becoming uniform due to extensive information flow and increased that international travel. Within such a setting it becomes, therefore, logical and economic the to follow a unified advertising policy. syste m is On the other hand, there can be no doubt that across the country peopleselect may speak different languages, may have different religions and traditions, and are subject ive to divergent physical and climatic conditions. To motivate in such situations and will definitely require proper adaptation of the advertising strategy to such diverse it that elements. is perso The criteria which help in determining whether unified or diversified strategy nal. It should befollowed are discussed below: is mmmmmmmmm) Type of product: When there are certain universal selling points select ive for some products, for example, razor blades, electric irons, automobile tyre, ball point pens,becau se the products are sold primarily on the basis of objective physical characteristics. Theseappro aches objective characteristics are likely to be considered by consumers to be identical, are made regardless of direct market differences, suggesting that the same appeals will be effective in all ly markets. only nnnnnnnnn) he homogeneity and heterogeneity of markets: T W hen to characteristics such as those income, education and occupations are alike, individual consumer characteristics who such as needs, attitudes, and customs may also be alike, thus suggesting that the advertisers use the same selling points. 1. Advertising

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International Marketing

have been identified as the target audience. It is personal because the letter and other publicity materials are mailed either by name or by designation of the identified receiver. The crucial first step in direct mailing method is the preparation of the mailing list. Once the list is ready, the letter and other printed materials are to be designed in a way so as to give a personal touch. The receiver must feel that it is not a routine letter but something different and personal. Direct mailing is generally less costly than advertising. Another most important requisite is the preparation of suitable sales literature. Sales literature can take the following forms: (1) company brochure or leaflet (2) product leaflets (3) price list (4) catalogues containing full listing and basic description of specific products.

JSZ Activity A t
A major step in direct mailing involves:

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3.

Personal selling

It is an effective means of reaching the buyers. It involves an alive, immediate and interactive relationship between the buyer and the seller. Major advantages of personal selling are:

T he str at

n be adjusted to meet the requirements of the buyers. The seller gets to know the prospective buyer's reaction almost instantaneously. He can collect information about the buyers markets and environment. He can provide technical and commercial information to the buyers.

eg Personal selling calls for very meticulous preparation on the part of salesmen in terms of acquiring all the necessary information about the product, pricing etc. but also y skills for personal communication. Salesmen should develop the necessary skills to be able to survive and grow in the competitive markets the world over. Personal selling ca can also cultivate long term personal relationship with the buyer. If a personal rapport is developed with the buyers, they would be hesitant in shifting to unknown suppliers.

Unit 9

International Promotion Strategy

Personal selling can be used effectively in industrial market for selling technical goods like machinery and equipments. However it is expensive but very effective. The exporter may lack the intimate and diverse knowledge of the environment in foreign trade.

& Activity B:
Two major advantages of personal selling are: 1.___________________________________________________________________

2 / _________________________ .

4. Store prom otions


This is a promotion method by which a country's merchandise is promoted by a department store where either a complete floor or a shelf can be hired for displaying products.

5. Trade fairs and exhibitions


Fairs and exhibitions constitute the means of presenting goods and services in an attractive manner with the aid of colour, light and motion in order to catch the imagination of the visitor, attract his attention and get him interested in the objects displayed. They help to reach the public which may not be reached in any other way or which by nature would disregard other media or publicity. Fairs are more useful for industrial products whose demonstration is more effective.

T r a d e F a ir s
Participation in a trade fair will help an exporter to have an idea of: ooooooooo)What is available in the market concerned? ppppppppp)Who would be his competitors? qqqqqqqqq)To what extent would the product have to be adapted? rrrrrrrrr)Prevailing prices in world markets sssssssss)Strengths and weaknesses of competing products. In addition, he would be able to know the new developments and technological trends in his industry. He may also come across a possible buyer for his product and an agent to represent him.

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Generally the term trade fair is used to mean general large fairs, whereas exhibitions as specialised fairs or solo or company exhibitions. Even in the category trade fairs, there are different types. ttttttttt)General Fair: In these fairs there are exhibits of all types and they have attraction both for the business firms as well as for the household buyers. There may be separate pavilions for separate product groups. uuuuuuuuu)Specialised Fair: These fairs are highly specialised in the sense that only specific products are displayed. These fairs are intended for the trade and industry and not for the general public. The objective of such fairs is not only to conclude deals immediately but also to have first hand knowledge of technical developments in that particular sector, to identify business partners on a long term basis or to get ideas for product development.

Exhibitions
vvvvvvvvv)Solo exhibition: Sometimes the government of a country may organise an exhibition of its export products in a country where market prospects are bright. The exhibition may be a specialised one i.e., where only a small number of related product groups are displayed or a general exhibition showing all important export products of the country. wwwwwwwww)Company exhibition: Such an exhibition is organised by an exporting firm to exhibit its own products depending on the nature of the products. The exhibition may be open to trade and consumer both.

Pre-Fair Planning
Once the decision is taken that the company should participate in the fair or the exhibition, it must prepare an action plan to derive maximum benefit out of this participation. It must see that all the organisational problems associated with the participation are identified and solved. Secondly it must prepare marketing and follow up plans to concretise the leads that may be obtained during the fair. The basic points which should be considered in this connection are given the form of a

182

checkl marketing plan ist below zzzzzzzzz)Draft preliminary budget :

(a) Befor e the fair:


xxxxx xxxx)P re pa re m ar ke t re se ar ch re p or t yyyyy yyyy)D ra w u p

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International Promotion Strategy

aaaaaaaaaa)Make site booking bbbbbbbbbb)Reserve hotel accommodation cccccccccc)Appoint customs agent to clear exhibits and display materials dddddddddd)Finalise budget eeeeeeeeee)Prepare publicity and advertising materials ffffffffff)Submit draft of stand design to fair authorities for approval gggggggggg)Issue invitation (direct mailing)

(b) D uring the fair:


hhhhhhhhhh)Ensure that the stand is adequately manned throughout. iiiiiiiiii)Ensure that all the visitors to the stand are welcome and their enquiries are answered and recorded. jjjjjjjjjj)Ensure that handout material is always available. kkkkkkkkkk)Obtain visiting cards of the visitors. llllllllll)Visit other stands to establish personal contacts. mmmmmmmmmm)Arrange follow up appointments with visitors, if required.

(c) After the fair:


1. I Arrange disposal of stand and exhibits in accordance with local customs and regulations.

2. Compute details of all enquiries received and business conducted. 3. Prepare the action plan for following enquiries.

> A c tiv ity C ;


a) A company manufacturing welding electrodes will prefer to participate in: ( ) General fair ( ) Specialised fair

1 8 3

International Marketing

b) Two important items in the checklist for planning participation in an exhibition are: 1.____________________ 2._________________________________________________ 9.3 INTERNATIONAL ADVERTISING ISSUES ____________________________________________________________________ A company that seeks to create an international campaign must have the ability to transform its domestic campaigns. There are strong reasons to create such a campaign. The creative process will force the company to determine whether there is demand on the international front for its product. The first mover advantage gained by a company in determining global demand for any product is huge since it commands an edge over its competitors. Because advertising is often designed to add psychological value to a product or brand, it plays a more important role in marketing communications for consumer products than in marketing industrial products. Frequently purchased and low cost per unit products will generally require heavy advertising. The maximum spending on advertising for different categories of products in 1998 is given in table 9.1. Table 9.1 : International product categories measured by advertisement spending Rank 1 2 3 4 5 6 7 8 9 10 Product category Automotive Personal care Food Entertainment and media Drugs Soft drinks Electronics Cleaners Fast food restaurants Computers, software, peripherals

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Companies like Unilever, Nestle, P&Q Coca-Cola spend nothing less than $1 billion in advertising outside USA. Clearly, the growth of international advertising will continue as some nations reach maturity stage and some new nations appear in the growth stage. The potential for international advertising also increases as companies recognise the emergence of new concepts such as product cultures. Some segments, for example, can be defined on the basis of global demography; youth culture is an example -rather than ethnic or national culture. Athletic shoes and casual wear in clothing can be targeted to a worldwide segment of young adults in the 18-25 years group. MTV is just one of the media vehicles that enable people, virtually anywhere, to see how the rest of the world is affected by products that are popular in other countries. Many human wants and needs are similar if presented within recognisable experience situations. International advertising also offers economics of scale in advertising as well as improved access to distribution channels. Nestle's 'NESCAFE' is marketed as a global brand even though advertising messages and product formulation vary to suit cultural differences. The overall requirements of communication and persuasion are generally fixed in nature and do not vary much from country to country. The same is true for the components of the process of communication. The advertiser's message must be encoded via the appropriate channels and decoded by the customer or receiver. The company faces the following major difficulties in its attempt to communicate with customers in any location. I. The message may not reach the intended recipient. This problem may be related to the advertiser's lack of knowledge about suitable media for reaching certain types of audience. The effectiveness of TV as a medium will vary with the proportion of TV viewership in a particular country. n. The message may reach the target audience but may not be understood, or (worse) it might be misunderstood. The target audience's level of understanding or improper encoding may be a problem. HI. The message may reach target audience but it may still not induce the recipient to take action. This could be the result of a lack of cultural knowledge about a target audience. IV. The effectiveness of the message may be lost because of 'noise'. Noise here, refers to external factors such as clutter of competitive advertising and confusion at the receiving end.

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The key question international marketers' face is whether the message and media strategy should be modified from country to country. Coca-Cola is of the school that consumers differ from country to country and they must be reached by advertising tailored to the respective country. However, there are specific products categories (like software) for which international advertising messages are not only viable but have very substantial cost advantages in brand building on an international scale. Localised and globalised advertising both have their rightful places in the advertising world. For successful international advertising, a global commitment to local vision is an essential attribute. An international advertising campaign will result in: Substantial cost savings Increased control Potential leverage for global appeal

A localised advertising campaign will result in: Focus on the most important features of a product in each nation An enhanced image of cultural sensitivity Greater chances of getting the message understood and relating to the unknown customer g> h)

The approach will depend on the product involved and a company's objectives in a particular foreign market. J& Activity D ; a) Two problems associated with communication with potential customers in any location are: 1.___________ 2.________________________________________ b) A software product is one category where the following type of advertising is more suitable ( )
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localised advertising (

standardised advertising

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International Promotion Strategy

9.4 SALES PROMOTION


Sales promotion refers to any consumer or trade program of limited duration that adds tangible value to a product or brand. Sales promotion laws and usage vary around the world but usually comprise the following: nnnnnnnnnn)Promotional pricing tactics oooooooooo)Contests pppppppppp)Games qqqqqqqqqq)Premiums and specialties rrrrrrrrrr)Dealer contests ssssssssss)Merchandising materials g) Tie-in and cross-promotions h) Trade shows and exhibitions \) Sponsorship The purpose of sales promotion is to stimulate customers to sample a product or to increase consumer demand. Trade promotions are designed to increase product availability in distributing channels. Besides providing a tangible incentive to buyers, sales promotion also reduces the perceived risk buyers may associate with purchasing the product. From the company's viewpoint, sales promotion provides accountability -the manager in charge of the promotion can immediately track the results of the promotion. Several types of sales promotion techniques are under review by individual countries. This necessitates a constant monitoring of regulations to ensure that a company's promotion techniques comply with local regulation. Most European countries have a limit on the value of the premium given. Colgate was sued by a local blade manufacturer in Greece for giving away razor blade with shaving cream. Austria considers premium to be a form of discriminatory treatment towards layers. In Finland, premiums are allowed so long as the word 'free' is not used with them. Belgium, Germany and Scandinavia have strict laws concerning promotion emanating from their desire to protect consumers from being distracted from the true value of a given product or service.

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In France, it is illegal to sell a product for less than its cost. In Germany, marketers must notify authorities in advance if they plan to have a sale. It is restricted to such events as going out of business, giving up a particular product line, end of January (winter), end of July (summer) and a twenty-fifth anniversary.

9.5 TELEMARKETING_________________________________

'"

When personal selling is carried out over telephone networks, it is called telemarketing. Although telephone selling has been in existence for a number of years in the developed countries, the growth of the direct marketing field has given a big push to this mode of selling. In overseas markets, telemarketing is not as far developed as in the USA because of the low penetration levels of telephones in the private households. In addition unsolicited sales calls are coming under the scanner in many countries under consumer protection law and invasion of privacy. Germany restricts unsolicited calls on grounds of privacy invasion and this ban even applies to an insurance salesperson's announcement of a visit.

9.6 THE INTERNET _ _


The internet is emerging as a viable medium for advertising. Its use in business to business communication and promotion via catalogues, product brochures, and instruction manuals is rapidly growing. Since a large number of businesses and industrial across the world have the internet, it can reach a very large proportion of the business to business market. Its usage as an advertising medium by consumer product companies is also steadily growing. Many goods companies have e-stores and others use it to push sales in retail outlets. The growing number of internet households accessible outside the USA generally constitutes a younger better-educated market segment with higher than average incomes. This group is an important market niche for many companies. However, new limitations will be set as the internet usage continues to grow in new and emerging markets. Issues such as pay-per-view, taxes, unfair competition, import duties and privacy are being addressed by many nations across the world.
*

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Serious internet advertisers or e-marketers need to be more effective in communicating the existence of their websites via other advertising media. Already, companies are increasingly posting vacancy and recruitment advertisements with full details on their websites while the print media are used merely to inform the reader to visit the company website for further details.

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International Promotion Strategy

& Activity E:
A good response from overseas customers to a marriage bureau can be expected in India if it advertises: ( ) in the print media

( ) in the local, regional language press ( ) in search engines on the internet

y./ rjjjL/j.\_^ i^j^i^i.--

The company's public relations (PR) department serves the purpose of fostering goodwill and understanding among its constituents both inside and outside the company. PR managers attempt to generate favourable publicity that is a non paid form of communication. They also play a key role in responding to disturbing press and media reports or controversies that arise because of company activities in different parts of the world. The basic tools of PR include: news releases newsletters press conference tours of plants and manufacturing establishments articles in trade and professional journals company publications and brochures TV interview appearances by company personnel special events and sponsorship homepages on the internet

Generally speaking, a company has little control on how a story gets reported. The company cannot directly control the tone or slant of the story. Sometimes, publicity is generated whenacompany simply goes about the business of international marketing activities. Nike received a great deal of negative publicity regarding alleged sweatshop conditions in factories run by sub contractors.

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It is in crisis situations that the ultimate test of a company's understanding of the power and importance of public relations comes to the forefront. The best response is be forthright and direct, reassuring the public at large and providing the media with accurate information. The Bhopal gas tragedy in 1980s is a classic example of how Union Carbide (a respected MNC in those days) had to face the brunt of public anger and discontent and found it difficult to settle the claims of victims' relatives even 15 years after the event. Advertising publicity and other forms of communication are important tools for the international marketer. All these elements can be used in international marketing either alone or in varying combinations. The identification of global appeals and benefits forces companies to probe deeply to identify the basic needs and motives. Advertisers may place a single global agency in charge of worldwide advertising or use one or more agencies on a regional or local basis.

Sony in India
Sony is the world's second largest consumer electronics maker after Matsushita. Ii recorded consolidated annual sales of about $67 billion for the fiscal year ending March 2005. The consumer electronics division contributes about 66 percent of the company's overall turnover. Sony Corp has been the subject of a clutch of restructuring programs and has cut 10,000 jobs and closed down 11 manufacturing locations out of 67 in the recent past. Sony Corporation now considers India a fast growing market for future growth. In addition to its dealer network in India, Sony has established 'Sony World' outlets that exclusively stock the popular and the latest range of Sony products. Sony expanded its dealers and network in India from 1800 dealers to 4700 dealers and the outlets from 157 to 174. With more outlets, the average sales per outlet has increased that is reflected in the growth of its business. More Sony exclusive outlets are being planned in residential areas, the idea being that the customer can visit the showroom at their leisure time with their families, which will help them have a feel of the products before taking a decision. In addition, the interiors are also being spruced up to impart the exclusive look and feel of Sony. The company has hired architects and store designers, making it one of the few companies in the country to do so. The company claims to have registered several success stories with its new retail initiative. Another strategy that has worked for Sony in India is the establishment of strong dealer

190

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International Promotion Strategy

networks. There are many first-time dealers who have never felt the need to switch over to strong competitors like Samsung and LG Electronics. Sony has also realised the importance of making available in India its latest range in TV sets, audios, and digital imaging products simultaneously as elsewhere in the world. Sony's portfolio in India includes its LCD TV range (Wega), projection televisions, plasma televisions, hi-fi audio systems, car audio systems, DVDs, digital camcorders, home theatre systems, PC monitors and laptops (under the VAIO brand). Sony's highest selling item globally remains its Walkman, the product that revolutionised music history in the world, but in India it is colour TV sets that account for the maximum business both in value and volume. The flat TVs and flat panel TV sets are presently the fastest growing segment in India. The company has a dominant market share of 85 percent in the India camcorder market. So far, Sony has remained a low-profile advertiser with an advertising budget that is about 6 percent of its turnover. Dealers seem to differ on the impact of advertisements by the company. The company is also relying heavily on print media for its advertising. Even when it launched the BRAVIA range of LCD TV sets, Sony focused on getting the showroom right and training the sales staff rather than above-the-line advertising. With the Japanese giant ready to reinvest in the Indian market, Sony India looks ready for a harder second round battle.
Source: Business India

9.8 CORPORATE ADVERTISING More and more international companies who are shifting their advertising budgets to corporate campaigns realise the value of a broader-based image. Canon, Vivendi and ABB are just three examples that are spending more money on corporate image advertisements to boost the profile of the corporate brand. Canon, for example, shifted 10 percent of its marketing budget in Europe to a corporate brand campaign. The firm wants to use its corporate advertising to help reposition the firm. It expects to achieve the shift from being a manufacturer of office automation machines to a office solutions provider. To make the transition, Canon has used an advertising campaign that carries the tag line: 'created by' with the visuals showing how Canon products stimulate consumers and companies to achieve their goals.

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ABB had a different reason for investing in a corporate campaign. They wanted to raise their profile in USA, when it was found that many policy makers there were unaware of ABB's capabilities. i These global firms are discovering that corporate campaigns that place a premium on image and broad information rather than specific brand features or performance characteristics, are very successful in establishing the name of the firm in the minds of both consumers and corporate business buyers. The vast majority of corporate campaigns run by consumer goods manufacturers are undertaken by firms in the shopping goods category, such as appliance and auto marketers. In terms of media use, firms in USA have found both the magazine and TV media to be well suited to corporate advertising efforts. The following points summarise the purpose for corporate advertising: tttttttttt)Build the image of the firm among customers, shareholders, the financial community and the general public. uuuuuuuuuu)Boost employee morale or attract new employees. HI. Communicate an organisation's view on social, political or environmental issues. vvvvvvvvvv)Better position the firm's products against local and foreign competition that is often perceived to be of high quality. wwwwwwwwww)Play a role in the overall integrated marketing communications of an organisation as support for main product or service advertising. The three basic types of corporate advertising are: xxxxxxxxxx)Corporate image advertising: The major portion of corporate advertising efforts focus on enhancing the overall image of a firm among important constituents-typically, these are customers, employees, and the general public. When IBM promotes its image through the slogan: "Solutions for a small planet" or when Toyota uses 'Investing in the things we all care about' to promote its five manufacturing plants in USA, the goal is to enhance the broad image of the firm. yyyyyyyyyy)Advocacy advertising: This type attempts to establish the position of the company on important social, political or environmental issues. It is referred to as advertising that addresses and influences public opinion on issues of concern to the sponsor. Typically

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International Promotion Strategy

the issues are directly relevant to the business operations of the organisation. Chevron, USA is one MNC that has used advocacy advertising to state its position on important environmental issues. 3) Causes related advertising: This type of advertising features a firm's affiliation with an important social cause-reducing poverty, AIDS control, increasing literacy and curbing drug abuse are some examples. The firm generally donates money to a non profit organisation in exchange for using the company name in connection with a promotional campaign. The firm's association with a worthy cause is expected to enhance the image of the firm in the minds of consumers. Corporate advertising serves an important supportive role for brand advertising and it can offer more depth and breadth to a firm's integrated marketing communications program.

$ Activity F:
In a situation where an Indian company wants to attract foreign investment, it should undertake: ( ) Product advertising ( ) Corporate advertising ( ) Product & service advertising ( ) Brand advertising 9.9 SUMMARY The MC program includes coordination among its major components namely, advertising, sales promotion, public relations and direct marketing. Global and international marketers face special problems in every market related to legal, language, media and production limitations. It is necessary to consider these when designing and formulating an IMC program. This unit has covered the principles of the major components of IMC with special reference to foreign facing international advertisers in designing the best messages for each of the markets being served. There is great risk of cultural misunderstandings in both public relations and advertising media.

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Brief reviews of the components other than advertising and sales promotion have been included. In the current business environment of extensive outsourcing in the IT and other industries, there is a special focus on two relatively new developments-telemarketing and use of the internet as a medium for advertising. i In the final section, a review of the basis and purpose of corporate advertising has been included. Significant changes are occurring in communication technologies that are causing dramatic changes in the structure of IMC programs in various companies. Operations in international markets cannot be disassociated from a fundamentally sound IMC program. 9.10 KEY WORDS _____________________________________________

Integrated marketing communications (EMC): This is a term of recent origin to describe all the major components of the marketing communications mix generally used by organisations and entities-namely advertising, sales promotion, public relations and direct marketing. Store promotion: Apromotion method where a country's merchandise is promoted by a department store or any retail outlet where either a complete floor or a shelf can be hired for displaying products. Telemarketing: The act of personal selling carried out over telephone networks is called telemarketing. Corporate advertising: Advertising that is used to boost the profile of the corporate brand instead of the physical product or service. 9.11 SELF-ASSESSMENT QUESTIONS Q1. Discuss the various techniques of sales promotion in overseas market. Q2. Why and how does advertising for foreign markets differ from that of domestic markets? Q3. Discuss the role and significance of trade fairs and exhibitions in promotion exports. Make a checklist for a company to plan its participation. Q4. Discuss the various factors you will take into account in selecting an advertising agency for international marketing.

International Marketing

10.1 INTRODUCTION Even when the international marketer produces the right product, carries out the appropriate promotion and takes measures for ensuring the availability of the product at the right place, the efforts will not produce results unless the pricing is right. Until the product's price reflects the customer's perception of quality and benefits in the price, the task of the international marketer remains unfinished. Determining the correct price in an international market is one of the most difficult challenges that go far beyond the way price is determined in domestic markets. This unit focuses on the major pricing policy questions that arise from the special factors found in foreign markets. The initial section deals with the introductory aspects in pricing, the two basic types of pricing orientation and the factors that affect export pricing. This is followed by the guidelines and factors that help the marketer decide transfer pricing - a very significant development that has taken root in today's world of increasing globalisation. The basic issues in marginal cost pricing are given along with the nature of the components of an export price based on marginal costs. A separate section deals with the environmental influences and issues that have a significant impact on international pricing. Price escalation issues such as exchange rates, inflation and government controls and subsidies have been briefly covered. Two other issues of importance in the current business environment are: counter trade and dumping. These have been highlighted prior to the final section on pricing approaches that describe some of the relevant types of pricing adopted by companies operating in foreign markets. 10.2 PRICING ASPECTS ______________^__________________

P ric in g is a p artic u larly critic a l an d c o m p lex v ariab le in o v e rse a s m a rk e tin g stra te g ie s T h ep r ic in g d e c is io n u ltim a te ly a f f e c ts a n o r g a n is a tio n 's a b ility to s ta y in th e m a rk e t. A t th es a m e tim e , th e u n c e rta in tie s o f e n tire ly u n p re d ic ta b le fo rc e s su c h a s c o s t c o m p e titio n a n d m a n d th re a te n a n d p re s e n t n u m e ro u s p itfa lls fo r in te rn a tio n a l de p ric in g .

In te rn a tio n a l p ric in g h a s s e v e ra l p ro c e s s e s a n d ra m ific a tio n s . C o rp o ra te h e a d q u a rte rs h a s a ro le in m a k in g p ric in g d e c is io n s. D iffe re n t p ric e -s ettin g a p p ro a c h e s a re a v a ila b le , a n d av a rie ty o f c o n c e rn s in flu e n c e p ric in g d e c is io n s in c lu d in g in tra firm p ric in g , d u m p in g a nleasing . A nd in tern atio n al m ark ets m ust w ork w ith facility th rou gh all th ese d co m p lex variab les.

5198

P r ic in g , a n im p o r ta n t d e c is io n in a n y b u s in e s s , b e it d o m e s tic o r in te rn a tio n a l, d ir e c tlya ffe c ts re v e n u e a n d th u s p ro fita b ility . F u rth e r, a p p ro p ria te p ric in g a id s p ro p e r g ro w th daesv e lo p m e n t o f m a s s m a r k e t d e p e n d s to a l a r g e e x te n t o n p r i c e .

Unit 10

International Pricing Strategy

.
f

Unifonn versus differentiation pricing


To what extent the setting of uniform prices is desirable in worldwide market is a question that multinational companies perpetually face. Some international markets argue for uniform prices. Others, however, observe that obvious differences in the market of various countries favour the use of internationally differentiated pricing policies. The decision between uniform and differentiated pricing would be dictated by such factors as competitive conditions, lifestyle position of the product, product diffusion process, regulatory considerations, channel structure, company objectives, and consumer price perceptions. If the competitive position of the firm does not vary from market to market, it may be worthwhile to pursue a uniform pricing strategy. A firm essentially in a monopoly or differentiated oligopolistic situation may price its product uniformly on a global scale.

&$ Activity A:
Pricing is an important decision for any business that directly affects Production and sales ( Sales and profitability ( Production and profitability ( Sales and share value ( ) ) ) )

10.3 PRICING ORIENTATION___________________________________.


Companies mainly follow two different types of pricing orientation: The cost approach The market approach

The cost approach involves firstly computing all relevant cost and then adding a desired profit mark up to arrive at the price. The cost approach is popular because it is simple to comprehend and use and leads to fairly stable prices. Under the market approach, pricing starts in a reverse fashion. First an estimate is made of the acceptable price in the target segment. An analysis is performed to determine if this price would meet the company's profit objectives. The market approach focuses on pricing from the viewpoint of the customer. Unfortunately in many countries it may not be easy to

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International Marketing

develop an adequate price demand relationship and therefore implementation of the market approach may occur in vacuum. It is this kind uncertainty that forces marketers to opt for the cost approach.

Activity B :
Two types of pricing orientation in export marketing are: 1.

10.4 TYPES OF PRICING 1. Export pricing


Export pricing is affected by three factors: a. The price destination (i.e., who it is that will pay the price - final consumer, independent distributors, a wholly owned subsidiary, a joint venture organisation) The nature of the product (i.e., whether it is raw or semi processed material components, finished or largely finished products or services, or intangible property, patents, trademark formulas) The currency used for billing (i.e., the currency of the purchaser's country, the seller's home country currency, or the leading international currency)

b.

c.

There are five principal ways of quoting export prices, ex-factory, free alongside-ship (FAS), free on board (FOB), cost insurance and freight (GIF) and delivered duty paid.

2.

Transfer pricing
Transfer pricing refers to the pricing of goods/services among units within corporation. Essentially, pricing decisions are affected by the following factors: a. Income tax liability within the host country Tariff and/or custom duties Exchange controls

200

b. c.

T
Unit 10 International Pricing Strategy

d. e. f.

Profit repatriation restriction Quota restrictions Predict status

To set transfer prices, companies usually set guidelines like the following: i All domestic and foreign units are profit centers and transfers must be set at levels that yield a reasonable profit to both the selling and buying units. iL Profit is divided according to functions performed in producing and marketing goods to unrelated buyers. ii Gross margins (the spread between production and distribution cost and the sale to an unrelated buyer) are divided more or less evenly between domestic producing and foreign marketing units. iv. Overall impact on consolidated profit is the paramount consideration and profit is taken where it is best for the total corporation.

& Activity C;
Two guidelines important for setting transfer price are: 1.__________________________________________________________________

2.

3. M arginal cost pricing


Pricing on marginal cost basis means that the prices should be so set that at least the marginal cost, popularly known as direct costs are covered. Ordinarily the total cost can be divided into two broad categories: fixed cost and variable cost. Up to a certain level of output, fixed costs remain unchanged, irrespective of the volume of output. Variable costs, on the other hand, vary in proportion to the volume of production. Thus, under the marginal cost pricing system, the relevant cost is the variable cost or the direct cost. The use of marginal cost pricing in the case of export markets is advocated on the basis that if the manufacturers are able to realise the direct cost including those involved in export operations specifically, they would be able to export without in any way affecting the overall profitability of their firms.

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There are a number of points in support of the use of marginal cost for export pricing: a. b. c. Export sales are additional sales and, therefore, these need not be burdened with overhead costs which are ordinarily recovered from the domestic markets. The manufacturer's product is probably less well known in foreign markets than that of his competitors from developed countries. The markets for the products of developing countries are usually in countries with low national income. In such cases, high prices may limit the sales to a small segment of the market. Low prices, on the other hand, may serve to widen and create markets. Competition in foreign markets may require quotation of a lower price.

d.

The question now arises: how to recover the fixed or overhead costs? There are two possibilities: i. ii. Fixed costs may be recovered from the domestic market, and Extra loading may be done on commodities that can bear high costs.

Feasibility____________________
The feasibilityi5f thadoptionrf marginal co^t pricing would, however depend upon: L -4ue^istenceofalargehomem n. adoptiofrofrnas?pfoHuction techniques which will reduce the gap between the full and the marginal costs,

in. the capacity of the home market to pay higher prices. Again the basic assumption for the use of marginal cost pricing is that additional production for exports is possible without increasing overhead costs. The main operating conditions justifying the use of marginal costs for exports are: i ii. When the firm has reached the break-even point on the basis of domestic costs. Where overheads are substantial

in. Domestic market is not large enough to ensure full capacity utilisation. iv. When export incentives are available

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International Pricing Strategy

2.___________________________ Limitations There are certain limitations of marginal cost pricing which must not be lost sight of: L later on. i This policy is not applicable or is of limited use to industries which are mainly dependent upon export markets and where overheads are insignificant. Marginal Cost Sets the Lower Limit A word of caution is necessary at this stage. When it is advocated that marginal cost should be the basis for export pricing, the idea is not that direct cost only should be charged in every case. The point that has to be emphasised is that marginal cost only provides the lower limit up to which a firm can reduce its prices without in any way affecting its overall profitability. Disadvantages There are certain disadvantages of marginal cost pricing. a. Developing countries might be charged of dumping their products in foreign If the importers become used to low price it might be difficult to increase price

markets. b. Intense competition among exporters from developing countries may lead to undercutting each other, resulting in the loss of valuable foreign exchange. c. Very often low prices may be quoted in the absence of adequate information about prices prevailing in foreign markets.

& Activity D;
Two main advantages of marginal cost pricing are: 1.__________________________________,_______________________________

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10.5 ELEMENTS OF COSTS FOR EXPORT PRICE QUOTATION The following chart gives the various elements of costs: zzzzzzzzzz)For export price based on marginal cost aaaaaaaaaaa)For export price based on full cost I. I Export Price Based On Marginal Cost

(1) Direct costs:


(a) Variable costs: Direct material Directlabour Variable productions overheads (for example, special dyes and jigs) Variable administration overheads (for example, salary of export clerk)

(b) Other costs directly related to exports: 204 Selling costs - advertising support to importers abroad Special packaging, labelling etc. Commission to overseas agent Export credit insurance Bank charges Inland freight Forwarding charges Inland insurance Port charges Export duties, if any Warehousing at port, if required Documentation and incidentals

Unit 10

International Pricing Strategy

Interest on funds involved/cost of deferred credit Cost of after-sales service including free parts supply Consular fees Pre-shipment inspection and loss on rejects After-sales service

Total Direct Costs


Less: Duty drawback and benefits from sale of import license, if any. bbbbbbbbbbb)Direct Cost Net = F.O.B. price at marginal cost ccccccccccc)Freight (volume or weight whichever is higher) ddddddddddd)Insurance

C.I.F. price (based on m arginal cost) H . Export Price Based O n Full Cost
eeeeeeeeeee)Direct cost as in (as in (1) above) fffffffffff)Fixed cost/common costs
&

Production overheads Administration overheads Publicity and advertising (general) F.O.B. price (based on full cost)

ggggggggggg)Freight (volume or weight whichever is higher) hhhhhhhhhhh)Insurance

C.I.F. price based on full cost


Part I of the above cost sheet gives the lower limit for export pricing. As would be clear from the cost sheet, all costs directly related to exports are taken into account for fixing the
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lower limit. If some incentives are allowed on the export of the product concerned, the lower limit would be further reduced by the amount of incentives. In the case of export houses purchasing their supplies from supporting manufacturers, the cost price of supplies obtained would constitute the lower limit. Points to be covered in an Export Price Quotation A precise description of the merchandise, packaging, quality and technical specialisation. Price including any rebates and discount and terms of payments. Terms of delivery. If c. i. f price is quoted, a breakdown of the same should be provided. Minimum and the maximum quantities that should be supplied. The mode shipment and the date of delivery. The period for which the quotation is valid.

Market Oriented Export Pricing The following chart gives the nature of analysis for market - oriented pricing: Analysis for market-oriented export pricing Market price______ Less retail margin on selling price______ Cost to the retailer______ Lew wholesaler's mark up on his cost______ Cost of the wholesaler______ Less importers' mark up on his cost______ Cost of the importer______

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Less import duty______

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C.I.F. price. Less freight and insurance charges______ P.O.B. realisation of the exporter_____

g$ Activity E;
Two factors that make GIF value different from FOB value are: 1.______________________________________
2._____________________________________________

10.6 INTERNATIONAL PRICING ISSUES


One of the major benefits to a country in having international trade is the favourable impact of international competition on national price levels and in turn, on a country's rate of inflation. There are three basic factors that decide the boundaries within which market prices should be set. The first is product cost which helps to fix the minimum price. Although it may be possible for firms to price a product below its cost, it cannot do this for long periods if it wants to continue marketing operations. The second factor is that competitive prices for comparable products create a price ceiling or upper boundary. International competition always puts pressure on the prices of domestic companies. A major benefit of international trade is the prospect of lower prices. Thirdly, there is an optimum price between the lower and upper limits for every product which is a function of the demand for the product as determined by the willingness and ability of customer to buy. With increasing globalisation, there is greater competitive pressure on companies to curb price increases. In an industry that involves foreign competition, companies have to compete with other companies all over the world. If a manufacturer raises prices, it is important to make sure that the increase does not put him out of contention with the competitors. The international marketing manager has to develop pricing systems and policies that address the minimum and maximum price levels along with the optimum price levels in each national market. The important considerations for marketing in overseas markets are: 207

International Marketing

O How sensitive are the price levels? ii) How competitive are the price levels in each market? in) Can different prices be charged for different price segments? iv) Is the demand in the target market price elastic or inelastic? v) Whether the prices are viewed by the host government as reasonable or unfair? vi) Do the country's anti-dumping laws pose a problem? vii) The types of discounts and allowances the firm can offer its international customers viii) Whether the price fixed by the firm matches that of the customer's perception of the price in the price-quality matrix ix) Whether the tariffs applicable on the product are likely to remain stable x) Whether the exchange rate will be reasonaby stable in case the firm is considering direct or indirect exports. Changes in domestic prices are generally reflected in the exchange rate of the country's currency. In the real world of currency markets, international marketers are faced with difficult decisions on how to deal with windfalls resulting from favourable exchange rates and with losses from unfavourable exchange rates. International pricing decisions must also take into account international transportation costs, the number of intermediaries in long channels of distribution and the demands of international key accounts for equal price treatment irrespective of country location. There are also internal organisational considerations besides cost. Within the typical corporation there are many interest groups. Organisational level profitability, maximum manufacturing efficiency, anti-trust implications of international pricing practices and compliance with government on transfer price legislations are some of the considerations that can give rise to conflicting objectives while seeking international market presence. In addition, the firm has to deal with the rapidly changing international market place. Very often, the information regarding demand is inaccurate or misleading. In Russia, for example market research is a fairly new concept and historical data may not be easily available.

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10.7 ENVIRONMENTAL INFLUENCES ON PRICING

_______________

Among the major environmental influences on pricing decisions are: currency fluctuations, inflation, government controls and subsidies, competitive behaviour and market demand. 1. Currency fluctuations There are two major dimensions to this problem. The first relates to fixing the price of products in country target markets. When this is carried out, any appreciation or depreciation of the value of the currency in the country of production will lead to gains or losses for the seller. The second one concerns fixing the pricing in the currency of the home country. If this is done, any appreciation or depreciation of the home currency will result in price increases or decreases for customers with no immediate consequences for the seller. When currency fluctuations result in an appreciation in the value of the currency of a country that is an exporter, companies can accept the fact that currency fluctuations may infavourably impact operating margins and they can renew their efforts to reduce costs, hi the short run, lower margins enable them to hold prices in target markets and in the long run, reduction in costs helps them to improve operating margins; for companies that are in a strong, competitive market position, price increases can be passed on to customers without significant decreases in sales volume. In more competitive market situations companies in a strongcurrency country will probably absorb any prices increase by maintaining international market prices at pre-evaluation levels. In practice, a manufacturer and a distributor will work together to maintain market share in international markets. The alternative actions can be: either the distributor or the manufacturer decides to reduce the profit percentage; the distributor may choose to purchase higher volume to achieve discounts; the distributor can reduce inventory and adopt just-in-time method for stocking and delivery.

By using these approaches, it is possible to remain price competitive in markets in which currency devaluation in the importing country is a price consideration. The international pricing strategies under varying currency conditions can be summarised as below: When domestic currency is WEAK the firm can: expand product line and add expensive features; 209

International Marketing

shift sourcing and manufacturing to domestic market; exploit export opportunities in all markets; speed up repatriation of foreign-earned income and collection; use full-costing approach, but use marginal cost pricing approach in new or competitive markets;

210

minimise expenditure in local, host-country currency; minimise local borrowing; bill foreign customers in their own

c u r

r e n c y . W h e n d o m e s t i

c currency is STRONG the firm can: engage in non price competition by improving quality, delivery and post sales services; improve productivity and engage in cost reduction; shift sourcing and manufacturing overseas; give priority to exports to countries with stronger currencies; deal in counter trade with weak-currency countries; reduce profit margins and use marginal cost pricing; maximize expenditures in local, host country currency; buy need services abroad and pay for them in local currencies; borrow money needed for expansion in local market; bill foreign customers in their own currency; slow down repatriation of foreign income.

An exchange rate clause allows the buyer and seller to agree to supply and purchase at fixed prices in each company's national currency. If the exchange rate moves within a specified range of, say plus/minus 5 percent, the fluctuations do not affect the pricing

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agreement that is spelled out in the exchange rate clause. Exchange rate clauses are designed to protect both buyer and seller from unexpectedly large fluctuations in currencies.

2. In fla tio n
Inflation refers to a persistent change in price levels and affects all countries. Inflation requires periodic price adjustments that are necessitated by rising costs that need to be recovered by increasing selling prices. In an inflationary environment, the important criterion for the firm is to maintain operating profit margins. So long as it maintains its margins, it has effectively protected itself from the effects of inflation. When payment is likely to be delayed for several months or is worked out on a long term contract, inflationary factors must be factored into the price. Because inflation and price controls imposed by a country are beyond the control of companies, they use a variety of techniques to increase the selling price to compensate the effects. They may charge for extra services, increase costs in transfer pricing or break up products into components, and price each component separately.

3. G overnm ent controls and subsidies


If governments limit the freedom of managements of companies to adjust prices, the maintenance of margins comes under threat, hi a country that is undergoing severe financial difficulties, and is in the midst of a financial crisis (eg. Foreign exchange shortage caused partly by runaway inflation), government officials are under severe pressure to take some action. This situation has occurred in Brazil on many occasions. In some cases, governments take immediate steps rather than get to the root cause of inflation and foreign exchange shortages. When selective controls are imposed, foreign companies are more vulnerable to control than local businesses. Government control can also take the form of prior cash deposit requirements imposed on importers. This is a requirement that company has to tie up funds in the form of deposit (with no interest applicable) for a specified time period if it wishes to import products. Such requirements force companies to lower prices, since lower prices mean smaller deposits. Another government requirement that affect the pricing decision is the restriction on transfer of profits out of a country. Under such rules, a high transfer price paid for imported goods by an affiliated company can be interpreted as a device for transferring profits out of a country. An action by a government on subsidies can also force a company to make strategic use of sourcing to be price competitive. In USA, a fair proportion of the agricultural sector is subsidised, 'however poultry products are not thus making their prices non-competitive in 211 world markets'.

'*

International Marketing

4.

Competitive Behaviour

Pricing decisions are also governed to a large extent by competitive action. If competitors do not adjust their prices in response to rising costs, the management is constrained in its ability to adjust prices accordingly. Conversely, if competitors are manufacturing or sourcing in a low cost country, it may be necessary to cut prices to stay competitive.

JS$ Activity F;
Three major environmental influences on pricing decisions in foreign countries are: 1.________________________________________________________. 2. 3. ________

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10.8 COUNTERTRADE
Marketers need to be aware of which markets require counter trades just as they must be aware of social customs and legal requirements. One of the earliest counter trade agreements occurred between Russia and Pepsi Company before the 'ruble' (Russian currency) was convertible and before most US companies were trading with Russia. Pepsi Company wanted to gain entry into the Russian market before Coca Cola. The only way possible for them was to accept vodka from Russia and bottled wines from Romania to finance Pepsi Company bottling plants in those countries. Pepsi Company dominates the cola market in Russia and all the former republics of the USSR, in part because of its exclusive counter trade agreement with Russia that prevented the entry of Coca cola for more than 12 years. There can be many reasons why countries insist on counter trade: iiiiiiiiiii)To reserve hard currency jjjjjjjjjjj)To improve balance of trade kkkkkkkkkkk)To gain access to new markets lllllllllll)To upgrade manufacturing capabilities

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mmmmmmmmmmm)To maintain prices of export goods nnnnnnnnnnn)To force reinvestment of proceeds from weapons deals Counter trade can take the following forms: Barter: that refers to the direct exchange of goods between two parties in a transaction across borders. A compensation deal involves payment in goods and in cash. General Motors (USA) sold locomotives and diesel engines to Yugoslavia worth $ 12 million and took cash and $ 4 million payment for cutting tools made in Yugoslavia. Counter Purchase (offset trade) - where the seller agrees to sell a product at a set price to a buyer and receives payment in cash. The first contract is contingent on a second contract that is an agreement by the original seller to buy goods from the buyer for the total sum involved in the first contract or for a pre-fixed percentage of the amount. Product buy-back agreement- which is made when the sale involves goods or services (eg. industrial goods or capital equipment) that produce other goods and services. The for seller agrees to accept a partial payment for a certain portion of the output or the seller receives full amount towards me price initially, but agrees to buy back a certain portion of the output.
? . . . . . '

10.9 DUMPING______________________________________________________ Dumping has achieved international proportion and has become an important global pricing issue. Dumping occurs when imports sold in a particular country are priced at levels that represent less than the cost of production plus an eight percent profit margin or at levels below those prevailing in the producing country. Many countries disapproved of the US systems of anti-dumping laws, in part, because historically, the Commerce Department almost always ruled in favour of a US company filing a complaint. Some countries use dumping legislation as a tool to protect local companies from aggressive pricing tactics by foreign companies. There are four types of dumping practices: Sporadic dumping occurs when a manufacturer with unsold inventories wants to 113 get rid of excess merchandise.

International Marketing
i

Predatory dumping involves selling at a loss to gain access to a market with the intention of driving away competitors. Persistent dumping involves consistent selling at lower prices in one market than in others. Each of the above three types involves charging lower prices abroad than at home. Reverse dumping involves deliberately pricing goods lower in the domestic market while charging higher prices in foreign markets. In such a case, the overseas demand is less elastic and the foreign market can tolerate a higher price.

JSZ Activity G;
The significant difference between reverse dumping and other types of dumping is:

10.10 PRICING APPROACHES_______________________________________


Some demand-oriented approaches to pricing are given below: Skimming pricing. When a new or innovative product is being offered, you can initially charge a high price, since the "early adopters" are not very price sensitive. You can then lower the prices to "skim" off the next layer of buyers, etc. Eventually, the price will drop as the product matures and competitors begin to offer lower prices. Penetration pricing. In this strategy, you set a low initial price in order to penetrate quickly into the mass market. Alow initial price discourages competitors from entering the market, and is the best approach when many segments of the market are price sensitive. Amazon.com, for example, offers a discount price and may lose money on the first sale, but this way they gain more customers at a lower marketing cost, who

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wi ll pu rc ha se pr od uc ts lat er (si nc e it co sts m uc h le ss to att ra ct th e m ba ck fo r th e se co nd or thi rd sa le if th ey

are happy with their first purchase experience). Prestige pricing. Cheap products are not taken seriously by some buyers unless

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they are priced at a particular level. For example, you can sometimes find clothing of the same quality brand at Nordstrom as you do at the Men's Warehouse. But because it is priced higher, Nordstrom's clientele believes it to be of higher quality. Demand-backward pricing is sometimes used by manufacturers. First, they determine the price consumers are willing to pay for a product. Using an approach that works backwards from the end-consumer selling price and applying the standard markups taken by retailers and wholesalers, they come up with the price they can charge wholesalers for the product Odd-even pricing takes advantage of human psychology that feels that USD 499.95 is less than USD 500. Studies of price points by direct marketers have found that products sell best at certain price points, such as USD 197,297,397, compared to other prices slightly higher or lower. Bundle pricing is offering two or more products together in a single package price. This can offer savings to both the buyer and to the seller, who saves the cost of marketing both products separately. The customer is willing to pay more because he perceives he is getting a lot more, even though the cost to the seller may not really be that much more.

Some of the cost-oriented approaches to pricing are given below: Standard mark-up pricing: In international markets, a manufacturer typically may mark his price up 15% over his costs, a wholesaler 20% over his costs, and a retailer 40% over his costs. The retailer gets a larger markup based on the principle that, since he is closest to the end user, he is required to spend more services and individual attention meeting the buyer's needs. Cost-plus pricing adds a small percentage to the retailer's costs. Experience-curve pricing assumes that it costs a company less to produce a product or provide a service over time, since learning will make them more efficient.

Then there are competition-oriented approaches to pricing: Customary pricing is where the product "traditionally" sells for a certain price. Candy bars of a certain weight all cost a predictable amount - unless you purchase them in a fancy boutique or an airport shop.

International Marketing

Above-, at-, or below-market pricing. Certain stores advertise "low cost" or "discount" pricing. Others price at the market, while others deliberately price abovethe-market at premium prices to attract prestige buyers. Loss-leader pricing works on the basis of losing money on certain very low priced advertised products to get customers who will buy other products at the same time. Flexible-price policies offer the same product to customers at different negotiated prices. Cars, for example, are typically sold at negotiated prices. Many B2B sales depend on negotiated contracts. Once the list or quoted price is determined, the manufacturer has the flexibility to make some special adjustments.

Quantity discounts encourage customers to buy larger quantities, and thus cut marketing costs. Seasonal discounts encourage buyers to stock inventory earlier than their normal demand would require. This enables the manufacturer to smooth out manufacturing peaks and troughs for more efficient production. Rebates, such as $40 off on Microsoft FrontPage 2000, are usually offered by the manufacturer, but sometimes a retail store will offer its own rebate. Rebates make marketing sense, since they strongly motivate sales, but often less than 50% of the buyers will remember to collect the receipt, proof-of-purchase, and rebate form, fill it out, and mail it prior to the expiration date. And, of course, the rebate is often subtracted from the list price of the item, which still has considerable profit built in. Rebate marketing is less than half as expensive to the marketer as the price cut would seem to indicate. Trade discounts are offered by manufacturers to distributors or resellers in their distribution chain. For example, a manufacturer may quote list price of $1000 less 30/10/5, meaning 30% off the list price to the retailer, an additional 10% off the $ 1000 to the wholesaler, and an additional 5% off the $ 1000 to the jobber. This pricing will be expected if you have an online B2B store. Cash discounts are sometimes offered for the costs saved from not having to extend credit and bill the buyer on an open account. This mainly affects B2B sales rather than retail.

IJ

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Allowances may be permitted for trade-ins or by a manufacturer for promotional advertising that a retailer undertakes. Geographic adjustments involve FOB (freight on board) pricing at the point of shipping.

JS $ A c tiv ity H ;
Three types of pricing strategies commonly used by companies in international marketing are: 1.____________________________'_____________________;__________________ 2 .

3 . 10.11 SUMMARY Market prices at the consumer level are much more difficult to control in international marketing than in domestic marketing. Factors such as market conditions, competitors groups, cost factors and government regulations have to be thoroughly researched and analysed not only for each country in which the firm operates but also for each market within a country. Controlling costs that lead to price escalation when exporting products in foreign countries is a challenging task facing the exporter. This unit has focused on the major pricing policy issues. The two basic types of pricing orientation and the factors that affect export pricing have been introduced. This is followed by the factors and guidelines that help the international firm having multiple product categories iecide on transfer pricing. The issues and dimension related to marginal cost pricing have been covered. Another section has dealt with the environmental issues and influences that affect international pricing in a significant way. The major issues of price escalation such as exchange rates, inflation and government controls and subsidies have been covered briefly. In the final section, the pricing approaches and the types of pricing that are relevant to companies operating in foreign markets have been described.

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10.12 KEYWORDS Differentiation pricing: This refers to the practice by companies in adopting different pricing methods and policies in arriving at prices for different export markets. Transfer pricing: The pricing of goods that are transferred from a company's operations or sales units in one country to its units elsewhere is known as transfer pricing (or Intra Company pricing). Marginal Cost pricing: Atype of pricing method that is concerned only with the recovery of marginal costs (or variable cost). As against this method, full-cost pricing refers to the method concerned with the recovery of fixed costs and variable costs. In such a case, the price is often set on a cost plus basis, that is, total costs plus a profit margin. Price escalation: This term relates to a situation in which selling prices in a specific foreign market are raised by shipping costs, insurance, packing, tariffs, channels of distribution, wholesaler margins, special taxes, administrative costs and exchange rate fluctuation. 10.13 SELF-ASSESSMENT QUESTIONS Q1. What are the factors that should be taken into consideration for setting a price in an overseas market? Q2. Discuss the concept of transfer pricing. How is it relevant in the context of the current international business environment? Q3. Explain the principles behind marginal cost pricing. What are its disadvantages? Q4. Explain the basic elements for export price quotation based on marginal cost? Q5. Discuss the role played by currency fluctuation in price escalation of goods. What options can a firm exercise when the domestic currency is weak? Q6. How do government controls and subsidies affect the price level decisions by firms? Q7. Discuss the types of pricing strategies available to international marketers.

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11.1 INTRODUCTION New changes in the political, economic, socio-cultural and technological environments call for new strategies in international competition. Outsourcing is the most visible form of international strategic partnership (ISP). In this form of partnership, the participants remain independent subsequent to the formation of the alliance the formation of the alliance and they make ongoing contribution in technology, products and other key areas. This unit describes some of the basic elements, purpose and reasons for outsourcing and emphasises the need for a long-term strategic partnership to ensure the firm's competitiveness in many foreign countries. The four forms of outsourcing have been explained along with their selection criteria. The availability and capabilities of supplier or partners are of utmost importance before the identification and selection. The ways by which products are evaluated for outsourcing have been described in the following selections. This is followed by the five basic steps in the selection of the right supplier. With outsourcing taking deep root in enhancing the competitiveness of companies, it becomes logical to forge an international strategic partnership in the long-term. Some of the important reasons for the development of new forms of ISP have been explained. The main advantages and disadvantages that are relevant to outsourcing have been described in detail. The basic reason for the success of the IT software industry has been the level of outsourcing that started in the mid-nineties. It is therefore appropriate to analyse the scope of IT outsourcing and understand which types of services are generally outsourced. It is also necessary to appreciate the necessity of building long-term strategic relationships in IT outsourcing, and a brief review explains the three important phases in building and maintaining such a relationship. 11.2 FORMS OF OUTSOURCING Terms used A number of terms have been used and are in vogue to describe international and global strategic partnerships. Some of these reflect the degree and level of partnerships developed between two or more companies in different countries: Collaborative agreements Strategic international alliances Global or international strategic partnerships (GSP or ISP) Outsourcing (or off shore sourcing)

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Contract manufacturing

Forms of outsourcing (offshore sourcing) There are four forms of offshore sourcing namely, offshore purchasing, offshore subcontracting, Joint-Venture offshore manufacturing and controlled offshore manufacturing. Offshore purchasing This is a relationship between independent buyers and seller-in which goods are exchanged for money. The arrangement may vary in many ways, including: Whether the transactions are directly between the buyer and seller or through one or more agents. Dealing may be on transaction- by-transaction basis or have some longer- term contract.

Offshore sub contracting t Covers many different relationships between independent companies in which the buyer is more involved with the source than in a simple buyer-seller relationship. The buyer may provide detailed product specification, technical assistance, raw materials, or needed components, or even some financing to foreign manufacturer.

Joint-venture offshore manufacturing It involves joint ownership by local firm and a foreign company of an offshore manufacturing enterprise. Controlled offshore manufacturing This relationship is that of a parent and a wholly- owned foreign operation, generally a subsidiary corporation that supplies the parent's needs for a product. Selecting the forms of offshore sourcing

A lte rna tives :


Specific forms of offshore sourcing arrangements vary widely - the basic distinction is the degree of control exercised by the buyer over the foreign source.
2 2 3

International Marketing

Offshore

Offshore

Joint-venture off

Controlled offshore

Purchasing

B U Y E R The needs of different industries vary and so do their off sourcing pattern. Paym i
1 ent Proc am pa

ative Forms of Offshore Sourcing Selection criteria

Apparel Industry: Offshore sourcing done through purchasing or sub-contracting. Electronic industry: More of controlled manufacturing.

Four important considerations for selection of various off shore sourcing methods: ooooooooooo)Company capabilities and resources ppppppppppp)Availability and capabilities of suppliers or partners FOREIGN SOURCES qqqqqqqqqqq)Projected sourcing volumes and variability

F i g .

rrrrrrrrrrr)Degree of integration of offshore sourcing with other operations 1. Company capabilities and resources

Different forms of offshore sourcing demand different abilities on the part of enterprises and vastly different commitments of resources.

1 1 . 1

A l t e r n

Unit 11

ke ep it Offshore purchasing requires little experience or investment. ru nn Controlled off shore manufacturing requires a considerable commitment of in investment g capital and management time. ste adi J & >A c t iv it y A ; ly The four forms of offshore sourcing are: to co 1 . _________________________________________________________;________________________________________________________________________________ ve r its fix ed co 4. st. 2. Availability and Capabilities of Suppliers or Partners An important determinant of how a company sets up off shore sourcing is whether or not acceptable partners or suppliers exist in the countries in which the parent company wants to locate a source. Suppliers with the needed production experience, technology, and management capabilities may be hard to find, as may partners with investment capital and other important inputs. Whether acceptable suppliers and / or partners are available depends, of course, on the complexity of the production requirements and on the size of the proposed operations. Small operations for relatively simple products may have a wide choice of suppliers or partners whereas larger investments for more complex products will be limited. 3. Projected sourcing volumes and variability Companies needing large volumes of foreign products can justify a large fixed investment - fixed cost can be spread over the high volume of output. For companies with smaller needs, an independent supplier will be more

Outsourcing and Strategic Relationships

active. Variability If a company establishes its own manufacturing plant, it will want to

225

In tern a tio n a l M ark e tin g

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If the business is variable, the company will choose the purchasing or subcontracting alternatives (example: fashion oriented products, where sales are difficult to project). 4. Degree of integration of offshore and domestic operations

If a company wishes to integrate its off shore sources tightly with the company's operations it will need considerable control over all sources - it will require control over offshore manufacturing. ^ A closely controlled offshore operation will facilitate qr^oordjnated productionscheduley ^asejnttamferQfteehaology, and provide flexibility in financial decisions regarding transfer pricing of components and finished products, dividend payments and capital investments.
*

When a company can tolerate a somewhat looser relationship with its sources or when requirements are so predictable that control is less important, foreign purchasing or sub contracting is often preferable to controlled offshore manufacturing.

$ Activity B:
Two capabilities that are desirable while selecting an offshore sourcing partner are: 1.______________________

2.
11.3 EVALUATING PRODUCTS FOR OFFSHORE SOURCING Main Cost Tradeoffs Some products are sourced offshore because they are not available domestically. In such a case, there is no alternative to offshore sourcing. Such cases are rare. Offshore sourcing is chosen because it is cheaper than domestic sourcing. Whether offshore sourching is cheaper depends on a product's manufacturing cost structure i.e. the mix of labour, material and other input needed in its fabrication. The relative cost of different inputs varies greatly among countries. The best products for offshore sourcing are those that use intensively the inputs that are cheaper abroad. Products Suitable For Offshore Sourcing Products suitable for offshore sourcing are those for which saving in production cost are sufficient to offset higher costs of transportation, duties and corporate overheads.

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Labour intensive products Most products or components suitable for offshore sourcing have a significant labour input- sewing garments - assembling semi conductors - workers in developing countries can be trained to perform such jobs with low cost. Standardised products Products with steady sales or at least predictable sales are more suitable for manufacturing than products that face abrupt shift in demand - off shore sources can be given long production run that can be programmed well in advance for required delivery dates. Products that are easy to ship and face low input duties: Products with high value relative to weight (volume) will have low transportation cost relative to their total manufacturing cost and sales price. Products with low import duties.

M il

Evaluating sources and partners For a supplier or subcontractor, the most important selection criteria relates to the source's capabilities for manufacturing and delivering acceptable products on time at acceptable costs. Sources should also be evaluated in terms of their willingness to be good long term suppliers. Joint venture partner should be selective with considerable care as the relationship is likely to be long term and requires relatively complex interaction between the partners. It is important to clarify what a partner is expected to contribute and its capability to actually make such a contribution. A partner is expected to bring the venture considerable expertise in addition to its capital investment. Important too may be govt. and business connections that a foreign partner brings to a venture. It is crucial to understand whether the goals and expectation of the company and the foreign partners are congruent. Ajoint venture relationship implies joint decisions on matters such as capacity expansion, profit layout policies, transfer prices and product diversification, which can be quite controversial if the partners have different objectives.

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Negotiating with prospective sources and partners Negotiating purchasing, sub-contracting and joint-venture agreements with foreign enterprises requires all the same negotiating skills that a domestic venture requires. In addition, however, cultural differences and differences in the role of the host country govt. are important to recognise. Bargaining styles differ greatly across nations. Evaluating production site The most important decision related to offshore sourcing is the choice of the country from which to source, especially if a firm contemplates the establishment of its own manufacturing facility.

Factors in evaluating desirability of a site are:


Labour factors Labour cost Labour availability Labour productivity Labour reliability and unions Infrastructure factors Industrial sites Transportation and communication Local suppliers of goods and services Govt. policy factors Govt. regulations Govt. incentives Stability factors Economic or political instability can cause unexpected problems for offshore sourcing operations. Inflation, currency fluctuations, civil disruption or changes in govt., all may
;l

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have unfortunate consequences.Economic stability is closely related to political stability. High inflation may lead to social disruption and political change. Likewise, political changes often lead to changes in economic policies.

& Activity C:
Two major considerations while evaluating sources and partners for offshore are: 1.__________________________________________________________________ 2.____________________________________

11.4 PROC UREM ENT PR OCESS


Selection of Right Supplier Five Basic Steps sssssssssss)Determine the requirement of what is to be purchased ttttttttttt)Identify suitable suppliers uuuuuuuuuuu)Assess the reliability and capability of these sources vvvvvvvvvvv)Register the potential suppliers wwwwwwwwwww)Review suppliers'performance periodically

1. Determining requirements
The imports need of the business firm or government department must be

clearly specified Type of product stated in technical terms Deadlines for receiving the goods

2. Identifying suitable suppliers

Draw up a list of suitable sources (need to have sufficient number of qualified 229 potential suppliers resulting in a competitive market situation- the best terms of purchase to be obtained.)

International Marketing

Sources

Advertisement Past suppliers


Directories Reliability and capability

Quality of Product Regularities of their suppliers Price of the product Supply capability in relation to buyers' need After sales service Financial soundness of the

company $ Activity D; Three major aspects related to reliability and capabilities in the procurement process are: 1._____________________________________________________________

2.. ___________________________________________________________ .

3 . ______________;___________________________
11.5 REASONS FOR INTERNATIONAL STRATEGIC PARTNERSHIP (ISP)
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While the international options used by companies to enter international markets have been reviewed in unit 06, this unit outlines the other forms of strategic partnerships and, in particular, outsourcing (or offshore sourcing). The recent changes since the early nineties the political, economic, socio-cultural and technological in environments of the international have combined to change the relative importance of firm

the sons for the development of new forms of ISP are: Falling trade traditio nal barriers between nations and between continents strategi c partner ships. S o m e

o f

t h e

i m p o r t a n t

r e a

Unit 11

Outsourcing and Strategic Relationships

Globalisation of markets across the world Convergence of consumer needs and wants Growth of new communications technologies

Some of the reasons for the development of offshore sourcing are: Cost reduction due to large differences in labour costs and development costs Desire amongst the alliance partners to operate in more than one foreign country Improvements required in delivery and reliability To overcome international competition in the targeted markets To establish a presence in a new foreign market or an emerging market To increase the number of available sources A means of reaction to increased worldwide competition or as a strategy to gain a competitive edge in certain international markets.

The main reasons behind the wave of outsourcing (particularly for companies operating in mature markets) are: i) External companies can perform certain operating activities better or cheaper. ii) Outsourcing allows a firm to concentrate its resources and energies on its core business - those activities that are at the center of its expertise and those that are essential for its competitive and financial success. & Activity E; a) Some of the reasons for the development of offshore sourcing are:

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International Marketing

b) Go to the website www.zensar.com write down three capabilities that and companyhas developed in the Business process outsourcing (BPO) segments:

11.6 ADVANTAGES OF OUTSOURCING _____________________________ The benefits derived by companies that adopt outsourcing in their strategic plan are many: Significant cost reductions are possible for the outsourcing firm. Some activities and functions can be performed better by outside specialists. It enhances the firm's ability to achieve a competitive advantage so long as both companies do not trespass each one's core competencies, capabilities and technical know-how. It reduces the company' s risk exposure to changing technology or changing buyer preferences. It streamlines the outsourcing company's operations and reduces the time to get new products in the marketplace, lowers internal coordination costs or improves operational flexibility. It allows the outsourcing company to leverage its core competencies.

Examples:
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Many PC makers have shifted from assembling units in-house to using contract assemblers because of the economies of scale associated with purchasing PC components in large volumes, and assembling PCs Dell Computers' partnerships with PC component suppliers have allowed it to operate with fewer than four days

of in ve nt or y co sts . Ci sc o ou ts ou rc es m os t of its pr od uc ti on an d as se m bl y of ro ut er s an d s wi tc hi ng eq

uipment to contract manufacturers that together operate 37 factories all linked to Cisco facilities via the Internet.

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Outsourcing and Strategic Relationships

Most large auto companies source navigation systems and audio systems for passenger cars from companies with specialised know-how rather than make these systems themselves. Many MNCs like HP Compaq, IBM and others have sold entire plants to suppliers and then signed contracts to purchase the output from them.

t General Electric (GE) USA, has a partnership for its jet engine division with SNECMA, a government-owned French aerospace company. This enabled GE to gain access to the European market so that it could sell its engines to Airbus Industry - the European consortium for aircraft manufacture and the main rival of Boeing, USA. In many cases, outsourcing is a superior strategic alternative to vertical integration. 11.7 DISADVANTAGES OF OUTSOURCING There are dangers in excessive outsourcing and not all of the considerations of outsourcing point towards advantages. Even ISPs prove to be failures if there is a mismatch of goals, objectives and trust. If not done judiciously, the outsourcing company may lose control over its core competencies and become over-dependent on the outsourced company. The outsourced company may gain capabilities of a high order and become a competitor to the outsourcing company. This happens frequently in contract manufacturing. The outsourcing company may lose touch with the prime activities and expertise that determine its success m the long-term. Cisco guards against loss of control and protects itslnafnrfacturing expertise by designing the productjon^^^sttTat its contract manufacturgr^must use. It utilises online technologytomonitor the factory operations of contract manufacturers around the clock. Partnerships may not work out smoothly when short-term and long-term goals of the

p a rt n e rs a r e d i v e r g e n t. D if f e r e n c e s i n m a n a g e m e n t p h il o s o

phy, expectations and approaches may come to the fore, affecting the performance of the partnership adversely.

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& Activity F;
Two major disadvantages in offshore sourcing are: 1.______________________________________ 2.______________________________________ 11.8 IT OUTSOURCING

'IT outsourcing' is the general term used for IT and IT-Enabled Services (ITES). With over 44 percent market share in the global outsourcing business and 70 percent in the Business process Outsourcing (BPO) market segment, India has become the largest outsourced partners and solution provider in this space. Other emerging countries that have entered this space include Argentina, Bangladesh, Canada, China, Czech Republic, Ireland, Malaysia, Mexico, Pakistan, Philippines, Poland, Russia, South Africa and Vietnam. Outsourcing is causing sweeping changes in the IT and ITES industries. Forrester Research,

a US based researc h organis ation, predict s that at least 3.3 run. white collar jobs and USD 136 bn. in

wages will be outsourced by 2015. According to Forrester, 830000 service-sector jobs moved offshore in 2005. Another research firm predicts that by 2015, the outsourcing rate of IT jobs in developed countries will increase to 30 percent from under 5 percent at present. According to Frost & Sullivan, another US research firm, the cumulative value of outsourced IT services work was worth over USD 464 bn. in 2004 from various developed countries. In terms of dollar value, Japan is the largest outsourcer of the world followed by the USA. Currently, most of the BPO revenue in India comes from voice services, but it is estimated that by 2010, the non-voice segment (also referred to as knowledge process outsourcing or KPO) will rise to 50 percent of the total revenue from outsourced services. The KPO segment includes emerging growth sectors like system integration, infrastructure management, automotive and avionics design, engineering services, legal research, equity research, risk management, simulation, telemedicine and human resources. Research process outsourcing (RPO) in the biotech industry is another growth sector. It is currently a USD 120 mn. business in India growing at the rate of 75 percent per year. RPO includes basic research, drug discovery, clinical trials management, compound screening, bio-informatics and regulatory submissions.

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The types of services in the IT industry that are outsourced are numerous and growing each day. The table 11.1 below provides a representative list. Table 11.1 : Outsourced IT Services

Category
Software development and maintenance services

Name of Service
New application development Application or service integration End-of-life support Legacy application maintenance Legacy application conversion Software quality assurance Call centers Customer support IT help desks Prospecting Telemarketing Mailing list management Web based and e-mail marketing Data design and maintenance Data processing and mining Market research Legal research Analytics Statistical analysis Geographic information systems Desktop publishing Document management Hardware development and testing Litigation support Tax preparation Exam grading Logistics support Supply chain management Multi-media authoring Movie production support Industrial design Engineering services Human resources Network management 23 5

Contact Management Services

Data Services

Miscellaneous

International Marketing

& Activity G;
Write down two types of services that are outsourced in the IT industry that are in addition to those given in table 11.1.

11.9 STRATEGIC RELATIONSHIPS IN IT OUTSOURCING______________


A project approach to outsourcing assumes that the overall level of outsourcing assumes that the overall level of outsourcing in an organisation is low, and therefore, no substantial benefits can be derived from scale. This approach focuses more on cost management rather than integration and joint development of capabilities. Outsourcing has become a strategic imperative that flows from a vision at the highest level of an organisation. Consequently, outsourcing has become a useful tool to increase an organisation's productivity and flexibility to compete. Long-term agreements help realise many of the following benefits: Better assessment of capabilities needed for organisations to become world-class in sourcing. A predictable way to build these capabilities. Improvements possibilities in many of the service level agreements (SLAs). Possibilities of simplification and standardisation; in re engineering and transformation of process or activities. Vendor investments and sharing of business risk and rewards- indicators of a true partnership to build long-term relationships. The organisations need to take a strategic view towards sourcing and follow a structured approach covering the phases mentioned in Table 11.2

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Tablell.2 : Phases in Strategic relationships P H A S E 1 ssessing A S ou rcing capabilities


Measurement of current sourcing effectiveness Defining the plan of having access to world class capabilities Identification of key capabilities required from the global sourcing program

PH ASE 2 Portfolio structuring

Identifying the activities that will be insourced, outsourced and co-sourced. Splitting the global sourcing portfolio among shortlisted models. Identifying SLAs with each partner on various global sourcing dimensions Identifying OLAs (Operational level agreements) for contractual interactions with vendors Agreeing on SLAs & OLAs with each partner

P H A SE 3 Relationship developm ent

xgf A ctivity H :
The three phases in strategic relationship development in the field of IT outsourcing are:-

11.10 SUMMARY The two main reasons for outsourcing have been explained as: i) external companies can perform certain activities better or cheaper, and ii) outsourcing allows a firm to concentrate its resources on its core business. Outsourcing is one of the first steps in establishing an international strategic partnership. This unit describes some of the basic elements, purpose and detailed reasons for outsourcing.
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In the initial sections, the four forms of outsourcing have been explained along with their selection criteria. The ways by which products are evaluated for outsourcing have been described in the subsequent sections. Some of the important reasons for the development of new forms of ISP are discussed in some detail. This is followed by a detailed description of the advantages and disadvantages of outsourcing. In the Indian context, it is now important to review the developments that have taken place in IT outsourcing. Sweeping changes are being witnessed in IT and ITES industries in India. To keep this topic simple, a section gives the reader a glimpse of some of the representative types of services that are outsourced. In the final section the three phases in building long-term international strategic relationships are briefly reviewed.

11.11 KEYWORDS_________________________________________________
Outsourcing: This is a form of international sourcing that involves buying suppliers outside the firm's country of manufacture. Firms resort to outsourcing as a reaction to increased worldwide competition or as a proactive strategy to gain a competitive advantage. Joint venture offshore manufacturing: This involves joint ownership by a local firm and a foreign company for an offshore manufacturing entity. Controlled offshore manufacturing: This condition exists when there is a relationship between a parent company and a wholly-owned foreign corporation (generally a subsidiary) that supplies the products needed by the parent company. International strategic partnership(ISP): Aterm used to describe a form of cooperative strategy in which the participants (usually in different countries) remain independent subsequent to the formation of the alliance and where the participants make ongoing contributions in technology, products, and other key strategic areas.

11.12 SELF-ASSESSMENT QUESTIONS

__________________________

Q1. What are the four important considerations a firm should have in selecting the right method of offshore sourcing? Q2. Explain the differences between joint venture offshore manufacturing and controEed offshore manufacturing with the help of an example.
238

Q3. Describe the process for evaluating products for outsourcing.

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12.1 INTRODUCTION In developing international marketing strategies, information is a key component. The information needs can range from general data required to evaluate market opportunities to specific information for marketing decision concerning the 4P's. The Marketer's task is therefore to find the most accurate, defendable and reliable data possible within the constraints imposed by time, cost and status of current development. This unit attempts to define the different elements in IMR, the approaches the marketing researcher can take and the problem areas that make IMR different from domestic marketing research. The significance of IMR is evident in the field of export trade since competition is open to both domestic and international companies. The important factors in estimating market potential and in obtaining market access are reviewed. This is followed by a section on a checklist of factors affecting demand and price structure. The stages in the research process and the basic contents of a research proposal are presented although these may be quite similar to those followed in the domestic research process. It is relevant for the researcher to know the sources and techniques of obtaining information. The typical external sources of information for products, commodities, trade practices, growth in imports and exports used in real life situations have been provided. This section is followed by the methodology used in field research. A separate section also reviews the scope of IMR and gives briefly the main differences between domestic marketing research and IMR. The reasons for and the problem areas of primary data collection are also discussed before an analysis of the role of the Internet inlMR. 12.2 MARKETING RESEARCH FOR EXPORT - IMPORT TRADE The significance of marketing research gains greater importance in the field of export trade in which competition is not limited only to domestic manufacturers, but also from foreign companies of varying sizes, including international giant corporations. Markets of today are dynamic and undergo sudden changes on account of the peculiar marketing characteristics of the individual markets. While it may be possible to forecast and ascertain the changes in the local marketing environments, it is highly difficult to undertake this exercise in respect of overseas markets as the exporter is away from the market place and not fully conversant with the market characteristics. In export trade, the distance between an exporter and his customers is ordinarily much wider than at home. By distance, it is not meant only physical distance. More important is

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the marketing distance created by intermediaries standing between the exporters and the ultimate consumers of his products and the cultural distance arising out of the fact that these consumers are members of another culture and society. All these distances conspire produce an information gap that needs to be overcome if a to company is to plan its export sales rationally. The way to close this gap is through a systematic study of foreign markets directed towards identifying and measuring export market opportunities. The rapidity of changes going on in the export markets, the buying sophistication of consumers, the growing complexity of international business operations, the intensity and quality of competition have made international marketing quite difficult. These circumstances offer an enormous advantage to the exporter who has superior information about the identity and behaviour of foreign buyers.
12.3 ESTIMATING MARKET POTENTIAL

Export market research should be able to answer three basic questions if management is plan effectively for the years ahead. to xxxxxxxxxxx) What is the market potential of a specific export market or (markets)? yyyyyyyyyyy) What is the company's sales potential in that market (or markets)? zzzzzzzzzzz) n w h at sp ecific seg m ent of th e ch o sen m ark et (o r m arkets) O sho u ld ex p ort management concentrate its marketing effort? Answer to these questions lead to the selection of a target market for the strategic exportplan. Further, research is focussed on this target market to learn more about the buyer's behaviour, marketing structure and competition. A wide range of factors can affect a product's prospects in the world markets. These factors need to be studied by the researcher in order to estimate a market's potential for products. The factors that limit market potential for an exporter can be grouped under five headings. His own country's trade regulations Limitations on market access Market size and growth The competitio n I Acceptable Prices
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Political Factors: The market researcher must also know about the political forces that may influence policy. Sometimes religious or ideological pressures can result in restrictions on the import of certain products, such as alcoholic beverages. Apart from such internal political factors, the politics of international relations can play a role in creating or eliminating tariffbarriers and in shifting the relative positions between competing supplying countries. Market Size, Pattern & Growth: Studying the official trade barriers tells the market researcher whether his product can gain access to a particular market. The researcher must also find out what sales potential his product really has in the market. He must assess the present size of the market, how it is likely to grow and what share of it this particular product can win. Imports: The researcher has to find out: - How much of the product is presently being imported. - From where have the imports been coming. - How the market share of the various foreign suppliers has been shifting and is likely to develop. The prices of exports from various sources. Consumption: Besides imports, it is also necessary to know how much of the product, the market actually consumes and is likely to consume in the future. The researcher must also study: The size and trends of production within the market. Export from that market. The factors that will affect the share of imports in consumption and in particular the share that his products might be able to capture.

When studying the size and pattern of consumption of a particular product, the researcher must investigate the following characteristics. How much of the product is consumed annually? Who consumes it? Where is it consumed? How often is the product bought by an individual purchaser?

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How is the product used? What other products are competing for the same usage?

Market Segmentation: In any national market, only a certain portion of the total population or the total number of industrial users is the buyer or the potential buyer of any particular product. These people/firms tend to share certain characteristics. In case of consumers, these shared characteristics might be related to such factors as income level, age, level of education, profession, ethnic background etc. There are three reasons why market researchers should identify segments: By identifying the segment or segments within the total market which are most likely to buy the product (the target segment), the researcher can arrive at a more accurate estimate of its potential consumption and sales by merely looking at the market as a whole. Identifying target segment in a market is a necessary step in collecting information that will help decide how to market a product. People in different social and economic groups often tend to purchase products in different kinds of shops, read different publications, watch different television programmes and respond to different sales argument. Selecting target segments and understanding their characteristics provides a basis for adapting the product to the market in order to increase its chances of success. Once the target market segment has been identified, it can be very helpful to draw up an "end-user profile" to bring together relevant characteristics of the 'typical' user. the people or organisations that make up the target market segment.

$ Activity B:
346

It is necessary to research the health and safety regulations for marketing herbal medicines in a foreign country because:

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International Marketing Research

12.5 FACTORS AFFECTING DEMAND Economic Factors: How much of a product people can buy, and which products they choose to buy is obviously influenced by their purchasing power. So a market researcher attempting to project a country's demand for a product must consider such factors as the general economic outlook, employment levels, the level and distribution of income and so on. Climate and Geography: Consumption of many products is influenced by the climate. Geographic factors also the affect the consumption pattern within a country. Internal barriers to transport and communication and differences in resources can result in great differences in the way people in different parts of a country make their living, their life styles and the products they use. Social and Cultural Factors: Certain people may have negative attitudes towards a certain country and its products. The frequency of their shopping can affect the size of packs they prefer to purchase. They may have a special liking or dislike for particular colours. They may be worried about how healthy a food product is, or be more concerned with its taste. Intangible factors like these can be more important than trade barriers or prices in deciding the fate of a product in a market. Competition: The market researcher must find out: The structure and extent of competition The reasons for the success of major competitors The chances of competing against them

In studying the structure and extent of competition, the researcher must try to answer the following questions: - Does direct competition exit, and if so, who are the important suppliers, domestic I and foreign?
'*

I -

What is the extent of indirect competition?

- What share of the market does each important supplier have, and how have these market shares been changing? V - What particular cost advantages or disadvantages do important suppliers have (raw material supply, labour cost etc.)?

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What are the plans for expansion of the competitors? If foreign suppliers have a significant share of the market, do they enjoy relative tariff, transport cost or similar advantages? Do the main competitors have a strong enough grip on distribution channels to make entry difficult?

Activities of competitors need to be studied in terms of the products marketed presently or proposed to be introduced in the short, medium and long runs, by sizes, specification. standards etc. in terms of prices quoted, discounts or commissions offered, distribution channels followed, packaging practiced and sales promotion undertaken. The information of competition helps in formulating, vigilant packaging, pricing, and promotional policies ot an exporter. Prices: One of the key questions the market researcher must try to answer is: "At what price must we sell our goods to ensure that they will be able to compete with similar offerings already in the market. To sum-up, the Research checklist for estimating market potential may be as follows: 1. Your country's trade regulations

Currency and tax regulations Licensing and other documentary requirements

2.

Market access Tariffs and quotas Internal taxes Health and safety regulations Political factors affecting access

3. 248

Market size, pattern and growth Imports (volume, value, sources, trends) Consumption (volume, growth trends, geographic pattern, market segmentatu n Factor affecting demand (economic, climate and geographic, social and culture

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International Marketing Research

4.

Competition Domestic production, volume and growth Structure Strength Reasons for success

5.

Price Structure Prices to endusers Trade mark-ups Transport cost Ex-factory cost

^ A ctiv ity C :
Two main factors affecting demand in a foreign market are:

2.
12.6 RESEARCH PROCESS AND PLANNING
The Research process consists of a series of stages in steps that serve to guide the research project from the conception through the final recommendations. These are: Problem Formulation

4
Research Objectives Research Design Design of Data collection Method

4
Questionnaire Designing
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Sample Design

4
Collection of data and information

4
Analysis and Interpretation of Data Research report writing However these activities could be summarised as: (1) Planning the research, (2) Analysis of data and information, (3) Gathering information, (4) Writing and presenting the report. Problem Formulation: One of the most valuable roles marketing research can perform is helping to define the problem to be solved. Only when the problem is carefully and precisely defined can research be designed to provide pertinent information. Part of the process of problem definition includes specifying the objectives of the specific research project. Problem formulation requires good communication between decision maker and marketing researcher. The decision maker needs to understand what research can and cannot accomplish. The researcher needs to understand what the decision managers hope to learn from research i.e., the project objectives. Research Objective: The research objective is a statement, in as precise terms as possible, of what information is needed. The research purpose motivates the development of research objectives. Research objectives have three components. The first is the research question: It specifies the information needed by the decision maker. The second element is the development of hypotheses that are basically alternative answers to the research question. The third is the scope or boundaries of the research. Research Proposal: A proposal describes a plan for conducting and controlling a research project. Administratively, it is the basis for a written agreement or contract between the manager and researcher, as well as a record of what was agreed. As such it provides a vehicle for reviewing important decisions. This helps ensure that all parties are still in agreement on the scope and purpose of the research, and it reduces later misunderstandings. Frequently proposals are used to make a choice among competing suppliers and to influence positively the decision to fund the proposed study. For these reasons, a proposal should be viewed as a persuasive device that demonstrates the researcher's grasp of the problem and ability to conduct the research and also highlights the benefits of the study.

5.

6.

250

Activity D ;

Three

important steps in the research process are:

Unit 12

International Marketing Research

l._
2.. 3. Basic Contents of a Proposal
aaaaaaaaaaaa)Executive Summary: A brief overview of the contents of the proposal. It may be the only part read by some people, so it should be sufficient to give them a basic understanding of the proposal. bbbbbbbbbbbb)Purpose and Scope: A description of the management problem, the possible reasons for the problem, and the decision alternatives being studied. cccccccccccc)Objectives: Defines the information to be obtained in terms of research questions to be answered. This information must be related explicitly to the management problem. dddddddddddd)Research Approach: Presents the important features of the research methods to be used. All aspects of the research that might be elements of a contract should be discussed, such as sample size, data collection method, sample selection procedures. eeeeeeeeeeee)Time and Cost Estimates: This encompasses all negotiated aspects, including total fees, payment, provisions, treatment of contingencies and the schedule for submission of interim, draft and final reports. ffffffffffff)Appendices: Any technical matter of interest, Statistical information etc. should be part of the back end of the proposal.

& Activity E;
In a proposal for identifying an export market for' Amul' brand cheese slices, you would attach the following appendices:

International Marketing

12.7 GATHERING INFORMATION


The sources and techniques by which information is gathered through market research are generally divided into two broad categories: Exploratory Research and Field Research. Exploratory research basically involves the collection of information from documentary sources, published or unpublished and the search for these sources. Field research involves collecting information primarily though contacts with people. In export market research, we can say that exploratory research is carried out mainly in the researcher's own country, while field research is carried out both in the domestic market and overseas market. The role of exploratory research is to provide some of the information needed for marketing and to lay a foundation for field research. Exploratory study is used for the following purposes: To provide enough information to identify the most promising markets and screen out others To pinpoint specific factors which should be investigated and to establish priorities for further research To gather information about the practical problems of carrying out research To increase analyst's familiarity with the problem To clarify concepts In general, exploratory research is appropriate to any problem about which little is known, Exploratory studies are characterised by their flexibility. Exploratory studies are carried j out through (i) Literature search, (ii) Experience survey and (iii) Analysis of selected cases. Literature search (desk research) is the quickest and cheapest way to collect information, The search may involve conceptual literature, trade literature, published statistics. Experience survey, which is also called key informant survey, attempts to reap the knowledge and experience of those familiar with the general subject being investigated These interviews are all unstructured and informal.
252

Analysis of cases - The third approach involves intensive study of selected cases of' phenomenon under investigation - examination of existing records, observation of the occurrence of the phenomenon.

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International Marketing Research

Evaluation of Sources 1. Coverage Extent to which source covers research topic of a) b) c) d) Level Emphasis Timeliness Accessibilit interest. Can the source provide information in the details required? Relevance in terms of application of source to problem at hand. How latest are the dates? Whether confidentiality or other barriers prevent the researcher from accessing the source. 6. Accuracy Internal Sources L Your own files: The researcher's files should contain information extracted from newspapers, trade journals, which he regularly refers to. 2. Company records: A market researcher can often find information in the company's customer lists, sales records, and correspondence from salesmen, agents, and distributors and letters from customers (including enquiries and complaints). Institutional Sources The institutions which provide market information are listed below: gggggggggggg)Libraries hhhhhhhhhhhh)Foreign Missions iiiiiiiiiiii)International organisations like FAO,OECD, WTO, ITC etc. jjjjjjjjjjjj)Government agencies kkkkkkkkkkkk)Chamber of Commerce llllllllllll)Trade Associations mmmmmmmmmmmm)Research Institutions nnnnnnnnnnnn)Bank oooooooooooo)Documentary sources - Bibliographies, Directories, Trade Statistics, Newspapers & Journals. Level of accuracy contained in the data.

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A list of selected sources of information (International) is given below: UN pppppppppppp)Yearbook of International Trade Statistics qqqqqqqqqqqq)World Trade Annual rrrrrrrrrrrr)Commodity Trade Statistics ssssssssssss)Country-wise Reports Food & Agriculture Organisation (FAO) tttttttttttt)Production Yearbook uuuuuuuuuuuu)Monthly Bulletin of Agricultural Economics & Statistics Economic Intelligence Unit, London (EIU) vvvvvvvvvvvv)Quarterly supplements on Countries wwwwwwwwwwww)Annual Supplements on countries xxxxxxxxxxxx)Special Reports on countries and commodities (Adhoc) Bank Report on countries by Lloyds Bank, Barclays Bank, Chase Manhattan Bank. OECD Publications yyyyyyyyyyyy)Foreign trade statistical series zzzzzzzzzzzz)Annual Economic Survey for different countries International Monetary Fund (IMF)
254

aaaaaaaaaaaaa)Annual Report bbbbbbbbbbbbb)Direction of Trade ccccccccccccc)International Financial Statistics

Unit 12

International Marketing Research

Overs eas Busin ess Repor ts


E U '. . :

W orldB ank
ddddddddddddd) Country Reports eeeeeeeeeeeee) Annual Reports

fffffffffffff) ew sletters N Y earbooks & D irectories


ggggggggggggg) Europa Y earbook: A W orld Survey hhhhhhhhhhhhh)elly's D irectory of M anufacturers K

Offici al iiiiiiiiiiiii) orner's R eference B ook for W orld Traders C Journa l of jjjjjjjjjjjjj) en's International Register (Im porters, Exporters, M anufacturers of Ow Europ ean D eveloping comm Countries) unity kkkkkkkkkkkkk) Financial Tim es Y earbook, Business Inform ation lllllllllllll) Comm odity Year Book (US A) mmmmmmmm mmm mm)Stores of the W orld UNCTAD/W T O/ITC nnnnnnnnnnnnn) Forum (Quarterly) ooooooooooooo)arket Survey Reports M ppppppppppppp)onographs on Trade Channels M qqqqqqqqqqqqq)andbook of International Trade and H Developm ent Statistics US Departm ent of C om m erce

Inter natio nal Mar ketin g

s ( P rrrrr ssss ttttttt uuuu

I n t e r

T B E A M F

The process of designing a questionnaire should follow a logical sequence. The basic steps are: n a t i o n a l

C u s
255

t o m

I
2M'

Unit 12

International Marketing Research

vvvvvvvvvvvvv)Define clearly what information is required. wwwwwwwwwwwww)Write series of questions, the answers to which would provide the required information. xxxxxxxxxxxxx)Arrange the questions in a logical sequence, making sure that they are as interesting as possible and free from ambiguity. yyyyyyyyyyyyy)The length of the questionnaire should be kept to the minimum. zzzzzzzzzzzzz)Before starting to design his questionnaire, the researcher should make a written list of points that need to be covered in terms of the overall research objective. aaaaaaaaaaaaaa)It is not always best to ask direct questions. Sometimes information can be gained by asking one or more indirect questions. bbbbbbbbbbbbbb)Each question on the questionnaire should cover only one point. 8. Questions should invite answers which can be recorded quickly and conveniently. Planning of Field Survey In-country Study: Before undertaking the overseas field survey the researcher should first undertake an in-country study to assess the supply base. This may include the types of problems one is likely to encounter while organising production/procurement. During this phase of the study, the researcher should study the raw material supply position, availability of skilled labour, quality control system, arrangement for bulk and standardised supplies etc. Programme Schedule: A programme schedule should be made in advance which allows for planned research (travel time, list of respondents, public holidays, interview schedule etc.). Sampling: In choosing his direct sources of information, the researcher must take care that they are truly representative of whatever aspect of the market he is researching. Arranging Interviews: It will not be possible for the field researcher to arrange 257 all his interviews beforehand. However, it is important to write ahead and arrange as many interviews as possible. This will give the researcher some advance idea about how to schedule his itinerary.

International Marketing

Timing: The researcher should arrange his visit so that he does not arrive in the country when most of the respondents have gone on holidays. If a specialised trade fair is being planned, it may be a good time for the visit to coincide with it. The researcher's schedule should never be too rigid. Once in the field he will undoubtedly discover new leads and should allow room in his schedule for following these up. The researcher should always try to arrange his appointments in such a way that he can tour the market country in an orderly manner. Samples: The researcher should organise manufacture of samples. These samples should carry price tags and detailed information about the specification etc. Literature: The researcher should carry literature, brochure etc. about the survey products. Visiting Cards : The name in the visiting cards should preferably be printed both in English and the local language. Letters : Letters requesting appointments for interviews should be neatly typed on Company's/Organisation's stationery. The letter should clearly state the purpose of the requesting interview.

Interviews
Arrive at the interview properly prepared and on time. Be neatly dressed. Begin by introducing yourself and explaining the purpose of your visit. Phrase your question clearly and concisely. Be brief. Don't begin with the most unwanted and difficult questions. Listen to the answers, be alert and show interest in the discussion. Take legible, comprehensive notes during the interview and read them through as soon as possible afterwards. Guide the discussion, keeping it focused on the subject of interview. Leave a short time for informal discussion at the end.

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Type of information and Data to be Collected

c c c c c c c c c c c cC c )r r e n t d o m e s t i c p r o d u c t i o n a n d f u t u r e cu p la n s o f p ro d u c tio n d d d d d d d d d d d dM d )r k e t s i z e = ( P r o d u c t i o n + I m p o r t s da E x p o rts) e e ee e e ee e e eeIm ) o rts ee p T r e n d d u r in g th e la s t fi v e y e a r s M a jo r s u p p li e r s In d ia 's s h a re f f f f f f f f f f f f Efx) p o r t s - T r e n d s a n d M a j o r d e s t i n a t i o n s f g g g g g g g g g g g gT rga)d e r e l a t io n s h ip a n d a g r e e m e n t g h h h h h h h h h h h hC o m m e rc ia l p o lic ie s hh) iiiiiiiiiiiiii) p o rt re g u la tio n s Im h) T a riff a n d n o n -ta riff b a rrie rs i) P ric e q u o tatio n s j) P ay m en t term s k) T ra d e re q u ire m e n ts I) D i s t r i b u t i o n c h a n n e l s & m a r k - u p s m)T ra n sp o rt n) M a r k i n g , P a c k i n g a n d L a b e l l i n g r e q u i r e m e n t s o) S p e c i f i c c o n s u m e r p r e f e r e n c e s p) C o m p e t i t i o n q) L i s t i n g n a m e s o f l e a d i n g b u y e r s , a g e n t s e t c . r) s) D e ta ils a b o u t tra d e f a ir & e x h ib itio n s S a le s p ro m o tio n
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,.

Jg$ Activity F;
The following steps in following a plan for field research are essential: 1._____________________________________________________

3.

12.9 CONTENTS OF A REPORT


The report must draw together in a well organised and concise format all the relevant data collected during the stages of research process. Basically, the report should have the following parts. Introduction The Summary of findings & conclusions The main body The appendices

The main body of the report should contain tables and charts. Tables and charts assist the reader (i) to grasp comparisons, trends and relations quickly and easily and (ii) to draw attention to the most important aspects of the data. The following guidelines may be kept in mind while drafting the report: Consider the reader, his outlook and experience Keep the report as short and concise as possible Write in a natural style Make sure that all topics covered are relevant to the purpose of the report. Double-check all figures and statistical data Use tables and charts , Ind mail thro iii)

Make sure that the report is neat, well-typed and easy to read.

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Presenting the report


If a market researcher wants his report to result in action, he must often play an active role in presenting it personally to the right people. Charts and tables prepared may be projected with an overhead projector or power point presentation or slide projector drawn on display cards. The researcher should present the summary of the report, particularly the main findings and recommendations of the study, specifying the agencies which have to implement the recommendations. If the report is not confidential, then it should be brought to the notice of the people who could use them. This might involve calling a press conference or organisation of a seminar.

12.10SCOPE OF IM R
While the purpose of domestic marketing research is well known, international marketing research (MR) involves two additional aspects. First, information must be gathered from and communicated across cultural boundaries. There are innumerable agencies available in most countries that are experienced in crosscultural communication and who overcome language barriers. Secondly, the environments in which the research tools are applied are often different in foreign markets. The difficulties faced by the international marketing researcher are: i) differing emphasis on the kinds of information needed; ii) the limited variety of appropriate tools and techniques available, and i) the problems in implementing the research process. The basic difference between domestic and international market research is the broader scope for foreign research necessitated by the high level of uncertainty. To facilitate the approach, research can be divided into the types based on information needs: i) general information about the country, area and the constituent markets; I) information necessary to forecast future marketing requirements by anticipating social, economic and industry trends within specific markets or countries; i) specific market information used to make product, promotion, distribution and price decision and to develop marketing plans. In domestic research, maximum emphasis is placed on the third type mentioned above, mainly on account of the fact that the information in the other two types is generally available through secondary sources.

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The broader scope of IMR is contained in the collection and assessment of the followingtypes of information: i) Economic: General data of the economy, inflation, business cycle trends, specific industry studies, key economic indicators. ii) Socio-cultural and political scenario: A general non-economic review of conditions that affect the division's business (refer to unit 5 for the important cultural factors) Hi) Overview of market conditions: detailed analysis of the international A market condition the firm faces in terms of the various segments. iv) Technological environment: summary of the current technological trends A as it relates to the firm's business. v) Competitive situation: Areview of the leading competitor's revenues, methods of market segmentation, products and apparent strategies adopted in foreign markets. vi) Infrastructure development: applies more to the emerging markets since This the state of the physical infrastructure is often crucial in timing the entry and operationalstrategies. As a firm becomes more committed to foreign marketing and the costs of possible failure increase, greater emphasis is paid to IMR.
Activity G ;

Infrastructure development in a country needs to be assessed because:

12.11 PRIMARY DATA COLLECTION_______________________________

If the answers to the research questions are not adequately answered or are extremely difficult to obtain, the market researcher should collect primary data.
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Primary data is data that pertains to the task specifically and newly collected for the particular research project. Parties that are contracted for primary data include the firm's sales representatives, distributors, intermediaries, and/or customers in short, all those who i can provide relevant market information.
i i

i. Marketing research methods are of two basic types: quantitative research and qualitative research. Quantitative research: In thi s type of research, a large number of respondents are given a set of structured questions in specific format or to select a response from a multiple choice set. The questions are designed to elicit specific responses regarding aspects of the respondent's behavior, intentions, attitudes, motives, and demographic characteristics. The responses received in a survey are then summarised in percentages, averages or other statistical parameters. Qualitative research: In this type of research the questions asked, are almost always open-ended or in-depth. The idea is to collect unstructured responses that reflect the j persons' thoughts and feelings on the subject. It is reported that Nissan Motors sent a researcher to live with an American family (renting a room in their house) for six weeks to I directly observe how Americans use their cars. Qualitative research seeks to interpret ' what the people in the sample are like - their outlooks, feelings, attitudes, opinions and their resulting actions. i Qualitative research is used in international marketing to define a problem more clearly. It is also used in cases where gaining an understanding of the market is desired more than quantifying relevant aspects. The most frequently used form of qualitative questioning is the focus group interview. Qualitative research is helpful in determining the impact of socio-cultural factors on behaviour patterns and in developing research conclusions that can be tested in later studies. Proctor & Gamble (P&G) has been one of the pioneers in this type of research obtaining consumers' feedback for more than 70 years. Some of the problems associated with primary data collection arise from the cultural differences among countries. /) Ability to communicate: It is difficult for a person to formulate needs, attitudes and opinions about goods whose use may not be understood, that are not in common use within the community, or that have never been available. ii) Wttingness to respond: The unwillingness or the inability of many persons to respond to research surveys may be due to cultural differences. In many countries

a n d s o ci et ie s,

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the husband is not the sole money-earner, but also dictates how it will be spent. In such cases, it is pointless to question the wife to determine demand and preferences. In some countries, women would never give their consent to be interviewed by a male. Hi) Sampling infield surveys: The lack of demographic data and available lists makes it difficult to draw meaningful samples. In many countries, telephone directories, census data and detailed characteristics of the population are not available in an updated form. The researcher must estimate characteristics and population parameters, sometimes with little basic data on which to build an accurate estimate. Without a breakup of the age of the total population, the researcher can never be certain of a representative sample requiring an age criterion because there is no basis of comparisons for the age distribution in the sample. iv) Language barrier: The language barrier and the difficulty in exact translation creates problems in extracting the specific information desired and in interpreting the respondent's answers. In the Italian language, the words for aunt and uncle are different for the maternal and paternal sides of the family. Literacy is yet another problem in developing countries. In some such countries, written questionnaires can be completely useless. v) Multi-cultural research problems: When companies operating on a global scale standardise various parts of the marketing mix across several countries, multicultural studies assume importance. The marketing characteristics across diverse cultures need to be compared for similarities and differences before a company proceeds with standardisation on any aspect of its marketing strategy. The four problem areas mentioned in the above paragraphs pertain to conducting research in one cultural setting- if extended to multiple cultures, one can imagine how the difficulties get further compounded. Multi-cultural research involves dealing with countries that have different languages, economies, social structures, behaviour and attitude patterns. When designing research to be applied in different countries in some cases, the entire research design may be different between countries to maximise the comparability of result.

g$ Activity H ;
Two main problems associated with primary data collection are: 1.______________________________________________,____________________ 2.________________________________________

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International Marketing Research

12.12 MARKETING RESEARCH ON THE INTERNET The Internet provides a new and important medium for conducting IMR projects. Two of the most important influences on industry are the Internet and globalisation. Worldwide consumer groups have been created on the Internet to help test marketing programs across international samples. The different uses of the Internet in international research are: i) Online surveys and buyers groups: These can include incentives for participation and they yield better responses than direct mail and phone surveys that are more expensive. ii) Online focus groups: Bulletin boards are used for this purpose in) Web visitor tracking: Servers automatically track and time visitors travel through websites. ivj Advertising measurement: Servers track links to other sites, and their utility can be assessed. vj Customer identification system: Many companies install registration procedures : that allow them to track visits and purchases over time. vi) E-mail Marketing list: Customers can be asked to sign up on e-mail lists to receive future direct marketing information via the Internet.
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u ie M e rn et- tatp T o d u cts an d seiv ices,


* ..'. < \ \-> 4 < > W o o W > T b f c B j % t ! " interacting with service providers and maintaining the brand relationship. 1 he met used are often embedded directly into the actual purchase and use situations, and are therefore more closely tied to actual economic behaviour. Some firms even provide the option of designing products online- the ultimate in applying research for product development purposes. Toronto city has posted an online city guide on the website: www.toronto.com. It contains apopup survey to solicit visitors' reactions and demographic information. The latter data are collected to help build visitor profiles, including browsing patterns that can be used in promotional materials given to potential advertisers.
I
*-

-.....................................................................

International Marketing

Today, the power of the Internet for IMR is the ability to easily access volumes of secondary data. These data have been available in the print form in the past, but now they are much easier to access and in many cases, are more current. If you want to know the quantity of a specific product being shipped to a country, the import duties on a product and whether or not an export license is required, is all there on your PC thanks to the Internet. The ability to conduct primary research is one of the most exclusive advantages of the Internet. As more members of the general population in various countries gain access to the Internet, it will become more powerful and accurate for conducting primary research. The Internet can be one of many methods of collecting data, giving the researcher more flexibility across countries. Samples of Important websites for IMR www.usatradeonline.gov www.exim.gov. www.wto.org www.oecd.org www.euromonitor.corn - Import and export information on more than 18000 commodities. The export-Import Bank of USA provides information on trade financing services by US Government. The World Trade Organisation provides information and important world trade figures. The Organisation for Economic Cooperation and Development (OEDC) provides information on OECD policies and associated data on 29 member countries. Euromonitor is a company that provides a variety of data and reports on international trade and marketing.

www.worldchambers.com - The world network of chambers of Commerce & Industry provides data and addresses regarding chambers of I commerce around the world. Activity I ; Two main advantages of using the Internet for IMR are: 1._____________________________________; 2.______________________________________

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International Marketing Research

12.13 SUMMARY This unit is intended to supplement the material normally discussed in basic marketing management sessions. Information plays a key role in developing international marketing strategies. The information needs can range from general data or statistics pertaining to a country to specific information for marketing decisions related to the four P's. This unit attempts to give a wide coverage to the issues in IMR as distinct from those normally encountered in domestic marketing research. The important factors in estimating market potential and in obtaining market access have been reviewed. A section on a checklist of factors affecting demand and price structure is a simplification of the various issues involved in these areas. The stages in the research process and the basic contents of a research proposal are presented. One of the qualities a competent researcher must possess is the ability to know the sources and the techniques of obtaining information. Some examples of commodities and growth in imports and exports have been included for ready reference. This is followed by a section on the approach methods for field research. Separate sections also review the scope of IMR, the research for and the problems associated with primary data collection. This unit ends with a brief analysis on how the Internet has become an effective tool in IMR. 12.14 KEY WORDS Marketing research: It is process of systematic gathering, recording, processing and analysing marketing information and data for the purpose of taking effective marketing decisions. International Marketing Research (IMR): This refers to the process of applying marketing research methods and techniques in foreign countries. ; Domestic Marketing Research: This refers to the research process applied and restricted to the domestic country. ; Primary Data: Data that is specifically collected without relying on other published ?>. information is called primary data. Secondary Data: it refers to data or information that is already available in published form, CDs or on the Internet.

International Marketing

13.1 INTRODUCTION
It is necessary to study the various aspects of e-marketing in today's world. Marketing is undergoing a revolution as a result of the explosion of information technology and the Internet. Nowhere is the impact of ICT (IT and communication technology) so deep than in the field of international marketing. This unit examines some of the basic elements of the new technological environment and discusses the changes that are being experienced in various markets. The possibility of an interactive relationship between companies and customers has become very real. Perhaps the deepest impact of e-marketing has been the widening scope of relationship marketing. This unit discusses some of the steps that are necessary to build relationship and establish brand presence across countries. With reference to an example, a section in this unit discusses in some detail how one MNC has managed to generate sales and build customer satisfaction through the medium of e-mail marketing. No discussion on e-marketing can be complete without a reference to e-commerce. This unit gives a small capsule on the basic terms and growth factors of e-commerce along with the reasons for its growing popularity. e-commerce is a term that is used to describe the state of a nation by taking into account the development and adoption of ICT technologies including IT infrastructure, hi the final section, relevant information from a white paper prepared by the EIU (Economist Intelligence Unit) is presented to give the reader a glimpse of how future rankings of countries may be arrived at by assessing the extent of their development in ICT.

13.2 IMPACT OF e-MARKETING___________________________________


The aim of market segmentation has always been to create a new value offer for as many customers as possible. In practice, a segment meant a 'collection' or group of customers having similar profiles, needs and wants. However, the emergence of the world-wide web has created a powerful new tool for accomplishing a task that was previously considered theoretical by marketers: creating marketing programs for a segment of one. Segmentation was not used in global marketing because it was too expensive to address the individual customer. With the availability of the Internet and IT, it is now possible to respond to the individual customer regardless of where the customer is located. e-marketing is now considered to be the single most important new development in technology in the entire history of marketing, particular in its ability to overcome distance,

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I the than land of an haps Jting. iblish MNC aofei.This igwith ccount tie final nomist ings of

e-marketing represents the extensive usage of the Internet and communication Technologies (ICT) in the field of marketing. Example Previously, the only way motorcycle accessories could cross national boundaries was by setting up marketing and distribution operation in foreign markets. Today this is no longer necessary. "Motorcycle consumer New' is one of the many reader-sponsored magazines that includes reviews of products that are marketed in various countries with the phone number and e-mail addresses of the manufacturer or dealer. Readers of the magazine can communicate directly with the supplier who can receive payment by credit card and ship anywhere in the world through express delivery. The immense decline in communications and shipping costs and the decline in tariff and non-tariff barriers to trade have opened up world markets to countries that were formerly too small to participate in foreign markets. Interactivity Before the emergence of ICT, communications between companies and their customers were limited to one-way communication. Companies made their offers in all their varieties and the customers made tier selections in the market place. The possibility of an interactive relationship between companies and prospects has now become very real. This is particularly true for online retailers who can use customer purchase behaviour information to customise their communication to their customers. Speed in international Marketing

as many istomers vide web insidered nentation idividual mdtothe >pment in ; distance.

Before the rise of ICT created revolution in communications around the world, the speed of information related to the company and products travelled slowly. Products had to be introduced in one country at a time. ICT has changed all that. Today manufacturers and enterprises have the option of introducing products and services across many countries on a simultaneous basis. Moreover, consumer expectations have changed too. The Korean consumer is as eagerly looking forward as the Australian one to the next big introduction from global companies like Sony or Microsoft. xgf Activity A; Two major factors in e-marketing that have helped international marketers are: 1. ___________________ _ __________________________________________ 2.__________________________________________________________ _ _ _ _
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International Marketing

13.3 RELATIONSHIP MARKETING


A major development in the marketing area and B2B marketing in particular, has been relationship marketing. The Internet has opened up wide-ranging new possibilities for creating a relationship with international customers, potential customers, suppliers and channel members, international marketers can now focus on delivering value to the individual customer. The company should offer the customer great value, and serving the customer should be profitable for the company. The relationship should turn out to be mutually beneficial. To build relationships on the web, the good websites should treat different constituents differently. The steps involved in building such a relationship are: jjjjjjjjjjjjjj)Identification kkkkkkkkkkkkkk)Differentiation llllllllllllll)Interaction

mmmmmmmmmmmmmm) Customisation 1. Identification


Websites need to capture information in respect of users. This involves more than gathering the names and addresses of visitors, e.g. their habits, preferences and interests. Companies generally have to make a trade-off here. Web users are increasingly being asked for their details when they visit specific sites. The most effective way to encourage completion appears to be in tying it to specific benefits such as a tailored environment or home page, or specific promotional offers.

2.

Differentiation
The company also needs to understand the relative worth of each user. In some circumstances, it can therefore be more appropriate to tailor content to reflect relative worth. This may involve prioritising the effort of designers to offer the greatest utility to higher value customer. Sites like amazon.com use a technique known as 'collaborative filtering'. This involves comparing the interests of a specific user with those of a larger group of visitors with a similar profile. In essence, the organisation can demonstrate to a user that they know what he/she might be interested in and offer a list of pertinent suggestions for purchase. Apart from promoting a feeling of relationship, this technique can also add

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substantial value, by suggesting resources the user might not otherwise have been aware of. The Amazon website, for example, prompts the reader with a list of other books that people who bought that book in the past also purchased.

3. In teraction
The most effective websites engage the potential purchaser in a dialogue and add value by being seen to interact with the user. The Fedex website allows users to input a consignment number and to track the progress of a particular package. This has reduced the telephone traffic to the organisation's call center and allowed the organisation to reduce costs while actually enhancing the service provided. Similarly, e-Trade.com site allows users to demand specific information that they might receive from the site. They may, for example, wish to be notified when the price of a stock reaches a certain level. The company contacts a link to the site should the user wish to buy or sell at that level.

4. C ustom isation
Customising some aspect of a service based on a particular user's needs forms an important aspect in a relationship strategy. Many of the current set of websites allow users to visit a site and to tailor the nature of the product to their own specific requirements. The user can now pick and mix the features that will be added to a new PC before it is shipped from the factory. Having gathered information from the users, it is important that the organisation uses that knowledge to add value for consumers, by customising the offering as a result. This may involve offering the facility to customise the product, customise the service or the manner in which the organisation stays in touch. In using the Internet as a relationship building tool, organisations should pay particular attention to the four elements mentioned in the preceding paragraphs and appraise their performance against the best performing sites on the web. It may also be useful to conduct an analysis of the performance of related sites (preferably of those firms in I the same product category) to develop a benchmark of their own performance, so f that the scope for potential improvement can be analysed.

H P M oves forw ard w ith 'T echnology at W ork' new sletter


HP is one of the world's leading technology companies. With nearly USD 80 bn. in annual revenues, HP provides a wide variety of technology products and solutions 275 including

International Marketing

powerful super-computers, servers, PCs, Printers and digital cameras - to customers ranging from the largest firms to individual consumers. HP believes in delivering a globally consistent, high quality customer experience that is critical to its success. Yet given its sise of 150,000 employees in 178 countries, maintaining its high standards for consistency and responsiveness is a challenge. B2B firms around the world have been pouring money in email marketing. However only well targeted and relevant emails generate sales and customer satisfaction. They can even damage the positive brand image that the firm is seeking to build through this medium. Because of its emphasis on deep customer research, relentless testing anc continual improvement, Technology at Work' email newsletter has influenced over USD lOOmn in revenue and saved million dollars in customer service costs. 'Technology at Work' has 5 million subscribers across the USA and Europe who receive one of 54 different versions of the newsletter once a month. HP's North American eMarketing Manager and one of the founders of Technology as Work' built the program on the following principles: Start with a clear purpose Determine the content that customers want Engage an executive sponsor

In this case the idea was aggressively promoted by the VP Marketing by implanting the benefits to the executive team and sponsoring the resources required to spread the implementation to the combined HP/Compaq marketing teams. Successful email specialists will appreciate the example set by Technology at Work' because it: balances user needs with business goals - the newsletter strives to meet both business and user needs by sending customers only products information related to their profiles and integrating promotions with utilities, humour, news and product updates. uses both profile and behaviour to create relevance - HP identifies customer groups with the content they are interested in and also how technical they want the content to be that enables HP to customise content and capability level. HP also supplements the profile by creating behavioural segments- like clickers, non-clickers and responders - to help optimise delivery frequency and message content.

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is relentlessly tested, measured and adjusted - HP believes in constant refinement that will make the newsletter even more valuable. HP test and optimises everything from colour and subject line to article length, order and balance in the ratio of news to promotions. HP also tracks measures for customer satisfaction, support cost avoidance, immediate revenue generation, deferred revenue generation, and offline assisted revenue. Further improvements likely to be introduced by HP include: more account-specific marketing programs that provide better support to the sales forces by introducing client-specific newsletter versions dedicated to the issues and products of its top client accounts; dynamically evolving customer profiles over time that will involve user behavioural data to trigger customer profile updates and better targeted companies as behaviours indicate changing user interests.
Source: Forecast Research Report , . , -,-..

J&i Activity B ; a) The four major steps in building relationships while adopting e-marketing are: 1.___________ 2 . 3 . 4 . b) Two major factors contributing to the success of e-mail marketing in HP are:

2.
13.4 e-COMMERCE e-commerce can be defined in a very simple way as using electronic media for conducting commerce. This involves activities like putting up an electronic interface between service

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provider and target (viz. Customer), streamlining the workflow in the organisation to process the requests from the customer and ultimately deliver what ever is promised. Say amazon.com has a web site which acts as the interface between the organisation and its customers, has a network of many warehouses which are interlinked so that they can process the incoming requests and ultimately has tie up with FedEx so that they can courier the goods to the customers. Contrary to the popular belief, e-commerce is much more than simply opening up a new, online sales channel. It's about using technology to streamline your business model, creating savings and increasing efficiency. It is about lowering costs and establishing closer, more responsive relationships with your customers, suppliers and partners. The two parties in the transaction i.e. provider of service and the target of service can be either a business or an end user (customer). Depending on this, the three types of e-commerce are: B2B (business- to -business) like Siebel technologies B2C (business -to-customer) like amason.com C2C (customer-to- customer), e.g., ebay.com

The companies involved in e-commerce can be classified in two categories. One is the company that exists only on the Internet. These companies do not have physical stores or do business in the traditional way. Two examples of this are Amazon.com and CdNow.com. The other type of company uses the Internet to complement their existing business. One example may be Barnes and Noble (barnesandnoble.com). In addition to selling books at their stores with locations across the country, Barnes and Noble operates a website in which customers can search for books that they may be interested in purchasing.

Example
iSteelAsia is a secure, neutral trading platform created by and for steel industry professionals. iSteelAsia enables users to buy and sell steel, network with a global community of steel traders and find up-to-date steel industry information and news. iSteelAsia offers the tools and advice that meet the needs of the steel trading community. [ Apersonalised Trading Center that keeps track of your buying and selling negotiations, yet provides an industry standard level of data security and privacy. , An easy-to-set up and maintain Company Account that allows you to add additional users at varying access levels, so you can manage your company's ability to view, create and negotiate trades.

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e-Marketing and e-Commerce

Conversion, industry research and community-based tools to complement your trading activities. News from a variety of external sources, plus industry reports and perspectives from experienced in-house editorial staff. Customer Service that can take care of your needs at any time, both offline and online.

Factors leading to growth


There have been a number of factors which have led to the growth of eCommerce. A few of them are: nnnnnnnnnnnnnn)Age of competition oooooooooooooo)Globalisation of economy pppppppppppppp)Commercialisation and privatisation of Internet qqqqqqqqqqqqqq)High labour cost and lesser available time rrrrrrrrrrrrrr)Higher volumes of sales at lower profits ssssssssssssss)Shorter product life cycles due to changes in technology tttttttttttttt)Faster communication of information over computer networks thus reducing distances worldwide as a result of the emergence of IT (Information Technology} - a combination of telecommunications and computer science. New technologies have changed the entire concept of doing business. Business needs to respond to these challenges in order to remain globally competitive as survival is of the fittest. e-Commerce is a critical action tool for competitive business strategies in international trade. e-Commerce encompasses the entire online process of developing, marketing, selling, delivering, servicing and paying for products and services. The Internet's Web browser and client/server architecture and networks of hypermedia databases on the World Wide Web serve as the technology platform for electronic commerce among inter-networked communities of customers and business partners. Since communication through Internet and other online services 279 have become very popular and easy to operate, traditional EC activities can now be conducted with new participants on a global scale.

International Marketing

broadband connections and mobile phones in the country; it also depends on such things as citizen's ability to utilise technology skillfully, the transparency of the business and legal systems, and the extent to which the government encourages the use of digital technologies. The importance of e-readiness cannot be gauged by technology penetration or average Internet access speeds. Returns from e-readiness are realised when countries use ICT to boost economic and social development. North America and Western Europe have translated investments in ICT into economic benefits. The so-called 'digital divide' between the e-developed countries and the e-developing countries is narrowing with each passing year. This is evident in the case of basic connectivity: emerging markets are providing the vast majority of the world's new phone and Internet connections. Many developing countries are also enhancing their e-readiness in other ways- for example, through the growth of IT outsourcing capabilities in countries such as Bulgaria, Vietnam and India. A country's level of e-readiness, more often than not, mirrors its overall economic development. Consistent economic development usually dictates a higher level of sustained investment in ICT infrastructure and the commitment to policy development. Some of the significant observations with the e-readiness rankings released in a while paper by EIU in collaboration with the IBM Institute for business value are given below: The adoption of open-source software has expanded business and public-sector access to IT in Latin America where the cost of basic packaged software is too prohibitive for many small enterprises and government agencies. Broadband wireless technologies like 'WiFi' and 'WiMax' are also coming into the ] picture for markets looking to improve online access. Mobile Internet makes sense for emerging markets not only because the networks are quicker to roll out than fixed infrastructure but also because developing countries are comfortable with wireless solutions. Voice over IP (VOIP) is another tool used to enhance connectivity - in developed and developing countries alike - by reducing the cost of international calling to help consumers and enterprises. Worldwide, Denmark was ranked No. 1 once again in the latest ranking with an ereadiness score of 9.00 (out of 10) while the USA, Switserland and Sweden follow with scores of 8.88, 8.81 and 8.74 .

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Among the BRIC countries, Brazil is ranked 41 (score:5.29); Russia 52(score:4.30); India 53 (score:4.25); China 57(score:4.02) Among the 20 countries in the list of 2006 are: Hong-Kong (4th); Singapore (6th); South Korea (16th); Taiwan (17th) and Japan (18th). The gap between the highest and lowest scoring countries has dropped from 6.08 points in the previous year to 5.80 points. Top rank holders in the previous year continue to be leaders in the latest list too that includes nine of the top 10 countries.

(This section is condensed from a white paper by EIU available on the website: www.eiu.com)

& Activity F;
According to you, the two most significant observations made in the report by EIU are:
1.______________,_______________________________

2.________________________________________________ 13.7 SUMMARY___________________________________________________


This unit has reviewed the important issues of e-marketing in the context of modern developments. It has been stated that the impact of ICT technologies in the international marketing field is deep and widespread. This unit has examined some of the basic elements of the new technological environment and has discussed the changes that are being experienced in various foreign markets. Perhaps the deepest impact of e-marketing has been the widening scope of relationship marketing. This unit has covered some of the steps necessary to build relationships. An example of how one MNC has managed to generate increased sales and build customer

satisfa mail marketing has been included. ction throug e-marketing and e-commerce are twin developments and one cannot be dissociated h e- from the other. This unit has only given the reader a small capsule on the basic terms and growth factors in e-commerce.

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International Marketing

In the final section, the concept of e-readiness as applied to the level of development of a nation has been introduced. Relevant information from a report prepared by the EIU (Economist Intelligence Unit) has been included to give the reader a glimpse of how various nations are ranked on the basis of the development and adoption of ICT technologies.

13.8 KEY WORDS___________________________________________________


e-marketing: Aterm used to describe the predominant adoption of IT and Internet in the field of marketing. e-Commerce: A general term, that is used to describe transactions that take place in selling of goods and services predominantly over the Internet. The main types of transactions are:- B2C (business to consumer); B2B (business-to-business); C2B (customer to business); ICT: An abbreviation for IT (Information technology) and communication technologies. e-mail marketing: It refers to the process of carrying and marketing activities mainly through the e-mail medium. e-readiness: A term that is used to define the level of growth in a nation of ICT, ICT infrastructure and the ability of its consumer, businesses and governments to use ICT to their benefit. Returns from e-readiness are realised when countries use ICT to boost economic and social development.

13.9 SELF- ASSESSMENT QUESTIONS


Q 1 . What does the term e-marketing refer to? In the field of international marketing, describe the ways in which e-marketing can be used. Q2 . Why is speed in international marketing an important issue in the current business environment? Q3 . Identify the basic steps in relationship marketing as applicable to the emarketing environment. Q4 . Describe the ways in which customer relationships can be strengthened through email marketing by any Indian firm involved in exports.

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International Marketing

14.1 INTRODUCTION The world economy has undergone drastic changes in the last 3 decades. It is necessary to assess how these changes have affected companies that are continuously exploring new overseas markets. All indications are that more changes are likely to be witnessed in economies that are embracing globalisation. This unit attempts to track some of the changes that are altering the business landscape in both developing and developing countries. Factors such as growth of developing countries and growth of global market segments are analysed. Some general guidelines and principles followed by successful companies in international markets are summarised in the next section. These may not be entirely new but can serve as important pointers for companies seeking new international markets. Countries have benefited a great deal from bilateral trade relationships. Atypical example of such a relationship is provided in detail on the India-European Union bilateral partnership. In a concluding section to this unit, the foundation on which the success of one of the top five IT Companies in the world has been built is given in terms of its guiding principles. 14.2 CHANGES IN THE FUTURE The world economy has undergone drastic changes over the part three decades. More changes are expected to follow over the next three decades. The emergence of international and global markets, global competitors and more players in the international arena are representative of the intensity of the changes in the past. Just as companies have changed their outlook towards export and world markets, the customers have grown increasingly intolerant of the short-term, quick-returns oriented company. The explosion of communication and internet technologies has made a drastic change to the expectation levels of customers across the various countries. This will no doubt accelerate the growth of the 'global customer' i.e. the customer who will share common interests and needs with his counterpart in many countries. There are many such changes that will continue to impact companies on a largescale. Some of these are discussed in the following paragraphs. 1. Growth of developing countries The so-called 'poor' countries of the world are now getting richer - and at greater speed than the rich countries of the world; most of the world economies are in a stage

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;-scale.

of economic growth. Countries such as Singapore and South Korea are already high-income countries. The expectation to economic progress is in Africa, south of Sahara (excluding South Africa which is 'showing reasonably good growth levels). 2. Emergence of the world economy

The second major change is the emergence of the world economy as the dominant economic unit. Companies that recognise this fact have the greatest chance of the growth in world markets. The USA is still a superpower, but it is no longer in a position to tell other successful nations how to tread the right path. Wealth creates the foundation for political and military power and the basis for an assumption of moral superiority.

3. Produc t maturit y and produc tion locatio ns Pro duc ts mat urit y is a con cept that nee ds to

be carefully redefined in today's economic environments. The automobile is a mature product in the sense that growth has remained stagnant or marginal in the developed countries. However, cars are being designed and adapted to suit different markets and the ways of manufacturing are being revolutionised. Automobiles today are being produced in countries at every stage of development, but more than 90% of the production comes from the developed countries. There are mature products that have become relatively standardised in their manufacture and continue to require a relatively high percentage of labour to produce. In such a case, the production has shifted increasingly to the developing countries. The athletic footwear industry has shifted its production to low cost countries, and no company has been able to reverse this trend. This has offered employment opportunities for the lower-income countries, and a challenge for the higher income countries to shift labour to other industries in which the cost of labour is not such a significant factor in the production location. The same trend has been observed in synthetic textiles and readymade clothing. However, the sheer competitiveness in the particular product-line or industry may force the larger firms to seek low-cost production bases. The phenomenal rise in outsourcing by the firms in developed countries to low-income countries seems to suggest that their production costs in home countries are making their products unremunerative in foreign markets. Changes in global and international competition are bringing companies into more direct competition with economic rivals in other parts of the world than was the case in the past. Companies in the same industries in

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International Marketing

different countries and regions compete aggressively with each other in manufactured goods, agricultural products, natural resources and services.

_ ^ _ vvvv vvvv vvvv vv) _

4.

Growth of global market segments


The future of international marketing lies in the ability of companies to address global market segments. More companies are showing successful approaches at identifying and tapping these segments. The soft-drink industry has been successful in reaching a global segment and is now taking actions to follow in the fruit-and-flavour segment. The rapidly expanding growth of Internet access and the capacity of the Internet itself are playing major roles in supporting the growth of global markets and international marketing. Amazon.com can reach customers in Taiwan and Turkey just as easily as it can reach any corner within the USA. Customers anywhere in the world are only a click away from their favourite book or music album. With credit cards, customers can pay for goods and services in any currency. These are the new economic realities. As the world becomes more integrated, new opportunities and new challenges emerge for companies and for countries.

5.

Growth of IT and Internet


This topic has been already dealt with in the previous unit. The unimaginable growth of IT and the Internet has enabled the marketing teams to address the single customer. Today, marketing has the tools to address the segment of one, the individual. This capacity is available in the local market as well as in the global market. Today small companies can act like big companies and vice versa. This is creating a new dynamism in every sector of the global economy, especially in the developed countries that have the resources to invest in IT hardware and software. In addition to e-commerce, the Internet revolution is creating a new medium for information, entertainment, communication and advertising, besides a new ecommerce retail segment.

5.

&$ Activity A ;
a) Two significant changes that have affected the economy and business in virtually all countries are: u u u u u u u u u u u u

3.

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Future Trends

Name two product categories or types that can be considered as global products:
1.___________________________________________________________

2_______________________________________-_________________ 14.3 GUIDELINES FOR COMPANIES SEEKING EXPORT MARKETS


Although there can be no fixed set of guidelines for companies attempting to serve markets, a look at some of the guidelines that have helped companies achieve success so far can be pointers for the seekers of export markets: wwwwwwwwwwwwww)Prospective entrants determine if they have a clear advantage over players. This may be a result of better or special technology, experience or access to customers. Such an advantage clears the path for overcoming barriers to entry or expansion. There is little doubt that a firm that has a clear advantage over prospective entrants or existing competitors is most likely to be successful. xxxxxxxxxxxxxx)Prospective entrants determine whether the market is a growing one. Clearly a market where the potential is stagnant or declining is less attractive than the one where it is growing. The fight for market share in a declining market cannot be continuous. yyyyyyyyyyyyyy)Prospective firms usually conduct their own competitive analysis for each foreign market. Porter's five forces analysis and other tools assess the attractiveness of a market. In an ideal situation that is conducive for entry or expansion, the bargaining power of supplier and customers is low; the industry has substantial barriers to entry so that the threats of substitute products is low, there are enough competitors and enough price elasticity so that the internal rivalry among existing competitors is not high. 4 Unmet market needs or under-served market niches are discovered by the prospective firm. Either other competitors are unable to serve some market needs or the firm has discovered some unique way of satisfying customers. It makes a great deal of sense when the firm discovers such a need or niche before moving into an export market with full resources. 5. The size of the market opportunity matters a lot. In addition to the ability to influence or have a strong impact on the industry, the firms need to take the size of the opportunity into account. The firm finds itself in an advantageous position when the market is :: neither too smal 1 nor too large.

ner. jday new ntries to e ation, 5 retail

International Marketing

6.

The potential entrant has found dissatisfied customers who do not mind the switching costs. In some industries, the level of customer satisfaction is extremely low. In such cases, the firm makes an assessment of: i) the level of customer satisfaction

ii) their difficulty in switching over to new supplier in) the process they go through in selecting a new supplier Apparently, this type of assessment has brought considerable success to the potential entrants in many foreign markets. They have avoided a market where the customers are generally satisfied, switching costs are high and price is the dominant purchase factor. zzzzzzzzzzzzzz)Potential entrants have sought out willing and able customers. They have usually carried out their homework in determining the price points paid for competitive products, the degree of customer willingness and the premium customers will pay for a better product. This makes the timing of entry into a foreign market a crucial aspect in international marketing. aaaaaaaaaaaaaaa)Potential firms have tracked macro-level trends. The macroenvironment and specific business and economic trends are also monitored closely so that their impact on the national economy can be gauged. The degree of economy reforms, the state of the physical environment, the healthcare system- all these and more can trigger developments that can affect the buying preferences of the customers in the selected country. bbbbbbbbbbbbbbb)Potential firms have identified the most attractive segments and sub-segments. This also provides the mode of entry into the specific markets, for example, the acquisition route may be preferable in markets that have good size, good growth potential and high market share targets in a short time-frame.

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ccccccc ve restrictions and the non-tariff barriers. Some countries offer more ccccccc favourable regulatory conditions than other countries. This issue can become a c) Po deciding te factor for companies that want to enter into multiple markets. nti al ddddddddddddddd)Prospective firms have developed the expertise to decide which market will be more en profitable than the offers. This is where they have possessed the additional tra marketing nt acumen to decide the right option. s ov er co m e th e re gu lat or y iss ue s su ch as th e tra de li mi tat io ns , tar iff le ve ls, qu an tit ati

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These guidelines are only representative and general in nature. Ultimately, every situation of market entry or expansion is unique and the decisions will almost always be company-specific and country-specific. There are also sufficient examples of companies that have based their decision for foreign expansion more on such, than on following a set of guidelines. However, those that have followed the above guidelines in their decision process have been invariably successful. J8$ Activity B; Three guidelines you will propose to a manufacturer of ayurvedic skin care products that is attempting to tap the market in Australia and New Zealand are: 1.__________________________________________________________________ 2. 3. 14.4 A BILATERAL PARTNERSHIP MOVES AHEAD_____________________ Companies in India and Europe have benefited to a large extent by the bilateral trade relationship established between the two governments. In recent years, the EU has emerged as India's largest trading partner and the country's biggest foreign direct investor. The current bilateral relationship encompasses political cooperation, along with cooperation in trade and economic partnership with India (the fourth-largest economy in the world). Trade between India and Europe has grown steadily over the last few years. In 2005, the UK, Belgium, Germany, Italy and France were India's five largest trading partners. The Indian-EU relationship had its origins in the early 60's. India was among the first developing countries to establish diplomatic ties with the formerly six-nation European Economic Community. A strong thrust for cooperation came in December 1993 in the form of the Co-operation Agreement on Partnership and Development. In July 1996, the relationship was further strengthened by the EUIndia Enhanced Partnership proposed by the European Commission. The first EUIndia summit in June 2000 marked the evolution of this relationship, and the summit has been an annual feature since then.

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Areas of Indian-EU Economic Cooperation


The European Union is the world's largest economic bloc. Being the largest trading partner and the biggest foreign investor, EU holds strategic importance for India. Both the EU and India are evolving joint initiatives to promote cooperation in diverse areas such as civil aviation, maritime transport, science and-technology, the space industry, information technology and telecommunications.

Exports by India to the EU


The EU is India's largest export destination. It accounted for 22 per cent of India's total exports in 2005; India had a 1.6- percent share in the EU's total imports. According to the Ministry of Commerce. Government of India, exports to the EU from April to August 2006 stood at nearly EUR 6.2 billion, which was 22.42 percent of India's total exports in this period. The major goods exported from India include textiles and clothing, engineering products, gems and jewellery, chemicals, metal and metal products, leather and leather products, agriculture and fisheries. India being a developing country, its exports to the EU stand to gain the benefit of reduced tariffs under the EU Generalised System of Preferences. This figure shows the export of goods from India to the EU over the period 2001 to 2005.

2 0 EUR Million

1 5 10
2001 2002

2003 2004 2005 YearsFig. 14.1: Exports of Goods by India 5 to EU (EUR billion) : 2001 - 2005 EU's Investment in India
The Indian market holds strategic importance for EU companies; this is highlighted by the fact that approximately 50 per cent of the multinational companies present in India are EL1 companies.
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The EU is the largest contributor of FDI in India. FDI approvals by the EU between 1991 and September 2004 constitute approximately 25.42 per cent of the total FDI approvals in India. The major investing countries from the EU were the UK, the Netherlands and Germany followed by France, Italy and Belgium. The following figure depicts the FDI inflow from the EU to India over the period 2001 -2004.

EURO
Million

1200 1000 800 600 400 200

~1
950

420
2001 2002 2003 Years

820

1043 2004 route.

Fig. 14.2 : FDI Inflow from EU to India (Euro Million) from 2001 - 04 India's Investment in EU and abroad Indian firms began investing abroad since 1992, after the Indian government restructured its policy guidelines to promote investment opportunities in the country. The government wanted to provide domestic firms with access to foreign technologies and encourage them to foray into new overseas markets. This policy change proved to be a watershed in the history of Indian economy, and Indian business houses have been increasingly venturing abroad since then. Best Practices Diverse strategies have been adopted by Indian companies for venturing in the EU. Though some companies such as Infosys and Genpact have preferred to grow organically in the EU, a majority of the firms have decided to opt for the inorganic

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Some of the best practices followed by Indian companies in the EU include: eeeeeeeeeeeeeee)Strategic Acquisition: India Inc., which has been scouting for global acquisitions, is now headed for Europe. Apart from several European private equity players that have put their holdings for sale, many old family-run manufacturing companies are also selling out their units. Amajority of Indian firms have grabbed these opportunities to enter into the EU market. They have used the acquired companies as a platform to establish a foothold in these companies. Ranbaxy, for example, has made four acquisitions in Europe in the first eight months of 2006. Even companies such as Infosys, which earlier chose the organic route, are now exploring acquisition opportunities. Several companies, such as Aftek Infosys, have been actively forming alliances with other companies to facilitate their entry into a segment or geography in theEU. fffffffffffffff)Establishing synergies with Indian Operation: The India firms with operations in the EU have continually endeavoured to synergise their European operations with the domestic ones. This has helped them to leverage the low-cost advantage offered by India. For example, VIP Industries acquired Carlton in the UK in 2004. The established Carlton brand provided VIP an easy entry into the high-growth European market. VIP has manufacturing plants in India and China, and it sources its products from these low-cost destinations to deliver them to its export locations in Europe. Thus, the combination of Carlton's reputed brand and VIP's low manufacturing costs provided the latter with a competitive edge. The success of several Indian companies can be attributed to such synergies. Another company, Sundaram Fasteners, carries out its back-end operations in India and caters to the European clients through

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its om its EU operations to its Indian locations to gain cost benefits. E ur ggggggggggggggg)Recruitment of Local Talent: Indian firms in the EU have been hiring local population op for their European operations. These local employees understand the geography ea and n provide services in collaboration with the company's core competence. In su addition, bs they help the company in bridging the cultural gap between India and the country id of ia operation in the EU. They form a highly educated and multilingual workforce for ri the es company. Such a recruitment strategy by the companies also earns them . support A from the local government, as it has a salutary effect on the problem of mt unemployment. ek HCL, for example, has made Northern Ireland its hub of operations in the EU. A It ut figures among the top 10 private employers in Northern Ireland, and the o local ou workforce hired by it has been instrumental in its profitability. t so ur ce s th e pr od uc ti on of s m all ba tc h co m po ne nt s fr

2 ______ .

I nf o J8$ A ctivity C ; ys ys According to you, the two most important outcomes of a bilateral trade relationship 's te are: a m 1.__________________________________ ac ti :________________________ v el 14.5 THE INFOSYS FORMULA________________________________________ y p In a recent survey of Global Services 100, Infosys was ranked #3 among the Top 10 ar Best Performing IT Service Providers. ti ci Global Services 100 is an annual ranking of the world's most innovative service p providers, a survey compiled jointly by Global Services, a CMP-CyberMedia LLC at media company and neoIT, an outsourcing advisory firm. es in In addition, Infosys has also been ranked among the top companies in the cr following ea ti categories: n g Best Performing Managed Services Providers pr o Leaders in Engineering Service Providers d u Leaders in Human Capital ct bl Development u e Partnering with Infosys pr in INFOSYS has consistently built on customer relationships around the world ts that has evolved from partial outsourcing to an end-to-end strategic partnership. a Being a hardcore technology company itself, the client's expectations and standards n on technical competence are fairly high. The company initially decided to outsource d only a small part of its functions. But as customers gained confidence in Infosys's th ability to deliver, Infosys became a key partner across all functions like: ei r IT Support: Production support and all kinds of development and maintenance re work. al is Product Engineering: This involves development of products on various at technical io domains such as VoIP, Network Management, Optical and Routing n. technologies.

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;______ _ __________ _ _

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BPO Services: Over the last three years, Infosys's BPO arm Progeon has been providing complete backoffice support on a number of processes order management, customer support, maintenance contracts and other service operations. Consulting: The impact of this partnership can be seen from the fact that Infosys has gradually moved from handling regular outsourcing work to participating in strategic initiatives and thought leadership through Infosys Consulting.

Infosys's success in managing end-to-end functionality has been powered by its Global Delivery Model. A special Governance Model has also been created to monitor the progress through all these functions; in-house tools are used to track all project plans and conduct regular quality reviews. Delivering Value Over the years, clients that are spread across the world have benefited from this relationship in a number of ways: Product engineering services have assisted in topline growth by designing the products faster in a more cost-effective manner. Over a period of last 3 years, the Total Cost of Ownership (TCO) has been reduced by more that 45%. BPO services have taken over a large part of customer management functions. This has helped reduce transaction costs by 40% and increased the number of transactions by 20%. This has helped achieve high level of customer satisfaction for order management, making it the only such center across the organisation. Integration of operations and IT has enabled faster implementation of changes, as requirements can be gathered and understood better. Better utilisation and management of resources enables the client to focus on its competence areas. Process improvement and technology-enabled initiatives have resulted in overall efficiency and improved knowledge management within the company.

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By creating an end-to-end operations management infrastructure, Infosys has not only helped the client bring down its costs, but has also helped improve the company's competitiveness by allowing it to focus more on innovation and other long-term strategic

Unit 14

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activities. In addition, Infosys believes that the following factors are necessary to become a global player and are critical to be a successful technology services provider: Effectively integrate onsite and offshore execution capabilities to deliver seamless and scalable services. Increase breadth and depth of service offerings to provide a one-stop solution. Develop and maintain knowledge of a broad range of existing and emerging technologies. Demonstrate significant domain knowledge to understand business processes and requirements. Leverage in-house industry expertise to customise business solutions for clients. Attract and retain high-quality technology professionals. Make strategic investments in human resources and physical infrastructure or facilities throughout the business cycle.

14.6 SUMMARY This unit has attempted to examine the key factors and concepts that have now become f imperative to achieve success on an international scale. The changes in the world economy I over the last three decades have affected both big and small companies as well as MNCs I and domestic companies. This unit has tried to focus on some of the changes that have ; altered the business landscape in both developing and developed countries. Factors such * as growth of developing countries and growth markets have been analysed. Some general guidelines and principals followed by companies successful in international markets have been discussed. Countries have benefited tremendously from bilateral trade I and trade relationships. The India-European Union bilateral partnership is one such example that has seen trade and businesses between companies in the two regions grow drastically. The final section gives a glimpse of some of the success factors of one of the top five IT services companies in the world, that essentially puts in capsule form the important lessons from the previous units in this course material.

International Marketing

Case Study 1
PORTAKABIN - RESPONDING TO THE ENVIRONMENTAL CHANGES Introduction

Changes in the business environment


The business environment in which firms operate, lies outside themselves. It is their external environment which is always changing. Some changes are so dramatic that everybody notices them, but others may creep up on an industry over the years and be largely ignored for too long. Changes take many forms and create new challenges. For an industry as a whole, it may well be that: Customers' needs and requirements change. They look for new, better and cheaper products. New technologies become established. These encourage new firms to enter the industry with better products and cheaper ways of doing things. Employees' skills need revising to take advantage of new technologies. New laws are passed that require changes in how businesses operate eg introduction of a minimum wage, restrictions in working hours and tougher health and safety requirements. Traditional sources of supplies of raw materials and components begin to look less reliable. New supply sources emerge. Banks and other investors start to lose interest in financing the industry. Pressure groups start to take a greater interest in the industry's activities. The industry ceases to be able to attract new, high caliber recruits.


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For individual firms within an industry, the external business environment also includes their competitors, who may:

Unit 15

Case Studies

introduce new, superior methods of production; change the ways in which they compete for business; ft extend their target markets; find new ways of attracting key employees.

One test of a firm and also of an industry is how well it recognises significant changes and adapts to them. The UK construction industry The British construction industry has to meet the needs of a whole range of ch'ents. These include: public and privately owned businesses and organisations in all sectors of British industry schools, hospitals, universities etc. national and local governments e.g., roads, railways, tunnels, dams, stadiums and offices private citisens, and particularly home owners All these clients want the finished job to be: better suited to their own particular needs; completed more quickly; 1 cheaper than in the past; finished to higher standards.

For this to happen, the UK construction industry has to change its approach. The industry did have some centers of excellence, but overall, there were many problems to be resolved. These included: ,. low profitability, which in turn led to: low levels of capital investment

International Marketing

insufficient research and development inadequate employee training outdated methods of production excessive waste of resources (e.g., time and materials)

many dissatisfied customers The need for innovation

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Customers' requirements could not be met by existing products. There was a need for new ideas and better techniques. This was because: Companies were looking for innovative buildings to provide more adaptable office space with reduced lead times. Schools, hospitals, universities etc needed better high quality, flexible buildings quickly. Governments wanted key projects delivered quickly and on time in order to fulfill their policy commitments. Government and Local Authorities' requirement for modern affordable housing.

Portakabin was already operating in many of these markets and meeting many of these requirements. With the government itself supporting the drive for change, ongoing innovation offered Portakabin many business opportunities.

Portakabin
Portakabin belongs to the select group of companies which have made such a mark that, in popular speech, its brand name is sometimes used (wrongly) for all the products of a particular industry. Such fame is a mixed blessing - there are some modular buildings and portable constructions on the market which Portakabin does not manufacture. 'Portakabin' is a registered trade mark and may be used only to describe buildings manufactured by Portakabin Limited. The company is protective of its trade mark and takes action against any infringement/misuse of the trade mark. This is mainly due to the need to protect it from becoming a generic term and the associated risk of the company losing exclusive rights to the use of the name, as happened to Aspirin and Escalator.

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Case Studies

Portakabin provides quality modular factory-built accommodation. Its products include modular building systems, re-locatable self-contained accommodation and also flat pack buildings to export worldwide. (For some buildings, there is a hire service for customers who prefer not to buy outright.) The Portakabin Group also includes Yorkon Limited, a single source building service specialising in steel frame modular building systems for use within healthcare, education etc as well as general commercial use. The group also provides added-value services including climate control, office planning and furniture solutions. Continuous research and development by Portakabin has enabled it to provide state-ofthe-art building solutions and to establish market leadership across a range of product areas.

Modular building expertise


In modular construction, bui Idings are manufactured and fitted-out in a controlled factory environment. In the meantime, the foundations are being prepared on-site. The customer's modules are then taken to the site and craned into position and linked together. Architectural features (such as brick cladding to the outside of the building, a pitched roof, glasing, lifts or a stair tower) are added on-site. The advantages of modular construction include: t Vastly reduced program times Significantly improved quality and reduced costs Greater ability to customise the building Minimised disruption during construction Safer, quieter and cleaner work on site

Clearly, modular building techniques offer many of the improvements that the Egan Report called for. The Portakabin Group provides organisations with a fast, effective response to their building requirements and provides both building and room modules in a range of sizes to offer flexibility for building and design solutions. For example, this system allows a building to be extended horisontally or vertically, to create multiple storey buildings, with little or no disruption to existing facilities. Internally, the modules can be adapted to match a range of specifications for open-plan or cellular offices, while externally, a wide choice of claddings, colors and treatments may be developed to fit in with other buildings or reflect a corporate style.

International Marketing

Innovative developments Housing In mainland Europe, housing sites contain many innovative forms of building. They use a high-degree of pre-fabrication and pre-assembly of factory-built parts which are then transported to the designated building site. Similarly, standardisation of components makes it possible to adapt modules to the specific needs of customers. This way of constructing buildings means that less work is done on site and more time is spent focusing upon the technologies associated with the construction. This includes using design tools such as Computer-Aided-Design (CAD). In London in March 1998, the Peabody Trust received planning permission to develop 30 factory-built, modular homes, in Murray Grove, Hackney. This was the first development of its kind to be piloted in Britain. The Murray Grove site has opened up opportunities for affordable housing. The housing is both distinctive and durable and the emphasis has been upon fine materials and a distinct architectural image. The Portakabin subsidiary, Yorkon, started work in Autumn 1998 and assembled the units on site in Spring 1999 i.e. through the winter months. Such an achievement is more or less unthinkable using traditional building materials and methods. In York in early 2001, there were 4,500 people on the council's waiting list for housing. Portakabin is providing 24 affordable homes on a brown field site on the outskirts of the city. The development occupies the site of a former school canteen, and is arranged four-storey high in a L-shaped configuration, with a private landscaped court to the rear. In keeping with the urban location, and clad in red cedar, the Sixth Avenue Apartments represent the first factory-built, multi-storey affordable housing project outside London and will take about 6 months to complete.

Industrial and other buildings In business-to-business markets, such as chemicals, pharmaceuticals and specialist services, firms need buildings that they can rapidly adapt to meet market changes, e.g. they may need more laboratory space and less dedicated office space within the same building shell and with minimum disruption to ongoing work. To meet this requirement, construction companies need to find methods of construction that are: clean, safe and efficient guarantee quality and save time

T"
Unit 15 Case Studies

Sony UK solved its need for additional office accommodation at its headquarters in Weybridge, Surrey with a two-storey building comprising 20 Duplex building modules. The building provided a flexible solution to accommodate 120 staff with fittings and furniture that can be re-configured as Sony's needs change. In Essex in March 2001 when the then Ministry of Agriculture, Fisheries and Food urgently needed office premises on site in order to tackle an outbreak of foot and mouth disease, Portakabin had four buildings up and running, to MAFF's specifications, within 48 hours. When the University of Leeds wanted a new nursery to accommodate 60 children, Portakabin built and installed their new Lilliput nursery system within five weeks. It includes specially designed features for a child-friendly environment. Although the sight of a new McDonald's restaurant might be more familiar than the examples listed, it might surprise students that many of these restaurants are modular buildings supplied by the Portakabin subsidiary Yorkon.

C on clu sion
The UK construction industry is changing its practices. Portakabin is helping to lead that change. Its projects are customer led, and offer high quality solutions in much less time and at a lower cost than traditional building methods require. This approach is in line with the rethinking that the Egan report demanded. Companies that have acted are becoming more competitive as they become increasingly customer led and in tune with modern construction methods and materials. Portakabin amply demonstrates this development.

Self-assessment questions
Q1. What methods should Portakabin adopt assuming it decides to enter the Indian market? Q2. Design a suitable approach and plan for integrated marketing communications assuming Portakabin wants to enter the EU.

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Case Study 2 AMWAY (UK) BETS ON THE INTERNET Introduction Founded in the USA in 1959, Amway is a global business with 6,000 corporate employees worldwide. It is one of the world's largest direct sales companies that services and supplies over 3.3 million Independent Business Owners (IBOs) in more than 80 countries and territories in Asia, Africa, East and Western Europe and the Americas. The critical relationship between Amway and the seller, or IBO, is at the heart of Amway's approach to direct selling. This form of selling allows each IBO to focus upon individual consumers and their needs, with the IBO delivering direct to the consumer rather than the consumer having to visit a shop. Because Amway manufacturers its own branded products and distributes these through 'direct selling', its operation differs from that of more traditional distribution channels. Having signed a contract to work within Amway's Rules of Conduct and Code of Ethics (best practice), IBOs are self employed and the Amway business gives them the flexibility to work where and when they want. They sell to people they know or meet, introduce others to the Amway business and form their own sales group. The personal contact and care they provide is an important element in direct selling. To do this they need support, and rely on having ready access to a quick, efficient supply chain so that they can meet customer needs. The Internet Opportunity Increasing use of the Internet has created real potential for businesses to develop di fferent types of business models and to try out new approaches to reach users directly and quickly in their homes. Amway was well placed to make such a move. With high levels of Internet use within the UK and Europe, market research showed that IBOs were Internet-ready, and that the time was ripe for Amway to develop ecommerce opportunities that would offer the 24 hour/7 day service its customers were ready for. Having received supporting merchandising materials, literature and training so that they know the best way to promote the features and benefits of Amway products, IBOs order the product direct from Amway having taken an order from their customer. Most operate their business part time from home, as many have full time jobs and want a flexible working

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pattern with Amway. They want to work at a time convenient for them, which can be any hour of the day or night, with an organisation they can rely on. The Internet offers the opportunity to meet these needs.

Strategic development of interactive communications


way's IBO customers depend on Amway for more than products. They look to Amway for support that will help them manage their businesses. For an organisation to be competitive in a crowded market place it has to be market-focused. Amway knows that it can succeed only when it can help its customers succeed. By placing customers at the centre of its focus, an organisation then builds processes designed to satisfy their needs. For Amway, this involves a whole series of activities that link the supply of raw materials to production processes, to physical distribution management and finally getting the goods in a timely way to the IBOs, who can then meet their commitments to their customers. With more than 3.3 million distributors in more than 80 countries and territories and with own branded products ranging from 'ARTISTRY' brand skin care and cosmetics to 'NUTRILITE' brand nutrition and wellness products, Amway faced a huge challenge in providing customers with goods at the right time, in the right place and in the right condition. The starting point was to undertake some market research that would enable Amway to understand its customers better, and provide a model for how a web e-business opportunity could best be developed.

Independent Business Owners (IBOs)


People join this business for a variety of reasons. Some become IBOs simply to be able to purchase products for their own personal use at a reduced cost. Others join in order to direct sell the products to others, earning a profit on each sale and additional financial benefits based on their sales volume. Business builders not only sell products; they also sponsor others to join the business. They are compensated for their own sales and well as the sales of those they sponsor, receiving incentive bonuses that increase as their own sales force increases. All IBOs have the identical opportunity to grow a successful business. Each business owner is compensated in direct proportion to his or her efforts. In order to understand what IBO customers want in terms of products and service, Amway builds up typical customer profiles. These are made as full and accurate as possible. In that way, Amway can target its current support services. Equally important, it is able to anticipate the future needs of its various customer groups, and can target them with specific product information.
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International Marketing

Amway knows that most IBOs are entrepreneurial individuals who want to sell quality products to people they know or meet. Most also fall into the conventional categories of socio-economic grouping. This is often used by marketing departments to segment the total audience and identify particular groups they want to target. Most of Amway's IBOs are well educated and ambitious, and many have families. Working from home, they supplement their family income mainly by working part-time, although some work full-time. Most of these IBOs have web access, many of them having bought PCs to support their children's educational progress. The research revealed that many IBOs felt they needed more support for their selling activities. In particular, they wanted quick, secure access to more accurate, up-to-date information that related specifically to them. The answer had to lie in a carefully constructed, properly run, well thought-out Internet operation.

Developing an Internet strategy


Business strategies are designed to be consistent with an organisation's overall purpose or mission. As a world leader in direct selling, Amway builds opportunities and partnership with individual customers so that they can share in its success. To support this purpose, corporate strategy involves making far-reaching long-term decisions that look to match an organisation's activities with its business environment. With huge changes in technology and many IBOs ready to make use of web access, Amway felt that the web would be one of the most effective ways of meeting their needs. For Amway's IBOs the web had many potential benefits such as: providing up-to-date feedback and information with fewer clerical errors receiving access to valuable business information and advice 24 hours a day, 7 days a week both from Amway and elsewhere

offering a range of evolving functions such as live online ordering enabling IB Os to check the bonuses they receive on their purchases providing a modern and exciting way in which to run and promote a retail business opportunity to like-minded entrepreneurs.

Making a strategic decision to develop the Internet for their IBOs enabled Amway to match technology with a whole range of functions such as marketing, operations and logistics in a way that would meet its needs more closely. As part of a Pan European decision,

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Unit 15

Case Studies

Amway's strategic plan was to increase its use of the Internet by 'e-enabling' all of its European markets in a phased roll-out plan over 24 months. In order to develop an online presence, Amway grouped countries together wherever possible so as to link parts of the business in a way that would serve customer needs. This enabled it to gain economies of scale, e.g. a reduction in distribution costs. Each of the following websites have common features for each region as well as services tailored for each country: amivo: UK, Italy, Germany, Ireland, Austria, Scandinavia (Denmark, Finland, Sweden, Norway), South Africa, Netherlands, Belgium, Greece. v.e.b.s.o. from Amway: Hungary, Poland, Romania, Czech Republic, Slovakia, Croatia, Slovenia, Turkey. The more established sites showed that, no matter what the size of the business, the Amway business model works across the Internet. Given this successful outcome, Amway was able to identify best practices on these older sites and then apply it to new sites such as the AMIVO site used by IBOs in the UK. The AMIVO website development has given UK-based IBOs an alternative, enhanced way of managing their businesses. The website rapidly attracted a significant number of IBOs keen to try the online service. Promotions helped to encourage repeat use of the site by demonstrating its unique benefits. Today, over one third of Amway's UK business is transacted through the AMIVO UK website and it is well on the way to reaching 50% by the end of 2004. The average value of orders is 25% larger online than offline. This has resulted in more efficient handling of orders and lower freight costs per order. When organisations make strategic decisions they have to take into account many of the changes taking place in their business environment. With IBOs facing significant competition from traditional channels of distribution, Amway believes it has used emerging technology in a way that provides both it and its partners with a distinct advantage in the marketplace. (Note: Further information on the products and business opportunities can be obtained from the website: www.amway.com)

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