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Instructors Manual
International Marketing and Export Management

Sixth edition
Gerald Albaum Edwin Duerr
For further instructor material please visit:
www.pearsoned.co.uk/albaum
ISBN: 978-0-273-71390-6
Pearson Education Limited 2008

Lecturers adopting the main text are permitted to download and photocopy the manual as required.
Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies around the world Visit us on the World Wide Web at: www.pearsoned.co.uk ---------------------------------This edition published 2008 Pearson Education Limited 2008 The rights of Gerald Albaum and Edwin Duerr to be identified as the authors of this Work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. ISBN: 978-0-273-71390-6 All rights reserved. Permission is hereby given for the material in this publication to be reproduced for OHP transparencies and student handouts, without express permission of the Publishers, for educational purposes only. In all other cases, no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without either the prior written permission of the Publishers or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd., Saffron House, 6-10 Kirby Street, London EC1N 8TS. This book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in which it is published, without the prior consent of the Publishers.
Contents
Chapters 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. International marketing and exporting Bases of international marketing The international environment: culture; economic, political and legal forces; and competition Export market selection: definitions and strategies Information for international market(ing) decisions Export market entry strategies Export entry modes Nonexport entry modes Product decisions Pricing decisions Financing and methods of payment Promotion and marketing communication Handling export orders and supply chain management Organization of international marketing activities Pages 5 30 48 66 78 91 104 119 134 150 166 180 196 214
3 Pearson Education Limited 2008
Albaum and Duerr, International Marketing and Export Management, sixth edition, Instructors Manual
Supporting resources
Visit www.pearsoned.co.uk/albaum to find valuable online resources For instructors PowerPoint slides that can be downloaded and used for presentations Links to articles and resources on the web. Also: The Companion Website provides the following features: Search tool to help locate specific items of content E-mail results and profile tools to send results of quizzes to instructors Online help and support to assist with website usage and troubleshooting
For more information please contact your local Pearson Education sales representative or visit www.pearsoned.co.uk/albaum
CHAPTER 1
International Marketing and Exporting

LECTURE OUTLINE
Chapter 1 discusses: The importance, opportunities and challenges of international marketing, and factors causing its rapid growth Being effective: the nature and practice of international marketing Export marketing strategy and planning The increasing impact of the Internet, World Wide Web, and e-business; the critical importance of technological advances, increased competition, and innovations; and the growth of nontraditional exports How the book is designed to be of use to students, entrepreneurs, and marketing professionals Cases illustrating how the text material relates to current opportunities and problems.
Introduction
The growing importance of international marketing
Increasing importance of international markets and exporting due to: (a) greater opportunities for enterprises of all sizes, including sole proprietorships, to sell to other countries; (b) increasing threats from companies and competitors in other countries; (c) importance of international sales in spreading risk, increasing profits, covering R&D costs, understanding emerging challenges; (d) increasing dependence of national and regional economic health on export sales.
Reasons for the rapid growth in international business

Nine major changes driving increased globalization: (1) technological advances and lowered costs in communications, the Internet, the World Wide Web, and e-commerce;
(2) increasingly sophisticated and diverse software to assist in increasing effectiveness and efficiency, lowering costs, improving products and services; (3) great improvements in transportation, logistics and supply chain management (4) increasing rates of entrepreneurial innovation and technological change; (5) the economic growth of China, India, and others with resulting changes in trade patterns and amounts; (6) continued lowering of barriers to trade and investment; (7) the internationalization of capital markets; (8) the increase in all types of strategic alliances; (9) continuing excess capacity in a wide range of industries. EXHIBIT 1.1 China and India in the international economy discusses: China as a major manufacturer, consumer of raw materials, producer of green house gases, and rapidly growing domestic market India as a major supplier of services; its rapidly growing economy.
Turbulence in the international marketplace

Increasing turbulence due to: (a) creation of new businesses, new markets, new ways of doing business, new methods of interacting with customers; (b) intensified competition; (c) diseases, terrorism, internal unrest, wars and threats of wars; (d) pirating of goods, fakes, contaminated and/or dangerous products; (e) increased emphasis on ethics and social responsibility. EXHIBIT 1.2 Succeeding internationally in the 21st century gives examples of companies that have grown internationally based on customer focus, innovation, and/or market segmentation. EXHIBIT 1.3 The chicken feet problem shows how an unexpected occurrence can cause serious difficulties in exporting/importing.
Responding to increasing opportunities and threats

Increased opportunities for domestic companies to more easily enter markets abroad accompanied by increased ability of foreign companies to enter domestic markets.
Failure to be proactive in exploring foreign markets leads to missed opportunities and lack of information about potential new threats. Exporting is no longer just an option for most companies; it is now an imperative. Figure 1.1 shows how the forces of firm factors, home country factors, host country factors, and global factors interact to affect the movement toward increasing internationalization.
Being effective: the nature and practice of international marketing

Being effective requires that the international marketer understand: (a) the nature of international marketing and its unique requirements; (b) the alternative approaches to organizing and carrying out international activities; (c) the basic decisions that must be made; and (d) the similarities and differences between domestic and international marketing.
A definition and unique requirements

The basic definition is simple: international marketing is the marketing of goods, services, and information across political boundaries. International marketing has the same elements as domestic marketing: planning, promoting, distributing, pricing, and support of the goods, services, and information to be provided to intermediate and final consumers. International marketing is typically more complex (and interesting and challenging) because of differences in culture, consumer tastes and needs, economic levels and structures, market structures, ways of doing business, laws and regulations, etc. Firms domestic approach may be ineffective, counterproductive, or illegal in foreign markets. International marketing manager must acquire a clear understanding of each target market, the differences that exist, and what must be done to accommodate the differences. Activities that must be adjusted to accommodate the differences in the particular requirements and market structures of each foreign market: analysis of markets and potential markets; planning, development, and packaging of products, services, and information to best meet consumers demands; selection of distribution channels that are most effective and efficient in the foreign market; promotion, including advertising and personal selling;
setting of prices; technical and non-technical support given to customers, both before and after sales; organization structure, management, and remuneration of employees.
Information sources are discussed in Chapter 5, and facilitating organizations that can provide assistance and support are discussed in later chapters. Exhibit 1.4 provides some examples of adjustments that 14 companies have made (or failed to make) in foreign markets.
Internationalization and the global marketer

Internationalization may be viewed as: a process, an end result, a way of thinking. A firm becomes more internationalized with more involvement and commitment to foreign markets. Most effective when developed as a carefully planned process for increasing penetration of international markets. Should consider advantages and disadvantages of exporting, licensing, establishing sales subsidiaries, producing abroad, and forming strategic alliances. The terms international, multinational, and global sometimes used interchangeably, but imply differences in approaches. International marketing is a broad term for any type of marketing across national boundaries. Multinational marketing implies a strong commitment to international marketing, and may be taken to mean that the marketer develops differentiated products and marketing strategies for each of its markets. Associated with adjusting products and practices in each country, with attendant relatively high costs. Global marketing generally implies that the company tries to standardize products and marketing practices worldwide in order to achieve economies of scale and lower prices. Limits to global approach: (a) significant differences in consumer demands and marketing requirements from country to country; (b) rising incomes have made consumers less pricesensitive; (c) flexible production systems have reduced the cost advantage of very large-scale production in some industries. A combination approach of think globally, act locally seems best for many companies; take a global view while also adjusting to local conditions. With a global view: (a) evaluate and enter markets worldwide based on individual potential and worldwide strategy; (b) procure capital and invest funds on a worldwide basis according to costs and opportunities;
(c) purchase raw materials, components, equipment, and supplies from sources worldwide; (d) staff organizations with best qualified managers and employees without regard to national origin.
Degree of internationalization
Measuring the degree of internationalization is useful to assist managers in thinking about how international the company is now, what potential it has, and where they want to be. Provides the first step in determining what international strategy is appropriate for the firm. Exhibit 1.5 lists some of the indicators useful in evaluating the level of internationalization of a firm. Smaller companies tend to internationalize in a different manner and to a different degree: moving in to closer markets or becoming niche marketers in niche markets. Joint ventures often used internationally as well as domestically.
International marketing management

International marketing management is faced with three basic decisions: (1) whether to engage in international marketing activities; (2) markets to be served; (3) methods or systems to be used. Major dimensions of international marketing: exporting, importing, and management of international marketing operations to and in foreign countries. The marketing program or mix is the planned and coordinated combination of marketing methods or tools used to achieve a predetermined goal. Market-driven versus product or technology-driven firms; tendency to move toward market driven. Controllable versus uncontrollable elements in determining marketing mix. (See Figure 1.2 Schematic model of the export marketing mix.) Profitability of any marketing program is situation specific and influenced by many variables.
The relationship of exporting and importing

Importing may be related to exporting. Importing of machinery and/or licensing technology may lead to exporting of products. Increasingly, manufacturers are incorporating components purchased from overseas in the products they then export.
Some similarities and differences

All marketing programs, domestic and foreign, must deal with the same variables, but their characteristics differ from one environment to another. International marketing executives need specific knowledge of international environments and cultural empathy as well as technical competence in marketing. Exhibit 1.6 discusses characteristics of export marketing executives. Key problems include (a) differing environments; (b) crossing of national boundaries; (c) simultaneous marketing in more than one environment. Approach requires: (a) an international or global outlook; (b) a realistic assessment of market targets and segments of the world market to be exploited; (c) assessment of environmental factors in the market segment targeted; and (d) formulation of a marketing program.
Export marketing planning and strategy

Strategic issues: choice of countries, product markets, target segments; methods of operation, timing. (Exhibit 1.7 discusses two systems helpful in determining whether a company is ready to enter foreign markets.) Tactical issues: product positioning, adaptation, advertising, pricing, distributing. Figure 1.3 shows the Export marketing planning process. Export planning and strategy development components: goal, program (marketing mix), and organization. Perceived risk is an important factor in determining how, or whether, to proceed.
Demand management
Marketing may need to be concerned with managing rather than just stimulating demand because of environmental, legal, supply, or other concerns. States of demand: negative, none, latent, falling, irregular, full, overfull (excess demand for oil during the oil crisis), unwholesome (vice products). (Exhibit 1.8 Various states of demand.) Different overseas markets or major market segments may have different demand states. The World Wide Web has increased the ability of a number of companies to shift some demand from busy to less busy period through real-time pricing.
Obstacles to exporting
Obstacles may be real or only perceived, but perceptions guide actions.
Barriers affecting many companies, particularly smaller ones, include: higher operational efforts required for foreign market, lack of information, lack of knowledge and skills, trade barriers, risk, and others (see Table 1.1). Coping with barriers for smaller companies (see the many suggestions in Exhibit 1.9).
The Internet, the World Wide Web, and e-business

All aspects of domestic and international business operations have been impacted by the Internet, the World Wide Web, and e-business. The Internet provides greatly increased speed and lowered costs in communications. The World Wide Web, operating over the Internet, is an easily used system for providing constantly available displays of information.
The Internet
A worldwide telecommunications network providing for rapid exchange of information. Connections made through local Internet Service Providers (ISPs). Uses a variety of communications linkages: telephone lines, cables, fiber optic lines, and/or wireless. Inexpensive in most countries: cost for use is that of local telephone calls plus monthly charge by the ISP. Very wide and rapidly expanding use.
The World Wide Web (Web)

Operates on the Internet, displaying information on websites. For advertising, attaining visibility is a problem for smaller companies. Increasing the number of visitors involves registering with Search Engines or through traditional media campaigns. Registration of name in one country does not provide protection of name in other countries. (See Exhibit 1.10) Web 2.0 sites are now widely used for advertising, facilitating cooperation, and gathering and promulgating information. The term refers to an expansion of the way the Web is used, with Blogs, social networking sites, and other interactive sites designed to allow input from multiple users.
E-business
Definition of e-business: the sale, purchase, or exchange of goods, services, or information over the Internet or other telecommunications networks. Business-to-consumer sales (B2C) growing rapidly than overall retail sales. For most large companies, a combination of traditional marketing and Web-based marketing appears to be most successful. (For an exception, see Case study 1.3 on eBay, Inc.) Business-to-business (B2B) spending is much greater than B2C sales. B2B transactions involve many activities in addition to buying and selling, including support of supply chain and distribution chain management, and provision of information for overall systems coordination.
The impact of technology

Improvements in technology have resulted in new products, the creation of additional international markets, and lowered costs of doing business. Information technology related trade now accounts for 16% of total world trade. Development and marketing of software to support e-business has become a major international industry. New products have resulted from major advances in communications technology, medical research and medicines, and traditional products and manufacturing processes. Improvements in shipping equipment and the applications of information technology in scheduling and control have reduced costs. Expanding use of radio-frequency identification systems (RFDI) is making supply chain management more effective and efficient Exhibit 1.11 gives an indication of the range of recent advances.
Entrepreneurial approaches to international marketing

New approaches to international marketing have been made feasible by technological advances and by recognition of emerging opportunities. E-business software allows companies to handle key functions in a coherent online system: supply chain and distribution chain management; ordering, billing, and inventory management; analyses of sales and trends; etc. Specific software is available to support specialized functions such as Customer Relations Management (CRM) programs, and many other individual and integrated programs.
Online marketplaces
The World Wide Web has allowed the development of online market places supporting large companies, small companies, and individuals. Exhibit 1.12 shows how small producers of handicrafts have been enabled to access the international market.
The virtual company

Advances in communications allow formation of virtual companies, based on the owners ideas, vision, knowledge, and abilities to organize and coordinate. Have little in the way of physical facilities and few or no employees. Contracts with outsiders to perform most business functions.
Business-government alliances
Increasing use of joint ventures and alliances between private businesses and governmental or quasi-governmental organizations.
The growth of non-traditional exports

Exporting services of knowledge-industry workers
Greatly increased capabilities and lowered costs in communications have enabled cross-border export of information services. Companies in lower-wage nations employ well-educated people in providing services ranging from call centers and back office support to advanced technical support, software development, and design services. Cost was originally the main consideration in importing of information services, but for some companies objectives now include worldwide strategies to take advantage of international specialization and multi-sourcing. There is increase in exporting of some specialized technical services from advanced countries to lower-wage nations. India is a major exporter of services, with other Asian countries and eastern European nations expanding similar activities.
Exporting business models

Opportunities for expanding internationally may exist for companies that: develop a better way of organizing and doing business;
identify and develop a new market; find some other innovative approach providing a competitive advantage.
Exhibit 1.13 provides examples of six companies that have successfully exported their business models to some other countries.
Purpose and approach of the book

The book is designed to: provide a solid introduction to international marketing; cover all types of international marketing entry modes and activities; provide additional emphasis on export management, used by many smaller firms as their entry mode and widely used by all international giants; be as applicable and valuable for small and medium-sized companies as for large international corporations; illustrate how the special requirements of exporting and international marketing affect the traditional functions of marketing; emphasize the knowledge and distinctive competencies required for marketing across national borders.
The book should be most useful to: undergraduate and graduate business students; those in professional qualification courses; Entrepreneurs and potential entrepreneurs; business persons concerned with increasing international opportunities and threats.
Each chapter discusses the knowledge required and adjustments that must be made in marketing functions to be successful in marketing internationally. Each chapter contains examples and cases designed to illustrate applications in current business practices and operations.
ANSWERS TO QUESTIONS FOR DISCUSSION

1.1 Why has there been such an increase in interest by business firms in international and export marketing? Will this interest continue to increase? Why or why not? Students may approach this question in several ways.
Companies are increasingly selling to, buying from, and competing with products from companies and individuals in other nations. International sales may provide additional profits, or even the major source of profits (Swiss pharmaceutical companies; Coca-Cola). Therefore, most companies must be interested in international marketing. The increased interest is partly the result of the growth of international markets. This growth is due to many factors including: lowering barriers to trade and investment; improvements in transportation, logistics, and communications; new products with international appeal; increased linking of companies, markets, and financing; and rapid expansion of world trade. It is also due to: productive capacity exceeding domestic demand in many industries; increasing foreign and domestic competition in many domestic markets; and the growth of overseas markets as standards of living increase in many nations. The interest will continue to increase as globalization progresses, world trade increases faster than world GDP, Foreign Direct Investment continues to increase, and the transportation, communication, cultural, and governmental barriers to trade are reduced. The growth in international trade and marketing has presented both new opportunities and new threats. Neither can be ignored safely. Students may come up with a number of additional reasons for the continuing increase in international marketing. These specific reasons may be drawn from the Sections The growing importance of international marketing and Reasons for the rapid growth in international business; elsewhere in the chapter; or knowledge from outside. 1.2 What is meant by internationalization and how does this relate to the global marketer? Internationalization is the process whereby a firm becomes increasingly committed to and involved in international business operations through specific products in specific markets. (Note: individual students may come up with somewhat different definitions based on other readings or interpretations.) The global marketer views major regions of the world as a simple or uniform market in which it markets a standardized product in a standardized way in order to achieve low relative costs. The traditional multinational company often adapts/individualizes products and practices to specific nations/regions to increase local acceptability but at an increased cost. 1.3 Is taking a global view limited to companies that view themselves as global companies? Explain. Taking a global view is not limited to companies that view themselves as global. The automotive division of Rolls Royce (before the sale to Volkswagen) might not have considered itself a global company since production, development of marketing policies, and administration were all concentrated in the UK. It could still have a global view, marketing the same product in the same way to the same market segment everywhere in the world (with only modular changes, such as right-hand or left-hand placement of steering wheels, to accommodate to local requirements). 1.4 Is it meaningful to attempt to measure the degree (or amount) of internationalization of a firm? Explain. It is useful for a firm to measure its degree (or amount) of internationalization as the first step in a gap analysis: assessing where the company is now with respect to international sales; how international the company could be; and how international it wants to be. The resulting analysis will enable the company to identify actions and resources needed to move from where it is now to where it wants to be.
1.5 What does it mean for a company to be market driven? Is this really important in todays environment or can a company be successful without being so driven? Explain. It means that the product and the marketing program are developed with the needs and interests of the consumer in mind. It is of critical importance to consider the consumer in every step of the marketing process from the analysis of markets and development of products through the after-sale service. In today's increasingly competitive market, if you do not provide exactly what the consumer wants, someone else will. 1.6 Explain the meaning of the following statement: If a company is to be successful in foreign markets, its management must have a good understanding of all aspects of the environment within which it will be operating. Such a statement gets to the heart of the meaning of applied marketing and the viewing of a marketing program as a system. The system consists of the set of marketing activities (endogenous) that are controllable by a firm and the set of environmental characteristics that are outside the firms control (exogenous). Endogenous activities are used to adapt to the exogenous environment. Thus, if a company is to successfully adapt it must know all it can about that economic, socio-cultural, competitive, political, etc. dimensions of the environment within which it operates. This relationship and the specific dimensions/activities involved are shown in Figure 1.2 of the text. 1.7 Give two or more examples of how external factors (exogenous variables) in the international environment make export marketing more complex than domestic marketing. Some examples are: (a) laws and regulations differ from country to country, and cover a multitude of factors including packaging and labeling requirements, health and safety requirements, etc.; (b) taxes, tariffs, quotas, and other restrictions may limit what you can sell, how much you can sell, and/or the costs involved; (c) cultural or social differences may prevent the sale of certain products, or require modifications to the products or distribution systems; (d) economic levels may limit markets; (e) geographic or infrastructure constraints may limit distribution channels; and (f) the extent and effectiveness of competition may be quite different. 1.8 What is the relationship between importing and exporting for an individual company? A company may import goods or services primarily for sale in its home or other markets. Many companies, however, import/obtain goods, services, licenses, and/or technology for use in making products for export. Machine tools may be imported in order to manufacture components or products domestically. Increasingly, companies are sourcing components worldwide for use in making final products to be sold both domestically and to other countries. From an individual companys perspective, the knowledge, contacts, products, and services gained through inward internationalization may influence the development of market entry and marketing activities used in outward internationalization.
1.9 What are the three distinct components of export planning and strategy development and how are they related? The three distinct components of export planning and strategy are: (a) goals (objectives to be achieved); (b) program (development of the marketing mix); (c) organization (what resources will be used and how they will be put together). The relationship among these components represents a closed system. That is, a company will start with some goal, then develop a program to achieve the goal, and must have an organization to implement the program. If, for example, the organization is not suited to the marketing program and the organization cannot be changed, the company must see if the program can be altered. If this is not possible, then the objectives must be changed to fit the organization and the marketing program capabilities. 1.10 Identify the potential barriers (or obstacles) that face companies considering or expanding international marketing operations. Which are most important and which are less important? Explain. Individual student answers may vary, but should include at least some of the following. There are several types of potential barriers faced by companies considering beginning or expanding international operations. Internal to the company might be a lack of knowledge of markets, exporting procedures, methods for evaluating risk, and costs; concern over communications, after-sale service, and the maintenance of control; and lack of qualified personnel and/or lack of support by top management. External to the company may be domestic export controls, foreign trade barriers, and foreign attitudes and requirements. Which are most important depends upon a combination of the specific case and the perceptions of the management of the potential exporter. 1.11 Is the role of the international marketer only to attempt to increase sales? Explain. The role of the international marketer is no longer simply to attempt to increase sales. While this may be of paramount importance in some cases, in other cases the marketer will need to be concerned with controlling demand. Examples of situations in which demand must be controlled include cases in which: (a) demand exceeds supply, either on a medium-term or long-term basis, as with some energy sources; (b) products or services must be allocated to various customers when there are temporary shortages of product, as with newly introduced products; (c) demand must be shifted from high-usage to low-usage periods, as in power generation; (d) specific products or services must be made available but for which full costs cannot be recovered, as in some medical services; or (e) demand should be shifted from an environmentally undesirable product to one more environmentally sound, as moving from gasoline-powered automobiles to hybrid cars or public transportation. Other students may base answers on the demand states given in Exhibit 1.8. 1.12 Is use of the World Wide Web appropriate only for large companies? Explain. The World Wide Web can be of use to companies of all sizes. It allows even very small firms to advertise and provide other information to potential customers and suppliers. The Websites of other organizations may provide information useful in determining whether they may be potential suppliers, customers, or partners in cooperative ventures.
On the World Wide Web, a companys size and physical facilities become less important than its ability to reach and attract others, and its ability to show that it can do or provide what is desired. 1.13 What is e-business? E-business (electronic business) is the sale, purchase, or exchange of goods, services, or information over the Internet or other telecommunications networks. It includes business-toconsumer sales (B2C), business-to-business transactions (B2B), and also transactions among government organizations and consumers or businesses. It can also include a wide range of facilitating and supporting services and information such as scheduling and coordination, supply chain management, distribution chain management, customer relations management, etc. 1.14 Are online market places useful only to businesses? Explain. Online market places are being used by companies of all sizes. However, they are also useful to individuals interested in exchanging goods or services (Ebay, for example), to handicrafts producers looking for wider markets (through Novica, for example), and for governmental organizations. 1.15 Does e-business present a threat or an opportunity to traditional stores and whole salers? Explain. It presents both a threat and an opportunity. It provides opportunities for existing companies to promote their present or new products more effectively, to gain additional sales to present customers, to gain additional customers who may not normally visit their existing facilities, and to expand to new market segments or new markets which can now be more easily reached. It allows new companies to enter existing markets. The threat arises from the fact that existing competitors may use e-business to attract customers away from you, and new competitors may find it easier to enter your market. 1.16 What factors have resulted in the rapid rise in outsourcing of jobs overseas? Improvements in communications technologies and capacities have made it possible for workers in one country (India, for example) to provide real-time, online information to users in another country (the US, for example). The wage differentials for well-educated people in India and the US, combined with decreases in communications costs, make the outsourcing of such work economically feasible. 1.17 Give an example of a business model and how it can give rise to an opportunity to enter markets overseas. Students may select from a number of examples. Wal-Mart has used its unique expertise in organizing its supply and distribution systems in its penetration of foreign markets. Examples of six other companies that have used their business models to expand internationally are given in Exhibit 1.13.
ANSWERS TO CASE QUESTIONS

1.1
1.
Export of art goods from Hungary

How might a textbook such as this one be of use to: (a) the class in the assigned project, (b) the artist if he decided to export his works, and (c) a potential new importer in another country?
(a) The students can use the textbook in developing their outline as well as in developing specific sections. As can be determined by looking through the table of contents, the textbook provides information about the factors that must be considered in developing the marketing plan. For example, the marketing plan should have sections on identifying potential markets (Chapter 5), channels for entering those markets (Chapters 6 and 7), making pricing decisions (Chapter 10), information on financing and methods of payment (Chapter 11), promotion (Chapter 12), and procedures and costs for actually handling the goods, all of which affect costs and thus the feasibility of the project. Information about particular challenges in international marketing is found throughout the book. (b) The artist should find the book useful in indicating areas and subjects that he must find out about and evaluate. He will need to cover much the same topics as the class, though he will concentrate on specifics that affect his particular goods. He will need to develop detailed information on the items discussed in the answer to Question 2 below. Given the potential scale of his production and sales, certain modes of entry to foreign markets are not feasible, and he will need to rely heavily on facilitating organizations such as foreign freight forwarders (see Chapter 13). (c) A potential new importer must also consider the same general topics as the students and artist, but will need to concentrate on the costs of obtaining the goods from abroad and the appropriate marketing strategy to use in his own country. 2. List some of the items that should be included under each of the major dimensions of a marketing plan for the art goods.
The students can be expected to come up with a wide range of items, some of which may include the following: Potential market(s): preliminary identification; information on imports and sales of art goods of this and related types; competition; economic and socio-cultural factors. Marketing channels available: indirect and direct exporting; alternatives and costs; control of goods, marketing, and designs. Promotion: economical means available for low-volume art goods; to be done by whom; costs and expected effectiveness. Financing and methods of payment: costs and bearing of risk. Physical distribution: procedures and responsibilities (partially dependent upon method of export chosen). Economic evaluation: estimated costs, revenues, and degree of risk.
1.2
1.
Murphy Company Limited

Does a small company such as the Murphy Company Limited have the capability of exporting? Explain. Would it be better for the company to expand its product line for the New Zealand market?
The Murphy Company Limited does have the capability of exporting. The company produces high quality products, which should give it an advantage in the international marketplace, and is known for superior service. Providing superior service in foreign countries will take planning, organization, and commitment. It is difficult to state definitely whether it is best for Murphy to expand its product line in New Zealand or attempt to export its present line of dishwashers and garbage pulverizers. Both actions are viable for a company that is growing and which has high quality products and is known for superior service. More detailed performance information about the company and more specific information about the market for its present product line are needed. In addition, the goals and objectives of Bryan Murphy, the Managing Director, need to be known. Looking only at the potential for export, Bryan Murphy is proceeding in a reasonable way by having the Director of Marketing, Fred Murphy, attend the Export Institutes seminar in Wellington. Rather than make a quick decision, Murphy Company is starting by acquiring basic knowledge on opportunities. In fact, the company may well be avoiding mistakes 1 and 5 as presented at the seminar. Starting with such basic knowledge the company will be better able to understand and specify its motives for export (Chapter 2 of the text) as well as conceive policies, procedures, and strategies for export market selection (Chapter 4 of the text) that are consistent with its motives and goals and objectives. 2. Evaluate the nine common mistakes in terns of their relative importance and impact on a company such as Murphy.
Student answers can be expected to vary. However, one thing is clear. Whether these mistakes are common, in fact, is probably irrelevant. All companies should be aware that these mistakes can occur. In that way many can be avoided and the negative impact lessened for those not avoided. 3. What should Fred Murphy recommend to Bryan Murphy?
More information is required in order for an evaluation and decision to be made. Possible expansion of the domestic line involves an analysis of the potential market for proposed additional products, an estimation of development and productions costs, and an estimation of expected marketing costs leading to a figure for potential profits. An evaluation of the profit potential from exporting involves additional data gathering.
1.3
1.
eBay, Inc.
Evaluate eBays marketing strategies to date. What changes, if any, would you suggest?
Ebay grew rapidly for several years based upon its original marketing strategy. However, growth in its original online business in the US slowed in spite of adding product categories and sites. Competitors have emerged in both domestic and international markets. The companys continued growth has become increasingly dependent upon acquisition of related services, not all of which have been as successful as hoped. The company needs to continue to monitor and evaluate the development of present and potential competitors, and new approaches, features,
and policies they may introduce. Their domestic marketing strategies have been largely successful to date, but need continual evaluation in the rapidly-changing market. Ebays international strategies need continued attention and re-evaluation. The company receives 48% of its earnings from abroad, but has encountered problems in some countries. 2. Evaluate its technical and personnel strategies. What changes, if any, would you suggest?
The founder acted quickly as growth indicated the need for professional management, something many entrepreneurs fail to do. The company added appropriate managers and personnel as problems and opportunities indicated increasing needs, keeping technological leadership a key strength of the company. In the future, the company must continue to quickly recognize emerging needs and new opportunities, and to adjust strategies as appropriate. 3. Has eBay really created a new type of market?
Yes. Ebay is the first to create an effective and efficient large-scale method for bringing together large numbers of potential buyers and sellers who otherwise would not have been in contact. (A market consists of the potential buyers and sellers of a product(s) who are in contact with each other.) They did so by entrepreneurial exploitation of technological changes. 4. Are eBays efforts to improve interactions with its members worth the cost?
Key strengths of eBay that have enabled the company to grow so rapidly are its interactions with customers and potential customers, and its facilitating of interactions among the members. Continual development of these key strengths does need to be carried on. 5. Is continued rapid growth desirable for eBay?
Growth is desirable to maintain its market leadership position and to increase the size of the market. Growth at any cost, without regard to profitability, is undesirable. However, while no costbenefit figures are given, increasing profits indicate that present growth rates in the current markets are not excessive. The company needs to pay particular attention to developing complete information about its existing and potential foreign markets. It should then be able to better evaluate the costs and benefits of acquisitions and expansion in specific overseas markets. 6. Where does growth appear to be feasible?
Growth appears to be feasible in overseas markets, and also in getting more people in the US involved if continued training programs are offered, and as the system is made easier to use. Careful evaluations of potential acquisitions are essential.
1.4
1.
DaimlerChrysler AG
What problems would Mercedes-Benz have faced if it had remained a niche player selling world cars to the luxury market worldwide?
Students may think of a number of problems. At least the following should be included: (a) Without a large volume of sales, it is difficult to support the costs of the frequent introduction of new models that the present world market seems to require. (b) Its overall size and profits would have been limited.
2.
What are the key characteristics of Fords approach to internationalization/ globalization?
The characteristics of Fords approach include: (a) The company began overseas marketing and then overseas production at the early stages in its corporate life. (b) It developed research and design centers overseas, to move closer to its international customers and later to rationalize its developmental activities. (c) It deliberately set about creating a global mindset in the company. (d) It has developed a diverse product line, including special cars for specific areas, though it prefers to produce cars that can be sold in more than one region. (e) It has made substantial efforts to develop cooperative relationships in strategic alliances. (f) 3. Its acquisition activities appear to have been carefully thought out and coordinated (e.g., the luxury car group), though financial results to date have been disappointing. What are the key characteristics of Toyotas approach to internationalization/ globalization?
The characteristics of Toyotas approach include: (a) The company has preferred to expand through exporting. (b) It has gone into manufacturing only when laws or other local conditions require it to do so. It has expanded overseas production primarily to avoid actual or potential import restrictions, to avoid adverse publicity, and in some cases to take advantage of savings in labor costs. (c) It has studied the local business cultures before going into production abroad. (d) It has expanded its product line slowly as it has gained international market share. (e) Though it produces both global cars and vehicles for specific regions, the company prefers to maintain product design and development, and overall control, in Japan. (f) 4. It maintains competitive advantage through careful control of its efficient production system. Which of the three companies approached internationalization best? Explain.
It is difficult to say whether Toyotas approach or Fords approach was best. Toyota has grown the most, rapidly. For some time it was comparatively less successful in Europe, apparently due to national preferences and lack of adjusting designs there, but is doing well at present. It is the leader in Asia. With its high legacy costs and some less attractive models of vehicles, Ford has lost market share to Toyota in the US. It continues to be accepted as a sort of European company in many countries there, though its European operations are not always profitable. It has been less effective in establishing a presence in Asia, though its joint venture with Mazda has worked well. Mercedes-Benzs acquisition of Chrysler (to form DaimlerChrysler) was a disaster. Sales of the Chrysler division were generally poor, cross-cultural problems arose in management, hoped for synergies were not realized, and distractions caused by the problems in the US at times diverted the attention of top management in Germany from its operations there. The Chrysler
division was sold in 2007 at a great loss. Mitsubishi Motors and the Korean subsidiary were also sold off after management conflicts and poor performance. Mercedes-Benz was not successful in applying their managerial approaches to operating companies in the US and Asia. 5. Are there other approaches to internationalization/globalization that Mercedes-Benz could have taken rather than rely on large acquisitions? What problems might they have caused?
Mercedes-Benz could have taken a number of other approaches: (a) The company could have expanded by increasing its own development of additional models for additional market segments. This would have been costly and relatively slow. (b) It could have gone into real partnerships with other manufacturers to jointly develop additional models, but this might have involved loss of the desired level of control. (c) Students may suggest other possible approaches. 6. Should the potential problems at Chrysler and Mitsubishi have been foreseen by German management?
This is debatable. The US market and automobile sales have always shown periods of depressed demand, so a downturn might have been expected. However, the economy had been strong for so long that the possibility of a downturn might easily have been discounted. The basic weakness of Chrysler was masked by its success in selling minivans. Chrysler should have noted the problems of discounting and inventory buildup earlier, notified the German headquarters earlier, and taken action taken more quickly. This was an error on the part of Chrysler that DaimlerChrysler would not have foreseen. On the industrial and overall management of sales levels, the German top management seemed to lack the needed cultural understanding and adjustments. The problems at Mitsubishi, related to the cover-up of defects, could not have been foreseen. However, DaimlerChrysler should have recognized the problems faced by a smaller producer when the Japanese automobile industry has great overcapacity and a weak market. Cultural problems arose in both Japan and Korea. 7. If Ford was so successful in working with Mazda, why should DaimlerChrysler have had any concerns about working with Mitsubishi?
Ford worked with Mazda for several years to develop the relatively smooth relationship they enjoy. After Ford took controlling interest in Mazda, they replaced one American CEO of Mazda because the union viewed him as too confrontational. DaimlerChrysler did not show the same amount of cultural sensitivity.
1.5
1.
Dell, Inc.
Should Dell have made changes to it marketing model in the United States earlier?
Dell should have made changes sooner. Its marketing strategy of selling exclusively over the Internet and telephone did not seem to be well designed for selling either laptop or desktop PCs to individual consumers in the present environment in the United States. It lost much of its cost advantage to H-P and other producers, while H-P introduced additional features that were attractive to many potential buyers. Dells attempts at cutting costs also led to problems with customers regarding sales and service.
2.
What problems may Dell encounter in its change in approach in the United States and elsewhere?
As Dell begins to sell through retail outlets in the US, customers will be able to comparison shop. There are four potential problems/requirements in doing so. First, Dells advantage/cachet in marketing on the basis of built-for-you may be impaired (and H-P has already set up Buildyour-own PC operations in some Wal-Mart stores that Dell may need to emulate). Second, there will be additional costs in doing so. Third, Dell will need to be sure that the models it offers through stores have features at least as good as those of similarly priced offerings of other brands. The final problem is that there may be some resistance/problems within the company to changing its traditional and previously very successful total reliance on direct sales. In other markets, problems are likely to be country-specific, and will be determined partly by the differences between the present and new methods. 3. Is the use of native speakers, as was done in Germany, important elsewhere in Europe?
The case does not provide enough information to answer this question. Some general observations can be made, but a country-by-country analysis would be required for even a preliminary judgment to be made. The importance of using native speakers (without foreign accents) in sales organizations is likely to be most important in countries such as France where there is a high emphasis on the national language (even though many people there speak other languages also). In countries such as The Netherlands, Denmark, and Sweden, where most people speak multiple languages, having native speakers may be less critical but should be investigated. 4. Is Dells Japanese marketing model likely to be successful in the long run?
The approach being used in Japan of using the Internet to appeal to consumers with low-end laptops is not likely to be successful in the long run. Low-cost private-brand manufacturers working for large retailers are taking more of the low-end market, threatening Dells sales there. Dells approach may also require adjustment if the market for higher-end PCs grows more rapidly in the future. (Note to instructors: Since this textbook has gone to print, it appears that PC sales are falling in Japan as more people are relying more completely on multi-function mobile phones for connections to the Internet.) 5. What marketing model should Dell use in China?
Dells present approach to the consumer market in China does not appear to be appropriate and should be more like that now used in the US. China has a rapidly growing economy and an increasing number of potential customers. Dell has substantial knowledge of Chinese business and government relationships since it has one manufacturing facility there and is building another one. Its present approach to the consumer market, however, does not seem well suited to the preferences of potential individual purchasers. In China, personal contact is very important for most potential customers, businesses as well as individual consumers. There is an aversion among many people to buying over the Internet, particularly when the buyers do not know the sellers. Even though there are many Seven-Eleven stores in China, there are not enough to provide a deliver-payment network capable of reaching most people (as is the case in Japan). This indicates the need for displays and information availability in stores that potential buyers can visit. This, in turn, requires a knowledgeable sales force to promote the product. Dell might develop its own stores. As another approach, Dell might provide a sales force at the wholesale level that can also train in-store marketers in chain stores or individual stores. Any cost advantage Dell may enjoy with its present system is not enough to overcome the disadvantages of a distribution system with which potential individual consumers are not comfortable. In China, the emphasis on long-term relationships and trust has led a number of companies to enter the market through Chinese distributors or partners. Dell might consider such an arrangement for expanding its efforts in marketing to individual consumers.
6.
What marketing model should Dell use in India?
In India, there is an emphasis on personal contact. Dell should use a marketing model similar to that described above for China.
TEST BANK
1. Growing interest in international marketing is due to: (a) increased opportunities to enter foreign markets. (b) increased competition from domestic and foreign firms. (c) lowered trade barriers. (d) All of the above. (e) None of the above. 2. More rapid growth in globalization has been limited by the lack of improvements in logistics and supply chain management. (a) True (b) False 3. China has become more important in international business (a) as a major exporter of manufactured goods. (b) as a major consumer of raw materials. (c) because of its large and growing domestic market. (d) All of the above. (e) None of the above. 4. A major weakness of the Chinese economy is the almost complete lack of both domestic and foreign research and development facilities. (a) True (b) False 5. India (a) continues to have a very low growth rate in its national economy. (b) is now a major exporter of manufactured goods. (c) has become a major exporter/international supplier of information services. (d) All of the above. (e) None of the above. 6. Greatly reduced turbulence in the international marketplace has been a major factor in increasing international trade. (a) True (b) False
7. Success in the international marketplace usually depends upon some combination of customer focus, innovation, and market segmentation. (a) True (b) False 8. Internationalization may be viewed as: (a) a process. (b) an end result. (c) a way of thinking. (d) All of the above. (e) None of the above. 9. With regard to internationalization and the global marketer: (a) the multinational or global corporation should view the world as a single market for every product. (b) the multinational or global corporation should view the world as a number of markets and provide complete standardization in products. (c) the multinational or global corporation should take a contingency approach and standardize or adapt products depending upon the products and markets. (d) All of the above. (e) None of the above. 10. The variables in the marketing program: (a) include controllable variables such as geography and cultural characteristics. (b) include uncontrollable variables such as the companys marketing activities. (c) are independent of each other. (d) All of the above. (e) None of the above. 11. While many firms start out as market driven, most end up as product or technology driven. (a) True (b) False 12. The relative export profitability of any marketing program or component is situation specific. (a) True (b) False 13. As long as an individual has an understanding of foreign environments and cultural empathy, it is not necessary to have technical competence in marketing to be a successful international marketing executive. (a) True (b) False
14. The export performance of a company is affected by the firm itself, the companys markets and industry, and the export strategy chosen. (a) True (b) False 15. In the modern international environment, profit is no longer a necessary goal for the private business firm. (a) True (b) False 16. The basic marketing mix decision includes planning and strategy with regard to market entry, products, promotion, channels of distribution, and price. (a) True (b) False 17. There is a single accepted definition for the term globalization. (a) True (b) False 18. A company with a global view operates without regard for national boundaries, except as they affect the relative desirability of one course of action over another. (a) True (b) False 19. Importing may be linked to making products for export by: (a) importing technology/intellectual property for use in developing products for export. (b) importing equipment to be used for producing exports. (c) importing components for assembly into products to be exported. (d) All of the above. (e) None of the above. 20. The basic decisions facing potential and actual international marketing management are: (a) whether to engage in international marketing activities at all. (b) what specific individual markets are to be served. (c) the method or system to be used to get the products into the hands of the users in foreign countries. (d) All of the above. (e) None of the above. 21. Innovations and changes have created new opportunities for some individuals and companies while creating threats or challenges to other companies. (a) True (b) False
22. The World Wide Web will soon replace the Internet. (a) True (b) False 23. E-business: (a) includes only activities carried out on the World Wide Web. (b) includes only the functions of buying and selling goods. (c) has resulted in the development of an international industry in the development and marketing of software to support e-business. (d) All of the above. (e) None of the above. 24. At present, online marketplaces are being used only by large corporations. (a) True (b) False 25. The exporting of services of knowledge-industry workers is done almost exclusively by high technology companies in the highly developed countries. (a) True (b) False 26. One advantage that firms have in exporting business models is that they do not have to be adjusted for use in the foreign country. (a) True (b) False 27. A virtual company is one: (a) that has no substantial physical headquarters or other physical facilities. (b) contracts with other organizations to perform almost all business functions. (c) may be comprised of only an individual with a desk, communications linkages, and knowledge. (d) All of the above. (e) None of the above. 28. A business model can be successfully exported only if it needs no adjustments or modifications for use in the foreign country. (a) True (b) False
ANSWERS TO TEST BANK QUESTIONS

1. (d) 9. (c) 17. (b) 25. (b) 2. (b) 10. (e) 18. (a) 26. (b) 3. (d) 11. (b) 19. (d) 27. (d) 4. (b) 12. (a) 20. (d) 28. (b) 5. (c) 13. (b) 21. (a) 6. (b) 14. (a) 22. (b) 7. (a) 15. (b) 23. (c) 8. (d) 16. (a) 24. (b)
CHAPTER 2
Bases of International Marketing

LECTURE OUTLINE
Chapter 2 discusses: The economic benefits of trade The reasons companies export and import The development of exporting and internationalization within the firm The growing impact of concerns regarding social responsibility.
Introduction
Rapid growth in international trade and globalization of business have raised concerns about: Efficacy and fairness of freer trade Costs as well as benefits to regions, nations and the world economy.
Potential benefits from export marketing

National benefits in the form of increased consumer welfare. Exporting companies benefit from increased profits. Discussion of problems for particular groups is found in the subsection, Concerns over free trade.
The effects of imports

Increased supply and variety of goods, and lower prices for consumers. Lower domestic production costs through import of raw materials and capital equipment, and access to technological advances through imports, licensing, and foreign direct investment.
The effect of exports

Economics of scale in production processes with resulting lower costs. Diversification of risks.
Increasing productivity and efficiency

Increased productivity through better utilization of resources. Increased productivity through technology transfer. Increased productivity through learning of better ways of organizing and doing business.
International trade theories

Three major theories, but none of them cover all goods traded at all times. These theories apply primarily to why particular countries import or export particular goods.
The classical theory of international trade

Concept of economic advantage. Absolute advantage where country A produces one product more cheaply and country B produces another more cheaply. Comparative advantage where country A produces both products more cheaply and country B produces one of them at a much greater cost and the other at only a little greater cost. No advantage (or equal advantage) where the ratio of production costs of the two are the same in both countries. Exhibit 2.1 explains why there are gains from trade under conditions of comparative advantage. Table 2.1 illustrates these gains. Table 2.2 shows a case of equal advantage under which there are no gains from trade.
The factor proportion theory

Resources are distributed unevenly internationally. A nation will export products that use a large amount of the factors of production of which it has an abundance, and are thus cheap. It will import products that use large amounts of factors of production which are scarce, and therefore expensive, in the country.
The product life-cycle theory of international trade

Many manufactured products have a life cycle including an innovation/introduction stage (new product), a growth and expansion stage (maturing product), and a mass production stage (standardized product). For the innovator country, in the first stage, production and use are domestic. Then exports are started. Eventually, production may be shifted overseas to be nearer markets and/or to use lower cost labour. The originally exporting country may become an importer. For other advanced economies, imports are required to meet demand in the first and second stages. Less developed countries begin to become exporters in the mass production stage. See Figure 2.1.
Concerns over free trade

The nations that have focused on exporting and lowering barriers to trade and investment have had much greater increases in per capita GDP than those that have emphasized protectionism. Specific groups of people have had slower rates of growth. Examples of growth rates of countries pursuing different policies are given in the text. Protectionist measures that have been studied have resulted in more jobs lost than saved. It has been argued that governments need to take measures to ensure benefits are shared more equally.
Export behavior theories and motives

Theories attempt to explain why individual firms engage in export activities. Companies expand abroad when they can no longer meet goals by operating solely in the domestic market. Focus on firms motives and strategies, marketing and other capabilities in exporting, and interactions with the foreign market environment. Risk, uncertainty, and imperfect knowledge affect export behavior.
Basic goals
A basic objective for a firm is to earn profit required for survival and to allow pursuit of nonprofit-oriented goals. For many firms, foreign operations provide a substantial portion of total revenue and total profit. Examples are given. For an increasing number of companies, strategic objectives are international in nature.
Specific reasons
Export motives may arise from internal influences or external influences, and may be reactive or proactive; may also be considered innovation oriented or problem oriented (Table 2.3 may be used in explaining). Managerial urge; export behavior is related to individual decision-making characteristics. Unique product/technology; foreign market opportunities or own advantages to be exploited. Risk diversification with different markets in different stages of economic cycle.
Economies of scale in production, advertising, distribution, or other areas: may be able to use both domestic and foreign resources (financing, marketing, production, human resources and research). Extend sales of seasonal product(s) Change agents: organizations promoting export activities Unsolicited foreign orders; change agents (outside organizations providing information and assistance) Small domestic market or only a part of domestic market can be easily reached; stagnant or declining home market. Excess capacity or resources; problems may arise because of dumping (selling a product in a foreign market at a price lower than it is sold for in the domestic market). Other goals: development of people; offshore plants to supply home markets. Companies usually operate with multiple goals in mind. Exhibit 2.2, Should a company market overseas, notes that the keys to achievement in international markets are: information, preparation, and commitment.
The development of export in the firm: internationalization stages

Export operations may proceed in stages; levels of exporting shown in Exhibit 2.3. Internationalization is usually an evolutionary process as the firm learns over time: requires increasing information, willingness to commit resources, and risk-taking. Degree of internationalization may be expressed quantitatively (in absolute or relative figures) or by qualitative measures (may be hard to measure). Decision makers perceptions are of critical importance. Internationalization of manufacturing firms often, but not always, occurs in several stages such as: export operation stage; foreign sales subsidiary stage; licensing and contracting alliances; and foreign production subsidiary or alliance stage.
Exporting and the network model

A basic assumption of the network model is that the individual firm is dependent upon resources controlled by other firms. It is often advantageous for firms, particularly those in international markets, to build up lasting, cooperative relationships with other businesses: distributors, agents, customers, competitors, consultants, and government agencies.
Need to stress mutual trust, interaction, and mutual commitment. The relationships may be strengthened by international extension, penetration, and international integration. Exhibit 2.4 discusses Relationship marketing, with advantages expected in reducing transaction costs and in cooperative actions to improve quality and responsiveness and reduce costs of overall operations. Dangers include loss of control and release of internal information. Figure 2.2 portrays Relational exchanges in relationship marketing. Networks of business relationships may be classified by geographical areas, products, technology, etc. (national nets, production nets, product nets, etc.)
Ethical/moral issues
Increasing demands by governments, consumers, special interest groups, and the public for companies to behave in a socially responsible manner. International marketers often must deal with: (a) different sets of ethics; (b) different views of what constitutes socially acceptable behavior; and (c) different legal requirements.
Defining ethics
Ethics is what most people in a society view as being moral, good, and right. What is ethical in one society may be considered unethical in another. Examples are given of different attitudes toward; (a) the paying of interest on loans; (b) women in the workforce; and (c) bribes. The above, and particularly, the issue of making facilitating payments or bribes, may result in conflicts between a persons ethical code, the laws of the home country, and/or the laws of the host country. In spite of laws prohibiting bribes in a number of countries, bribes are still used in those countries as well as many others (even, at times, with actual or tacit governmental approval). Environmental issues are of increasing concern, particularly in the more economically developed countries.
Possible bases for ethical decision making

No universally agreed upon standard or model, but approaches include: (a) Principle of utilitarianism: correctness determined by results. (b) Principle of rights: overall benefits to society do not justify overriding rights of some people. (c) Principle of justice: fair treatment. These, and other approaches, may lead to different decisions.
Applying ethics in international marketing

Need for concern with issues of: products or services; promotion; and customers. Some specific dos and donts are given with regard to products, market penetration, advertising and promotion, prices, and the treatment of customers, employees, and suppliers. International marketer needs knowledge of ethics, values, and customs (and laws) of host markets as well as home market.
Social responsibility and the business environment

Views of the proper goals for business vary among countries (e.g., Britain and the US; continental Europe; Japan). Even in US, more is expected from businesses than profit maximization. Continuing arguments for and against companies doing more than is legally required. Overall tendency in most countries is to expect and/or demand a higher level of social responsibility.
The stakeholder concept

Stakeholders are those individuals or organizations with some interest in the activities of a business. Owners rights have been widely recognized in market economies. Other stakeholders with legal and moral rights include employees, customers, suppliers, and governmental bodies. Secondary stakeholders include competitors and special interest groups. Effects on the environment are receiving a much greater attention. Institutional investors are becoming more active and influential, especially in the US.
Changing views of social responsibility

Strong tendency for society to demand that companies act with concern for overall social and environmental needs. International marketer needs to act in a way that is viewed as socially responsible by both host country and home country. Exhibit 2.5 compares legal practices, businessgovernment relations, and social responsibility in two countries: Japan and the US.
Effects on the political/legal environment

Issues related to social responsibility may result in changes in the political/legal environment (as discussed in Chapter 3). Occurs when some group: (a) identifies a problem/issue and need for change; (b) develops support; and (c) obtains legislative or administrative support Some of the many issues of current concern are listed in the text. Outsourcing of jobs is one of these.

2.1 What are the benefits arising from international trade? Are they the same for industrial goods as for consumer goods? What costs to consumers arise from international trade? The major potential benefits are lower prices and an increased variety and supply of goods from which to choose. For the most part, these benefits are the same for industrial goods as they are for consumer goods. The import of consumer goods has a direct effect; the import of industrial goods results in lower domestic production costs and/or better products and/or the acquisition of new technology thereby benefiting the consumer indirectly. Consumers in the country of export may also benefit to the extent that domestic firms that export can generate economies of scale in production, which can then be passed on to domestic buyers in the form of lower prices. If exported products are in short supply relative to demand, then market prices in the producing country may be driven higher. 2.2 Discuss how exports and imports help to increase productivity and efficiency. Briefly, exports and imports lead to increased international specialization, with the most efficient industries in each country tending to increase their output, thereby gaining economies of scale. The transfer of technology, including the importation of new equipment and systems, also leads to improved productivity.
2.3 The productivities of factor inputs with respect to different products are determined by a combination of natural and acquired advantages. Is the productivity of the Japanese due primarily to natural or acquired advantages? How about the French or the Chinese? Explain. Japan is not exceptionally well endowed with the natural resources of mineral wealth, soil, and climate. Until recently, it was also short of capital. The high level of productivity of the Japanese, therefore, must be due to the acquired advantages of knowledge, skills and techniques. France is better endowed with the factors of production so some advantages have been natural. However, there has also been substantial acquisition in the form of learning of how to use the factors available and in developing products that are less natural-resource-dependent. China has extensive natural resources but is less rich in most of these, on a per capita basis, than France. In its current economic development efforts, it is relying heavily on improving the skills and motivation of its people and on the acquisition of technology. In the end, all advantages due to managerial know-how and overall human resources are, in fact, acquired advantages. 2.4 (a) Briefly explain the different types of economic advantage for two countries, A and B, each able to produce two products, X and Y, and discuss the conditions for trade to be advantageous (assuming no transaction costs). (b) How is it possible for an individual business firm to have a comparative advantage? (a) If A can produce X more cheaply than B can produce X, and B can produce Y more cheaply than A can produce Y, we have a case of absolute advantage. If A can produce both X and Y more cheaply than B can produce X and Y, but A has a proportionally greater cost advantage over B in producing X, it is a case of comparative advantage. If A can produce both X and Y more cheaply than B can produce X and Y, and the ratios of As advantages are the same for both products (say, for example, A can produce each of the products at exactly half of the cost that B can produce them), it is a case of equal advantage or equal differences. Trade is advantageous under conditions of absolute and comparative advantage, but not under conditions of equal advantage/differences. (b) An individual business firm can have a comparative advantage in much the same way as a nation. But, this would apply to a multi-product company. If at least two of the products of this company were in demand at home and in a foreign country, and there was a company in the other country making the same products, relative cost differences could lead to a situation of comparative advantage. This could lead to a potential trading relationship if the products were relatively homogeneous and branding was not an important attribute. 2.5 Find an example of a country that is exporting a product for which it has an absolute disadvantage with a trading partner but where there is a comparative advantage. Explain the nature of this relationship. Students answers will vary. One example the instructor could use would be the export of machine tools from China to the United States. In labor hours per unit of production of both standard machine tools and technically advanced machine tools, production in China is more costly. But the difference in the cost of producing technically advanced machine tools in China is relatively much higher than the cost of producing standard machine tools. Since the overall low level of productivity in China results in low wages relative to the US, China is able to export standard machine tools to the US while importing technically advanced machine tools from the US.
2.6 Explain the product life-cycle concept as it relates to international trade and investment. What does the concept mean to the individual firm? As a product goes through its life cycle of introduction, growth, maturity, and decline, the location where it is most advantageous to produce the product tends to shift. In the introductory phase, the advantage is in the country of introduction (usually an economically developed nation), with rapid change and market uncertainties allowing high profit margins and dictating small-scale production. As output grows, exporting becomes possible. As the life cycle changes from growth to maturity, lower costs become a greater concern and production tends to shift to other consuming nations and/or lower labor-cost areas. Eventually, the country of origin may even import the product from a low labor-cost area. The way in which the product life cycle affects a companys export product mix is discussed in Chapter 9. At this point, it is sufficient to say that a companys product (i.e., its brand of the product) goes through such a cycle over time. Moreover, the product itself may be in different stages in different foreign markets. A company will find it difficult to manage a product in different stages of the cycle. Thus, the stage of a product in a foreign market may influence a company's decision to market it in that country. 2.7 Export motives may be classified as internal or external, and reactive or proactive. What is meant by these terms with respect to export marketing? Give examples of each of the combinations of export motives. Internal motives are those that arise from stimuli within the firm, while external motives are those that arise from stimuli outside the firm. Reactive motives are those that arise simply in response to some occurrence in the environment, while proactive motives arise from the executives actively seeking new opportunities. A decision to actively seek economies of scale by opening new markets overseas would represent proactive motives generated internally. A decision to undertake additional foreign marketing activities as a result of opportunities coming to their attention from outside would be classed as proactive, external. A decision to undertake activities in order to avoid risks in marketing only domestically would be classed as reactive, internal. Simply responding to unsolicited orders from overseas would be reactive, external. Depending upon the circumstances, a particular action may be motivated by differing combinations, but understanding the classification scheme helps one understand how a particular company is motivated. Students examples will differ. 2.8 Why might some companies be willing to undertake new or additional international and export marketing even though it apparently offers only similar (or even lower) levels of profitability? The companies see offsetting advantages in increased stability of sales and/or profits, diversification of risk, greater growth opportunities, outlets for excess production, or the need to protect existing overseas markets from new government restrictions. 2.9 What is meant by a change agent in export marketing? Give examples of each type of change agent. A change agent in export marketing is some organization external to the company that encourages and assists the company in starting or expanding international marketing activities. Government agencies, trade associations, etc., may be active in this area. Other companies, such as export agents and foreign importers, may also do this. Examples of change agents will vary.
2.10 How can a company determine how internationalized it is? Explain. A company may gain some evaluation of how internationalized it is through use of a number of different measures. Quantitative measures include the number of countries in which a company is doing business; foreign assets, sales, or profits; the number of employees overseas; etc. These may be stated either in absolute terms, or as percentages of the same factors for domestic operations. Qualitative measures that are very difficult to measure might include top managements international orientation and its commitment to international marketing, or how decisions are made regarding sourcing and market penetration. Exhibit 1.1 in Chapter 1 provided one specific approach. 2.11 Find an example of a company that has expanded its export/international marketing activity, or started such activity, and determine the companys objectives for doing so and the results achieved. If the student does not have personal knowledge of any such company, he or she can find examples in business periodicals. The instructor might draw examples from Case 1.4, DaimlerChrysler. Toyota undertook exporting because the Japanese market was too small to provide the level of sales and profits they wanted. They began manufacturing overseas because of trade barriers in the US and European markets. They have succeeded very well, now earning the greatest profits of any Japanese company. The actions of Mercedes-Benz, its reasons for acquiring Chrysler, and the resulting problems are discussed at some length in the case. 2.12 How can a company make operational use of the network model and relationship marketing in planning and implementing international marketing programs? Selecting suppliers and distributors is a part of planning and implementing marketing programs. Relationship marketing emphasizes the building of lasting relationships or informal partnerships, often with substantial sharing of information, with suppliers and distributors. The objectives are to reduce transaction costs, and to work cooperatively with others in the value chain to improve quality and responsiveness and lower costs. An assumption is that the value of such cooperation will more than offset the advantages of short- term competition over cost and quality between possible suppliers. The network model portrays the relationships between the various partners as a set of networks that may be global in nature, and may be grouped by geographical areas, products, techniques, etc. When a company recognizes the existence and importance of networks of business relationships in particular industries and regions, it is in a position to identify and expand its own position and relationships through international expansion into nets new to the firm, penetration by developing existing positions, and international integration by increasing coordination between its positions in different national nets. Increased and improved relationships facilitate the gathering of information, the development of useful contacts with others that control or can facilitate access to needed resources (including, for example, marketing channels and government approval agencies), and the building of personal confidence. 2.13 There are many who believe that whatever is legal is ethical. Do you agree with this belief as it might apply to the international marketer? Explain your position and give examples of behavior in the global marketplace that would support your position. The position that what is legal may not be ethical is probably easier to defend. Nestles promotion of baby formula in areas where it was not properly used was legal but considered
unethical by many people. Activities resulting in serious contamination of the environment are legal in a number of countries, both less economically developed and more developed, but is considered unethical by many people. High-pressure tactics to sell unneeded or harmful products to children or the aged may be legal in some countries but are still viewed as unethical by many people even in those countries. 2.14 Is being right or wrong about moral issues in international marketing activities an absolute or is it relative? Explain. It is relative; that is, deciding whether some action is right or wrong depends upon the individual marketer, the host society, and the marketers home society. Small (or even large) bribes are considered right (or even required) in some societies, while considered morally wrong by some people and perhaps illegal under home country laws. Attempting to provide equal employment opportunity to women is some countries would be both wrong and illegal to the host society but perhaps considered morally right by a marketer from another society. 2.15 With what particular issues must international marketers be concerned? Explain. The ethical and moral issues with which international marketers must be concerned include the following: safety and effectiveness of the product; market entry and expansion methods should conform to local and home country values; advertising and promotion should be honest and activities of sales personnel monitored; prices should be set at a level viewed as fair; and customers, employees, and suppliers should all be treated in a manner that is viewed as fair. 2.16 Are traditional views about the goals of business the same in Britain, the United States, and the continental western European countries? If not, how do they differ? They differ. Traditional British and the US views held that the primary goal of business organizations was to maximize profits/returns to the stockholders/owners. In much of continental Europe, business was believed to have much broader obligations including responsibilities toward customers, employees, suppliers, and society as a whole. In the US a more broad view of corporate responsibility is developing but it is still far from many of the views in Europe. 2.17 In general, are businesses becoming more or less sensitive to social responsibility issues? Why? Businesses are becoming more sensitive to social responsibility issues because of growing awareness of environmental and product problems, activities of public interest groups, lawsuits (particularly in the US), some proactive companies, and the possibility that issues related to apparent failures of businesses to meet social responsibility needs may result in additional laws or regulations affecting business.

2.1 Bridgestone Corporation
1. What appears to have caused delays by Firestone in recognizing and responding to the problem with the tires?
The delays appear to have been caused by a combination of factors: (a) Though customer-return data was collected for each model of tire by the line on which it was produced, and should have allowed the company to spot the problem quickly, the companys computer information system did not produce the required information quickly or in a form which facilitated analysis.
(b) Information from engineering was not exchanged with the marketing group, delaying identification of the problem. (c) No system for reporting problems of this type, or for taking action, was in place. (d) The president of Firestone did not consider the problem serious, and delayed sending information to Bridgestone (possibly because he did not want to embarrass the subsidiary or himself). (e) The president of the parent company in Japan did not realize the seriousness of the problem, and thought that the subsidiary should solve it. 2. Why was the response of the company not adequate to satisfy the US public and government?
Both Firestone and Bridgestone used approaches that have traditionally been satisfactory in Japan: deny the problem as long as possible, and if that does not work, offer an apology. In Japan, individuals typically have not brought lawsuits against companies in such situations and the government has not taken strong action against the companies. Exhibit 3.9 in Chapter 3 provides more information about legal practices, businessgovernment relations, and views of social responsibility in Japan and the US. In the US, Firestone did have to defend itself in court against lawsuits, and settled many quietly. But it did not realize that such a furor could erupt over the defective tires when the press publicized the problems, lawyers and individuals saw opportunities for more lawsuits, and the US government started a serious investigation. That is, neither the subsidiary nor the parent had an adequate understanding of the American social, legal, and political environments. 3. Should a company apply the ethical, behavioral, and legal standards of the home country or host country in its overseas operations?
Students can be expected to have a variety of viewpoints on this. At a minimum, the company must conform to the laws of the country in which it is operating, as well as the laws of the host country which apply to overseas operations. The company should also try to meet the ethical and behavioral standards of both. In some instances, there may be a conflict between the two. Cases in point would be: Scandinavian countries prohibiting discrimination against women in employment while some Middle Eastern countries prohibit women working certain positions or in jobs where they will be in contact with men; US law prohibiting the payment of bribes to government officials while such payments are expected in a number of countries. In all overseas operations, companies must be fully aware of and be sensitive to laws and customs, and the likely consequences of actions they may take. 4. In your view, and given the time frames indicated in the case, did Ford act as quickly as it should?
Students can be expected to have a variety of opinions on this. Depending upon the composition of the class, some will probably defend the company while others will indicate that it was too slow. Those defending the company might point out that it did recall tires in places where it appeared that high temperatures might make them unsafe, that many of the problems in the US may have involved incorrect actions by drivers (under-inflated tires or other actions), that the tire problems were Firestones responsibility, and that the company pushed Firestone to make better analyses of potential problems, and that the Ford Explorer had a much-better-thanaverage safety record even with Firestone tires. Those who blame the company may note that the Ford Explorer should have been better designed, that the recommended tire pressure might have been too low, and that the tire chosen as standard equipment was not of an optimum size.
The discussion should bring out the fact that different conclusions may be drawn from the same facts, particularly in social responsibility and ethical issues. 5. Given what is known at this point in time, should the US government have required that new cars must have tire pressure warning systems?
Students may have varying viewpoints on this, some stressing that it is the governments responsibility to ensure the highest possible level of safety. Others may argue that the extent of the problem is not known (sizes and uses of tires where it is important), that the government is overstepping its role in continually pushing for new equipment to improve safety when some of this equipment has had unanticipated adverse effect (cars equipped with antilock braking systems apparently have higher accident rates then cars without the system because drivers use less caution when they feel safer; airbags have saved many lives but have also proved dangerous to children and frail persons), and/or that costs will be driven up. 6. What ethical issues arose surrounding the situation in Venezuela?
Ford recognized a problem in the Middle East and recalled tires there in 1999. In February 2000, it recalled tires in Thailand and Malaysia. It did not recall tires in Venezuela until May 2000. If Ford and/or Firestone recognized that there was likely a serious problem that would also apply to the tires made in Venezuela and used in Latin America, they should have made an immediate recall. It is not clear from the case when the problems with the Venezuelan-made tires became apparent. The Venezuelan government apparently believed that the companies knew about the problems and did not take action when they should have. Little has been said in the case about the political, legal, and social environment in Venezuela, or the details of the recall there. This would be an interesting topic for the students to research, but is beyond what is covered in the case.
2.2
1.
GlaxoSmithKline
Are the present pricing policies of the major pharmaceutical companies ethically justifiable? Explain your view.
Students can be expected to have different views. Some can be expected to argue that the prices are ethical because they support the development of new drugs that are needed to combat diseases, and that price controls would reduce research and development. In the long run, people everywhere would suffer. It appears from the comments in the case that R&D work is being shifted from the EU (where prices are regulated) to the US (where prices are not regulated). They may argue further that having the government conduct drug research and development would likely not be as efficient or effective as relying on private R&D under a free market. Others can be expected to argue that drug companies earn excessive profits, that they spend excessive amounts on marketing, and sometimes promote expensive but not fully effective drugs. 2. Are companies in less developed countries ethically justified in producing and selling generic copies of patented drugs without obtaining the permission (and paying) the patent holders? Explain your answer.
Students can be expected to have different views.
Some will argue that the needs of the people in the country who cannot afford the prices charged by the patent holders justify making unauthorized generic copies. The laws in some less economically developed countries allow such action. This is a legal rather than an ethical argument, but may be supported by ethical arguments based on human need. The principles of utilitarianism, rights, and justice may all be applied, but may be interpreted differently and may not give consistent results. Others can be expected to argue that the rights of the patent holders should be upheld in order to support the research and development which has led to the current drugs and can be expected to lead to additional drugs. If it were not for the higher prices supported by the patent system, we likely would not have the AIDS drugs available today. A third approach would be to examine marginal costing, and see if drugs could be supplied by patent holders to poorer nations or poorer people who cannot otherwise buy the drugs at lower than full costs, but costs greater than the marginal cost of production. It would be hard to calculate the actual costs, and perhaps even more difficult to set up a system to determine who should get lower prices and who should pay more. 3. With Americans paying substantially higher prices for prescription drugs than people in other countries, are US consumers unjustifiably having to subsidize the development and sales of drugs to people in other countries?
Viewpoints will differ. On one hand, due to the higher level of affluence in the US compared to less economically developed countries, it is perhaps reasonable for US consumers to subsidize these countries in drug availability. On the other hand, it may be viewed as unfair that other developed economies, such as those in Europe do not pay the same prices and thus bear the same portion of R&D costs. It can be argued that, solely from a financial point of view, US consumers are unfairly treated, but the social benefit may justify the cost. Finally, insofar as prices actually paid by customers in other countries exceed the total manufacturing and marketing costs, they do provide funds available for R&D and profits. 4. Is the selling of drugs abroad at lower prices than in the United States actually a case of dumping? If not, why not? If so, why do other countries force dumping of pharmaceuticals when they try to stop dumping of steel?
There are two definitions of dumping: one is selling something below full cost (including both fixed and variable costs); the other is selling something below what it is sold for in the country of manufacture. The selling of pharmaceuticals abroad at lower prices than in the US probably meets both definitions (if you include R&D costs). What makes dumping attractive to the seller is the opportunity to sell additional amounts of the product, without taking away domestic sales at full price, at a lower price that still exceeds the variable costs. This helps cover the variable costs and contribute to total profits. Countries try to stop the dumping of products that they also make in their own country, like steel, in order to protect domestic producers. In the case of pharmaceuticals, even if they do produce the drugs locally, the overriding concern is the welfare of the domestic population (or the costs to portions of the government-supported medical system). Countries seldom worry about the dumping into their country of goods they do not make domestically. This just lowers their costs/improves the terms of trade.
5.
Is advertising by pharmaceutical companies socially desirable?
From the companies standpoint, the purpose of advertising is to acquaint potential consumers with the product and to encourage them to buy it. From societys standpoint, the purpose of advertising should be to provide product information to consumers or potential consumers for making educated purchasing decisions. Without advertising, the awareness of new and existing useful products would be limited to the publics detriment. Thus, advertisements containing ethical, non-misleading information have a social value. Arguments against some of the advertising being done by pharmaceutical companies come largely from the following: (1) The inaccuracy of information contained in some/many advertisements. (2) The promotion of equally or less effective but higher priced drugs. (3) The high costs that add to the overall cost structure of developing and selling drugs. (4) The pressure put on doctors by patients who are convinced of the truth of the advertisements but who have limited medical knowledge about the effects of the drugs. 6. What policies should GlaxoSmithKline adopt with regard to:
(a) pricing of patented products during the early years of protection and as patent protection is due to expire? In initial pricing, GSK has a responsibility to its stockholders to set prices high enough to cover the costs of overall research and development (including failures) and a level of profits high enough to attract capital. It also has a social responsibility to other stakeholders including potential and actual customers. Because of the monopoly position of the patented drug, the companies will always be accused of taking away as much consumer surplus as possible, that is, charging a price which will maximize profits. As patent protection nears expiration, GSK has three options: (1) market its own generic brand to get that brand established in the market while it still has protection; (2) lower the price on the existing brand; or (3) maintain or raise the price on the existing brand while increasing advertising. (b) attempting to influence public policy through advertising or lobbying? Advertising may be used in an attempt to influence public opinion and thus indirectly put pressure on the government with respect to freedom from price, advertising, or other controls. In 2001, the pharmaceutical companies were sponsoring advertisements to show the benefits of their research, discoveries, and beneficial new drugs. This appears to be a useful approach, particularly when sponsored by the pharmaceutical company association. Lobbying is a more direct approach. A negative stance toward any type of government program designed to providing drugs to senior citizens or others at a reduced price could be counterproductive if it irritated enough consumers who might influence public policy. It might be more useful to support a program that would provide somewhat lower prices in a program that would supply drugs to a larger population. With the low marginal cost of additional production common in pharmaceuticals, lower prices with higher volumes supported by a government program might be profitable. It should also influence favorably the public and public policy.
TEST BANK
1. Which theory of international trade is applicable to (or explains) the trading of all goods at all times? (a) Classical theory of international trade (b) The factor proportion theory of international trade (c) The product life cycle of international trade (d) All of the above (e) None of the above Questions 2, 3, and 4. Both Germany and Denmark make machinery and furniture. For each of the following three cases in Column A, indicate which item from Column B is the type of advantage involved. COLUMN A 2. In Germany, machinery costs $10 per unit and furniture costs $5 per unit; in Denmark, machinery costs $12 per unit and furniture costs $6 per unit. 3. In Germany, machinery costs $10 per unit and furniture costs $5 per unit; in Denmark, machinery costs $5 per unit and furniture costs $8 per unit. 4. In Germany, machinery costs $10 per unit and furniture costs $5 per unit; in Denmark, machinery costs $12 per unit & furniture $7 per unit. COLUMN B (a) Comparative advantage (b) No advantage (c) Absolute advantage (a) Comparative advantage (b) No advantage (c) Absolute advantage (a) Comparative advantage (b) No advantage (c) Absolute advantage
5. Motivation for engaging in exporting may come from which of the following combinations of factors? (a) Internal and proactive only (b) Internal and reactive only (c) Internal or external and proactive or reactive (d) External and proactive only (e) External and proactive only 6. Although international trade grew rapidly in total amount during the last half of the 20th century, its relative importance decreased in most economies. (a) True (b) False
7. While imports provide consumers with an increase in the supply and variety of goods, they do not provide any benefits to domestic industry. (a) True (b) False 8. The product life-cycle theory says that a nation will export that product for which a large amount of the relatively abundant (cheap) input is used, and it will import that product in the production of which the relatively scarce (expensive) input is used. (a) True (b) False 9. Many, but not all, exporting companies probably face less total risk than nonexporting firms by virtue of having diversified geographical markets. (a) True (b) False 10. Through which of the following can a company strengthen its international network? (a) International extension (b) Penetration (c) International integration (d) All of the above (e) None of the above 11. Relationship marketing is based upon several assumptions including the following: (a) Transaction costs will be higher, but lower prices will be paid for components purchased. (b) Continuous bidding from potential competing suppliers is highly desirable. (c) Presents dangers of loss of control and release of internal information. (d) All of the above. (e) None of the above. 12. Ethics is comprised of what most people in a society view as being moral, good and right. (a) True (b) False 13. Examples of differences in ethics between different societies include attitudes toward: (a) the paying of interest on loans. (b) the place of women in the workforce. (c) the paying of bribes or facilitating payments. (d) All of the above. (e) None of the above.
14. The international marketer will always be safe following the laws and customs of the host country. (a) True (b) False 15. A universally agreed upon basis for ethical decision making is: (a) the principle of utilitarianism. (b) the principle of rights. (c) the principle of overall benefits to society as a whole. (d) All of the above. (e) None of the above. 16. In the stakeholder concept view of the corporation: (a) stakeholders include those who have an interest or some share in the undertaking. (b) some stakeholders have legal rights. (c) some stakeholders may claim more rights. (d) All of the above. (e) None of the above. 17. There is a strong and increasing tendency for many societies to demand that companies act with increasing concern for overall societal and environmental needs. (a) True (b) False 18. Social responsibility and corporate profit are incompatible. (a) True (b) False 19. Japan and the United States have almost identical views of what is proper with respect to: (a) legal practice. (b) businessgovernment relations. (c) social responsibility. (d) All of the above. (e) None of the above.

1. (e) 9. (a) 17. (a) 2. (b) 10. (d) 18. (b) 3. (c) 11. (c) 19. (e) 4. (a) 12. (a) 5. (c) 13. (d) 6. (b) 14. (b) 7. (b) 15. (e) 8. (b) 16. (d)
CHAPTER 3
The International Environment: Culture; Economic, Political and Legal Forces; and Competition
LECTURE OUTLINE
Chapter 3 discusses the impact on international marketing and export management of: Culture and the socio-cultural environment Economic forces The political and legal environments Competition.
The three cases at the end of the chapter illustrate the application of some of the topics discussed in the chapter.
Introduction
The international marketer needs to operate in both a domestic environment and one or more foreign environments. The marketing functions that must be carried out are the same in all markets; but all marketing activities are affected by each of the differing environments. The environment in the home market is usually well understood, but cannot be assumed to be the same in foreign markets. Differences in cultures, economic forces, political/legal forces, and competition directly affect information requirements and accessibility, negotiations, market entry strategies and modes, channels of distribution, product and pricing decisions, financing and methods of payment, promotion and marketing communications, logistics, and organization structures.
Culture and the socio-cultural environment

Culture and the socio-cultural environment influence the behavior of: Customers Managers who plan and implement marketing programs Employees Marketing intermediaries.
Culture also influences the political/legal environments. Exhibit 3.1 gives some examples of the pervasive effects of culture on international/export management. To be successful, international marketers need to develop: an understanding of the foreign culture, how it differs from their own culture, and how this affects the desires, objectives and behaviors of potential customers and others in the marketing chain.
Exhibit 3.2 discusses some of the particular requirements for successful marketing in China.
Managing cultural differences

Understanding cultural differences and developing appropriate strategies for marketing in the foreign environment has enabled many companies of all sizes to market successfully and profitably. Some successes and failures of some large companies shown by experiences of: Wal-Mart, Seven-Eleven Japan (Case 4.2), Ikea (Case 4.1), Toyota, DaimlerChrysler (Case 1.4), Renault, General Motors, and VW (Case 8.3) Export managers who lack cultural awareness can create serious problems and losses. Exhibit 3.3, Managing multiculturalism, provides some useful observations.
The nature of culture

Culture may be viewed as the sum of a groups learned behavior patterns, attitudes, and material things. (Many different definitions are used.) Table 3.1 presents some indicators of a persons culture. Culture usually changes slowly over time, though governmental or other organizations may attempt to force a more rapid change. There are cultural universals that all cultures have: language, sports, status differentiation, etc.
The dimensions of culture are summarized in Table 3.2. Table 3.3 shows some value orientations with regard to selected factors. Table 3.4 shows clusters of countries that have significant similarities in values. Exhibit 3.4 discusses views of Asian values. Understanding the general patterns and themes of culture is not enough for the international marketer. He/she must learn the specifics of the culture, which affect the marketing of the firms products or services.
Culture and communication

Communication is both by language and behavior (nonverbal communication). Knowing what people mean by their behaviors, and how they view time, space, things, friendships, and agreements is essential for the international marketer. In high context cultures (like Japan), the situation, relationships, and unspoken understandings may carry more meaning and importance than the words themselves. In low context cultures (like many European nations and the US), the meaning of the message can usually be wholly or partially isolated from the context in which the message occurs.
Self-reference criterion (SRC)

Most people initially define problems in terms of their own culture. The SRC effect, or likely cultural bias, occurs when an individual is able to define problems in terms of only his/her own culture. The international marketer should learn how to define problems in terms of the local culture as well as his/her own culture. The comparison can then indicate possible areas for mutually agreeable solutions.
A concluding comment
Culture affects all international and export marketing activity.
Economic forces
Demand for products is affected both by population size, and by the size and distribution of income and wealth. Even in countries with low average incomes, population segments with high incomes often provide markets for luxury goods. Demand for some goods is also affected by climate, geography, and other factors.
Market development
The extent of economic development of a country may be classified in various ways, such as: Developed or developing By income level By rapidity of growth (eg, as big emerging markets (BEMs)),
Table 3.5 shows the classifications of selected countries by the World Bank based on GNI per capita. Other schemes of classification may be used. General classifications are of only limited usefulness to the international marketer; should not be used as the sole basis as to whether to enter a given market. Exhibit 3.5 shows Economic development variable in countries use of electricity and electrical goods. Companies must also consider a countrys overall business environment, and the types of risks to which entrants to the market may be exposed.
Some areas of change

Asia and Latin America are areas of major change and growth. Table 3.6 gives Populations and Per Capita GNIs for Asian areas. Countries in central and eastern Europe are generally economically successful since collapse of the Iron Curtain. Table 3.7 shows selected indicators for these areas. China: is now the worlds second largest exporter. is attracting additional producers and marketers of consumer goods as economy grows rapidly.
Figure 3.1 indicates high growth areas in China. Market openings in some Latin American countries are leading to rapid growth and attracting increasing investment by Asian countries. Russias middle class is becoming more important. Middle East and North African region still dominates global oil markets, but a number of the countries are poorly integrated into the world economy. some are increasingly investing in Western companies.
Political/legal environment
The government provides the political/legal environment, though not all factors that affect businesses are part of formal government policy. International marketing is affected by all levels of government: supranational, national, and local. Important factors for businesses: economic system, form of government, and type of legal system. Nationalism or protectionism may result in behaviors by government officials or other businesses even though they are not specified by law (e.g., the traditionally strong, though now declining preference of Japanese companies for buying from other Japanese companies). There is a growing number of preferential trade agreements in Asia and the Asia Pacific region. See Table 3.8.
Role of government
Governments intervene in the economy by (1) promoting exports and other international activities, (2) impeding international transactions, and (3) government firms competing with private firms. Interventions occur at the international level (such as through World Trade Organization (WTO), other international organization, and the former GATT), at the national level, and at the subnational (province or local) level. (See Exhibit 3.6 concerning high hopes for the WTO.)
Government controls
Table 3.9 shows politicallegal constraints that impede exporting and international marketing in general. Increased terrorist activity and the attacks of 11 September 2001 in the US have greatly increased government regulations and spending on security in some countries. (See Figure 3.2) Controls affecting domestic as well as international business: legal forms, labor laws, taxation, rules governing marketing of certain products, etc. Controls specifically addressing international activities: licensing of trade, tariffs (protective and revenue), countervailing duties, anti-dumping duties, quotas (absolute, tariff), VERs or VRAs (Voluntary Export Restrictions or Voluntary Restraint Agreements), extra taxes (as on large cars), qualitative controls, exchange controls, restrictions on foreign investment and financial transactions, and limitations on foreign operations, including marketing. Export controls may be placed on certain products or services, usually those related to national defense. Packaging and recycle requirements for materials are being increased, leading to redesigns, some changes in transportation requirements, and some new business activities.
The growth of the Internet and the World Wide Web, and the increases in e-commerce, are leading to new legislation and regulations. The US and the EU use different approaches, and China presents an extreme case in regulation.
Other types of legal/regulatory activities

Environmental: greenhouse gases, packaging, environmentally friendly products. Regulation of labor. Table 3.10 shows proposed labor standards. Protection of intellectual property. Tax policy. Antitrust regulations, mergers, pricing, and business practices. Corruption.
Promotional activities
Many governments actively support export promotion themselves or with businesses: promotion, financing, information services, and export facilitating services. Programs may focus on assisting small- and medium-sized business, though large firms may be assisted in some cases. Exhibit 3.7, Assisting small businesses discusses governmental assistance programs in several countries. JETRO, the Japanese External Trade Organization, changed from export promotion to import promotion because of Japans large and continuing export surplus. Barriers to exporting which government programs are designed to overcome: (1) lack of motivation to export; (2) lack of information; (3) operational/resource-based limitations. Some governments assist exporters through: (a) financial activities: providing loans, guaranteeing credit, and working with international organizations; (b) providing information services and export facilitating activities; (c) providing export subsidies; and/or (d) authorizing free trade zones/free ports, free perimeters, or export processing zones. Private organizations also promote international marketing: chambers of commerce, trade associations, export service organizations, etc.
State trading
Government involvement in international marketing is not a normal and regular activity in most capitalist countries. State trading is done for many reasons, including political, economic, defense, exchange control, and other goals. Private business firms must be concerned because of: need to adjust marketing programs; governments can be powerful bargainers or competitors because of their monopolistic powers.
Economic integration
A key economic force since the 1950s. Range in types of economic integration from Free Trade Areas to Economic Unions and Political Unions is shown in Table 3.11. Table 3.12 shows existing economic integration arrangements. Effects of regional integration upon outsiders: Preference effect lowers opportunities for outsiders because of preference given to insiders. Growth effect increases opportunities for outsiders because of overall increase in demand.
Effects upon companies inside the region: larger markets for most competitive firms and industries; greater competition hurts less competitive firms and industries. Potential problems: Preference effect may cause trade to flow in inefficient ways (trade diversion). Regionalism may block efforts to liberalize trade worldwide.
The European Union has moved a long way toward the creation of a single internal market; but the exporter must still deal with differences in tastes, preferences, distribution structure, etc. Even with economic integration, separate markets do not cease to exist.
Competition
It is one of the most dynamic forces affecting marketing strategy. Differential advantage gives an individual firm an edge over others. Effective use of information gives tactical competitive advantage.
Competition is not always fair: bribes, political activities, etc. are not viewed as illegal or unethical by some countries/cultures.
Nature of competition
Structure of competition: number and types of competitors. Actions of competitors: product, channel, price, and promotion. Competition from acceptable substitutes: aspirin, razor blades, soft drinks, and automobiles.
Factors influencing competition

Types of product: homogeneous products have intense competition on price; differentiated products use nonprice competition. With homogeneous products, prices tend to be forced down to average unit costs. Many companies try to differentiate their products and gain the potential for higher profits. Overall, competition is influenced largely by: general business conditions; culture; economic and social conditions; costs; laws and regulations; and actions of competitors.
Coopetition, the simultaneous competition and cooperation between two or more rivals competing in global markets, is becoming more common. See Exhibit 3.8.
Summary
Each of the major components of the international environment discussed in this chapter (sociocultural, economic, political/legal, competitive) has a distinct effect on competition, but there may also be interactions between the components. The international marketer/exporter needs to remember that a business firm is a product of its environment.

3.1 Various classification schemes are sometimes used to give an indication of the potential of a particular market/country. Explain why these schemes should or should not be used as a basis for deciding what markets to enter. These schemes should not be used as a primary basis for market entry decisions. At best they indicate which markets are likely to be worth further investigation. They must be combined with socioeconomic, cultural, demographic, and structural data if one is to assess the market potential for a given product or products. 3.2 Explain the meaning of cultural universals. Do these provide universal guides to behavior in all societies? How can the international marketer use these universals? Do values fit within cultural universals. Explain. Cultural universals are factors that are found in all cultures, such as the presence in all cultures of food taboos. However, they do not give us universal guides to behavior in all societies. Some societies proscribe the eating of pork, others the eating of beef, others both pork and beef, and others neither pork nor beef. The cultural universals simply give us a list of elements about which every society has some restrictions or conventions, but do not tell us what those specific conventions or prohibitions are. The international marketer could possibly use a list of cultural universals as a guide to some areas where cultural differences might affect values and actions. Status structures are a cultural universal, and different societies may have different values within the overall universal. 3.3 Do you agree that the international marketer does not need to study the culture from a narrow perspective, but rather needs only a broad perspective to learn about general patterns and themes? The export marketer needs to know the details of how values, attitudes, preferences, and laws relate specifically to product and marketing requirements for the target group in the society. A broad perspective on the culture is very useful in providing a framework for understanding the market, knowing what to look for in the way of requirements, and suggesting which products and approaches may be effective. But a broad perspective by itself is not sufficient to avoid problems and pitfalls. 3.4 Explain the meaning of the following statement: Managing multiculturalism within the international marketing organization and within the markets it serves is what makes international marketing exciting and frustrating. This statement is designed to call attention to the human environment and the diversity in human beings. Characteristics such as language, religion, values, attitudes, and social organizations vary across national markets and even within a national market. Although the primary impact may be on the market and consumers/customers within the market, consideration must also be given for the people within the international marketing organization. Not only is exporting of relevance, but other modes of entry such as investment, licensing, and joint ventures are affected as well. So-called excitement and frustration may arise also from consumption patterns of people, their political ideologies, nationalistic feelings, and application of the self-reference criterion. Statements about what is exciting and what is frustrating will vary among students.
3.5 What is the silent language of international marketing and how does it relate to the concept of culture is communication? Spoken and written language is obviously an important means of communication. But people also communicate through their behavior in how close they stand, when they look directly into anothers eyes or avert their gaze, posture, gestures, etc. The same behavior may mean two different things to people from two different groups. The silent language is nonverbal communication. The relationship between culture and communication is discussed in the section Culture and communication in text. 3.6 What is the self-reference criterion and how should the international marketer apply it? Explain. Using the self-reference criterion, the marketer defines problems in terms of his/her own societys cultural traits, habits or norms. What he/she needs to do is redefine problems in terms of the foreign cultural traits, habits, and norms in order to see the likely effects of cultural bias and how this bias can be overcome. 3.7 Government can play many roles in international marketing. What are these roles and how does each affect individual business firms? In general, the roles that government at all levels play are intervention roles of participator, planner, controller, and stimulator. All these are designed to apply to the activities and behavior of individual business firms. More specifically, individual companies are affected by having transactions (1) encouraged or facilitated through export promotion activities, (2) impeded by controls, and/or (3) replaced by, or at least facing competition from, state trading organizations. 3.8 Why is it that some exporters would support voluntary export restraints agreed to by their governments? Perhaps the major reason why exporters might support VERs is that it may be profitable for them to do so. Often, VERs may create a situation where a scarcity in the marketplace exists, particularly for certain market segments. Domestic products and those exported from other countries are not viewed by the market segments as being equal or better than that which is limited by a VER. This allows the exporters to sell the products they are allowed to ship for a higher unit price. When VERs were imposed on shipments of automobiles from Japan to the US, the profits of the major Japanese automobile manufacturers actually increased substantially. 3.9 For a country of your choice, determine what its government does to promote exports and other international marketing activity. Students answers will vary. Some will be limited to national government activities while others will include what is available from sub-national government agencies. Some information about the activities of the Australian, Japanese, and other governments was given in the text. 3.10 What is regional economic integration, what is its objective, how is it supposed to achieve its objective, and what impact is there on individual exporters? Regional economic integration refers to arrangements that combine separate individual economies into a larger economy. One objective is to increase standards of living for consumers. It has the potential to result in a greater trade, a better allocation of resources, a more efficient production through economies of scale, and a greater investment and technological progress. It may impede worldwide integration and thus suboptimize.
The potential impact on individual exporters depends upon whether an exporter is located inside the area or outside. In general, however, individual companies are affected by a preference effect and a growth effect. These are discussed on pages 139 and 140 of the text. More efficient producers tend to benefit and less efficient producers tend to decline or go out of business. 3.11 Should an economically integrated region be considered as one market area? Explain your answer. Would your answer vary for the European Union in contrast to, say ASEAN? Such an area should not be considered as one market area. Within the EU, and individual countries as well, for example, there are economic, demographic, social, and cultural differences that create different market conditions. Tastes and requirements vary from area to area and/or group to group. There are also laws and regulations that differ from country to country within the EC, and within individual countries, although to a lesser extent. Within ASEAN, there are even greater differences and, to date, less progress in reducing trade barriers and harmonizing laws and regulations. 3.12 Can the European Union become too big? Is there a point of diminishing returns for a regional economy? Explain. There is not sufficient information available at the present time to provide a clear answer to this question. Some EU countries are concerned about a number of potential problems, but is still in an expansionist mode overall. To date, the economically less-advanced nations that joined up to 2004 have grown more rapidly since joining. While growth of the more economically advanced nations has not been as rapid as some would like, to date the EU has been a success. 3.13 What is really meant by a company having a differential advantage over its competitors in one or more foreign markets? A differential advantage is some unique advantage a firm has over its competitors in a given market. This may be a trademark, a marketing organization or distributing network, product characteristics, lower costs, higher quality, or any other unique characteristics which real or potential competitors cannot duplicate at the present time.

3.1
1.
Supreme Canning Company

Was the chairman of the American company wrong for not having found out in advance about Japanese business practice?
The chairman was wrong for not having found out in advance about Japanese business practice because it cost his company a potentially very valuable customer. The normal assumption in the US is that companies should try to maximize profits within the constraints of law and social responsibility. The chairman had ultimate responsibility for the profitability of the company, and his failure to find out about the Japanese or to get a competent consultant cost his company money. 2. Were the Japanese wrong for not having found out about American business practice before they initiated contacts?
From an economic standpoint, the Japanese were wrong for not having found out about American business practices before initiating contacts. However, even knowing American customs (which they may actually have known), the Japanese have such a strong aversion to
doing business with people they do not know, do not trust, find abrasive, or feel will not meet their needs, that they are willing to sacrifice short-term profits to avoid potential long-term problems. The number of potential suppliers of processed tomato products from the US is larger than the number of potential large-scale Japanese importers. The Japanese president has more options than does the American president. 3. What should the president of the American company do now?
The president of the American company probably needs the authority of his chairman before taking the steps which would be necessary to reestablish contacts. If he receives approval, the president should hire a competent consultant (or consulting firm) who can find or act as a gobetween between the two companies. The characteristics of this go-between would be such that he/she has high-level corporate or governmental contacts in Japan through whom he/she may arrange meetings and discussions. While this may seem a bit strange to Americans who like direct and frank approaches, it is the only approach that is likely to be successful in Japan at this point.
3.2
1.
Ford Motor Company

Are Fords report and comments: (a) an exceptionally honest recognition of the conflicting demands placed upon the international corporation by its various stakeholders (society, customers, employees, and stockholders); (b) an admission that corporate interests may be in conflict with social responsibility; or (c) a foundation for building an approach to research and development that will attempt to reconcile the conflicting demands?
All of these are probably correct to some degree. Students can be expected to take varying views. As they go through the additional questions below, they may begin to revise (or to confirm) their original opinions. 2. Is Ford behaving in a socially responsible manner when it continues to make SUVs? Discuss.
Students viewpoints can be expected to vary, with more diverse groups likely to come up with a greater variety of viewpoints. However, the discussion should cover the main points discussed in the case above: (a) Should the companys primary responsibility be to its stockholder, customers, or society as a whole? (b) What would the result likely be if Ford were to stop making SUVs? (c) Is undertaking socially desirable activities justifiable if it reduces profits or reduces employment? (d) Can a company survive in the long run if it fails to be actively socially responsible, that is, do more than is legally required? (e) Is the company justified in undertaking activities that it considers beneficial for society as a whole if the activities reduce profit or employment?
3.
Should the government be more aggressive in setting safety standards? Why and why not?
Again, students viewpoints will vary. (a) One major argument may revolve around the costs of governmental requirements versus benefits received. (b) Another argument may center on who has better information available about what is desirable: customers, the company, consumer groups, or the government. (c) Another argument may concern the overall issue of freedom versus protection by society. 4. Should the government ban vehicle types that it considers unsafe or not socially responsible?
This is a difficult question. Of course, vehicles must meet the safety/technical requirements set by the government. The US is still primarily a market economy, rather than a command economy, but the government is increasingly active in placing requirements and restrictions on the production and distribution of products which may be unsafe (toys, food, drugs, etc.). The limits on governments action are mainly what the public is willing to accept with respect to their freedom of choice. The arguments made with respect to question 3 above are also relevant here. 5. Should Ford oppose or support tighter environmental standards that would apply equally to all vehicle manufacturers? How should Ford react to varying environmental standards in different countries?
Considerations may include: (a) The company may view some tighter environmental standards as being technically infeasible, too expensive for customers, and/or as having a negative impact on sales and profit. (b) Some students may feel that the American automobile manufacturers expend too much effort in fighting proposed requirements and too little effort in working toward meeting tighter requirements. (c) Ford must at least meet the minimum requirements in each country in which it sells vehicles. Some students may feel it should provide the most environmentally advanced vehicles everywhere, but the additional costs might make it noncompetitive in some nations. 6. Is spending corporate funds on nonrequired socially responsible activities an unjustified expenditure or a recognition that in the long run companies must exercise social responsibility in order to avoid societal or government actions that will damage them?
This has been a long-standing argument that will not be resolved here, but the value lies in thinking about and discussing the problem.
3.3
1.
Avon Products, Inc.

In what ways does Avon follow a global strategy? Does this experience indicate that it should pursue a different strategy?
The company does follow a global strategy, with adjustments as necessary to meet local requirements. The companys vision statement indicates that it has a global strategy, the divisions are linked together by the Global Business Council, Avon sells in 135 countries, and 65% of its earnings come from overseas operations. It targets the same market segments worldwide and, until the events depicted in the case, used the same direct marketing approach in all of the 45 countries in which it has subsidiaries (its major markets). It has developed eight global product lines. The company has manufacturing facilities in 45 countries, indicating that it is doing its sourcing on a worldwide basis. This experience indicates that Avon will have to pursue a different marketing strategy in response to the actions of the Chinese government. It does not indicate that there was anything wrong with its original strategy under the previous circumstances. With the new marketing strategy it is being forced to follow in China, the company is experimenting with applying the knowledge it is gaining there to operations in selected other markets. 2. What options did Avon have in responding to Chinas ban on direct selling?
Avon had at least five main options (and also combinations of these): (a) Cease direct selling immediately, and begin to develop their own sales organization with retail facilities. (They chose this course, invested in additional facilities and developed a distribution system of their own that included retail outlets.) (b) Cease direct selling immediately and seek to sell through established retailers. (c) Continue direct selling up until the absolute deadline and then make required adjustments. (d) Try to convince the Chinese government, directly or through the US government, to revoke the ban on direct selling. (e) Cease attempting to sell in China and possibly close production facilities there. Avon actually chose a combination of (a) and (d). 3. What effects will the use of traditional retailing in China have on Avons overall marketing strategy?
Avon could treat the new methods in China simply as an aberration required by local laws, and continue to use only its direct marketing approach everywhere else (that is, use a multinational rather than a global approach). Or it could try to determine if the knowledge and skills being developed in China could be applied successfully in some other markets, perhaps in parallel with its traditional direct selling method. (Note to instructors: Case 6.3 in Chapter 6 discusses what the company has done since in China and its other markets.) 4. What actions and organizational changes are required by Avons new marketing strategy in China?
The company will need to decide upon the types of stores through which it will sell: convenience stores, supermarkets, department stores with counter services and sales representatives, independent and exclusive salons, franchised stores, and/or Avons own retail stores. Since
Avons strength is in personal service, selecting a channel or channels that can capitalize on this strength would benefit Avon. Since it does not presently have in-store counter displays, it needs to develop a specific counter design that customers can identify with and relate to. This presents an opportunity for Avon in China to create a new identity. Some of its important elements should include contemporary and modern styling, sophistication, practical and functional orientation, value, quality, and technology. As it establishes its own retail stores, and/or arrives at agreements with existing Chinese retail outlets to handle their products, it will require changes in manufacturing and logistics management. This will require the hiring and extensive training of additional personnel for marketing and distribution. Many of these people will probably have to be full-time workers who may have different objectives than the majority of Avons previous direct sales ladies. 5. What are some other tactics and strategies that Avon could pursue in China?
It is very important for Avon to reestablish its image as a good corporate citizen among the Chinese people. Because the action of the Chinese government tarnished the image of direct selling companies, the face conscious Chinese may find it shameful to associate with what might be regarded as an immoral company that is not respected. Avon needs to build its image as a legitimate, world class company. It is also critical for Avon to enhance its image with the government, with careful use of present and possible additional contacts in the government. Emphasis should be placed on Avons contribution to the PRC and the Chinese people, through manufacturing, exports, employment, and taxes. The company should also emphasize its reputation, years of experience, and the non-pyramid direct selling structure it has used. It would also be helpful if Avon could continue to develop more manufacturing operations in China, demonstrating both its value and its commitment to the country. 6. What cultural dimensions of the Chinese people can be expected to affect the future success of Avon in China?
Avon should be concerned primarily with the cultural dimensions of middle and upper class urban women, who are both more modern and have higher discretionary incomes. They have become increasingly interested in their appearances, tend to be both skeptical and value conscious, and like bargains. They will respond favorable to products that are perceived as: having higher quality, and have a smart, successful, and feminine image. They respond favorably to the use of celebrities, including movie stars, successful women, and beauty care authorities, in advertising on TV (and possibly on radio).
TEST BANK
1. Major components of the foreign environment that the international marketing company faces include: (a) political/legal forces (b) socio-cultural forces (c) competition (d) All of the above (e) None of the above
2. Terrorism has expanded to a worldwide phenomenon affecting individuals and businesses in many countries. (a) True (b) False 3. Because of Chinas restrictive government policies, the countrys rapid growth as a manufacturer has not yet led to many opportunities for foreign marketers. (a) True (b) False 4. Culture affects: (a) types, designs, styles, and colors of products. (b) methods of negotiation. (c) themes and presentation of advertisement. (d) All of the above. (e) None of the above. 5. Regarding culture: (a) there are no cultural universals. (b) culture frequently changes very rapidly over time. (c) culture is the sum of a groups learned behavior patterns, attitudes, and material things. (d) All of the above. (e) None of the above. 6. In communicating across cultural boundaries, it is important to understand that: (a) accurate translation of the spoken words is the most important aspect of negotiations. (b) behavior itself is a form of communication. (c) in high context cultures, the precise meaning of words must be known. (d) All of the above. (e) None of the above. 7. In communications in high context culture societies like Japan, the situation, relationships, and unspoken understandings may carry more meaning and importance than the words themselves. (a) True (b) False 8. Governments intervene in a countrys and the worlds economy by: (a) being a participator, planner, controller, or stimulator. (b) by promoting international export marketing transactions.
(c) by impeding and competing in international export marketing transactions. (d) All of the above. (e) None of the above. 9. With the decline of Communism, government organizations no longer compete with private companies in the international marketplace. (a) True (b) False 10. With regard to government controls: (a) revenue tariffs are often quite low. (b) voluntary restraint agreements are always opposed by exporters. (c) dumping is selling in foreign markets at a very high price. (d) All of the above. (e) None of the above. 11. General classifications regarding the level of economic development of various countries into developed, developing, and newly industrialized can be used as the primary basis for any company to decide whether or not to enter a given market. (a) True (b) False 12. The self-reference criterion (SRC) indicates that if you really understand your own motives, you will be able to solve problems that arise in international activities. (a) True (b) False 13. Political philosophy and beliefs that might affect behavior of business firms might not be a part of formal government policy. (a) True (b) False 14. When all of the laws planned under Europe 92 are finally passed, the international marketers will be able to view the EU as a single market. (a) True (b) False 15. The World Trade Organization (WTO): (a) is a part of GATT. (b) can levy fines against countries that violate its rules. (c) provides a dispute resolution mechanism. (d) All of the above. (e) None of the above.
16. Quotas are classified as: (a) absolute quotas. (b) tariff quotas. (c) voluntary quotas. (d) All of the above. (e) None of the above. 17. National governments are often a source of valuable basic information upon which marketing decisions are based. (a) True (b) False 18. In the process of economic integration, all companies in the integrated area will benefit from: (a) the growth effect. (b) the preference effect. (c) trade diversion. (d) All of the above. (e) None of the above. 19. Many companies attempt to distinguish their products from those of competitors in order to avoid the problem that producers of homogeneous products have in increasing profit margins. (a) True (b) False
Answers to Test Bank Questions

1. (d) 11. (b) 2. (a) 12. (b) 3. (b) 13. (a) 4. (d) 14. (b) 5. (c) 15. (c) 6. (b) 16. (d) 7. (a) 17. (a) 8. (d) 18. (e) 9. (b) 19. (a) 10. (a)
CHAPTER 4
Export Market Selection: Definitions and Strategies

LECTURE OUTLINE
Chapter 4 discusses: The processes for determining what markets to enter Determining what product(s) are best for what potential market(s) Marketing direction for existing products Evaluating overall market portfolios.
Introduction
Chapter orientation is strategic in nature. Marketer has a key role in strategic planning process: many planning tools depend upon concepts of market share, market definition, segmentation, positioning, product life cycles, and customer relationship management (CRM). Export market selection: determining which markets to compete in. Export market direction: build, hold, or divest. Problem of Insufficient and overlooked markets discussed in Exhibit 4.1. Exhibit 4.2 provides an Analysis for international expansion.
Market definition and segmentation

Market segmentation: a breakdown into segments of customers for particular products in particular countries. Need to consider countries, channels, customer segments, etc. Critical importance of analysis prior to commitment to international expansion. Exhibit 4.2, Analysis for international expansion, covers: External analysis focused on the characteristics of the targeted markets and their fit with company products
Internal analysis focused on the resources of the company available for supporting increased complexity and differences in foreign markets Need to recognize that each country is unique, so country-specific plans are required Need to develop realistic expectations.
Export market segmentation

Many possible ways; may use multiple methods. Consider: (a) measurability: ability to identify potential segments. (b) accessibility: ability to reach and serve (communicate and deliver). (c) profitability: is market worth separate attention? (d) actionability: can effective programs be formulated for attracting and serving?
Bases of segmentation
Several models available as guides to market segmentation, not one model is a complete guide. Table 4.1 provides a classification scheme of various bases for export segmentation. A study of consumers in 20 countries proposed bases for international segmentation for luxury products. A study of 15,000 adults in 14 countries showed some global similarities. Consumer segments may also be based on ethical beliefs. Exhibit 4.3 shows an example of segmentation by core values. Business-to-business markets as well as consumer markets can sometimes be segmented. Table 4.2 indicates the importance of international segmentation performance dimensions. One model of strategies available indicates ways to increase sales: (a) increase penetration: extra market share in existing markets (b) develop products: product innovation (c) extend markets: new users for existing basic offerings (d) widen activities: new products and markets around core activities.
Market expansion/selection process, procedure, and strategy

Market selection process: reactive vs proactive approaches
Reactive; responding to inquiries; very common, especially for small or new exporters. Proactive; formal or informal search. Exhibit 4.4 discusses closeness of markets with regard to psychic, cultural, or psychological distance.
Market selection procedures: expansive vs contractible methods

Expansive: working outward from core; to nearest neighbor (nearest in distance or similarities); may adapt products and/or segment markets or neither. Table 4.3 shows country placements in temperature-gradient clusters. Contractible: reducing large number of possible candidates; preliminary screening, determining specific factors, ranking; geographic segmentation including prohibitive product and market factors. Figure 4.1 provides A conceptual framework for country/mode of entry selection. Figure 4.2 shows a Model for selecting a target country. Figure 4.3 shows an Export market selection: a market screening procedure. Indicators useful for detailed foreign market analysis are shown in Exhibit 4.5. Steps in segmentation: Geographic segmentation: information stage and decision stage Customer segmentation.
Market selection strategies

Market concentration: high levels of effort in a few markets; slow/gradual expansion over time. Market spreading: resources spread over many markets; fast rate of growth in the number of markets served. Exhibit 4.6 discusses methods for allocation of marketing resources during market penetration.
Considerations affecting the choice of export market expansion strategy

Concentration provides advantages in: power of specialization, scale, and market penetration; greater market knowledge; higher degree of control; learning of the export process and the experience curve.
Spreading has advantages in providing: flexibility; less dependence on particular markets; lower perception of risk.
Table 4.4 compares factors favoring export market concentration and market spreading. Differing customer segments for different products in a country may cause a company to set up more than one type of entry method. Any model needs to be supplemented with in-depth information regarding product factors, environmental factors, export marketing factors, political risk assessment, etc. The Internet is making it easier for patriotic shoppers in some countries to find suppliers for domestically produced goods where imported goods dominate. Figure 4.4 shows Sales response function for low market share vs high market share strategies.
Foreign market portfolios: techniques and analysis

Standardized approach to portfolio analysis
Portfolio analysis is to evaluate degree and nature of international involvement. BCG (Boston Consulting Group) model considers market strength and market attractiveness. Standardized portfolio models do not include risk dimension.
Applying a portfolio model to export market selection decisions

Country attractiveness/competitive strength matrix to identify: invest/grow countries; harvest/ divest/license/combine countries; dominate/divest countries; selectivity countries (Figure 4.5 and Table 4.5). Advantages: early consideration of companys strengths/weaknesses helps determine primary role of each market. Still only provides part of the overall analysis needed.
Summary
Decision making alternatives regarding foreign market selection and export market strategy are actually continuums between the opposite extremes presented in the book. The chapter presents alternative strategies as dichotomous for illustrative purposes; in reality, many policy possibilities lie between these extremes.

4.1 Strategic export planning requires the development of an effective marketing strategy, including market selection and direction (development). What major implications does this have for the companys export manager? The implications are: (a) The export marketer must consider the role of each market and product within the corporate portfolio. (b) Market selection must focus on broader strategic issues as well as on issues of segmentation and differentiation. (c) The export marketer needs to contribute to strategic planning, providing detailed views of foreign markets without neglecting the overall or aggregate picture. 4.2 Explain the difference between export market selection and export market direction. Market selection is the process of evaluating opportunities, relative to a companys abilities, in order to select markets to enter. Market direction is the related process of determining whether to build, hold, divest, or abandon its position in a given foreign market. 4.3 What is market segmentation, and why is it more complex for foreign markets than it is for domestic markets? Market segmentation means the breaking down of all overall market for a particular product or service into sets of customers who respond differently to marketing strategies. It is more complex in export markets because of the diverse economic, cultural and political environments encountered. 4.4 What is the best way for segmenting export markets? Explain. There are many ways for segmenting export markets, and no single best way. There are general market indicators and specific product indicators that may be applied at the country market or customer market level. The desirability of any particular way of segmenting depends upon the results of an evaluation of the following factors: (a) measurability, (b) accessibility, (c) profitability, and (d) actionability. 4.5 Give examples of global market segments and companies that are marketing on that basis. Can small and medium-sized enterprises market successfully to such segments? Explain. Students may come up with a number of different segments and companies. One segment would be the very wealthy and prestige-conscious individuals globally to which Rolls Royce sold
its automobiles (before the company was sold). Another would be the large segment of people who want soft drinks, to which Coca Cola has marketed so successfully. Small and medium-sized companies can market successfully to such segments in a wide range of markets from clothing through specialized industrial products to professional services. The World Wide Web has made such marketing easier. 4.6 Explain the difference between a proactive market selection approach and one that is reactive. Is one approach better than the other? Why? In a reactive market selection approach, the exporter (or potential exporter) simply responds to incoming orders or proposals from foreign distributors. In a proactive approach, the exporter carries out systematic research to find and assess potential markets. An in-between approach occurs when a business person becomes aware of opportunities regarding a potential market through personal travel or comments from colleagues, and then takes action. There is no definitive answer to the question of which approach is better. Much depends upon an individual company and its objectives and size as well as its commitment to doing business in foreign markets. The proactive approach is one that involves more formal processes for market selection and is marketing oriented. In contrast, reactive market selection is informal, unsystematic for the most part, and purchasing oriented; export marketing, therefore, is sporadic. 4.7 What is psychic distance? How useful is it to a manager to be able to measure (by index or scales) such distance between countries? Explain. Psychic distance is a measure of the differences between countries in many areas including culture, history, and economic and industrial development. A manager may find it useful, when considering entering new primary or secondary markets, to have some knowledge of the relative differences between the domestic market and foreign markets under consideration. The index or scales provide indicators of the uncertainties involved in entering specific foreign markets and the resulting breadth and depth of information that must be developed in order to successfully enter the particular markets. 4.8 Distinguish between expansive and contractible market selection procedures. If you were making a decision on such a procedure, which would you favor, and why? In the expansive or clustering methods of market selection procedures, expansion proceeds from the home market to a similar one(s), and then on to other similar ones based on experience. In the contractible market selection procedure, the company starts with a review of all national markets and uses a series of screenings to eliminate the less promising markets. Responses to the question about which approach is preferred can be expected to vary. Empirically, reported research suggests that the expansive method is most commonly used in practice, at least among small and medium-sized exporters. 4.9 Differentiate between market concentration and market spreading as expansion strategies. Is one universally better than the others for a given product? In a market concentration strategy, the company enters relatively few foreign markets and devotes a high level of effort to developing each one deeply (achieving a high level of market penetration). In a market spreading strategy, the company enters a larger number of markets and spreads its resources more thinly, often relying on foreign agents and preserving flexibility. It is not possible to state categorically that one strategy is better than the other, even for companies marketing the same product. For any company, it is situational. Table 4.4 in the text summarizes the major considerations.
4.10 If sales response functions are S-curves, is it more cost effective to expend a little marketing effort in each of several markets, or to concentrate efforts in fewer markets? What if the sales response functions are concave? If the sales response function is S-shaped, it means that the response to lower levels of marketing effort is very low, but increases more than proportionally with increased effort. Therefore, more marketing effort should be expended in fewer markets. With a concave sales response function, the greatest returns are generated by expending a little effort each in a larger number of markets. 4.11 Using the variables shown in Table 4.5 develop operational measures of each, specify differential weights you feel are realistic, and apply these for a matrix analysis (such as shown in Figure 4.5) of the EU countries and ASEAN countries, using a consumer durable product of your choice. Answers will vary, but each student should have followed a similar approach. Choose a particular product (a Whirlpool TM clothes washing machine for example). The country attractiveness for each country must be determined. First assign a weight to each of the six items in the first column of Table 4.5. Then, for each country, indicate how it ranks on a scale of l to 10. Multiply the assigned weights by the assigned importance and sum the results to obtain a country attractiveness of between 1 and 10. Then do the same for the nine competitive strength characteristics from the second column for the particular product for the particular company. This will enable you to place each productcountry combination in a matrix such as that shown in Figure 4.6. 4.12 Repeat the exercise stated in question 4.11 for an industrial product. Explain any difference in the resulting matrix from that derived in 4.11. Question 4.12 will be answered using the same general method that was used in question 4.11. The weighting of individual elements and the rankings can be expected to be different for the industrial product than they were for the consumer durable product. 4.13 What changes would you make in the variables used in Table 4.5 to measure country attractiveness and competitive strength? Explain why you have added or deleted variables to those shown. Students answers will vary.

4.1
1.
IKEA
Evaluate the market expansion approach taken by IKEA.
IKEAs initial international expansion involved foreign sourcing of products (inward internationalization, as discussed in Chapter 1) because of inability to obtain goods from local manufacturers at a low price. In international marketing they adopted an expansive strategy with a modification first to target the most conservative market in Europe, followed by a relatively slow further expansion into other northern European countries, and higher-income Englishspeaking nations. The approach is appropriate for a company that has identified its competitive strengths in designing and marketing high-quality, mass produced, and reasonably priced furniture in kit form. Assembly is left to the final consumer. The emphasis on working with manufacturers to
ensure quality components and feasible designs coupled with the relatively slow approach to expansion has avoided overextension, a cause of failure for some other marketers. 2. Is it better for IKEA to own its factories or to contract for its products?
In general, it is better for IKEA to contract for its products rather than to purchase or build factories. Its competitive advantages, as discussed in the answer to question #1, are in design and marketing. It has been able to ensure feasibility of design and quality of components by working closely with contract suppliers. Owning more factories would tie up money, which can be used more effectively in expansion of marketing activities, and would expose the company to more risk. In special cases, taking an ownership position or providing financing may be necessary to assure availability of components, quality, or responsiveness by suppliers.
4.2
1.
Seven-Eleven Japan
What factors accounted for Seven-Elevens initial success in Japan?
Seven-Eleven initial success was due to: (a) their recognition of the potential market for a business of their kind because of demographic changes with more women in the workforce, less time for them to shop, and high income levels; (b) high concentrations of people going to and from work and other activities that made it easy for many potential customers to reach well-located stores; (c) cultural willingness to pay more for extra service; (d) a lack of competitors willing and able to serve this market; (e) a recognition that economies in distribution could be made by developing their own distribution chain; and (f) 2. its recognizing the value of having a host country partner because of the business environment. What factors accounted for Seven-Elevens continuing success in Japan?
Their continuing success is due to continual innovation: (a) continually improving the mix of products and the quality of products; (b) continually improving and expanding the services available (and hereby attracting more customers and store visits, as well as increasing earnings through the sale of services); (c) developing improved information systems to support inventory and supply systems; and (d) working cooperatively with other companies in order to offer additional products at competitive prices more efficiently and effectively. Seven-Eleven Japan has kept ahead of their competitors in most of these areas.
3.
Is Seven-Eleven Japan wise in extending its delivery and payment services to Taiwan?
Though the per capita income in Taiwan is only one-third that of Japan, the population is even more concentrated, relies heavily on public transportation, and also goes though choke points on its way to and from work. There are more Seven-Eleven outlets in Taiwan, on a per capita basis, than in Japan. Taiwan has had rapid economic growth, people who are obviously willing to pay for convenience and frequent Seven-Eleven stores, and people who are reluctant to give out credit card information over the telephone. It appears to be a good market to expand this service. 4. If its extension of services to Taiwan is a success, should it extend such services to the United States, Thailand, or other countries? What factors should be taken into account in making such a decision?
Factors to be considered include income levels and distributions in target market areas, population densities, ease of access/closeness of large numbers of people to Seven-Eleven stores, willingness to pay for convenience, willingness to use the Internet combined with reluctance to provide credit card data over the telephone. On Seven-Eleven Japans web page (http://sej.gsc.ne.jp), students should be able to find data on the number of Seven-Eleven stores in each of the countries in which it operates. Population and density figures, income levels, and other information about the societies are available from government sources and elsewhere. 5. Is the offering of more services in Japan, including banking, provision of in-store terminals for use by customers, etc., likely to cause problems for part-time workers in the franchises?
It is likely to cause problems for part-time workers in the franchises. Since some (or many) individual franchisees may not have the resources to provide the necessary training, SevenEleven itself must do this as it continues to expand its offering and install associate equipment. This is likely to involve substantial costs unless turnover rates are quite low. The costs of the additional training must be justified by the additional traffic, revenue, and profits generated for Seven-Eleven. 6. Does China offer good potential for further expansion for Seven-Eleven?
China does offer good potential for Seven-Eleven because of its concentrations of large numbers of people in a number of cities, increasing incomes, and interest in greater convenience. There are also dangers because of the lack of transparency, the importance of relationships, and sometimes a lack of consistency in policy in business and government in China. The choice of partners is critical. Reliability, trustworthiness, and appropriate political/societal contacts of partners are extremely important. 7. Was Seven-Elevens entry strategy appropriate for the country? Explain why or why not.
The entry strategy was appropriate. The initial use of licensing agreements allowed them to determine the viability of the market and the appropriateness of possible product mixes. It also provided them with a better understanding of the cultural/business/political environments. With this experience, the company was then in a good position to undertake equity investments with partners.
4.3
1.
Better Way Company Limited

What are the major considerations in Mistines attempts to continue its growth and dominance in the market?
In product development, it needs to: (1) continue developing high-quality new products in order to keep present customers interested and to attract new customers; (2) continue to attract additional salespeople, and retain a satisfactory percentage of existing salespeople, with backgrounds appropriate for existing and targeted new market segments; (3) identify and expand in to attractive new market segments domestically and internationally; and (4) continue to develop advertising, promotion, and sales person motivation appropriate to existing and new market segments. 2. Evaluate the growth strategy that Better Way has been using both domestically and internationally.
It has been very effective in Thailand as evidenced by its market dominance and sales growth. This has been accomplished by identifying new market segments, such as teenagers and men, by product development, and by effective promotion. Internationally, it is using top manufacturers around the world to produce its products. It has introduced its products in nearby low-income countries, and is investing in manufacturing facilities in Vietnam and the Philippines (which should increase it local presence and recognition). 3. What actions would you recommend over the next five years? How would you apply specific marketing mix decisions to those actions you have recommended?
The company needs to be sure that its marketing methods (including identification of appropriate marketing segments, specific products to be introduced, pricing, organization structure and treatment of managers, attraction and remuneration of sales personnel, advertising and promotion) are appropriate to the cultures in each of the countries in which it operates. Laws and customs must be accurately determined and carefully followed. In Taiwan, with its higher income levels, selecting target markets and pricing will be of particular importance. If distribution is to be done through intermediaries in Taiwan, this must be carefully thought out and monitored so that brand name and company reputation are maintained. It can be expected that a possible entry to Hungary and Russia, with their different cultures and economic structures, will need to be carefully researched, planned, and executed.
TEST BANK
1. The international marketer must focus on: (a) individual products and their foreign markets. (b) strategic measures used in strategic planning. (c) the role of each product within the corporate portfolio. (d) All of the above. (e) None of the above. 2. Experienced international marketers virtually never fail to determine if there is an adequate market for their products or services prior to market entry. (a) True (b) False
3. With the introduction of the Euro, the European customers comprise a single market in every way. (a) True (b) False 4. Market segmentation is a process of breaking down overall markets into segments of types of customers for particular products in particular countries. (a) True (b) False 5. In market segmentation, actionability refers to deciding whether or not to take action. (a) True (b) False 6. In choosing an export market expansion strategy, a market concentration strategy is characterized by: (a) funneling resources that can be made available into a small number of markets. (b) a gradual rate of growth in the number of markets served. (c) Both of the above. (d) None of the above. 7. In market selection procedures: (a) contractible methods are used to reduce total foreign involvement. (b) contractible methods usually focus first on the nearest neighbor. (c) expansive methods work outward from the core. (d) All of the above. (e) None of the above. 8. In the contractible method of market selection procedures, you work outward from the core market to the nearest neighbors. (a) True (b) False 9. In the expansive method of market selection, the exporter/international marketer: (a) will not adapt products. (b) will not target other segments. (c) may or may not adapt products and target other segments. (d) All of the above. (e) None of the above.
10. The expansive method of market selection is sometimes called the nearest neighbor approach. (a) True (b) False 11. There are many possible methods to use in export market segmentation and applying mixed criteria can create the most meaningful segments. (a) True (b) False 12. In the market selection process, many companies begin exporting through reactive approaches. (a) True (b) False 13. Accurate political risk assessment has been made easy by the availability of the Business Environment Risk Index (BERI) which makes further risk analysis unnecessary. (a) True (b) False 14. The critical mass is the threshold at which small increases in time and resources can be expected to result in significant gains in volume and profit. (a) True (b) False 15. Market portfolio analysis is a tool that provides a total export marketing picture so other tools are not needed. (a) True (b) False
Answers to Test Bank Questions

1. (d) 11. (a) 2. (b) 12. (a) 3. (b) 13. (b) 4. (a) 14. (a) 5. (b) 15. (b) 6. (c) 7. (c) 8. (b) 9. (c) 10. (a)
CHAPTER 5
Information for International Market(ing) Decisions

LECTURE OUTLINE
This chapter discusses: Information requirements and processes in developing marketing decision support systems Export marketing research: developing information for planning, evaluation, and control Use of the Internet and e-mail for gathering data.
Introduction
The development of adequate and accurate information regarding foreign markets is necessary for the development of effective international marketing plans. International marketers need an information support system, which must provide information that is relevant, timely, in the form needed, accurate, exhaustive, and easy to access and use. Information is often needed on educational, sociological, political/legal, and economic constraints as well as markets and marketing structures. The amount of information available is often overwhelming, but specific required information may not be available. The development of Internet and World Wide Web makes much information available to small and medium-sized companies as well as large companies, but is not adequate to provide all of the information required in most cases. Larger international marketers often develop marketing decision support systems; new and smaller exporters often develop data on a case-by-case basis. Figure 5.1 shows the components of a model of An international marketing information system. Collection of information may be by in-house group or an outside research organization. Exhibit 5.1 discusses Dealing with an outside research firm. Table 5.1 shows the steps in the international (export) marketing research process. Figure 5.2 shows the steps in the research process.
Sources of information
Internal: from company records and knowledge of employees often overlooked, underutilized, or ignored. External: many, many sources as noted in the text and in the Appendix; Internet has become a major source of information. Primary data: information obtained directly from the ones you want to know about. Secondary data: information from any source of published information, private and governmental. Secondary sources alone usually are not sufficient, but often very useful. Exhibit 5.2 discusses a CultureGram, available from Brigham Young University, which provides useful introductory information about country cultures. Vast databases are available to international marketers on the Internet. Exhibit 5.3 gives examples of websites providing information on a number of national markets. Internet sites vary in accuracy, completeness, and currency. Information on competitors can be obtained from a number of sources (see bullets in textbook). Many small and medium-sized companies gather much of their information from the following: Personal sources, including visits to the country. Professional sources, including chambers of commerce, consulates, etc. Published materials.
Table 5.2 outlines Sources of market information and those who collected it. Formal systematic research is not always done when identifying foreign market opportunities.
Assessing market potential

Secondary data is often used to estimate the size of potential markets. Table 5.3 describes some of the techniques used. Key dimensions: number of potential users; maximum expected purchase rate. Market potential is the amount of product that the market could absorb over some indefinite time period under optimum conditions of market development. Market demand is the total volume that would be bought by a defined consumer group in a defined area in a defined time period in a defined marketing environment under a defined marketing program.
Market forecast is expected market demand based on the marketing plan developed. Sales forecast is expected level of sales using a particular marketing plan. Table 5.4 provides Brief descriptions of selected forecasting methods. Problems resulting from an overestimation of market size are discussed.
Export marketing research

Marketing research defined
Marketing research is the systematic search for, and analysis of, information relevant to the identification and solution of problems relevant to the firm in marketing decisions and activities. Functions: description and explanation, prediction, and evaluation. It is done to provide information for planning, control, and evaluation. Information from both present and potential customers is of particular importance for customer satisfaction measurement. Customer relationship management (CRM), a process for achieving a continuing dialogue with customers, has become increasingly important: Computer software is available to support CRM systems. Exhibit 5.4 discusses Global customer relationship management.
The export market(ing) research process

Dimensions: problem formulation, research method and design, data collection techniques, sample design, data collection, analysis and interpretation, and reporting results (as outlined earlier in Figure 5.2). All steps, from determining effective survey methods to interpreting the results, must take into account the culture and environment in which the data is being collected. The same question may be interpreted and responded to differently in different cultures. Willingness to provide personal data varies from culture to culture. Table 5.5 shows Sampling choices in international marketing research. Problems when using outside suppliers for implementing data collection: see bullets in textbook. There are problems in analysis, interpretation, and reporting of results. To be of value, a marketing research report must contain information for changing the state of knowledge of the reader.
Substantial efforts were required to assure consistency between English- and Chinese-language versions of the first page of a questionnaire (Figure 5.3). Figure 5.4 outlines the process in Collaborative and iterative questionnaire translation. Exhibit 5.5, including Figures 5.5 and 5.6, illustrates uses of visual data.
Issues of concern
Seven issues noted in bullets in text. Comparability of data from different countries often a problem: different definitions, different methods of data collection, and different views and uses of products. Table 5.6 indicates differences in definitions used by PepsiCo in 7 countries. Exhibit 5.6 discusses the problems regarding equivalence of data in international marketing research. Need for pre-testing of questions discussed in Exhibit 5.7.
Using the Internet and e-mail for data collection

The Internet and World Wide Web are useful for collecting data from many sources; provide one of the worlds largest libraries of secondary data. E-mail collection of primary data (using survey techniques) often quicker and less costly than mail surveys. Problems: getting valid samples, language, and respondent reactions. The Appendix: provides a list of selected publications and the websites providing secondary data.

5.1 How would you respond to a person making the following statement: As a general rule, the export market manager has few sources of information available for use in market selection. This is not an accurate statement. To the contrary, the sources of international and product information are usually overwhelming, and the problem is to identify the relevant data. The Internet and World Wide Web, indexes and guides, and other publications provide a wealth of information. In any given situation, certain specific information desired by the export market manager may not be available, so market research may have to be undertaken.
Even though there are usually many sources of market-related information, there still remain problems regarding the age of the data, its accuracy, and its relevance for the decision to be made. 5.2 For three different products that are being exported, or are exportable, list the major sources of information on competitors activities. Specific answers to this question will vary. General sources of such information include: trade publications, competitors house organs and annual reports, a companys salespersons, employees of other companies, competitors advertising and product introduction/ improvement notices, competitors web listings on the Internet, and other sources. 5.3 Select two foreign markets one a developed country and one a developing country and develop a list of sources of information which might be helpful to you in assessing the probable market for an exportable product from your country (specify your product and the country). Are web-based or nonweb-based sources preferable? Discuss. Answers will vary. Selections from the many sources listed in the text and Appendix of Chapter 5 should provide a good start. The use of a combination of web-based and nonweb-based sources will provide the best/most complete results. For many countries, using web-based sources will be the easiest and fastest place to start, but will not generally provide all the information required. 5.4 What is the market research process that the international/export marketer uses and what are the major issues that can arise to provide complications? The international market research process involves problem formulation (determining what management needs to know), research method and design, data collection, analysis, and interpretation, and the reporting of results. Complications may arise due to incomparability of data: different definitions or methods of collection, and different uses of products. Other problems may include complexity of research design, lack of accurate secondary sources, and high costs of collecting primary data. 5.5 Marketing research is beyond the capabilities and needs of the small exporter. Only larger companies doing business in many countries have need for research services. Discuss. This is not true. Small exporters face the same risks and problems as larger companies with respect to potential market acceptance of the product, size of the market etc. The limited resources of the smaller exporters may restrict the methods used and extent of marketing research conducted, but the basic needs for information are the same. The Internet and web have made it easier and less costly for small exporters (as well as large exporters) to do marketing research. 5.6 What is the nature of the equivalence problem in doing research in multiple foreign markets, and how can it be resolved? The equivalence problem is the difficulty in establishing comparability and equivalence of data and research conducted in different countries with differing cultures, languages, measuring systems, etc. People in different countries often: (a) place different interpretations or meanings on similar objects/stimuli/behavior; (b) categorize objects/stimuli/behaviors differently; and/or (c) have different roles or functions for concepts/objects/behaviors. These result in problems in translation, calibration, and metrics. Making a valid comparison is difficult in these circumstances
and requires that the researchers and users of data understand the differences, make adjustments for the differences insofar as is possible, and recognize that achieving absolute equivalence may not be possible. 5.7 Explain how the Internet may be a valuable source for information, for even the smallest-sized exporter. The Internet can be a valuable source of information, especially for the smallest-sized exporter, because a wealth of information is available for a minimum of effort. Up-to-date information is now available on the Internet which previously was not available, was difficult to locate, or would have required visits to offices of banks, governments, or other organizations. 5.8 How can the international marketer overcome the incompatibility of research methods usable in different countries when doing a comparative study? The international marketer doing a comparative study covering a number of countries can partially overcome the incompatibility of usable research methods by: (1) determining the questions/approaches which can be used in each country/area; (2) clearly indicating/stating the differences in collection and reporting of results; and (3) indicating limitations in the interpretation and use of noncompatible data. Various students are likely to approach this question from differing perspectives, but should cover in some manner the requirements listed above. 5.9 If a company cannot use the same methods of data collection for the same study in its different markets, how can a valid comparison be made? Discuss. Making a completely valid/accurate comparison may not be possible, but a satisfactory comparison may be made by recognizing the possible differences in the meanings derived from the data and then adjusting for them.

5.1
1.
SAN A/S
Explain how secondary information can be used to meet the objectives of the market study.
Secondary sources can provide: basic information about the economy, including total size, income levels, and industrial structure; information about imports and exports of similar/related products; potential customers, competitors, and marketing intermediaries. Comparisons with similar data from countries in which SAN A/S already sells it products and services will provide some estimate of sales potential for the companys products. Knowledge of the potential market, existing competitors, and the availability of appropriate marketing intermediaries will provide a basis for a preliminary evaluation of possible marketing strategies and policies. These, of course, should be followed by visits and conducting more in-depth studies. 2. What kind(s) of data and sources of such data would be useful?
Useful data on the economys size, structure and development; customs and regulations; the people and culture; potential customers and competitors; facilitating organizations etc. can be
obtained through the sources listed in the chapter. These include, but are not limited to: government offices and publications (national and supranational), news and trade papers and magazines, business and trade associations, foreign freight forwarders/customs house brokers, commercial banks, published studies, websites on the Internet of the above and of potential customers and competitors, etc. 3. Should SAN A/S enter the Australian market? Defend your answer.
It would be premature to give a definite answer at this point. The sources of secondary information discussed above can provide relevant and useful information, but additional data should be gathered by inquiries of marketing intermediaries and trips to Australia. At this point, favorable indicators are that the Australian market size and economic structure fall within the ranges of other markets that SAN A/S has already successfully penetrated. Adjusting to customs and language differences will require careful study, but should not present serious problems. A problem is that, in spite of the increased speed and ease of international travel, the greater travel distance from Denmark of the Australian market (and time differences) may present problems in communications and control.
5.2
1.
Aquabear AB
Should Aquabear AB enter southern hemisphere markets with its line of ski wear?
Students answers to the basic question of whether or not Aquabear should enter southern hemisphere markets with its line of ski wear will vary. The question cannot be answered properly from using only the facts that are presented in the case. Some additional secondary research will be necessary. Some students may raise the question of looking into entering Canada and the United States rather than the Southern Hemisphere. These North American markets are large, but competition will be intense. Also, the company has stated that it wants to even out the seasonal variations in production and sales. The question of why South Africa was not included in the list of potential markets was already raised in the case. Some students may also want to discuss this. If seasonal variations are of primary concern, other alternatives are available to the company. Production variation would be easier to handle than would sales. The ski wear product line could be produced throughout the year, but this would require storage facilities, which may increase the cost. However, ski wear, particularly vests and jackets, may be sold for other uses such as hunting, hiking, fishing, and other outdoor activities. This would expand sales to cover spring and fall seasons, but not summer seasons. Thus year-long sales, even of vests and jackets, are not feasible. Since ski wear has become a fashion item, much like regular clothes, annual changes are required and year-long production may not be feasible. Finally, customers are accustomed to reduced-price sales just prior to the season starting and at the end of the season. A better alternative for Aquabear to pursue might be contra-seasonal or all-season, products for its existing and new geographical markets. This would be particularly appropriate if the existing plan and machinery could be used. Thus, Aquabear should look to sport or recreational clothing that is used in seasons other than the ski season-light-weight jackets and rain gear, swimsuits, runners clothing, boating gear, etc. After all, the company started manufacturing and selling maritime leisure wear as its original product line. This could be expanded in its present markets and could be marketed in Southern Hemisphere markets as a contra-seasonal product.
2. 3.
If so, which market(s) should it enter and why? If not, why not?
Questions 2 and 3 are interrelated and can best be answered together. Most students should pursue the basic question asked about Aquabear ski wear line Snowbear. In order to answer this, a more extensive market analysis needs to be done using secondary data sources. Some background data developed by Harald Gornisson is given in the case, and a list of necessary additional information which he believes should be gathered is also provided in the case. A comparative analysis of the four countries can then be done. Some students may decide to analyze the countries on the basis of geographic proximity and may end up with two alternatives Argentina/Chile and Australia/New Zealand. Whether this is desirable may depend upon the entry mode that is to be used. At present, the company exports directly through a foreign-based agent. This may be good for New Zealand where the specialty stores are strong but not so good for Australia where large department stores play a dominant role. In this case, some other entry mode may be used. In any event, such pairing should not be done until individual country data have been examined. As an illustration, students may present their analysis for each country in the following way. SIZE: POPULATION: MAJOR METROPOLITAN AREA POPULATION: (cities and populations) MAIN SKIING RESORTS: (location and number) SKIING SEASON: ESTIMATED NUMBER OF ACTIVE SKIERS: OUTLOOK: (for sport) TOURISTS: (number and expenditures) OUTLOOK: (for tourism) BUSINESS LANGUAGE: MARKET POTENTIAL: (ski suits per year) CURRENCY: ECONOMIC SITUATION: GNP PER INHABITANT: STANDARD OF LIVING: OUTLOOK: POLITICAL SITUATION: CUSTOMS TARIFF: IMPORT RESTRICTIONS: EXPORT CREDIT: DISTRIBUTION CHANNELS: MEDIA: TRANSPORTATION COSTS: by air: by sea:
Other useful information would include foreign trade data (export and import situation), particularly for textile, clothing, and footwear products. Also, the trade specifically with Sweden should be examined. A general evaluation of the four potential markets may appear to be as follows: Argentina Number of skiing resorts Skiing resorts close to densely populated areas Estimated number of active skiers Length of skiing season Language/cultural barriers GNP per capita Price level Market growth potential Customs tariff, import-related fees Sales (service) tax Import restrictions Political situation Competition Media situation + + + ? + (+) ? + Australia (+) (+) + + + + + + + + ? + Chile + + + ? + ? ? New Zealand + + + + + + + + + ? +
One interpretation of this is that Chile has the least promising market despite good skiing opportunities and low tariffs (duty). Similarly, Argentina has a high duty and sales tax as well as an uncertain economic and political situation. These factors together with a potential language barrier make Argentina a less promising market despite having a relatively large market potential for the product class, at least this time. Australia and New Zealand seem to be the overall best choices. However, the small market potential is New Zealand and the staggeringly high duty on womens ski wear by far outweigh the other factors as the relatively long and stable skiing season, great skiing opportunities, and a large number of local and foreign skiers. Thus, a possible conclusion is that Australia is the most promising market in the Southern Hemisphere despite not having as developed ski areas as other countries. Since Australia and New Zealand are not too far from each other, both countries could be entered by export with Australia serving as a base. Aquabear might consider licensing as a mode of market entry, with the licensee being in Australia. Naturally, a suitable Australian company would have to be available and agree to such an agreement.
5.3
1.
Ford Motor Company Latin America

Evaluate Fords use of different methodologies in its Global Quality Research program prior to 2000.
Fords original Global Quality Research System was a major step forward in obtaining information globally from customers on vehicle quality of Fords and competitors quality. The information was then used by the Ford Quality Office and manufacturing plants to identify and fix quality
problems. The methodology was designed for use by mail, though other methods were used in countries in Latin America where the mail system was unreliable or inefficient. It required a fairly long time for respondents to complete the form and response rates were low even in the US (where they averaged only 35 to 40%). In Latin America, where personal intercepts or appointments were used, results were not satisfactory. Because of this, information obtained was often either misleading or incomplete and practically paralyzed the Latin American manufacturing plants that were supposed to find and fix the underlying problems. 2. Evaluate Fords decision to change to what is essentially a single global methodology for data collection, a CATI system.
Ford and the RDA Group, their full service market research firm, worked together in identifying the problems in the research program in Latin America. The methodology was faulty, particularly the length of the survey. Those people who did respond to the survey were a biased sample of owners. It was also found that it took almost a year to get the results analyzed and sent to the manufacturing plants. These delays allowed manufacturing problems, identified at the home office, to continue in the plants for a long period. Ford and the RDA Group worked with both customers and Ford management to determine problems and possible solutions. The analysis led to a reduction in the number of questions and a customization of the questionnaire according to the type of vehicle the interviewee owned. A switch was made to a CATI (computer assisted telephone interview) form of interview. Tests indicated that the new program solved the major problems of the previous method, and resulted in quicker and more useful information flowing to the manufacturing plants. 3. What method should Ford and the RDA Group use in markets having low telephone penetration? Explain.
The CATI program might not work well in markets where there is low telephone penetration among automobile purchasers. This would seem to be increasingly unlikely with the spread of cellular phones around much of the globe. However, if such a problem does arise, the personal intercept or appointment approach could be used with the customized question-asking format/process changed to approximate that of the CATI approach.
5.4
1.
United Parcel Service, Inc.

Evaluate UPSs use of survey research data to aid clients and potential clients.
The two surveys have been effective in helping clients and potential clients to begin/expand marketing in China. The first survey indicated the general product categories of imports in which urban middle-class Chinese were interested. The second developed specific information about what appeals to Chinese customers about certain American products. This will enable potential/existing exporters to better meet consumer preferences. UPS should also inform clients/potential clients about where they can find more information about doing business with the Chinese, and information regarding useful service organizations and marketing intermediaries. 2. Is using survey research the way UPS does as a marketing/promotional tool a sound use of marketing expenditures? Explain.
Yes, it is an efficient and effective use of marketing funds. It serves two major functions. First, it provides clients and potential clients with information about what they may be able to export to China and how to adapt present products to better suit customer preferences. This can be expected to directly generate additional business for UPS (and on presently underutilized flights
to China from the US). Second, it is providing valuable publicity for UPS that can be expected to attract additional customers from among companies not presently using UPS. 3. How might UPS use marketing research to aid its own operations?
UPS could use marketing research to determine what customers like best about their service, what services should be added, and what aspects of their operations need improvement. Understanding what the customers want/need is the key to developing programs to improve customer relations/satisfaction.
TEST BANK
1. Secondary sources of information available to exporters: (a) may provide an overwhelming amount of information. (b) include information from commercial banks, consulates, and freight forwarders. (c) usually should not be relied upon as a sole source. (d) All of the above. (e) None of the above. 2. The key dimension(s) in assessing market potential include the number of possible users of the product and the maximum expected purchase rate. (a) True (b) False 3. Useful techniques for estimating export market size include: (a) income elasticity measurements. (b) lead-lag analysis. (c) regression analysis. (d) All of the above. (e) None of the above. 4. Problems in international marketing research data collection and interpretation include: (a) lack of secondary data available for some countries. (b) problems in establishing comparability and equivalence of data and research conducted in different contexts. (c) translation equivalence in questions. (d) All of the above. (e) None of the above. 5. International marketing research is no longer needed once a company is selling in a foreign country since its sales tell it what it needs to know. (a) True (b) False
6. As a general observation, the sources of international market and product information are very limited, and the problem is to find data. (a) True (b) False 7. The basic international marketing research process is no different from the general domestic approach to marketing research. (a) True (b) False 8. Many companies overlook, underutilize, or ignore internal data sources. (a) True (b) False 9. Primary data refers to information obtained directly from those about whom one desires the information. (a) True (b) False 10. Qualitative research in Europe and the US is virtually identical because the countries all use rationally-based approaches. (a) True (b) False 11. Data analysis of information gathered in the EU is relatively easy because of the standardization of definitions and categories. (a) True (b) False 12. Dangers arising from measure equivalence (translation equivalence) in questionnaires are that a poorly worded item: (a) may cause respondents difficulty in answering. (b) may produce data that are not valid. (c) Both of the above. (d) None of the above. 13. Using the Web has made the gathering of secondary data easier and cheaper, but may not provide all of the information required. (a) True (b) False
14. The Internet does not offer any assistance to the researcher in gathering primary data. (a) True (b) False
Answers to Test Bank questions

1. (d) 11. (b) 2. (a) 12. (c) 3. (d) 13. (a) 4. (d) 14. (b) 5. (b) 6. (b) 7. (b) 8. (a) 9. (a) 10. (b)
CHAPTER 6
Export Market Entry Strategies

LECTURE OUTLINE
This chapter discusses: The importance of the mode of entry into a foreign market, and how it affects all aspects of the marketing program The whole channel concept Alternative entry modes Factors affecting choice of entry mode Managing the channel.
Introduction
Market entry strategy consists of entry mode plus marketing plan. Implementing entry strategy is analogous to establishing a channel of distribution.
Entry as a channel decision

Channel structure
International marketing channel: the system of marketing organizations that connect the manufacturer to the end user. Includes intermediary organizations, their capacities and capabilities, and geographical coverage. Two flows: (1) transaction (ownership) flow and (2) physical flow. Combined in export merchant (who takes ownership); broker handles only transactions. Marketing organizations: independent companies performing direct role in sales function. Facilitating or service organizations: providing services, but not members of the marketing channel. A marketing channel is composed of organizations that connect the manufacturer to the final users of the product.
Importance of the entry decision

Entry decision influences costs, and the prices that purchasers have to pay. Developing international marketing channels can be slow, costly, and be with long-run implications. Entry decision limits other activities in marketing mix. Considers costs versus benefits from each channel member. Location of production is the first channel decision. Selective distribution: using only most profitable outlets and ignoring others, which may not be effective when competition increases. Changing economic conditions may have serious effects on international marketers. Things may not work out as planned: for example, problem with Wal-Marts approach to consumers in Germany. Eliminating wholesalers can backfire as shown in Exhibit 6.1. Entry mode may affect other activities in marketing mix.
Whole channel concept

Integrated system: headquarters organization, channels between nations, channels within nations. Channels chosen can influence size and structure of the headquarters organization.
Entry as Strategy
Entry methods used should be consistent with companys strategic objectives. Companys strategic objectives may vary from one market to another. Dominant objective should be to build permanent market position.
The elements of entry strategy

Objectives and goals, policies and resource allocations, choice of entry modes, control system, and time schedule. Managers need to plan entry strategy for each product in each market: often for national markets, but sometimes for subnational markets. Major portions of functions may be carried out by intermediary organizations.
Alternative market entry modes

Major alternative strategies for entering foreign markets shown in Figure 6.1. Channels between nations: exporting: direct (by parts of own organization) or indirect (by others); other entry modes: licensing; contract manufacturing; management contracting; manufacturing; assembly operations; joint ventures. Exhibit 6.2 E-commerce drivers includes Internal Drivers Product online transferability E-commerce assets Export market e-commerce infrastructure Demand for e-commerce
and External Drivers
Figure 6.2 provides A model of antecedents and drivers of export marketing strategies. Channels within nations: Figure 6.3 provides an outline of Some alternative marketing channels within a nation. Exhibit 6.3, including Figure 6.4, gives an example of complexity in Japan.
Increasing use of Internet and Web for exporting for B2B and also for B2C. Internet and World Wide Web often used in conjunction with other methods.
Factors influencing choice of entry mode

Mode of entry determined through experience or by analysis. Need to determine: kind of mode, channel members, relations, and feedback methods.
Type of mode
Determined by a combination of the following: Target market: distribution of customers, requirements of customers, level of economic development of market. Product: characteristics (value, weight, bulk, need for service, etc.). Availability of marketing organization/structure. Figures 6.5 and 6.6 show (1) a local country market in Guatemala and (2) scenes from Hong Kong.
Company consideration (capabilities, experience, size, product line, finances, and prejudice/ desires of executives). Governmental policies: for example, regulations on imports, foreign exchange, promotional programs, etc. Regulations regarding e-commerce vary widely, and are in flux. Table 6.1, Logistic regression models coefficients for types of services, shows the impact of transaction cost analysis (TCA) variables, and organizational capabilities, on capital-intensive services and knowledge-intensive services. Type of entry mode may be determined by desired degree of involvement as shown in Exhibit 6.4, including Figure 6.7. Various criteria for channel selection may point to different methods. May be influenced by companys ownership, location, internalization, and global strategic posture. Multiple entry modes may be used in a given foreign market using unrelated modes, segmented modes, mode complementarity, and competing modes.
Channel members
International marketer does not necessarily control the choice of all individual firms in the marketing channel. Need to consider the willingness of some organizations to handle your products. May have limited or no control over wholesalers.
Managing the channel

Channel may be viewed as a network of stakeholders. Requires coordination and direction. Interpersonal links are often important in the selection of channel members. Exhibit 6.5 presents a view of stakeholder relationship marketing in China.
Relations with intermediaries

Assistance offered to them; help received from them. Types of marketing policies: gravity, push, and pull. Problems: culture, nationality, environmental, and distance gaps.
Channel feedback
Two-way communication required for evaluation and corrective action.
Selecting the entry mode

Naive rule
Same entry mode for all foreign markets, tunnel vision.
Pragmatic rule
Workable entry mode for each market, with preference for low-risk entry; may miss most effective/profitable modes.
Strategy rule
Conduct analysis to determine right entry mode for each product in each market.
Using free areas

Free areas are considered to be outside of the customs area of a country where they are physically located. Products can be brought in and out, and worked on, without payment of duties until entered into county of final destination.
Summary
Any given manufacturer will typically be using more than one entry mode at one point in time. No single entry mode is best in all places for all products; should form fit.

6.1 Explain how the flow of transactions and the flow of the physical product relate to the foreign market entry mode. Transaction flow is the path of ownership transfers between the producer and the final buyer. Physical flow is the path of physical possession of the product between the producer and the final buyer. Together they form the export marketing channel of distribution or foreign market entry mode. Transactions may be facilitated by nonmembers who do not take title themselves (brokers), but arrange or assist in the transaction flow.
6.2 Why is the decision regarding foreign market entry mode a particularly important decision for international marketing managers to make. The decision regarding foreign market entry mode is important for several reasons as given below. (a) It can affect the final price that consumers will pay for the product. This is not only because each participant requires a profit margin that is added to the price but also because efficiencies can be created or destroyed. (b) A proper channel can help reduce fluctuations in production demand. This can reduce problems related to inventory cost and control and unstable employment. (c) A channel can be slow and expensive to set up. This may hinder the profitability of foreign market entry by reducing margins or missing opportunity windows. (d) The entry mode decision may affect the other factors in the marketing mix. These include the final price, the attributes, and the promotion of the product. (e) Poor relations between producers and channel members can cause problems that may reduce the effectiveness of the system. 6.3 Discuss the nature of the whole channel concept. The whole channel concept views the entire channel of distribution as one integrated system with the producer on one end and the final consumer or industrial user on the other. The significance of this is that the system is only as strong as its weakest link. Therefore, great care should be given to the selection of all channel members. The channel members and the producer can have a great effect on each other's operations and profitability in the future. Students can be expected to discuss the roles of the headquarters organization, the channels between nations and the channels within nations the three components of the integrated system. 6.4 Evaluate the use of the Internet for export and other international marketing entry modes. The Internet has become an important means of informing potential customers and potential marketing channel participants about a companys products/services and its competitive strength. It is open to all types of companies manufacturers, retailers, and service companies. It is also being used increasingly for direct sales to businesses and consumers. Its use in B2C (business to consumer) marketing activities is growing, but is much smaller in size than B2B (business to business) activities in sales, procurement, and overall supply chain management. It facilitates both intra- and intercompany information exchange and control of operations. Notes to instructors: (a) Through the use of the Internet a small company that designs customized automated production systems for special applications was able to publicize its service and receive invitations to bid on projects from foreign companies it had no other effective way of contacting. (b) Chapter 7 provides additional information about the Internet and international marketing entry modes.
6.5 Government regulations can affect the viability and effectiveness of a company using the Internet as a foreign market entry mode. Contrast the government regulations governing e-commerce in the United States, a European Union country (e.g., the United Kingdom or Germany), and an Australasian country. Is the Internet easier to use regulation-wise in one of the countries? Explain. Governmental regulations can impede the use of the Internet as a foreign entry mode by regulations and restrictions, taxes, costs of service, and by any uncertainty regarding regulations or taxes. In the US, the major regulations affecting activities on the Internet are primarily those related to all types of commerce and competition. Connection costs are low. Sales taxes on Internet purchases are prohibited by federal (national) law (as of September 2001), but this prohibition may elapse. Then state and local governments would be free to pass a patchwork of state and local taxes on Internet purchases. In Germany, privacy laws are very strong/restrictive, there are greater restrictions on advertising and more strict limitations on what can be sold (e.g., Nazi-related items prohibited). There are many and sometimes conflicting regulations of the other governments in Europe. China has many rules restricting what companies can do and say on the Internet, and exercises censorship. Internet access charges are comparatively higher than in the US The use of the Internet is less restricted in the US than in Germany and China. (Note to instructors: additional information on restrictions on the Internet can be found in Chapter 7.) 6.6 A number of alternative entry modes were identified in the chapter. Locate a company that uses export and one using overseas production or a strategic alliance. Describe their market entry strategies and determine why the companies differ in the entry mode being used. Answers to this question will vary, but should include an analysis or evaluation of why each company used the entry mode it did, and whether their choice appears to be appropriate. The analysis/evaluation should be based on the advantages and disadvantages of the different methods, as discussed in the text. 6.7 Identify the major factors that have a bearing on the type of market entry mode that an export marketer might select. Is there any one or more that are more important than others? Explain fully. The first major factor that influences the market entry mode is the characteristics of the target market. If the target market is diverse in nature, spread out geographically or buys often but in small quantities, the system must provide ready access through a variety of sources. It will also tend to be longer and more complex. Target market preferences should also be considered. Products must be available where potential customers expect and want them to be. The level of economic development of the target market is another factor. It affects the type of channels available. The degree of political stability and existence of legal barriers in the target market are also factors. Levels of risk and complexity are affected and must be considered when selecting a mode. The next major factor is the product itself. Many of its attributes may affect the entry mode decision. Unit value, weight and bulk, technical complexity, and perishability may all have an effect. The familiarity of the market with the product is also a factor.
The availability and competence of potential channel members both in the home country and foreign markets may also affect the mode decision. Lack of these may force a producer to consider more direct forms of exporting or even not entering the market. Company-related factors include marketing management capability and know-how, newness of the company to export marketing activities, size of the company and width of its product line, financial strength and ability to generate capital, management preferences, and extent of control desired. Any of these can influence the entry mode decision. Government policies can also be a factor. Regulatory activities and import licensing may affect the access to markets. Foreign exchange regulations may limit the local importers ability to buy goods. Policies such as export promotion and local ordinances may serve to predetermine the channel choice. There is no one factor that is most important under any condition. That is, importance is situation specific. 6.8 Under what conditions would a strategy of multiple entry modes be most appropriate and under what conditions would it be inappropriate? Discuss. A strategy of multiple entry modes might be most appropriate: (a) in different countries where the largest markets have different characteristics (size of market, market structure, and government regulations) or (b) in a single country where the various products to be sold are expected to have different markets, market structure, etc. A strategy of multiple entry modes might be inappropriate for companies with only one product line or one or more similar product lines entering one or more similar foreign markets. 6.9 Why should a company make a specific channel decision for each product going to each overseas market? The best (most efficient or most effective) channel is determined by a combination of the characteristics of the product itself and the characteristics of the market, the structure of distribution for each particular country, and other considerations such as governmental requirements. 6.10 Select an industrially developed country (perhaps Japan or a European country) and a relatively less developed country (perhaps a Latin American or African country). Contrast the relative importance of the factors that should be taken into consideration by a foreign based manufacturer of a low-unit priced packaged good selling in both markets, when determining policy on selecting appropriate channels of distribution in those markets. In which case is the managerial decision easier to make? Discuss. Answers will differ among the students. The answers should include comparisons of the size of the market, the requirements of the customers, physical requirements for distribution, availability and capabilities of marketing organizations, and government regulations. 6.11 How can a company possibly satisfy all five stakeholder groups so each maximizes what it is trying to maximize. Explain. Any time an organization (or individual) has more than one stakeholder (or one goal), it is not possible to completely satisfy (maximize) all stakeholders if any of their objectives are in partial conflict. The organization has to decide/plan/work to maximize one goal within the constraints of satisfying (to some acceptable level) the goals of the others.
6.12 Contrast the naive, pragmatic, and strategy approaches to choice of export market entry mode. Under the naive rule only one form of foreign market entry is considered. This ignores the differences of markets and often results in one of two situations. First, entry may be attempted into market for which the only entry mode is not appropriate or second, a market will be entered with an inappropriate mode. Either situation produces less than optimal returns. Under the pragmatic rule, the company enters a market with a low-risk entry mode and only searches for a new one if it turns out to be not feasible or unprofitable. The advantages are that risk is minimized and costs of investigating mode alternatives are reduced. This cost reduction results from ending the search as soon as a workable mode is identified. The cost is the opportunity loss if a less than optimal mode is chosen. Under the strategy rule, the company investigates all viable alternative modes. This may result in a trade-off between market objectives and higher costs. However, the chances of choosing the optimal mode are maximized.

6.1
1.
Yang Toyland Pte Limited

What advantages and disadvantages would you see for Yang Toyland in signing the proposed contract with Gross-Versand.
A key factor in any potential arrangement between Yang Toyland and Gross-Versand (G-V) is whether G-V will follow through and take delivery of the second half of their original order. Only if this happens, will the investment in additional equipment be justified economically; at least in the short run. Obviously, a greater amount of sales (in units) either to G-V and/or to other customers needs to continue and even be increased if the investment is to have long-run benefits. A major risk with this type of arrangement is that Yang Toyland becomes overly dependent on a single customer, which is particularly disadvantageous since additional capital equipment is needed. One possible way to hedge against G-Vs not accepting the remainder of the order is to find a manufacturer in Singapore or elsewhere in Southeast Asia who would produce units on a contract-manufacturing basis. Of course, G-V would have to approve the quality. Some advantages to Yang Toyland are derived from the market diversification afforded by the order of G-V. Doing business with G-V leads to diversification both geographically and in types of distribution outlets. Risks are thus spread. Another potential advantage is the greater profit that could be generated if G-V accepts the entire order. Also, Yang can learn about the mailorder methods of distribution that could help it in exporting to other mail-order houses. A major disadvantage in signing the contract is the contract itself. It is overly one sided. Everything is to the advantage and benefit of G-V. Suppliers have no real benefits stated. If a satisfactory relationship were to be established between Yang Toyland and G-V, then Yang should live with the one-sidedness of the contract. If the products sold to G-V are successful, they might be sold through other export and retail distribution methods. Despite Mrs Mullers comments, the statement of general purchase conditions says only that mail-order houses cannot be supplied with the products sold to G-V. Y.C. needs to clarify this issue with Herr Clausen and should insist that only mail-order houses be covered by the agreement.
2.
What should be Y.C.s objective in his discussion with Herr Clausen?
Although answers to this question may vary, the major objective is to arrive at an agreement that is beneficial to both the parties. Y.C. needs to get assurances that the second half of the order will be accepted as long as the quality of the first shipment meets the specifications. This is the critical point in the agreement. 3. What topics should Y.C. discuss with Herr Clausen and in which order?
Answers to this question will vary widely depending upon the position a student takes regarding G-Vs splitting the order and how a student views the one-sidedness of the contract. All topics that are relevant to arriving at an agreement of mutual benefit should be discussed. There is no single ordering of importance of such topics.
6.2
1.
Avon Products, Inc. (B)

Does it appear that the marketing strategy that Avon used in China from 1998 to 2006 worked well? Might some other strategy have been more effective?
The strategy has apparently worked well since Avon has received permission to open retail outlets. They also obtained permission to use sales promoters who do not take title to the merchandise, but are paid commissions on sales to retail customers. The company also was fortunate to be able to develop a preferred customer program (see the answer to Question 2 below). Alternatives of delaying the cessation of the original operations, being more confrontational with the Chinese government or trying to get the US government to bring more pressure on China, would probably have soured relations with Chinese officials. This would have been a mistake in a country where personal relations are often more important than the laws and regulations. Withdrawing form the Chinese market would have meant the loss of long-run opportunities. Cutting back on manufacturing there would likely have resulted in seriously damaged relations. 2. Discuss the probable usefulness of the development of the preferred customer program in the short term and in the longer term for Avon. How do you suppose the program might have been used by some of the preferred customers?
The preferred customer program has both short- and long-term benefits. In the short run, it allowed for sales to some of its former representatives at substantial discounts, thereby enabling them to resell the products at retail for their own account. It thus provided Avon with additional sales, continued contact with some former representatives, maintained goodwill, and identified individuals who might make worthwhile employees. In the long run, it provides a possible base for an additional marketing channel as well as identifying potential employees. 3. What might be the advantages and disadvantages of Avon applying some of the marketing models it developed in China to other markets?
In the increasingly competitive marketplace, a company cannot rely on the same marketing approach to succeed. Applying some of the marketing models it developed in China to selected other markets will give Avon an opportunity to test the applicability and effectiveness of these models elsewhere. It may, in the long run, prove advantageous to use these new models in combination with or to replace their traditional direct selling model. The primary disadvantages are (1) possible loss of focus and identity and (2) possible alienation and loss of the traditional direct sales representatives in markets where other approaches are introduced.
4.
Should Avon continue to experiment with new marketing approaches? What are the possible costs and benefits?
Avon should continue to experiment with new marketing approaches. Their direct marketing approach may not continue to work effectively in the present markets as competitive pressures change, and may not be appropriate in some additional markets that may be entered. The potential benefit is developing knowledge and abilities that help them remain competitive. The potential costs, aside from the actual expenses of instituting new marketing methods/channels, are (1) possible loss of focus and identity and (2) possible alienation and loss of the traditional direct sales representatives in markets where other approaches are introduced. 5. Was it wise of Avon to return to a direct selling method when the Chinese government allowed it to do so? Explain.
Avon may not actually have a choice. It appears from the case that the Chinese government wants Avon to provide a model of direct selling that they may use in drafting new regulations. Thus permission may really mean a recommendation for action that Avon should not ignore. In any event, it appears that the return to direct selling will be successful since direct sales are now increasing without reducing the sales through the Beauty Boutiques. There is, however, a potential for serious conflict within the organization if the direct sales people (sales promoters) believe that they are losing sales to the Beauty Boutiques. Most Beauty Boutiques want to become involved in direct selling while selling in their stores and offering after-sales service to sales promoters, so the threat is real. Avon will need to find a way to resolve potential conflicts.
6.3
1.
Klako Group
Are service companies like the Klako Group most valuable in unique situations like China or do they have a role in assisting companies wanting to enter markets elsewhere, as, for instance, the European Union or North America? Explain.
The Klako Group itself enjoys a competitive advantage in assisting companies wanting to enter the Chinese market and providing a variety of services for companies after they are in the Chinese market. Because of their connections in other parts of the world, they could offer to assist Chinese companies interested in entering markets in those areas. But it would require developing extensive new knowledge and competencies regarding the target markets of Chinese companies. In general, other service companies like the Klako Group could have a role in assisting companies with limited international knowledge to develop and implement plans to enter foreign markets. In spite of the many sources of information available, as discussed in the main book, smaller companies would often benefit from assistance by a service company that has extensive knowledge of and contacts in their target market. Problems for the service company would include finding potential clients and convincing them of the need for assistance. 2. In what ways would you expect the Klako Group to be able to assist a company in finding and making with (a) a Chinese supplier? (b) a Chinese marketing organization? (c) a Chinese partner?
Though Klako specializes in providing services within and through Hong Kong, they have offices and contacts in Shanghai, Beijing, and Shenzhen. They can use their own experiences and their contacts, and contacts of their contacts, to help find and evaluate Chinese suppliers, marketing organizations, and potential partners.
TEST BANK
1. Independent organizations in the foreign market: (a) should always be eliminated to save money/reduce price. (b) should always be used because they are specialists who save money/reduce price. (c) should be used where benefit outweigh costs. (d) All of the above. (e) None of the above. 2. The whole channel concept in international marketing: (a) indicates management should find the best international channel for each product. (b) indicates the channel should be viewed as an integrated system. (c) includes headquarters organization, channels between nation, and channels within nations. (d) All of the above. (e) None of the above. 3. As shown by examples from Japan, eliminating of wholesalers always results in cost reduction and improved profits. (a) True (b) False 4. In considering alternative market entry modes: (a) indirect exporting is where a manufacturer transfers only the actual activity of selling to some other organization. (b) indirect exporting is where the manufacturer uses a dependent organization that is administratively a part of the manufacturers company organization. (c) licensing is a form of direct exporting of products. (d) All of the above. (e) None of the above. 5. Any particular manufacturer should: (a) use only one entry mode at a given time. (b) individual products may require different entry modes, but in a given foreign market area only one entry mode should be used. (c) individual market areas may require different entry modes, but only one entry mode should be used for all products in a given area. (d) All of the above. (e) None of the above.
6. An international marketing channel of distribution is a system composed of marketing organizations that connect the manufacturer to the final users or consumers of the companys product in a foreign market. (a) True (b) False 7. In the interests of efficiency and economies of scale, for any one product a single entry strategy should be used for every foreign market. (a) True (b) False 8. Only in unusual and poorly run companies will management prejudice have any influence on types of entry mode or channel used. (a) True (b) False 9. The international marketer does not necessarily control the choice of all individual firms in the marketing channel. (a) True (b) False 10. Government regulations/taxes/actions regarding e-commerce and the Internet are: (a) consistent within Europe (b) have not been enacted/taken in China (c) are evolving, changing, and vary widely (d) All of the above (e) None of the above 11. Various criteria for channel selection may point to different recommendations regarding the approach that should be used. (a) True (b) False

1. (c) 10. (c) 2. (d) 11. (a) 3. (b) 4. (e) 5. (e) 6. (a) 7. (b) 8. (b) 9. (a)
CHAPTER 7
Export Entry Modes

LECTURE OUTLINE
This chapter discusses: Indirect and direct exporting Types of organizations used for each Advantages and disadvantages of each
Relations and agreements with foreign-based distributors and agents Importance of the Internet and e-commerce as entry modes Gray market exporting.
Introduction
Choice between using direct and indirect exporting organizational forms involves: (1) cost of performing functions and (2) transaction costs of organizing activities or contracting with others. Exhibit 7.1 discusses Germanys export champions: focus and problems. Figure 7.1 shows how a foreign manufacturer may use both indirect and direct forms of export for consumer goods. Figure 7.2 shows a broader view of the paths that exporting can take.
Indirect export
Uses independent organizations in the producers own country. A given company may both use indirect export and also have a dependent organization (e.g., export department) in the company working with independent marketing organizations.
Marketing organizations
Merchants take title (ownership); agents do not.
Home-country-based merchants
Export merchants: do all steps except product and package modification; not available in all markets; deal primarily in staple commodities; may be more powerful than client companies. Trading companies: a type of export merchant. Table 7.1 shows various types of export trading companies. Exhibit 7.2 discusses Japans general trading companies (sogo shosha). These are large and do many functions; arrange and provide financing; are supply and demand oriented rather than production or user oriented. Exhibit 7.3 Here come the Chinese discusses their trading companies. Export desk jobber/export drop shipper/cable merchants: buy and sell primarily raw materials; do take title but not physical possession.
Home-country-based agents
Export commission house: essentially becomes a domestic buyer; easy but the exporter has little control; not usually long term. Confirming house: assists overseas buyers; pays exporter. Resident buyer: can build up long-term relationships. Exhibit 7.4 discusses Traveling buyers. Broker primarily finds buyers for sellers and vice versa. Export management company (EMC): acts as exclusive export department for several allied but noncompeting manufacturers; function like part of manufacturer for overseas buyers; uses manufacturers letterhead; some act more like distributors (merchants), others like agents. Manufacturers export agent: operates in own name; doesnt provide as many services (no advertising and financing, for example).
Evaluation of independent marketing organizations

Advantages: inexpensive to start, have foreign expertise, build up volume quickly, good for outof-the-way markets. Potential drawbacks: may not provide enough marketing effort; take some of profit; may drop a manufacturer.
Cooperative organizations
Piggyback marketing: Company A is marketing the product of Company B through Company As channels; may use the brand of B or A, or a private label; easy, low risk way to begin exporting.
Figure 7.3 shows Chains of distribution in piggyback marketing. Exporting combinations: associations to promote exports of members products or to serve as export cartels. Cartels may be for market domination, international commodity agreements to stabilize prices, or to promote exports (sometimes under special laws allowing cooperation). Exhibit 7.5 discusses some legal cartel arrangements, privileged companies.
Direct export
To importer or buyer in foreign market a manufacturer may use more than one approach. Exhibit 7.6 provides a stages model of export development that does appear to hold true independent of firm size.
Home-country-based department
Built-in export department: does actual seeing or directing of selling, but support functions (advertising, logistics, credit) done by other departments; easiest to establish; may have problems getting support from other units and in carrying out technical functions. Separate export department: self-contained and largely self-sufficient in advertising, logistics, etc.; little conflict in daily operations but there may be competition for resources. Export sales subsidiary: provides unified control; profit center; can more easily allocate orders and supervise traffic management; ease of financing; wider product line; tax advantages in some countries.
Foreign sales branch

Provides control, service, and dedicated staff for the products, but is costly. Handles all of sales distribution and promotion in a designated market area. Used by most direct sales companies.
Storage or warehousing facilities

Used when inventory in foreign markets is necessary or profitable. Facility can be used to serve one country or a region.
Foreign sales subsidiary

Has greater autonomy because of foreign incorporation and domicile.
May have tax and business practices advantages (but taxes are not the only reasons for establishment).
Traveling salespersons
Functions: selling activities, customer relations, information gathering. May act as demonstrator or tutor. Balance costs versus benefits; consider required volume to support.
Evaluation of dependent organizations

Benefits: full return on sales, protection from neglect, gain knowledge, permanency, and protect goodwill; costs decrease with volume. Table 7.2 shows Export sales characteristics associated with direct export. Potential drawbacks: costs and risks, may be difficult to obtain specialized knowledge, volume may be slow to build. Conditions making dependent organizations preferable: see three bullets at the end of the section in the text.
Foreign-based distributors and agents/representatives

A distributor is a merchant who takes title (ownership of goods). An agent is a representative who does not take title. Unfortunately, terms are often incorrectly used interchangeably. In direct exporting, use of exclusive agents or distributors is easiest and least costly; also has potential for development. Steps in process of selecting a foreign representative: draw up a profile of what is needed, locate and evaluate prospects, choose. Table 7.3 shows elements to consider in the profile of a potential distributor or agent. Franchise gives holder the right to use brand name and trademark under certain conditions; given for a specific territory. Exhibit 7.7 Distributors and product quality, discusses problems where manufacturing suppliers do not meet design specifications.
Relations with foreign-based distributors and agents

Foreign representative legal agreements are extremely important: Text provides a list of typical required provisions. Need agreement on exclusive rights, competitive limits, termination.
Selecting a foreign representative: a key decision; some guidelines are provided in the text.
The Internet and e-commerce

The Internet and World Wide Web impact all phases of business. Used as a source of information and as a place to buy. Communication is immediate; distance does not impact cost. May be able to reach potential customers not otherwise accessible. Advantages: low capital investment; small size of company not a problem; updates are easy and immediate; translation may be less expensive; reliable; provides audit trail. In e-commerce, value of B2B is greater than the value of B2C, but B2C is growing rapidly, particularly in web auctions such as eBay, Yahoo! and, in China, Taobao. Cellular telephone ownership and access are an important indicator of future Internet behavior in many countries as there is an increasing number of applications for wireless access to the Internet. Many business functions can be performed on the Internet; see page 337 of the text. Some problems with B2B: no substitute for face-to-face contact; varying levels of access; possible imposters and misuse. In China, one problem is that relatively few customers have credit cards. Government regulations vary widely from country to country. China has a vast number of rules restricting what companies can do and censoring what they say on the Internet. Figure 7.4 provides a model for looking at a Countrys infrastructure and marketing institution development. Figure 7.5 indicates likely Successful e-marketing strategies using the model in Figure 7.4. Exhibit 7.8 shows how Nestle uses the Web in many ways.
Gray market exporting

Gray market channels are those not authorized by the exporter: see Figure 7.6. They are, however, legal to use in importing genuine goods in most countries. Also called parallel imports. Parallel imports between EU countries are legal, but such imports from outside the EU are banned.
Undercut authorized dealers, may not provide service, may not retain brand image or reputation, may create conflict/problems between manufacturer and authorized dealers, may disrupt manufacturers global strategy. Both reactive and proactive actions that manufacturers may take are listed in the text.
SUMMARY
Whether exporting directly or indirectly, treat exporting as a bundle of very important relations. See page 343 in Chapter 7 Summary. THE APPENDIX TO CHAPTER 7 provides a guide to Developing an Export Plan.

7.1 When exporting indirectly, is it better to use a merchant or an agent in the export marketing channel? Explain. When exporting indirectly, whether it is better to use a merchant or an agent when exporting depends on the objectives and needs of the exporter. A merchant takes title to the goods and assumes most of the risk. In return for this, the merchant consumes a greater share of the return, receiving a greater share of the producers profit margin. This can be justified for a producer who has little foreign market and export knowledge or is very risk adverse. An agent does not take title to the goods and so most of the risk remains with the producer. Agents act by bringing buyers and sellers together without assuming the role of either. For this they generally consume a smaller portion of the profit margin. A producer who is willing to assume more financial risk may prefer this type of channel. 7.2 Under what conditions is it best that an exporter use an export management company and when is the manufacturers export agent a better choice? An export management company (EMC) is most commonly used in situations where the manufacturer either cannot afford or does not desire to get involved with export marketing. EMCs are experts at this and handle several related, but noncompeting products. This serves to share the expenses of export promotion between several producers. They often assist clients in setting up their own export department or begin direct exporting once established. The manufacturers export agent functions much in line with an EMC, but does not provide advertising and financial assistance. They are used most effectively when a firm wants to sell
small orders to overseas buyers, enter a new overseas market, or sell a product which is new to consumers in overseas markets. These agents prefer to retain more of their own identity and remain as the foreign sales representative on a permanent basis. In general, a major difference between the EMC and the manufacturers export agent is that the EMC serves as the export department for a manufacturer while the export agent serves as a salesperson. 7.3 For a small manufacturer, is it better to engage in piggyback marketing or join an exporting combination? Why is this so? For a small manufacturer, piggybacking can offer the advantage of relying on the already established export capabilities of a larger company. It is a low risk way to begin export marketing for companies too small or unwilling to invest in it themselves. The drawback is a loss of control over marketing activities. Export combinations work well in situations involving undifferentiated goods produced by more than one firm. Under this type of arrangement, the producers work together in export activities and can control a market through price-fixing, restriction of supply, division of marketing territory, centralization of sales, or pooling of profits. 7.4 Cooperative exporting organizations are most suited for small- and medium-sized organizations. Discuss. Cooperative organizations are currently used by large organizations to form export cartels, often with special legal status. Small- and medium-sized producers of similar, undifferentiated products may form a cooperative exporting organization. Problems are most likely when differentiated products are being handled through the cooperative organization. The dangers of entering any type of cooperative exporting organization include lack of agreement between members on key issues, loss of corporate and brand identity, and lack of representation of individual interests. 7.5 What types of channel conflict may arise in indirect exporting? Because of such conflict is it not better for the exporter to do it directly? The types of channel conflicts which might arise in indirect exporting include transfer pricing and decisions on marketing activities. In transfer pricing all parties want to obtain the highest level of profit margin they can. Marketing activity decisions include channel selection and levels of sales and promotional activities. Direct exporting prevents these conflicts from arising, but for the small or inexperienced exporter the risk and investment levels involved may be prohibitive. Therefore, indirect exporting may provide the best alternative. Furthermore, there may be some economies of scale available through indirect exporting which make it the best choice. 7.6 What impact does the nature of the foreign market area to be served have on the exporters choice of type of channel? The impact the nature of a foreign market has on channel type choice stems mainly from the demands it puts on marketing activities required. When a foreign market is very similar in consumer tastes and habits and in distribution structure to the domestic market, a manufacturer is able to handle more of the export marketing responsibilities itself. This would suggest employing the services of an agent rather than a merchant or even turning to direct export. If it is very different in these areas, the services of a specialist such as a merchant may be required.
Another factor is the level of risk associated with a market. If it is high, a merchant may be a good alternative. They are experts in the foreign market and are highly paid to assume the risk. 7.7 Distinguish among the built-in, separate, and sales subsidiaries as forms of export departments. The built-in export department is the simplest- and easiest-to-establish form of home-countrybased export department. It consists of an export sales manager and some clerical help. The manager is responsible for coordinating all export sales activities. This is suited for situations where the company is small in size, relatively new to export marketing, expects moderate to small overseas sales volume, management philosophy is not oriented toward growth of foreign business, existing marketing resources are not fully utilized in the domestic market, or the company is unable to find resources, or, if able to do so, key resources are not available. The separate export department is larger and more self-contained and self-sufficient. It may be structured on a basis of function, geographic region, product, customer, or some combination of these. It is formed as export activities increase and helps resolve problems inherent in the builtin department. An export sales subsidiary is created in an attempt to completely divorce export sales activities from domestic operations. It allows for unified control of export activities, control and accountability for costs and profits, placing of orders with the most suitable plant, easy access to sources of finance for export activities due to separate financial position, handling a more complete line of products due to its ability to carry those from outside sources, and exploitation of some tax advantages. The largest concern it can create, aside from its cost, is in the question of setting a transfer price. 7.8 The decision facing the export marketer concerning establishing a foreign-based sales subsidiary is a difficult and complex one to make. Discuss. A foreign sales subsidiary is a separate entity incorporated in another country. As such it is subject to the laws, regulations, business practices, and customs of the country where it is formed. One of the common reasons for establishing it is potential tax benefits. Therefore, all these factors must be considered when deciding to open one. Then, once that decision has been made, the firm must decide where to open it. All these factors must again be considered to choose the place that offers the best opportunity. Also, because the foreign sales subsidiary acts as a separate entity, transfer prices must be established. This can be difficult due to conflicts of interest between the managements of the two organizations. 7.9 Is there one best way to export directly? Defend your answer. There is no one best way to export directly. Which method is best depends on the situation. When a company is new at exporting and needs help in establishing foreign markets, a foreignbased distributor or agent may be best. The drawback is that profit share and much control are given up. Once sales grow and experience is gained, the company may want to establish their own organization. If a foreign presence is not required for foreign sales, a home-country-based department may be adequate. In situations where a foreign presence is needed, but constant contract is not necessary, a traveling salesperson may be appropriate. The main consideration is that travel expenses can be quite high, so the sales potential must be large enough to justify them. If more constant contact is necessary, a foreign sales branch may be needed. This also allows for a service center to be operated. In some situations a foreign sales subsidiary may be required in order to take advantage of potential tax benefits, conform to local business practices or fulfill
requirements of local law. If a large supply of product is needed, a storage or warehouse facility can be operated in conjunction with any of the methods mentioned. 7.10 Why is it important that the exporter be very careful in the selection of foreign-based distributors and agents? The reason an exporter must be very careful in the selection of a foreign-based distributor or agent is that the exporters success in the foreign market is dependent on the action of the distributor or agent chosen. Both distributors and agents assume much control over the marketing activities in the foreign market. Poor performance by them can result in unsuccessful foreign market activities for the exporter. Another reason for careful selection is that it may be difficult and/or very costly to drop an agent (and in some cases distributors as well) in some countries. Many countries have laws regulating this, even when there is just cause for taking such action. Up to a years notice and additional compensation may be mandated. 7.11 Is e-commerce (or Internet marketing) eventually going to replace traditional approaches to export? If so, which approach(es) is/are to be replaced and why is this so? If not, why? Discuss. Internet marketing can be expected to provide additional competition to traditional approaches to export, but will not completely replace them. Advantages to Internet marketing that will continue to drive its expansion include reducing costs, expanding reach, and providing instant information and continued information flows. Traditional approaches will continue to be used because of customers desires and economic considerations regarding certain goods. Some/many customers will want to: actually see or touch what they may be buying; try on clothes or test golf clubs; compare items side-by-side by tests, prices, appearance, or other criteria; talk face to face with a knowledgeable person about the operation, service, or other requirements for a piece of equipment; walk out of the store with the purchase etc. Shipping costs for sending some types of goods to individuals may be more costly than using traditional marketing channels with larger shipments via ocean containers; this would be the case, for example, with many consumer durables such as refrigerators. 7.12 Why should an exporter worry about gray market distribution of its products in foreign market? What can be done to protect against this practice? The gray market or parallel distributors: (1) provide competition for the authorized distributor(s); (2) may offer prices so low as to reduce the conspicuous consumption attraction of certain luxury goods; and (3) may not provide the level of service desired by the exporter. A key to protecting against gray market distribution is better management of global marketing policies. A company that carefully controls differences in distribution margins between different market areas reduces the opportunities for unauthorized distributors to make money from the gray market. 7.13 Trust has been described as a key element of any relationship between exporter and importer. How does trust affect relationships, and how does an exporter adapt when cultures differ in their views of trust? The development of trust is even more important in international activities than in domestic activities because: (1) misunderstandings/problems are more likely to arise when different business cultures are involved; (2) it is more difficult to resolve differences/disputes when different viewpoints and laws are involved; (3) while resorting to legal action might be acceptable in some societies, it may totally destroy relationships in others; and (4) in any event, legal action across borders tends to be expensive and difficult.
The first step in avoiding problems is for the exporter (and importer) to study the values and ways of doing business in the others country. They should attempt to ensure that their own conduct will not turn a difference/disagreement into a breakdown in trust.

7.1
1.
Sinova Management Consultantcy Ltd.

What advantages are there to an exporter wanting to enter China and/or Hong Kong for using an agent like Sinova?
Ms Chan and her employees can provide information, contacts, and assistance in making all sorts of business and logistical arrangements. Ms Chan had unique qualifications for starting a company to provide services for companies wanting to enter China: a cross-cultural background and multilingual capabilities; a European university degree and solid experience in banking; good contacts in Hong Kong and China plus potential European clients from among those whose accounts she had handled while working for major banks. As her business grew, she added multilingual employees with a diversity of professional backgrounds and abilities. Ms Chan was thus able to provide valuable assistance to European companies wanting to invest in China, and an increasingly wide range of services to them as her own staff grew. For her clients, she could provide advice and services that they could not have obtained by themselves without great cost (and possibly not even at great cost). 2. Are the benefits of using Sinova most valuable to small exporters or can the multinational larger firms also benefit? Explain.
The benefits are clearly very valuable to small exporters who do not have the resources or contacts to support expansion into the Chinese market. Multinational firms can also benefit from the services her firm can offer as they expand into new areas or markets: contacts and services supporting smaller divisions; and even services for established divisions of larger companies if she can provide the services more reliably, more efficiently, or more cheaply. 3. If an exporter has used a company like Sinova, at what point in the exporters market development would it be more profitable to stop using them? Discuss.
The exporter might find it profitable to stop using their services if it developed a staff in Hong Kong and China that was of sufficient size to carry out some of the functions itself (or hire other local companies to do so) more responsively, cheaply, reliably, or effectively. It could be expected that even if a company does grow in size sufficiently to justify providing some of these services itself (local marketing management) or by hiring specialists (customs house brokers), it would likely continue to use Sinova to provide the other services that it would be more expensive for the exporter to carry out.
7.2
1.
Quint Winery
Does the Japanese market appear to offer enough potential for Quint Winery to export there? Explain why or why not.
The Japanese market does appear to offer potential for Quint Winery to export there. Wine sales are increasing in Japan, and German wines already occupy second place in value of imports (behind France). The white wines in which Quint has traditionally specialized have the largest share of the Japanese market. With the wide range of distribution channels opening up
in Japan, there are opportunities for small, high quality producers like Quint to begin to export to that market. 2. How can Quint Winery locate potential Japanese purchasers?
The activities sponsored by JETRO can be very useful, Japanese travel companies may also prove helpful, and placing information on the World Wide Web (in English) is of increasing value in Japan. Quint Winery can arrange to have its products displayed in Japan at one of the governmentsponsored trade shows of consumer goods. This will bring them to the attention of the various importers. It is important that the winery have attractive brochures made up, stressing the high quality and limited production quantities. This will serve to increase the attractiveness of the product to smaller importers, and avoid attracting buyers who might require more than is available. JETRO can assist in making arrangements to have the brochures translated into Japanese. JETRO can also supply lists of potential importers, and provide initial contacts. Japanese travel bureaus and airlines are always looking for interesting activities for tour groups, and a wine tasting party and dinner might prove very popular. Again, JETRO can provide contacts. Small wine importers and small department store chains in Japan are continually seeking additional items that may be imported in relatively small quantities. 3. Should the winery owner visit Japan, or should he attempt to attract company representatives to come to his winery? Is your answer influenced by specific aspects of Japanese culture? Explain.
Japanese business people place a high value on getting to know and trust those with whom they expect to do business. However, making a business trip to Japan is a very expensive undertaking. Initially, Quint Winery could have their products (and brochures) entered in one of the trade shows, invite traveling Japanese company or travel organization representatives to come to a wine tasting party in Germany, and get on the World Wide Web. They could then wait for an initial indication of interest before deciding about a trip to Japan. 4. Should the winery work by themselves in any attempts to enter the Japanese market, or should they attempt to cooperate with other local wineries in a type of cooperative export effort?
The potential problems of coordination and control of an export marketing effort by a group of competing small wineries would probably offset any gain that could be hoped for. At some point, however, there will have to be some form of consolidation of orders from a number of small wineries in order to make up economical container loads. This function might be performed by a German freight forwarder or other facilitating organization, or by the buying representative of a Japanese importer. 5. What kind of marketing research should be done with respect to potential Japanese consumers?
The small volume of exports that could be provided by Quint Winery, and the large amount of secondary research information available from JETRO, indicate that little primary research other than taste testing is likely to be cost effective. This tasting can be done at their winery if Japanese can be attracted to their wine tasting parties. Potential Japanese importers could also be given sample bottles after contacts through trade shows or other means.
6.
What other questions should the owner ask; what problems may he expect to encounter?
The owner will need to know all of the legal requirements for testing and labeling for the Japanese market. Maximum and minimum quantities available/required must be determined. Possible exclusivity of distribution rights must be discussed. Time of transfer of title, responsibilities for each step in the export/import processes, and methods of payment must be agreed upon. Language problems in both interpretation and translation can be expected. Negotiations with the Japanese often proceed more slowly than Europeans and Americans expect. In short, the owner should acquire much of the information provided in a book on international marketing and exporting.
7.3
1.
Nestle
Evaluate Nestles use of the Internet and Web to this point. How will its marketing operations be enhanced?
Nestle has made a very ambitious plan to use the Internet and Web to make the company more agile, more responsive to its customers, and more profitable. In practical terms, this includes sharing information online and increasing cooperation between various components of the company to reduce procurement costs and duplication of activities, coordinating sales and manufacturing, reducing transportation/supply chain costs, providing better information for management, and improving customer relations. 2. What other uses of the Internet should Nestle explore?
The list of software solutions offered by SAP is extensive. SAP should be able to provide programs to support additional efforts such as gathering more information from customers (if they are not already pursuing this as part of their current efforts). Nestle may eventually want to consider e-tailing again. 3. Does the signing of a contract for such major software and solutions development with SAP seem appropriate at this stage? Should the company take one step at a time rather than attempt to do so much at once?
The advantage of undertaking so many initiatives at one time, with the supplier SAP, is that it increases the probability of being able to develop an overall system with coherent parts. Additionally, some components such as management control systems will depend upon the information bases developed in order to work. The potential problem with the alternative of moving more slowly and using multiple specialized suppliers is that the final system may be suboptimal and/or the components may fail to work together. Doing everything at once is, of course, expensive. It could have serious effects on overall operations and managerial control if it fails to work as envisioned. For the approach chosen, Germanys SAP, the worlds largest supplier of enterprise resource planning offering integrated management systems, seem to be a good choice. The company has both extensive experience and resources. 4. Will the Internet and World Wide Web revolutionize international marketing? Explain.
They already have. They have resulted in the creation of new markets (e.g., eBay), more closely linked suppliers and customers, and even resulted in joint activities by competitors. Pricing is
more transparent and competitive. B2B business has grown very rapidly. B2C business is increasing, and many traditional businesses are using the Internet to provide information to customers and make sales. With the continuing growth in communications capabilities and expanding use of the Internet and Web, further advances can be expected. 5. What are the advantages and disadvantages of having some 8000 brands?
Advantages: It enables the company to meet local preferences in both products and brand names. Where several products can be economically handled through the same marketing channels or manufactured in the same plant, economies can be realized. Disadvantages: A wide range of products and varying brand names for the same products is likely to dilute management attention, require more types of packaging and diverse distribution channels, result in duplication of advertising, and fail to capture possible benefits of international brand recognition (as enjoyed, for example, by McDonalds and Coca-Cola).
TEST BANK
1. Germanys Mittelstand or midranking companies: (a) pay high wages, but employ few workers. (b) target small but profitable niches. (c) save money by avoiding R&D expenditures. (d) All of the above. (e) None of the above. 2. Japans sogo shosha or general trading companies: (a) are supply and demand oriented rather than production or user oriented. (b) deal only internationally, not domestically. (c) do not provide financing. (d) All of the above. (e) None of the above. 3. The government of the PRC has avoided fostering multipurpose trading houses because of the problems faced by Japanese and Korean conglomerates in the Asian financial crisis (19971998). (a) True (b) False 4. Export desk jobbers: (a) are also called export drop shippers or cable merchants. (b) take title but not physical possession. (c) are used primarily in international sales of raw materials. (d) All of the above. (e) None of the above.
5. Piggyback marketing: (a) is used for competing products from unrelated companies. (b) always uses the brand name of the carrier. (c) is never used for industrial products. (d) All of the above. (e) None of the above. 6. Regarding foreign-based distributors and agents/representatives: (a) a distributor is a merchant and a customer of the exporter. (b) an agent is a representative of the exporter. (c) the terms distributor and agent are often used interchangeably or incorrectly. (d) All of the above. (e) None of the above. 7. Points made in Germanys export champions are that: (a) it can be advantageous for a company to restrict its exports to a small percentage of total sales. (b) Germanys Mittelstand companies can no longer compete in exporting. (c) in Germany, there are too many existing companies that are not willing to risk developing completely new products and too few new companies are being created. (d) All of the above. (e) None of the above. 8. Using e-commerce to replace a salesperson may be a mistake where person-to-person interaction is very important in a relationship. (a) True (b) False 9. It appears that the export development process tends to proceed in stages, and is not primarily dependent upon firm size. (a) True (b) False 10. A built-in export department does actual selling or direction of selling, but support functions are carried out by other departments. (a) True (b) False 11. The only reason for establishing a foreign incorporated sales subsidiary is the tax advantage. (a) True (b) False
12. An important function of the field sales force should be that of information gatherer and communicator. (a) True (b) False 13. Gray market channels are those that are not authorized by the exporter for a particular foreign market. (a) True (b) False 14. A franchise never gives the holder the right to use a brand name or trademark. (a) True (b) False 15. Parallel imports into the EU are banned, but are allowed between member countries of the EU. (a) True (b) False 16. The percentages of the populations having Internet access are similar in the US and the European countries. (a) True (b) False 17. In e-commerce: (a) B2C commerce is much larger than B2B commerce. (b) B2C commerce is no longer growing. (c) There is very little e-commerce in China. (d) All of the above. (e) None of the above.
Answers to Test Bank questions

1. (b) 11. (b) 2. (a) 12. (a) 3. (b) 13. (a) 4. (d) 14. (b) 5. (e) 15. (a) 6. (d) 16. (b) 7. (c) 17. (e) 8. (a) 9. (a) 10. (a)
CHAPTER 8
Nonexport Entry Modes

LECTURE OUTLINE
This chapter discusses: Reasons for using other-than-export market entry forms and methods available. Considerations in establishing manufacturing facilities Assembly operations: motivations, advantages, and disadvantages Strategic alliances: wide range of types available
Introduction
Profit motive underlies decision to go into some type of production activity in foreign markets. Defensive (reactive) in response to pressure from government, competition, or nationalisticoriented buyers. Offensive (proactive) a difference in attitude, by choice and by plan. China, with entry into the WTO, has joined the EU and NAFTA as an investment destination for purposes of market penetration and/or sourcing. Created assets such as communications structure, marketing networks, and attitudes and business culture make investment in a country or economic integration area more (or less) attractive. Service and distribution/retailing companies as well as manufacturing companies increasingly are making investments in foreign countries. Outsourcing occurs when a company extends a portion of its operations to a third party; Outsourcing is often called offshoring when it involves moving white-collar jobs to low-wage countries. Competition or other factors may give nonexport modes of market entry an advantage. First-mover advantages enjoyed by the company first in the market: reaches customers first, establishes brand name, easier to find distributors, may be able to set standards, and may be able to erect barriers to later potential or actual entrants. Exhibit 8.1, The Chinese are moving silently but swiftly, discusses FDI by China as well as into China.
Alternative modes of entry

Modes of entry: manufacturing, assembly, and strategic alliances. Strategic focus: expanding sales volume, typical of Japanese. improving productivity and cost reduction, typical of the United States and British. Many host countries provide incentives to attract FDI, but many also put obstacles in the way. Examples are given in the text. Problems in managing the workforce may be an obstacle: for example, in China, where companies may be expected or required to provide a wide range of social services and continued employment even if demand drops.
Manufacturing facilities
General considerations
Setting up manufacturing facilities seldom a companys first international operation. Large investment in capital, personnel problems, relations with government. Many advantages: control and flexibility, easier protection of trademarks, integration of worldwide production program, better image in host country, and others. Three questions to answer: location of facility, degree of ownership, and start from scratch (greenfield investment) or acquire existing firm.
Location
Considerations include climate for foreign investment, production considerations, special conditions; text provides an outline of specific factors. Choice may be determined by costs, availability of skilled labor, or other factors. Costs often the basic factor. Potential for growth in a particular host country may encourage investment there in anticipation of opportunities for market penetration. Political risks: transfer, operational, ownership/control, and general instability. Macro risks affecting all foreign companies and micro risks affecting only specific companies, industries, or projects. Figure 8.1 provides a model for Evaluation of political risk. Exhibit 8.2, including Table 8.1, discusses How can political risk be assessed? and shows criteria used in overall BERI and in subindices.
Ownership
Wholly or partially owned; government limitations; ownership of stock by local nationals may be desirable or required. Example of considerations in feed operation and poultry production in the text. Governments may change policies after investments are made. Examples of CocaCola and IBM in India in the 1970s given here, and confiscation of oil company properties in Venezuela in 2007 was given in Chapter 1.
Implementation of the decision

Greenfield: starting from scratch, including setting up facilities, labor recruiting and training, and providing management team. Acquisition: fast, but finding the right company is difficult and integrating management styles may be a problem. Acquisitions may involve minority, majority, or total ownership by the investing firm. Advantages to the acquired firms in infusions of capital, technology, or managerial capabilities. Brownfield: acquiring an existing facility and replacing most but not all of the resources and capabilities of the acquired firm. Special risks in cross-border mergers listed in the text. May be problems in removing former owners. Exhibit 8.3, Merger mania, provides examples of cross-border mergers and acquisitions. Companies from India, Russia, and China are increasingly making acquisitions abroad. Figure 8.2 shows Entry mode choice for two types of acquisitions. Table 8.2, Estimated government index (GEI), selected countries, shows one evaluation of the degree to which there is rule-based governance in selected countries. Figure 8.3 shows extent of acquisitions by Rupert Murdochs News Corporation.
Assembly operations
Assembling in foreign country using mostly imported parts; may evolve into using mostly locally produced parts (as in Case 8.3, VW in China). Political factors may be important: nationalism, through laws including the tax code or preferences given, etc. Buyers may simply prefer products made in the home country.
Strategic alliances
Nature of strategic alliances
Many different definitions listed out in the text: basically companies from two or more countries forming long-term collaborative arrangements for mutual gain. Strategic alliances increasingly necessary because of increasing competition. Six advantages are listed out in the text. Seven core dimensions and five dimensions of fit are on pages 374 and 375 in the text. Exhibit 8.4, How to succeed in a joint venture/strategic alliance, discusses the seven principles that the presidents of Ford and Mazda feel were the keys to their success. Figure 8.4 shows Phillips alliance network.
Licensing
May involve technology, trademark, designs, knowledge, and trade secrets. Involves various payments and fees. See the list given in the text. May include cross-licensing and franchising. Basic advantage: ease and low cost. Disadvantages: create potential competitor, potential loss of control, lack of flexibility. Franchising is a special type of licensing in which the franchiser usually supplies an important ingredient. Franchising may be combined with a joint venture. Objectives of licensing often include obtaining revenue, gaining advantage in market entry and marketing, acquiring reciprocal knowledge. See the list given in the text. Need to formulate basic policies on licensing: 10 such types of policies are listed in the text (see page 379 in the text).
Contracting
Contract manufacturing is becoming more common. Advantages: minimum investment; control over marketing; allows locally made label. Six advantages are listed in the text. Disadvantages: loss of manufacturing profit, creates potential competitor, may be difficult to find good manufacturer, and some loss of control.
Outsourcing/offshoring: Figure 8.5 shows some countries that are Outsourcing locations. Table 8.3 shows Cost per hour of employing a call center agent in selected countries. Management contracting occurs when an international marketer operates a company in a foreign market for a local investor. Local investor provides capital; international marketer provides managerial know-how. Hilton hotel system example. May also provide turnkey operations where international marketer is responsible for construction of facility, training personnel, and initial operation. Contracting involves complex agreements with potential for conflict.
For outside firm: low-way risk of entry, limited legal responsibility, and quick return.
Joint ventures
Have both technical and emotional dimensions. Every potential joint venture must be evaluated on its own merits. May be the best way for a company with limited capital and labor resources to enter more foreign markets. The selection of the partner is perhaps the single most important factor. Design and implementation may be complex and time consuming. Figure 8.6 shows Joint venture ownership structure options.
Other types of strategic alliances

Marketing, R&D, provision of services, etc. A number of examples are given.
Choosing among alternatives

No one best way. Exhibit 8.5 shows how Competitors from the same country approach Europe differently. Daewoo parent companys very rapid expansion eventually drove it into bankruptcy (discussed in Case 9.1, Daewoo Corporation).
Summary
There is no easy answer to which mode of entry is best, even when it has already been decided to establish a production presence.

8.1 What are the major nonexport modes of entry into foreign markets? How does strategic focus relate to such market entry modes? The major nonexport modes of entry are (1) establishing a manufacturing plan, (2) setting up of assembly operations, and (3) forming a strategic alliance with one or more other companies. The strategic focus of the company, including its relative emphasis on profitability, productivity, volume, risk, and control, will be factors in determining the appropriate entry mode. 8.2 What are the major considerations taken into account by the international marketer in a decision to engage in some form of foreign area production? The major considerations are the size of the market which can be served, and opportunities to expand that market, costs of production, government barriers to continued imports, government incentives or barriers to manufacturing there, and control. 8.3 If a company were contemplating establishing a manufacturing facility in a foreign market, why might it decide to wholly own the facility rather than partially own it? Similarly, why might it prefer partial ownership? While establishing a wholly owned facility generally requires a greater commitment of capital, it provides greater control. Partial ownership may result in better government and business relations in the foreign market if the partner is well connected/has a good reputation. 8.4 When developing manufacturing operations in foreign markets is it better for the international marketer to seek out merger/acquisition possibilities or start from scratch (a greenfield investment)? Explain. Which approach is better depends upon the situation. A greenfield investment usually is more time consuming and involves problems in facility setup, recruiting and training labor, setting up the management team, and usually large capital commitment. An acquisition usually allows a faster start-up, and provides existing management, labor, facilities, and marketing organization with all their strengths and weaknesses. Acquisitions often result in some problems in establishing or merging differing managerial approaches. Local participation in ownership may be required by some governments. 8.5 Why might an international marketer who is involved in foreign production still have problems concerning channel control and cooperation? Would such a marketer handle channel conflict differently than the international marketer who exports? The international marketer with foreign production may still have problems in gaining cooperation and control. There may be problems in developing modified managerial approaches and operating methods that work well in the foreign country. Securing cooperation from other companies in the distribution chain may also be a problem. The producer will generally have both greater knowledge of local requirements and a greater ability to rapidly respond to those requirements than will an exporter.
8.6 What is a strategic alliance? Why are these alliances so popular and who benefits? Strategic alliances are cooperative ventures between two or more companies designed to exploit some marketing, manufacturing, or R&D opportunity. They are increasingly popular because, if properly set up and operated, they enable the participants to use the strengths of each to achieve more jointly than they could individually. All participants must benefit or the alliance will not last. 8.7 What are the key essentials for a strategic alliance to be a success? Goal compatibility among the participants, strategic advantage for each, interdependence, commitment, communication and conflict resolution, and effective planning and coordination. 8.8 Licensing seems to be a fairly safe way for a manufacturer to produce in a foreign market for the first time. Comment. Licensing is a relatively easy and low-cost method of entering a foreign market. It may not always be safe, however. See the answer to Question 8.9. 8.9 Although licensing and contracting may appear to be desirable, they have drawbacks. What are the drawbacks? The licensor or contractor may gain enough knowledge to become a competitor, lack of control over production that may lead to quality problems, lack of control over marketing that may lead to inadequate market exploitation, and it may be difficult to coordinate the activities of a licensee with other entities in the worldwide marketing plan. 8.10 Why might a company not choose outsourcing even when production costs are sufficiently lower? A company might be concerned with training a potential competitor, loss of intellectual property, problems in finding a satisfactory manufacturer, loss of control in manufacturing, possibility that it will be accused of exporting jobs, or exploiting or mistreating foreign workers. 8.11 Why might an international marketer prefer a joint venture to a licensing arrangement? Joint ventures may be encouraged or required by certain host governments. They may be preferred because joint ownership encourages each partner to contribute in areas where he/she is strong, provides a feeling of cooperative effort, and when successful accomplishes more at lower risk and cost than could be achieved by the partners working independently. 8.12 In running a jointly owned facility in a foreign market (including a joint venture), it is not necessary to own more than 50% to maintain operational and management control. Discuss. The percentage of equity required for control depends upon the circumstances. Control with less than 50% equity may be possible if the remaining equity is divided among two or more other companies, or if the outside investor controls essential resources required by the jointly owned facility. If the local company controls essential resources, or has governmental support, the outside investor may not have effective control even with more than 50% equity. Exactly 50% equity for each of two partners may just lead to stalemate.
8.13 Why are management styles, and any cultural difference that exist in styles, important in all types of market entry modes involving partners? Management styles affect many aspects of operations and relationships. For example: (a) differences in communications styles may lead to misunderstandings and conflict; (b) the ways in which decisions are made may result in conflict if one partner prefers consultation with the reaching of consensus desired/required, and the other prefers less input and top-down decisions; (c) junior managers and other employees may respond in unexpected/undesired ways to directions and orders that are given in a way (management style) to which they are not accustomed; and (d) misunderstandings and conflicts may occur when partners have different modes of personal interaction. 8.14 Select a company that has chosen direct investment in a foreign market and a company that has established a strategic alliance abroad. Analyze why each company made the decision it did. Explain why you would or would not agree with that decision. Students answers will vary. Some students will note that many international marketers use more than one form of envy mode for different products and/or countries. (The instructor may wish to use an example like that of Nissans and Toyotas approaches to beginning manufacturing in the United States. Nissan entered with a wholly owned plant in Tennessee. Toyota, which was concerned about how to deal with unionized American labor and with American suppliers, entered a joint venture with General Motors in Fremont, California. Toyota followed up this successful learning experience with the building of a wholly owned plant in Kentucky.) 8.15 Choose a company that has made both a direct investment in a foreign country and has become part of a strategic alliance in that same or another country and analyze why the company chose those particular forms of entry. Student answers will vary, but should include consideration of some of the factors of risk, cost, control, access to technology, or others discussed in the text. (See the Toyota example above.)

8.1
1.
Terralumen S.A.
What should be Francisco Alvarezs position at the directors meeting?
Senor Alvarez is faced with a difficult situation. The American parent does not understand Spanish business culture, the Spanish real estate market, or the Spanish labor market. They have not evidenced any interest in learning about these factors, and apparently do not recognize their importance. Their new plan for accelerated expansion based on the report of an American consulting firm appears to have been similarly oblivious to these factors. (Did the consulting firm simply provide a report that projected what Delta wanted in the way of rapid expansion without really testing the plans feasibility?).
Since the Americans seem unwilling or unable to adjust their approach to the Spanish environment, Senor Alvarez should do two things. He should prepare American-style arguments for the meeting itself, and he should begin to formulate a plan of action in case of dissolution of the joint venture. Regarding the proposed accelerated expansion, the American-style arguments should include a quantitative analysis of the resources required for, the potential sources of the required resources, and the feasibility/infeasibility of the plan. The large amount of funds required for capital investment would not be available from current operations of Terralumen, which had not even been able to pay current debt obligations to their Spanish bank out of earnings. It would likely not be possible to attain sufficient rental space to accommodate the proposed increase. Hiring and training of the large number of people required would not be very risky with the requirements of Spanish law. Senor Alvarez should quantify all of these costs and problems insofar as possible, and sum up with the amount of additional capital that would be required. He should also present a short written summary of the reasons legal, financial, and otherwise in the Spanish environment, which make such expansion risky and infeasible. Regarding Deltas proposed changes in contract terms, Senor Alvarez should maintain his position. It is not apparent that Delta intends to make any contributions that would justify Terralumen making any concessions. 2. Can the joint venture between Terralumen S.A. and Delta Foods survive? What do the partners need to make this happen?
From the facts provided in this case, it appears unlikely that the joint venture can survive. The demands of Delta, and the negotiating stance they are taking, appear to indicate a lack of understanding of Terralumens contributions to and importance in the joint venture, as well as a complete lack of understanding of requirements for successful operation in the Spanish market. Deltas approach seems to combine a high level of ethnocentrism with substantial arrogance. In order for the joint venture to survive, Delta needs to change its stance. If Delta does that, Terralumen could make some minor concessions on other items. 3. If Delta does want out of the venture, what terms should be set by Terralumen?
It can be expected that the restaurants are operated using the Blue Ridge name, and this name would almost certainly remain with the Blue Ridge corporation. There are three basic possibilities for ending the joint venture: Terralumen might be able to buy out Deltas interest, might sell its interest in the chain to Delta, or they might divide the assets. It would be best if this could be done by negotiation, but if they have to go to court (in Spain, where the subsidiary must be, by law, incorporated), Terralumen should have an advantage. It is probably in the best interest of Terralumen to buy out Deltas share in the partnership. Terralumen has acquired valuable experience in establishing, staffing, and operating fast food outlets, and should be able to use this experience in developing a chain of their own. It would be helpful if they could retain control of all or most of the outlets, changing their name and focus as appropriate. If Terralumen has to sell its interest, it should not do so unless it can gain a substantial capital gain on its contributions. If it must divide the assets, it can attempt to obtain the best of the locations for itself. (Note to instructors: Though very well disguised, this is a real case. Delta, the new parent of Blue Ridge, did not have a good understanding of the requirements for developing and running restaurants overseas, and of course additionally suffered from the problems noted in 1 and 2 above. Terralumen bought out Deltas share, and went on to establish a very successful chain of specialty fast food restaurants in Spain. Blue Ridge had little success in France and Germany, and virtually disappeared in Spain.)
8.2
1.
GG Farm Machinery Company

Do you agree with the decision made by Marcel Ger? Explain your answer.
Marcel Gers decision seems to be appropriate given the small size of his company, his lack of interest in spending much time or effort in getting deeply involved in activities in Australia, his good patent protection, and the fact that the best candidate for cooperation wants to be a licensee rather than a distributor. Table 8.5 does not explain fully the entry on duties. It says that duties exist for some products, but it is unclear if there are duties on GG Farm Machinery Companys specialized piece of machinery. Surely the marketing consulting firm should have determined specifically what the duty rate is. Licensing is particularly appealing to firms that have technology, product, or manufacturing expertise who lack the resources, desire, or experience to enter foreign markets. There are virtually no risks and the only costs are in negotiating and signing a mutually acceptable agreement, and checking on and controlling the implementation. The major disadvantages are loss of control, potential returns from marketing and manufacturing may be lost, and the licensee may turn itself into a competitor when the agreement expires. A further drawback is that the licensor learns nothing about the foreign market. In summary, licensing is a low-cost method of potentially making relatively easy money in the short term. 2. What other modes of market entry into the Australian market might GG have considered? Why are these viable alternatives?
They might have considered: A Joint Venture. A joint venture provides a more extensive form of participation in foreign markets. The major advantages are the sharing of risk and the combined strengths of the two partners. Joint ventures allow the partner to gain access to market knowledge and build its expertise in this area. The main disadvantages are the costs of control and coordination in working with a partner and the potential for conflict. Over time, many joint ventures are dissolved because the partners perceived inappropriate allocation of costs versus returns (i.e., each partner felt the other was contributing too little and getting too much). Direct Investment. This would have involved setting up a plant in Australia. This would require an investment of time, effort, and money that are probably far beyond what GG is willing to consider. The advantages of direct investment where it is feasible are (1) control is maintained, (2) market knowledge is gained, and (3) all profits accrue to the firm. Exporting directly or indirectly, as discussed in Chapter 7.
8.3
1.
VW in China
Evaluate Volkswagens strategies with regard to marketing.
Volkswagens marketing decisions were limited by government regulations, involved considerations of the long-term potential of the market, and were directly tied to its changing entry strategies. Volkswagens early entry into the Chinese market, and its entry decisions, enabled it to become the nations market leader in automobile sales. It made wise decisions in selection of partners that could provide political and economic support, and could directly increase the market for its automobiles. (See the answer to question 2 immediately below.) Its cooperation with city of Shanghai resulted in the city setting up a taxi company using VWs Santanas. As the market in China expanded, and competition increased, Volkswagen added additional models to its line. It has also lowered prices as other companies have expanded manufacturing in China and competition has increased. With Chinas entry into the WTO and
attendant lowering of tariffs, the company is also increasing imports of specialized models that cannot be sold in sufficient numbers to justify local manufacturing. These models add to its prestige. Originally, a partner had the responsibility for marketing the cars produced in its initial joint venture. VW has now developed its own sales network, an incentive system for dealers, and is moving into financing of car purchases. The marketing policies, and directly related manufacturing policies, have been very successful to date. Increasing investment by other automobile manufacturers is resulting in a decline in market share even while VWs sales are increasing. (See the answer to question 3 below.) 2. What choices did Volkswagen have in market entry strategy, and did it make a wise decision?
Volkswagen originally entered the Chinese market through exporting, and its success made it confident that it could sell enough cars in China to justify entering into assembly and eventually manufacturing there. Government regulations required that it have a Chinese partner or partners. The first step in the process of investing was to develop relationships with government officials at the national, regional, and local levels. As the location for its first assembly plant, it chose Shanghai, the industrial and business center of the country. Its first partner, under the control of the municipal government, had an excellent industrial network for supplying parts. The Bank of China became a third partner (valuable in facilitating payments, etc.), and a firm controlled by the national government became a fourth partner. Its second joint venture was with a firm directly under the control of the central government. Volkswagen has carried out policies of increasing the use of locally made parts, establishing joint ventures, developing licensing agreements, and undertaking other forms of cooperation. It has modernized its production lines and provided employee-training programs to improve quality and productivity. Its strategies have been very successful, providing stronger growth than enjoyed by other entrants into the market. 3. Should Volkswagen make a strong effort to maintain market share?
Volkswagen cannot maintain market share. The market is growing rapidly, but the amount of FDI flowing in to China from other European, American, and Japanese automobile manufacturers is growing even more rapidly. Meeting overall market demand would require investments of an amount beyond the capacity of VW. Oversupply is already emerging as a problem and prices are falling. Volkswagen needs to concentrate on improving productivity and lowering prices to remain competitive, hopefully continuing to increase sales (while market share will inevitably be eroded). 4. Could selling the super luxury Phantom in China be useful for Volkswagen even if it does not make money there?
Having a super luxury car in the Volkswagen lineup should contribute to the companys image and prestige. This may be helpful in getting increased sales across the whole line of VWproduced automobiles. 5. What benefits can Volkswagen expect from its promotional activities?
Its promotional activities keep Volkswagens name in front of the public in the increasingly competitive Chinese market. It also should give the company an even better image with the people and government.
8.4
1.
Nouveau Cosmeceuticals
Evaluate Nouveau Cosmeceuticals use of licensing in entering the Eastern European market.
Their use of a licensing agreement can be evaluated in three ways: (1) the problems involved in using another form of market entry; (2) the advantages of using licensing; and (3) the disadvantages of using licensing. Aces lack of knowledge regarding international business, and the high costs that would be incurred in setting up her own marketing network, argue against taking a more direct approach. The licensing agreement can be expected to provide rapid international expansion with minimum cost and effort. The dangers in using licensing are discussed in the answer to question 2 below. 2. Should the company have formed a more formal and complete strategic alliance agreement? Why or why not?
The details of the agreement are not clear from the limited information provided. It does appear that the Latvian company is licensed to sell Nouveau Cosmeceuticals only within Latvia, so this leaves Ace free to pursue licensing agreements with distributors in other countries. However, this would require a level of initiative and involvement that Ace has not shown so far. One potential problem is that the Latvian distributor might at some point decide to make and sell its own line of Cosmeceuticals in competition with or in place of Nouveau Cosmeceuticals. They might do this just in Lavia or in other countries as well. They may have better contacts in other European countries than Ace. The formulas for the product are apparently not protected, there is apparently no no competition agreement, and the Latvian company might be able to manufacture the products more cheaply themselves. Thus, a more formal and complete licensing agreement should have been made.
8.5
1.
Sonya Madden
Evaluate Sonya Maddens decision to locate her business close to where she has her products produced.
As the sole owner of the business, Ms Maddens personal preferences, as well as purely business reasons, are important. From the business standpoint, the basic questions are (1) either locating close to the market or close to the customers provides greater advantages and (2) where are conditions most favorable for headquartering the business itself. Ms Madden prefers to be based in Hong Kong and the city does appear to have advantages for her business operations. The design function could probably be located anywhere, but Madden feels that proximity to the production source is important in getting what she wants quickly and with personal oversight. The location in Hong Kong, properly noted, also probably provides some cachet. Trips to the market, her customers and potential customers in the US (why not Europe?) are less frequently required and fairly quick and easy from Hong Kong. The planned openings of offices in New York and Los Angeles will add substantial costs that would have to be covered by the potential benefits (and greater sales) of having representatives available locally, that is, in US time zones.
8.6
1.
Wah Shing Toys

Is this an alliance that cannot miss? Discuss.
The ecological problem of disposing of 500 million alkaline batteries per year is real. However, it is not clear from the material presented in the case that (1) the technical problems in developing
fuel cells for a wide range of toys will be easily solved; (2) the costs involved will be such that a wide range of toys can be produced economically; or even (3) what the specifics of the fuel cell car developed are. According to the case material, the H-racer miniature car developed by Horizon Fuel Cell Technologies uses a hydrogen fuel cell. Hydrogen fuel cells for full-size automobiles are still in the development stage with some individually produced cars using them now on the road for testing. Problems with them are that they require a source of pure hydrogen, either derived from a fossil fuel or from electrolysis of water (which requires a lot of energy). The hydrogen must be held under a great deal of pressure to keep it in a liquid state (at least in the amounts required to run a full-size automobile). Such a car is zero emissions as it runs along the road as the hydrogen and air burn to produce only water vapor, once the hydrogen has been obtained/produced. So it would seem that the H-racer would have to have a rechargeable container for holding the hydrogen a container that would have to be refilled from time-to-time with hydrogen. But the company is talking about fuel cell toys powered by the sun. Mr Wankewycz says in the case that The product is basically a miniature version of a real zero emissions car that runs on power generated from sun and water. For a reader to be able to evaluate what he is saying, it would be necessary for the reader to find out how the sun and water part works. Could it be that the hydrogen is produced by using energy from the sun to generate electricity to perform the electrolysis? 2. Would the venture be better if Wah Shing had acquired Horizon Fuel Cell Technologies or visa versa? Why or why not?
It is probably better for both companies to be in a joint venture than for Wah Shing to have acquired Horizon Fuel Cell Technologies (or visa versa). Wah Shing is a large-scale manufacturer most skilled at applying well-developed technologies in producing advanced toys. Horizon seems to be more focused on developing new technologies that can be applied. It is likely that the managerial skills and approaches best suited to the primary activities/objectives of each company might lead to conflict if one company owned the other.
TEST BANK
1. First-mover advantages may include: (a) reaching customers before others (b) establishing brand recognition (c) finding distributors and retailers who do not already handle the same type of products/ services (d) All of the above (e) None of the above. 2. The strategic focus of companies that have nonexport foreign market-based operations tends to vary among companies from various countries: (a) US companies in the UK market tended to focus more on cost reduction. (b) Japanese companies in the UK market tended to focus more on volume. (c) US companies in the UK market tended to focus more on improved productivity. (d) All of the above. (e) None of the above.
3. International strategic alliances: (a) refer to cooperative activities between companies from two or more countries. (b) have become less common as increased competition has reduced trust among companies. (c) are seldom used by large, strong companies. (d) All of the above. (e) None of the above. 4. A fundamental purpose of an international or global strategic alliance is to enhance the long-run competitiveness of the strategic partners. (a) True (b) False 5. In the FordMazda collaboration discussed in how to succeed in a joint venture/strategic alliance, (a) Ford provided expertise in manufacturing and product development. (b) Mazda provided expertise in international marketing and finance. (c) top management involvement, frequent meetings, and anticipation of cultural differences were important in success. (d) All of the above. (e) None of the above. 6. Market entry modes that have the drawback of training potential competitors are: (a) licensing. (b) greenfield wholly owned manufacturing. (c) contract manufacturing. (d) only answers (a) and (c) are correct. (e) only answers (b) and (c) are correct. 7. The exhibit discussing the approach used by Korean companies in the European market indicated that: (a) rapid growth in their market share to over 20% each inspired them to find even better ways to continue their rapid expansion. (b) Daewoo, Goldstar, and Samsung all used the same approach. (c) a key to their approach is stressing the advantage they have because of the reputation they have for high quality. (d) All of the above. (e) None of the above.
8. An advantage of mergers and acquisitions as a form of market entry is that there is no problem of integrating management styles. (a) True (b) False 9. A foreign assembly operation differs from a typical manufacturing operation in that the former primarily assembles imported parts. (a) True (b) False 10. The turnkey operation is a specialized form of management contract. (a) True (b) False 11. The selection of a local partner is perhaps the single most important activity involved in establishing a joint venture. (a) True (b) False 12. Once the decision has been made to have a production presence in a foreign market, determining the best mode of entry is easy. (a) True (b) False

1. (d) 11. (a) 2. (d) 12. (b) 3. (a) 4. (a) 5. (c) 6. (d) 7. (e) 8. (b) 9. (a) 10. (a)
CHAPTER 9
Product Decisions
LECTURE OUTLINE
This chapter discusses: The meaning of product Balancing standardization versus adaptation Product planning and development Product mix decisions Packaging: languages, protection, promotion Branding issues.
Introduction
The product is the heart of the marketing mix; if a product fails to satisfy, no other part of the marketing mix will make it succeed. Multiple foreign markets make product planning and policies extremely complex. Particular market segments or niches occur throughout the world. Examples are given of companies meeting varying consumer demands by adjusting products for both large and small markets.
Product policy
Dimensions: (1) product planning and development; (2) product strategy. Applies to single products, product lines, and total product mix. Policy questions regarding: commitment to product mix as products reach maturity. commitment to new product acquisitions/innovation. organizational requirements for approaches used. For export marketing, a key policy decision is that of adaptation or standardization (globalization).
A product (or service) is the sum of all the physical and psychological satisfactions the buyer (or user) receives as a result of the purchase and/or use of the product. Internationally, product strategy translates into product adaptation or standardization (globalization). Exhibit 9.1 discusses how Faber-Castell created a green global brand. Figure 9.1 portrays the dimensions of a product: (a) physical product core; (b) the product package; (c) auxiliary services.
Product planning and development

Major forms of product development are shown in the following sections.
New products
Methods for adding to foreign product mix: exporting of additional existing products, acquiring a firm, copying products, marketing other companies products, and internal product development. Figure 9.2 shows the steps in developing new products: idea generation, initial screening, business analysis, developing, market testing, and commercialization. Exhibit 9.2 discusses Inventing the smart: the micro compact car, a joint venture between Mercedes-Benz and SMH, the makers of Swatch. Location of Research and Development (R&D): Possible market orientations: home market; host market; and world market. As international experience grows, more R&Ds located abroad. Ford operates several design centers of excellence in various locations. Table 9.1 lists Important criteria for considering overseas R&D locations. Any given center must have a critical mass of R&D resources to foster communications and technical interaction within the group and with its environment. R&D is becoming increasingly globalized. In screening ideas, it is important to use criteria designed for the product. Exhibit 9.3 discusses alternative Strategies for idea generation and development. Table 9.2 shows Evaluative criteria for screening new product ideas. Innovation and diffusion of ideas; approaches used: center-for-global, local-for-local, local-forglobal, and global-for-global approach. Table 9.3 lists The most innovative companies in 2007.
The International Organization for Standardization (ISO) has developed a series of standards specifying design, manufacturing, logistics, and other controls that must be provided in order for a company to receive ISO certification. Exhibit 9.4 shows the five components of the ISO 9000 series of quality standards widely used in Europe and increasingly internationally. Quality management and total quality management (TQM) can be used as a strategic weapon: overhaul everything from R&D to marketing and service. get products to market faster with fewer defects and at lower costs.
But bad quality can still occur. Product positioning strategy attempts to establish buyer/user perceptions of the attributes of a product. Figure 9.3 shows that perceptions of product characteristics may vary from the actual characteristics. There is also an ISO 14000 series covering environmental performance. Table 9.4 lists the numbers of companies having ISO 9001 and ISO 14001 certificates in 10 countries.
Changes in existing products

Modifications may be required by regulations or customer preferences in other countries. Product life cycle may be extended by making modifications.
New uses for existing products

Five types; see page 423 of the text.
Product elimination
Need for a procedure for systematic review of products to identify and possibly eliminate weak products. Disproportionality phenomenon: 8020 principle concerning profit contribution (ratio may vary). 80% of products provide only 20% of profit. Figure 9.4 shows The phasing continuity matrix having to do with the synchronization of new product entries with discontinuation of old products.
Product mix decisions

Determining breadth and length of product mix sold in a country. Exhibit 9.5 discusses Managing a line of consumer products.
Analytical approaches
Assumption in product portfolio analysis, the objective is: most relevant characteristics of a product and expected returns and riskiness, or efficient portfolios maximizing expected returns for a given risk, or minimizing risk for a given return.
Figure 9.5 shows the BCG portfolio matrix with dimensions of market growth rate and relative market share. Problems with the BCG portfolio approach are discussed in the text. Required information may not be available. Some exporters rely on niches rather than prices and market share. Major value of BCG approach is in suggesting a framework for analysis. Decision theory: useful framework for ideas; specific information may not be available.
Internal determinants
Breadth and length of the export product mix are determined by company objectives and resources, and by potential profitability.
External determinants
Customer influences: cultural and social values; perceptions/stereotypes. Country stereotypes may differ by product categories, as well as by countries, and by regions. Studies indicate that consumer ethnocentrism, a preference for products from ones own country, is widespread in the world. Many companies now use multi-country input to: design, source, and manufacture a single product. Competition: may make a market not worthwhile. Products stage in life cycle (Figure 9.6): Leaders and followers (Figure 9.7).
Products usually introduced in home country first, but Japanese color TVs and video disks sold in US first. Other external factors: market structure, government regulations, physical conditions, etc. Exhibit 9.6, Fad marketing, discusses a product introduced in Japan by PepsiCo largely as a marketing stunt.
Standardization vs adaptation
Global strategy focuses on standardization: use home market design or lowest common denominator. what are people willing to sacrifice for lower costs. So-called global product strategy designed either to meet (1) home market requirements or (2) the lowest common denominator in the export markets. Adaptation focuses on local requirements: voluntary or mandatory. In-between strategies: some standardization with some adjustment for legal requirements, tastes, technical requirements. for many products (e.g., music) world is divided by groups of people rather than national or regional markets. may need to think global but act local. Some companies providing both more standardization and individualization: more standardization and long production runs for large market segments. more customization for affluent market segments using short production runs. Cost savings can also come from standardizing packaging. Many examples are given in the text. Figure 9.8, discusses how various products fit in a matrix of Market requirements and product characteristics. Some products may be individualized for cross-national market niches, Figures 9.9 and 9.10. Exhibit 9.7: discusses global and niche companies: Megacorp, Inc. vs Niche Ltd. Table 9.5 shows Factors to consider for global product strategy in deciding whether to globalize or adapt.
An approach to determining standardization

Benchmarking to determine whether selected countries might accept a similar product.
Effect of other marketing variables

Table 9.6 shows Product-communications strategy alternatives.
Packaging
Probably the cheapest, quickest, and the easiest way to adapt a product. Provides protection and promotion. Provides visibility, information, emotional impact, and workability. Multilanguage packaging becoming more prevalent for consumer goods. Figure 9.11 shows an EKS diet and kitchen scale package. Figure 9.12 shows Some eco-labeling programs. Some amount of standardization desirable. Limiting the number of sizes of packages used often reduce costs. Materials preferred by customers vary from market to market. Need for recyclability of packaging is now a concern, particularly in the EU, and increasingly in the US CE marking, indicating compliance with EU safety standards, required for a wide range of products in order to ensure they can move freely through the EU.
Branding issues
A brand distinguishes a sellers goods or services: brand names, trademarks. Figure 9.13 shows the many trademarks used by LEGO.
Brand protection
First use or first registration gives rights to brands depending on national legislation; code law countries generally use date of registration as the criteria. There are various international agreements providing for protection of trademarks and intellectual property rights. Information on trade mark protection available from most national governments. Laws not always enforced in some countries.
Table 9.7 Flunking brand geography shows that many US undergraduates do not know the country-of-origin of some five major global brands. They are arising from the growing counterfeit trade; counterfeit products cause losses to legitimate producers and are unsafe in some cases. Figure 9.14 shows the difficulty in distinguishing legitimate and counterfeit Lego products. Figure 9.15 shows real and fake Louis Vuitton handbags.
Branding decisions
Selecting a good brand(s); determining the number of brands. Single brand to identify products, increase efficiency of advertising. Local brands to meet local market requirements. Multiple brands as a part of market segmentation. Multiple brands may be used by a producer to distinguish between products of varying quality or characteristics. Using many local brands increases costs, but has advantages in meeting customer requirements, etc. (See page 450 in text.) So-called global brands usually positioned the same way in every market. It is generally easier to create a new brand than reposition an older brand. Need to consider the image or implication of brands in specific markets: obscene words, hidden meanings, etc.

9.1 Explain the major product policy questions facing the exporting company. In what ways, if any, does the size of the company affect the relative importance of the questions? The major product policy questions are: (a) Should the company keep a commitment to its existing product line as the products in the line reach maturity? This concerns the question of whether to make attempts at extending a products life or develop new products as replacements. (b) And/or how strongly should the firm follow a strategy of new product acquisition/innovation? Should the firm follow a policy strictly even if opportunities exist which are inconsistent with it? (c) What are the organizational requirements for following each of the above approaches? What type of organizational structure is best suited to facilitate the product policies mentioned?
The size of the company is going to have an effect on the companys ability to execute a given strategy due to limitations of resource availability. 9.2 Is there a best way for a company to acquire new products for its export product mix? If so, what is it? If not, why? No single approach is best for all situations. Which one is preferred in any case depends upon a number of factors including company size, resources, objectives, types of products, markets being considered, etc. (a) Export domestic products: easy to implement, low-cost approach, but may not give best fit for foreign markets unless modified in some cases. (b) Acquisition of a firm or some operations of a firm that has a product for which there are potential or existing overseas markets. This method may result in: greater market power in an industry or diversification, but may be costly and cause management/coordination problems. (c) Copying products developed successfully by others, but may have problems competing with existing brands unless own brand name is well known in foreign markets. (d) Internal product development issues include location of R&D facilities, the process of screening new product ideas, the diffusion of new product innovations, may be costly. No single approach is best for all situations. Which one is preferred in any given case depends upon a number of factors including company size, resources, objectives, types of products, markets being considered, etc. 9.3 What is the relationship between a companys product development policies and its implementing a product positioning strategy? A product positioning strategy determines what markets are to be targeted with a product. In order to be successful in a given market, a product must possess a collection of characteristics that will provide the benefits sought by that market. A companys product development policies define the methods by which the company develops new products. This methodology will affect the resulting products and thereby, their ability to provide the benefits sought by the target market. 9.4 Can an exporter realistically follow the strategy of product phasing when replacing a product in the product mix being exported to a foreign market? Explain. An exporter can successfully accomplish product phasing in a foreign market as long as the new product satisfactorily provides the benefits sought by the target market and the marketing mix communicates this is an effective manner. Product phasing strategies are butt-on, low-season switch, high-season switch, and fudging. 9.5 Evaluate an exporters use of the product portfolio approach to decisions about its product mix. The product portfolio approach may suggest some useful approaches and considerations for larger firms. The value of the product portfolio approach for small- to medium-sized companies involved with exporting has been questioned on the issues of violations of the basic assumptions concerning the experience curve mechanism, questionable measurements, potential lack of a portfolio of
strategic product/market combinations, lack of information, and key factors of success for these companies are not necessarily based on cost, prices and market shares. 9.6 Evaluate the use of fad marketing in global operations. Can the international marketer use the technique profitably in more than one country? Explain. There are many potential hazards in using this technique in any market: the cost of developing a special fad product may be expensive; unless it is quite good, it may give the brand a bad name; and if it is very good, people who have tried it may be angry when they cannot get more. Different markets respond differently to fads marketing; the Japanese market is known for fads coming and going. The success of PepsiCos with its fad marketing of Ice Cucumber in Japan was the result of much development work and the companys ability to sell 4.8 million bottles in a short period. It was designed to create interest in the already established Pepsi brand in Japan. It might be used in other markets that are fad-prone and where Pepsi is well established, though the reaction might be different and possibly negative in some markets. 9.7 Is standardization or adaptation of individual products the most desirable policy for an exporter? Why or why not? There is no definite answer to this question. It depends on the circumstances of a particular situation. The following is a list of permanent criteria in that decision. (a) Adaptation may be mandatory due to: language differences, differing electrical systems, differing measurement systems and specification, and government requirements. (b) In other cases it may be voluntary. (c) Adaptation is less common for commodity goods than for differentiated products. (d) Cost savings are available through standardization, but the benefit of this must be weighted against the interest of buyers in having individualized products. 9.8 For export packaging and branding considerations discuss how language may be significant, particularly to the multi-market exporter. Language must be considered by the multi-market exporter due to the fact that language is used on most packages to communicate a desired message about the contents. Many different languages are used around the world. In order to ensure that the message will be communicated the exporter must make sure it is in a language which is understood in the chosen market. This may require altering the package and result in increased expense. Branding must also be considered because it allows buyers to distinguish between comparable products and thereby provides the producer the opportunity to advertise profitably. In order to accomplish this, the brand name must be distinct and recognizable in the markets served. 9.9 Discuss the importance of using ecologically correct packaging materials and the major impact of packaging policy. Is eco-labeling necessary? Why? The use of ecologically correct packaging materials is already required by the laws in some countries, and more countries will be adopting such requirements. In Germany, a law requires that distributors take back and recycle or otherwise properly handle transport, sales, and secondary packaging. Increasingly, consumers are concerned about the recyclability of packaging materials and take that into consideration when making purchasing decisions. Thus, it can be expected to provide an advantage to at least an increasingly large segment of the market. The major impacts of packaging are on costs, sales, and company image.
9.10 What can an individual exporter do about counterfeit products being sold as its own? Will this really be effective over time? The first thing an exporter should do is become aware of the trademark protection laws in the foreign markets. This can be accomplished independently or by consulting legal council. The local laws and procedures concerning trademark protection can vary. An exporter should register his trademark in each of the foreign markets in which he/she intends to do business now, or even in the far distant future. This will provide the exporter with the legal means to defend the trademark. In spite of the fact that national governments are concerned with trademark protection, it is primarily up to the exporter to police its foreign markets in order to detect counterfeiting of its products. In some countries, exporters or legitimate importers can get customs officials to seize counterfeit goods (where they can be identified). Individual companies can also institute lawsuits against counterfeiters; for them this is expensive and may not work in some jurisdictions. Companies, trade associations, and governments can also bring the problem to the attention of the public and if possible induce exporting countries to take action against exporters of counterfeit goods. None of these approaches can be expected to be completely effective, but ignoring the problem is worse. 9.11 Find a company exporting its products under the same brand name in all (or most) markets and a company that uses a variety of brands. How do these companies differ and are these the reasons for different branding policies? Explain. Answers to this question will vary, but should be based on and include concepts presented in this chapter. Coca-Cola and McDonalds use their basic brand names in most markets to promote global recognition and acceptance. Multiple brands, such as those used by the New Zealand Dairy Board, may be designed to meet local market preferences or requirements. 9.12 Is global branding limited to certain products, product classes, and/or companies, or can any company selling any product pursue global branding? Explain. Global branding is not limited to certain products, product classes, and/or companies. It is used for a wide range of products from beverages to automobiles. Products and families of products that are most suited for global branding include those which meet wants in customer segments in a number of different national markets, and which can be marketed in the same way to similar categories of customers. The use of particular brand names in particular markets may be prohibited or limited by law or by culture. Commodities may or may not be branded (bananas are often branded; wheat not branded; rice branded in some markets, particularly to identify quality, and not in others).

9.1
1.
Daewoo Corporation
What were the advantages and disadvantages of Daewoos original strategy of manufacturing goods for marketing by other companies under the brand names of those companies?
The advantages of Daewoos present marketing strategy is that: (a) it allowed the company to concentrate its management effort on maintaining and increasing low cost and high quality in manufacturing; and (b) it avoided the high costs and risk of trying to develop its own brand names. The disadvantages are that: (a) they did not have control of the marketing of their products; (b) they lost potential marketing profits; (c) they did not reap the benefit of any customer loyalty developed; and (d) distributors could switch to other suppliers. 2. Was Daewoos original model out of date for a company in a rapidly industrializing country?
It was becoming out of date. As labor costs rise during a countrys rapid development, companies in general have to both reduce costs per unit by increasing productivity and increase revenue by adding more value to their products. In marketing, by developing and promoting their own brand name, and selling under that brand, Daewoo had the potential for increasing sales and obtaining for themselves the value added in marketing. 3. What were the advantages and disadvantages of expanding production as well as marketing overseas?
There were at least two advantages in expanding production as well as marketing overseas. The company was able to obtain recognition, cooperation, tax breaks, and financial assistance from the governments of the countries in which they opened manufacturing facilities. Second, they benefited from the publicity that they received upon becoming a major investor in each of the countries, leading to public interest, support, and substantial market share. The disadvantages were that it required a large capital investment (even after government subsidies), the company had to learn to manage the foreign workforces, and they had to learn how to work with suppliers and distributors in each of the countries. This required a great deal of the time and energy of Daewoos management. It was expected that Daewoos management would have serious difficulties in understanding and motivating workforces with cultures so unlike that in Korea, and dealing with local businesses that had substantially different cultures. 4. Should Daewoo have expanded its own marketing of Daewoo brands to so many countries in a short period of time? If not, how should they have chosen the markets in to which to expand?
The company expanded too rapidly. They simply did not have the resources required for the size of effort they undertook. They were, of course, additionally hurt by economic downturns domestically and in some overseas markets. But there was still a basic problem in the scope of their expansion efforts. In order to sell its own brands in Europe and the rest of the world, Daewoo had to gain recognition as for its products quality, cost, and service. It could also expect to have to renegotiate some of the current agreements for contract production and for distribution.
The company had to: (a) develop effective advertising campaigns in each overseas market, tailoring the effort to local conditions and preferences; (b) locate, hire, train, and manage competent people overseas for its own control and distribution network (perhaps including acquiring some existing organizations); (c) build or acquire physical facilities such as warehouses, service centers, and offices; (d) arrange the additional financing required as they take over more of the distribution chain: and (e) coordinate the efforts between different markets. Daewoo needed to become more sensitive to the cultures and business practices in the other countries as they assumed more functions there. If the company had decided to enter fewer markets, they first should have decided upon their overall strategic approach. For example, they might have decided to concentrate on sales to other Asian countries where lower cost of their vehicles could be an advantage. Or they might have chosen to go into the US market, though two other Korean companies were already in that market. They could have concentrated on Europe where there was increasing demand for small cars. They could have chosen to enter markets in Eastern Europe where quality standards have not traditionally been high, and sought to gain market share through lower prices coupled with better quality. Finally, they could have concentrated on selling to the smaller Latin American countries that have been largely neglected by major automobile manufacturers. After deciding upon their strategic approach, they could then have evaluated the potential of each country, the ones to be targeted, and methods to be used. 5. Was Daewoos collapse due to internal policies, the external economic environment, or the Korean governments changes in attitude/policy?
The collapse was due to a combination of all three, but the ultimate responsibility lies with the Daewoo management. Chairman Kims experiences during his thirty years of operating Korean businesses was that the government would always come to the aid of the large conglomerates when they needed assistance. The chaebol had enjoyed easy access to funds, special government benefits, and bailouts of its subsidiaries when needed. However, the attitude of the government had changed. For several years it had urged, and then attempted to force, the conglomerates to reduce the number of business sectors in which they operated restructure, and to reduce their debts. With the Asian economic crisis of 19971998, the government continued to push for reduced size, scope, and borrowings by the chaebol. The governments ability to act forcefully was somewhat limited by the fear that if it pushed too hard and allowed/forced the collapse of one of the major chaebol, it would have a serious effect upon employment and the already weak economy. Chairman Kim believed that an economic downturn was the best time during which to expand and that the banks could not allow Daewoo to fail. He thus overexpanded, and apparently used some questionable and/or illegal actions in obtaining additional funds for expansion. This led to the worlds largest corporate insolvency in history.
9.2
1.
The Pampered Chef

Evaluate Pampered Chefs approach to new product development for the global market.
The approach is well suited to developing products for their very high quality line of kitchen tools to be sold to a very high-end (and reasonably large) niche market. The basic approach is time consuming and expensive: using specialists to identify changing trends and opportunities; developing product specifications in-house; working with manufacturers to develop prototypes; doing extensive in-house testing and, where appropriate, using outside test facilities; and continued interaction with the companys consultants (sales people).
For each of their foreign markets, they test their products in kitchens similar to those in the particular market, and for preparation of foods suitable to the preferences of the people.
9.3
1.
BRL Hardy
Evaluate BRL Hardys decision to market its Banrock Station brand as a green product in international markets.
BRL Hardy has developed a model and laid a foundation for introducing Banrock Station brand as a green product in international markets. The company has identified a (sizable) market segment potentially receptive to green products in each of several foreign countries. They have experience in working with environmental groups, first in Australia and subsequently in other countries. They have combined that work with appropriate advertising, label and packaging design, attending wine shows and providing point-of-purchase displays, getting news stories about their work in restoring wetlands, and providing a website where consumers can take a virtual tour of their operations. Building a brand on an image as good earth, fine wine appears to be a very good way to market their product to this niche in an overall market where many brands compete for shelf space and consumer attention. 2. Is this a good strategy for a market such as the United Kingdom, where buyer label (private brand) wines have a dominant position?
BRL Hardy already had a number of brands selling in the United Kingdom, demonstrating that it is able to successfully penetrate that market. By introducing Banrock Station wines as a green product, with the attendant additional promotional activities note in the answer to question 1 above, it should be able to capture sales in the targeted market segment. 3. Should BRL Hardy consider buyer labels for its green product?
The companys strength in the green product wines has been its ability to differentiate its products from other wines. The advantage of producing wines for other companies with the brands of those companies would be making some additional profits on additional turnover. BRL Hardy could not, however, expect to receive as high a margin on that output since someone else is doing the marketing. The disadvantage would be helping set up a potential competitor for this niche marketing segment.
9.4
1.
The internationalization of Chinese Brands

Evaluate the process followed by Chinese Companies to gain brand recognition internationally.
Most of Chinas manufacturing exports are still produced by OEMs for sale under the brand names of companies from more developed countries. This leaves them unable to gain the profits from and control over marketing that would be possible if they used their own brands. Two approaches have been used by Chinese companies in trying to establish their own brands overseas. One is to start developing their own brand names (advertising and marketing) in less developed countries, and then progressing to richer nations. This appears to be a slow and sometimes difficult process. The second approach is to attempt to develop recognition of their brands in the developed nations first, with recognition by other nations following more easily. The latter approach seems to be quicker and more effective in the long run. But it requires the development and production of high quality products that can be sold in a developed country (or
countries) at lower than prevailing prices for such products. (See the answer to question 2 below.) 2. Is the experience of Japanese companies in the 1950s and later really applicable to Chinese companies today? Explain.
The success of Japanese companies in the 1950s and later was based on several factors that are not easily duplicated by Chinese companies now. Because of the (mistaken) assumptions of a number of American companies shortly after World War II that Japan was a small and remote market that was never likely to become a substantial exporter, and the policies of the Japanese government at the time, Japanese companies were able to acquire advanced Western technology in many fields at a very low cost. Additionally, Japan had some advanced technology of its own that it had developed before the end of the war (in optics and cameras, for example). It is more difficult for China to obtain advanced technology today, though a number of large Chinese companies, with some government support, are requiring that foreign companies provide some advanced technology as a condition of entering or expanding joint ventures. There is also an increasing number of research and development facilities in China. Most large Japanese companies, particularly the leaders in their respective industries, had close relationships with the Japanese government. The government funneled the limited money and foreign exchange available to those that had the potential to (eventually) export, concentrating first on textiles, and then shipbuilding and steel production. These companies, in turn, felt a moral obligation to the nation to export products, as did other companies that developed later. As companies such as Honda, Toyota, and Sony grew in Japan, they sought to serve their country and increase total sales by entering export markets. They were willing to undertake substantial expenditures in R&D, and sell at lower prices in the overseas markets than they did in the domestic market, in order to do so. A number of these companies also felt that if they first entered the most demanding market, the US, other markets would be easier to evaluate and enter. In the cases of both Honda (first with motorcycles) and Toyota (with automobiles), their first attempts to enter the US market failed. They then spent much time and money in redesigning their vehicles to suit American needs and preferences. 3. Can Chinese SMEs internationalize their brands or is this only possible for larger firms? Why or why not?
SMEs that already have products suitable for niche markets in other nations, for example traditional medicines, may use their own names in other markets, possibly using both Chinese characters and local names in local languages. Other products, such as designer-type clothing, may be able to penetrate other markets under Chinese names using westernized names. SMEs that provide some intermediate product used in a wide variety of industries worldwide (such as micro electric motors used in opening and closing automobile windows) can internationalize their own brands, using a westernized name, through the development of very high quality products and promotion through trade fairs and trade publications.
TEST BANK
1. As companies gain more international experience, a larger portion of R&D is conducted in the home country. (a) True (b) False
2. In product planning and development: (a) every product should be judged by exactly the same criteria. (b) companies which export products in diversified industries need multiple sets of criteria. (c) a master set of criteria may be developed and only selected criteria are used dependingupon product type. (d) All of the above. (e) Only answers (b) and (c) are correct. 3. Total quality management: (a) requires the use of ISO 9000 series of quality standards. (b) is designed to get products to market faster, with fewer defects, and at lower costs. (c) is primarily just a means of fine-tuning production controls. (d) All of the above. (e) None of the above. 4. Limits on the use of product portfolio analyses for small and medium-sized exporters include: (a) they may not have a portfolio of strategic product market combinations. (b) they may not have strategically relevant information on the actual and future market size, rate of growth, and shares. (c) the key factors determining their success may not be costs, prices and market shares. (d) All of the above. (e) None of the above. 5. In branding decisions: (a) a single brand helps to identify products and improve efficiency of advertising. (b) local brands help to meet individual market needs. (c) there is a need to consider possible hidden meanings or implications of brands. (d) All of the above. (e) None of the above. 6. For some products, like automatic washing machines, people in different EU member countries have the same preferences. (a) True (b) False 7. The two most relevant characteristics of a producers portfolio are its expected return and its degree of risk. (a) True (b) False
8. Japanese producers of color televisions and video disc players sold their products in the US before selling them at home. (a) True (b) False 9. For some products, the world is divided by groups or types of people rather than national or regional boundaries. (a) True (b) False 10. A product can be viewed as including: (a) the physical product core. (b) the product package. (c) auxiliary services. (d) All of the above. (e) None of the above. 11. There are products that have a small share of any given national market, but are successful in world markets. (a) True (b) False 12. Packaging is probably the cheapest, quickest, and easiest way to adapt a product to make it more suitable for foreign markets. (a) True (b) False

1. (b) 11. (a) 2. (e) 12. (a) 3. (b) 4. (d) 5. (d) 6. (b) 7. (a) 8. (a) 9. (a) 10. (d)
CHAPTER 10
Pricing Decisions
LECTURE OUTLINE
This chapter discusses: Factors that must be considered in determining an export price The effects of the Internet and World Wide Web on pricing Export pricing strategies; relationship to domestic pricing Choice of currency to be used; hedging possibilities Price quotations, terms, and calculations Transfer pricing issues.
Introduction
Pricing involves export pricing and pricing within national markets for locally produced/ assembled goods. Pricing in export marketing is more difficult than domestic pricing. Successful B2B marketing is shifting from selling commodities to selling specialty products. Prices set in one market may affect operations in other countries. Prices need to be set considering: consumers, distributors, partners, licenses, joint ventures, and subsidiaries (transfer pricing). Determining relations: between products; between geographical areas; whether to bundle products; and degree of central control. Five distinct facets to pricing problem: see pages 469 and 470 in text.
Determinants of an export price

Pricing has a powerful and immediate effect on sales and profitability.
Costs
Cost pricing is simple, suggests fairness. Establish a price floor: out of pocket, direct, or marginal costs; or full costs. Determining basic costs helps estimate how competitors will react. E-commerce/e-trade tends to lower cost differentials between markets. Exhibit 10.1 shows The nets threat to prices and brands. Ways to help offset the Internets effects: price lining, dynamic pricing, and bundling. Exhibit 10.2 discusses Using the Internet to smooth out demand. Added costs in exporting: investment, additional paperwork and transportation, legal requirements.
Market conditions (demand)

Value to purchasers sets price ceiling. Estimating demand schedule: asking people; barter experiment; test market; comparison; statistical analysis. Table 10.1 discusses Factors affecting price sensitivity such as customer economics, customer search and usage, and competition.
Competition
Pure competition and monopolistic competition are opposite ends of a continuum. Competition determines where prices should be set between floor and ceiling prices. Consider barriers to competitors: product distinctiveness, brand prominence, and effectiveness of distribution. Increased competition in EU has resulted in widespread price cuts. Fair profit or cost pricing may lose sales or profits. Kodaks problems in price competition with Fuji were aggravated by problems in dealings with large retailers Wal-Mart and Walgreen Co. Exhibit 10.3 discusses New approaches to pricing: alternative strategies and web-based systems.
Legal/political influence
May set maximum prices for consumer protection. May set minimum prices to protect domestic competitors. Antidumping legislation: laws against selling in foreign markets at prices below those in the home country market. Legal restrictions on price differentials, rebates, price escalation, etc. vary from country to country. Exhibit 10.4 discusses Recent antidumping actions. Limits on setting prices are also affected by elasticity of demand.
Company policies and marketing mix

Export pricing affected by past and present corporate philosophy, organizational structure, and managerial policies. Product decisions affect both costs and what consumer is willing to pay. National stereotypes affect how people perceive products, and thus what they are willing to pay for a product from the country. Price disadvantages can be overcome by: product features, technical support, and prompt delivery. These are affected by channels used, relations with representatives, and promotional policies.
Summary
Value to customer sets ceiling price; floor price set by direct costs or full costs.
Fundamental export pricing strategy

Experience-curve (learning curve) pricing based on expected decline in costs as accumulated volume increases. See Figure 10.1. Break-even point pricing strategy seldom used internationally. Table 10.2 shows Alternative pricing objectives. Gap between cost and value allows a pricing strategy.
Skimming the market

Start with a high price, lower as small market at top is exhausted, and repeat.
Sliding down the demand curve

Like above, but company reduces prices faster and further in order to establish itself in the market.
Penetration pricing: designed to create a mass market

Expansionist pricing, set lower. Assumes high degree of price elasticity of demand. Assumes costs decrease rapidly with increases in accumulated volume.
Preemptive pricing
Discourage potential competitors. Take advantage of experience curves.
Extinction pricing
Eliminate existing competitors. May involve dumping, legal problems. Exhibit 10.5 shows Some pricing strategies and results achieved.
Summary
High or low price determined by: Product and its characteristics. Present and future foreign market: projected size and acceptance of product. Financial and technical ability of exporter to meet demand.
No single best strategy for all products or markets. Setting the optimum price requires good information and understanding of your own companys policies. Many companies do not use all of the analytical tools available.
Relation of export to domestic price policies

Export prices lower than domestic
Marginal pricing and/or desire for greater markets.
Export prices higher than domestic

Rationale: extra investment, extra expenses, slower turnover, and risk. Exhibit 10.6 Price escalation, including Table 10.3 Cost figures of a consumer product, demonstrates how additional costs of exporting can drive up prices and suggests possible strategies.
Export prices on a par with domestic prices

Permits pricing felt to be necessary and fair. Gives a feeling of safety when inadequate information is available. Avoids antidumping problems.
Differential pricing
May occur where: there are differential elasticity of demand in different markets, and there is effective separation of markets.
Other factors including differences in competition and attractiveness of markets may affect pricing. Problem of products from low price market going to high price market via gray market/parallel imports (as already discussed in Chapter 7) which is generally legal. Smuggling is still a problem and a major one in some countries (including China). It may be reduced in some countries by the use of RFID (Radio Frequency Identification) technology. Differential pricing may be appropriate for: varying market strategies, product line considerations, product line pricing, and modification requirements. Differential pricing may be used seasonally, cyclically, and occasionally when there is periodic oversupply (e.g., markets for oranges, steel).
Currency issues
Introduce risks for either exporter or importer. Devaluation may affect competitiveness of manufacturers. See Exhibit 10.7 The effects of changes in currency valuations. Currency crisis in one country may spread to other countries.
Hedging may be used to reduce the risks of exchange rate changes (and also may be used to assure inputs can be obtained at a set price): costs and benefits/risks.
The price quotation

Export prices quoted according to one of two standard sets of definitions.
Comparison of terms
Brief explanations of revised American Foreign Trade Definitions 1941 and INCOTERMS 2000 are given. Figure 10.2 and Table 10.4 provide comparisons. Written explanations are given in the text. (Instructor should briefly discuss meanings of terms: ex (point of origin), FOB, FAS, C&F, CIF, and ex dock. All are described in the text.)
Selection of trade terms

Determined by many conditions including government requirements. See page 495 in text.
CIF quotations
Estimation and formula methods are given. Estimate method is less accurate, but it is the only one that many exporters know/use. Most ocean freight is now sent by containers, with charges based per container load with a maximum weight per container. A less-than-container load shipment is charged at a rate based on the greater of its weight or volume (computed at a set equivalency rate between weight and volume). (A long ton is 2,240 pounds and 40 cubic feet; a short ton is 2,000 pounds; a metric ton is 1,000 kilograms or 2,204.62 pounds.) A minimum bill of lading charge is made for very small shipments. Exhibit 10.8 shows a typical CIF calculation. Bulk shipments (for oil, grain, coal, etc.) usually charged by the cost of using a specialized vessel.
Transfer pricing
For products transferred to foreign subsidiaries or partly owned foreign operations.
Decentralization and profit centers

Flexibility in setting transfer prices may be: limited by law. used for managerial control. used to influence location of recorded profits.
Transfer pricing to wholly owned foreign subsidiaries

Basis: competitive market prices, costs, and legal restrictions. Transfer prices affect customs duty and location of profits. Legal tests: reasonable, business purpose for price. Exhibit 10.9 discusses serious Legal problems in transfer pricing and penalties that may be incurred. May involve negotiation or bargaining to provide fairness to both buying and selling divisions (of the same company). Negotiation may take much time and effort, and may result in squabbles. If both buyer and seller are profit centers, prices should be competitive.
Transfer pricing to partially owned foreign enterprises

Involves who gets what share of profits as well as above. Thus the issue of fairness is involved.
Summary
Pricing in foreign markets is more complex than pricing domestically. Complexity increases if selling involves several foreign markets. Improved communications technology, including use of the Internet, has led to more transparency and need for more care in international pricing.

10.1 What is the meaning of the anatomy of a price as it refers to an export price? The anatomy of an export price is the set of factors that help determine it and the relationship among them. These factors include: Costs Market conditions and consumer behavior (that is, demand or value) Competition Legal and political issues General company policies, including policies on financial matters, production, and organization structure, and on marketing activities such as the planning and development of products, the product line, marketing channels, sales promotion, advertising, and selling.
The value of a product (demand) sets the ceiling price while cost sets the floor price. Between the cost floor and value ceiling is a gap. In the gap, where to set an export price depends on the influence of the other factors. 10.2 Explain why export prices should or should not be established using the same methods and according to the same criteria as prices set in the domestic market. Export prices should be established according to the same methods and criteria as those established for the domestic market. Prices are one element of the marketing mix for a product. The marketing mix and all of its elements should be established in an attempt to achieve the objectives and carry out the strategy for the product. Differences in prices established in domestic and foreign markets results from differences in costs, market competition, and objectives. 10.3 Discuss the relationship between objective and strategy in export pricing. Objectives are internally generated goals for the company and product, i.e., what it is that management wants to achieve in export by using price as a marketing tool. Strategies are actions intended to achieve the objectives. A list of strategies available to the exporter, and the objectives associated with them, are given in the answer to question 10.4 below. 10.4 What alternative pricing strategies are available to the exporter and what objective(s) does each seek to achieve? Is any one more desirable than the others? Explain. The available pricing strategies, and the objectives they are designed to accomplish, are as follows: Skimming the market: using the highest possible price to get the largest short-run profit possible. The price is then lowered as necessary as the market for the high price is exhausted. The company ultimately retires from the business. Sliding down the demand curve: this is the same as the above strategy, except that the company is forced to reduce prices faster due to potential competition. Companies do desire to
remain in business and want to become established before competitors can become entrenched. Penetration pricing: prices are set sufficiently low to rapidly create a mass market. The volume created should be large enough to lower costs and produce a profit. Preemptive pricing: prices are set low (close to total unit costs) to discourage competition. As costs are lowered so are prices. Extinction pricing: low prices are set in an attempt to drive weaker competitors from the international market. Which one is the most desirable depends upon the companys objective(s) in the specific market. There is no one single strategy that is always preferable. 10.5 Can a small exporter use experience-curve pricing? If so, how? If not, why not? A small exporter can use experience-curve pricing as long as he is financially able to survive through the period of low initial prices and does not face competition that can exist on prices lower than his. He would accomplish this by setting initial prices below the unit cost in order to gain an advantage over competitors. Market share increases result in efficiencies that lower costs. Eventually the costs are lowered below the initial price. Figure 10.1 in the text illustrates the rationale underlying this approach to export pricing. 10.6 Under what conditions might an exporter establish a policy of differential pricing for foreign markets? There are two conditions important for establishing a policy of differential pricing as mentioned below. Differential elasticities of demand: high elasticity suggests lower prices and inelasticity suggests higher prices. Effective separation of markets: this is to eliminate communication about price differences and availability of product from markets with lower prices to markets with higher prices.
10.7 Since all trade terms are basically the same, there is no need for using them in export sales contracts. Discuss. This statement is not true because the trade terms determine when the responsibility and liability are transferred from the exporter to the buyer, and what costs the exporter will bear. In addition, there are two sets of definitions which differ somewhat: (1)INCOTERMS 2000; and (2) Revised American Foreign Trade Definitions 1941. 10.8 Under what conditions might an exporter prefer to use INCOTERMS for a price quotation and under what conditions might this exporter prefer to use Revised American Foreign Trade Definitions1941? Does an exporter always have the choice of what trade schema to use? The exporter may not have a choice, depending upon the requirements of the importers country. In general, the exporter should provide a price quotation that the customers find suitable, such as CIF under Revised American Foreign Trade Definitions or CIP under INCOTERMS.
10.9 What factors must the exporter consider when making a decision on price quotation? The factors that the exporter must consider are as follows: Whether shipment will be made on domestic or foreign carriers Availability of insurance coverage Availability of information on costs Exporters need for cash Need of importers to have quotes from several suppliers which can be readily compared Currency convertibility problems Requirements of the government of the importing nation.
10.10 From the perspective of the parent company is it better to use a low export transfer price or a high transfer price? What effect does extent of ownership of the importing unit have on your answer? Explain fully. The question of whether a low or a high export transfer price is better from the perspective of the parent company depends mainly on the tax laws in the two countries involved. The goal is often to realize the maximum profit in a country with the lowest level of corporate income tax since in many countries tax is not paid on foreign earnings until the earnings are repatriated. In a situation where the tax level is higher in the home country, a lower transfer price would be preferable. However, antidumping laws and arms length transaction requirements may interfere with a companys ability to fully achieve this goal. The level of ownership by the parent company will affect this decision. If the level of ownership is low, the advantages of lower taxation may be nullified by sharing of profits. In this case the interests of the parent company will be better served by high transfer prices resulting in increased profits that are not shared. However, the interests of the other ownership in the importing unit will limit a companys ability to set transfer prices in this manner. 10.11 How does the nature of the product involved affect what might be a desirable transfer pricing policy? What transfer price might be desirable depends at least partly on: whether the product is one that will probably never be supplied by an outside supplier; it is one for which a decision on whether to buy or sell must be made on a long-term basis, or it is one for which the source may be changed on a short-term basis. One writer has suggested that in the first case, transfer prices should be set at the long-run competitive price, in the second case prices should be set at the long-run competitive price with adjustments made for abnormal circumstances, and in the third case prices should be set at the current competitive level. 10.12 Discuss what you feel to be the ideal approach for establishing an export transfer price. Answers to this question will vary, but should be based on the following factors: tax and tariff factors, arms length pricing, level of ownership held, and special purposes of joint ventures.
10.13 Explain when the export firm should no longer be concerned with the pricing of its products. The export firm may have no control over the pricing of its product to the end users when the product is sold to an agency of a foreign governmental or to an overseas distributor who takes title to the goods. But the export firm should still be concerned since the final pricing in the latter case is likely to affect the total amount sold.

10.l RAP Engineering and Equipment Company
The price quotation problem facing RAP is pretty straightforward and routine for the experienced exporter. For the inexperienced exporter it may appear to be imposing, but it really is not. The basic approach is that of cost-plus pricing. All relevant costs must be considered.
1. Calculate the C&F Lisbon price per machine and the CIF Lisbon price per machine.
The first thing that the student needs to understand is the meaning of C&F and CIF quotations: C = cost, which is the total cost to get the goods out to the vessel at the port of export. Sometimes the FAS value is used. This is all costs to place the product alongside the ship on the dock. Other costs beyond that may then be included in the freight charge. F = freight, which are the delivery costs from the port of export to the port of import. I = charge for insurance. Using the data presented in the case, the C&F price is determined as follows (all numbers rounded to an even dollar): Cost of machine to RAP RAP markup Rail cost (Akron to Seattle) Trucking and handling Export packing Shipping to pier Storage and handling Heavy lift (for chassis only) Consular invoice Ocean freight (based on measure) US$ 4,500.00 900.00 750.00 18.00 70.00 15.00 21.00 54.00 2.00 891.00 Total $7,221.00 The student should note that the ocean freight charge has been quoted for weight or measure. Both charges should be examined and the larger amount is included in the quotation as it is the one that will be charged.
To determine the CIF price, RAP needs to calculate what the insurance charge will be and add this to the C&F price. A simple way to do this is to use the formula: CIF = C&F / (l 0.011R) This particular formula assumes an insured valuation of 10% greater than the C&F value. Doing this for both under- and above-deck shipments gives: CIF (above deck) CIF (below deck) 2. US$ 7,425.00 7,359.00
At what point in time, or place, will RAPs responsibilities for arrangements of the shipment end? When does RAPs legal liability end and when does it acquire the right to payment?
RAP responsibilities for arrangements of the shipment end when the goods are loaded on the carrier or are in the custody of the carrier at the port of export, even though the company is responsible for paying transportation to a named foreign port under C&F and transportation and insurance for CIF. With a C&F quotation, the exporter may have agreed to arrange for the insurance although the buyer pays it directly. This is rare, however. Similarly, RAPs legal liability ends when the goods are on the vessel and a signed on-board bill of lading is issued. At that time RAP has the right to payment. Figure 8.3 in the text shows these relationships. 3. How would your answer to Question 2 change if the term of sale was FOB vessel (FOB) or ex dock (DEQ)?
If the term of sale were FOB, legal responsibility and liability end when the goods are placed on the ship (as evidenced by an on-board bill of lading) and RAP is then entitled to payment. If it were ex dock in the importers country, legal responsibility and liability end when the goods are delivered to the dock in the importers country and RAP is then entitled to payment.
10.2
1.
The Capitool Company
What should be Capitools general policy on the formulation of international transfer prices?
It appears that Capitools policy for formulating international transfer prices and for implementing same is based, in part, on so-called arms length negotiating conditions. The German subsidiaries purchase components, available in Untied States divisions, from these units only when the delivered price is less than that from suppliers in Germany and other countries. The policy also reflects business purpose conditions if there is need for quick delivery and this is forthcoming only from the United States. These two conditions apply to Class B and C products. When the needed product is not available in Germany (a Class A product), then it is sourced from the United States. Overall, this seems like a reasonable policy and one that should not concern either the United States or the German governments. However, one modification might be necessary as the internal market of Europe 1992 emerges. That is, the comparison base should be broadened from Germany to the European Union and perhaps even the European Economic Space (EES), if the non-EU countries can get EES operational. 2. What methods should be used to set Capitools transfer prices and who should be involved in the process?
In examining methods to set transfer prices one must consider those factors that influence such prices: competitive market prices, costs, and legal restrictions. These are discussed briefly in
the text. A major consideration, of course, centers on the purpose of the transfer price and which unit buying or selling is of most concern to the company. After all, transfer pricing is a way to shift revenue, and thus, profits, from one unit to another, if the customs and tax authorities do not intervene. On balance, Capitools corporate policy on transfer pricing, as outlined in the case itself, seems reasonable as market price if there is one is used as a base for setting the transfer price and subsidiaries are free to purchase from outside if priced lower. When there is no market price, the buyers and sellers negotiate a price. Other considerations may arise when the subsidiary is not wholly owned, e.g., Genforsler-Capitool GmbH. In this case Capitools policy is to set a transfer price that results in a profit for Genforsler-Capitool, which reflects what it deserves on the basis of its operations and efficiency. Another consideration is the trade-off in taxes and in customs duties. Regarding who should be involved in the process, one answer is everyone who is part of the transaction, that is, transfer prices per se should not be mandated by people not directly responsible for the transactions involved. In short, the buying and selling organizations should negotiate on the ultimate transfer price, subject to market conditions. 3. Should Capitool have a system of multiple transfer prices: (a) for different products, (b) to different countries or (c) to different classes of customer?
It is reasonable to state that there should be multiple transfer prices for varying types of products, countries, and customers. But the process and broad policy should be the same, even if the resulting prices should differ. Every product, country, and customer-type is unique in many respects. This should be reflected in the resultant transfer prices, and these may vary. But, the process followed can be standardized.
10.3
1.
Strato Designs
Are the Japanese customers of Strato Designs likely to be willing to accept price quotations in dollars? Discuss.
No. The Japanese would be no more willing to bear the exchange risk than is Strato Designs. As customers, the Japanese expect the exporter to meet their terms, and will probably be unwilling to buy if the price is not quoted in yen. 2. What should be the companys objective in managing the exchange rate situation.
The companys objective in managing the exchange rate situation should be to concentrate on making money from manufacturing, not on speculating on the future trends in the exchange rate. If they do not hedge against exchange rate fluctuations, they are indeed gambling. 3. What model or system would you recommend that Strato Designs use? Defend your choice.
The company should use a strategy that minimizes their exchange rate exposure. Strategy 1 is probably the best. It offers complete protection, is less costly than Strategy 2 (though without a potential windfall profit), and is easier to arrange than Strategy 3. Strategy 4 is satisfactory if they do have a balance in exports and imports, but this is not the case for most companies. Strategies 5 and 6 are both too risky. It is unlikely that the treasurer of Strato Designs is able to predict future exchange rates better than the market is. The company is in the business of manufacturing and selling, not speculating in the market.
4.
Is your choice in Question 3 something the company should do for all the foreign currencies they might have to manage or only for the Japanese yen? Explain.
Strato Designs should use the same strategy with all foreign currencies they may have to manage, and for the same reasons as discussed in Question 3 above. For the currencies of some countries, there may not be an active forward market. In this case, Strato Designs should price in US dollars if possible, or pick Strategies 3 or 4 if they can be arranged.
TEST BANK
1. The Internet: (a) can make a buyers search more efficient. (b) encourages buyer-led pricing. (c) erodes risk premiums experienced. (d) All of the above. (e) None of the above. 2. Because it discourages the comparison shopping available in stores, and provides little opportunity to find out information about the products, the Internet discourages rational shopping. (a) True (b) False 3. In determining an export price: (a) market condition (demand) will set a floor price. (b) costs will set a ceiling price. (c) competition will determine whether prices should be set between the floor and the ceiling. (d) All of the above. (e) None of the above. 4. In determining an export price, it does not matter whether the exporter uses full or marginal costs. (a) True (b) False 5. In developing a fundamental export pricing strategy: (a) penetration pricing assumes unit costs go down as the total amount produced increases. (b) preemptive pricing assumes unit costs go down as the total amount produced increases. (c) extinction pricing is closely associated with dumping. (d) All of the above. (e) None of the above.
6. Price differentials occur among foreign markets where: (a) there is effective separation of markets. (b) elasticities of demand are the same across markets. (c) gray marketing/parallel importing is inexpensive and easy. (d) All of the above. (e) None of the above. 7. In the relation of export prices to domestic prices: (a) marginal cost pricing and experience-curve pricing indicate export prices should be higher. (b) concerns over antidumping regulations indicate prices should be set lower. (c) to secure market acceptance and initial purchase, prices should be set higher. (d) All of the above. (e) None of the above. 8. Transfer prices are of great concern because: (a) they help determine where profits are earned. (b) they may result in charges of dumping. (c) they may affect amount of customs duties. (d) All of the above. (e) None of the above. 9. In pricing decisions, any consideration of costs requires knowledge about volume. (a) True (b) False 10. Fair profit pricing will assure a high level of sales and a high level of profits. (a) True (b) False 11. Break-even point pricing strategy is used very widely in international business. (a) True (b) False 12. It is the gap between cost and value that make it possible to have a pricing strategy. (a) True (b) False 13. Currency devaluations may affect a companys international competitiveness, at least in the short run. (a) True (b) False
14. The level of prices an exporter charges should be determined by: (a) product characteristics. (b) present and expected future market conditions. (c) financial and technical ability of exporter to meet demand. (d) All of the above. (e) None of the above. 15. An exporter may have some shelter from competition in a foreign market(s) because of: (a) product distinctiveness. (b) brand prominence. (c) better distribution channels. (d) All of the above. (e) None of the above.

1. (d) 11. (b) 2. (b) 12. (a) 3. (c) 13. (a) 4. (b) 14. (d) 5. (d) 15. (d) 6. (a) 7. (e) 8. (d) 9. (a) 10. (b)
CHAPTER 11
Financing and Methods of Payment

LECTURE OUTLINE
This chapter discusses: Methods used in arranging export financing to meet the needs of both exporters and importers. Exporters want assurance of payment; importers want assurance of receiving goods or services Return of goods is difficult or impossible; legal actions are difficult, costly, and may be infeasible
Documents used in financing and payment Types of risk and credit insurance available Countertrade arrangements.
Introduction
Terms of financing and payment are of great importance to both the exporter and the importer, and may affect the price quoted. Note to instructors: In order to make this material clearer to the student, it may be helpful to begin by writing brief simplified definitions of the terms draft and letter of credit (L/C) on the board: Draft: A draft is an unconditional order in writing from the drawer to the drawee, directing the drawee to pay a specified sum of money to a specified beneficiary at a particular time. (May be issued in connection with a letter of credit.) Note: The check you (the drawer) write on your bank (the drawee) is a form of draft; it orders the bank to pay some entity/someone (the beneficiary) a specified sum of money at a particular time. Letter of credit: A letter of credit is a guarantee, usually by a bank, that it will pay a specified sum of money to a specified beneficiary when certain conditions are met. Advances in electronic communications have had a major impact on: bank interfaces with customers inter-bank operations.
Some customers still fill out paper application forms for letters of credit (L/Cs) and other financial transactions. Most companies now conduct much of their banking/financial transactions online. They use web-based application forms; send EDI (electronic data interchange) files and other files electronically. Most letters of credit and other forms are no longer sent in full-language text in hard copy or electronically; the usual procedure now is as follows: Over 90% of inter-bank transactions are now made through SWIFT (Society for Worldwide Inter-bank Transfers), a proprietary electronic network owned by banks. Forms for most transactions (including inquires, payments) are filled out in the language of the companys home country. These are put in a standard format (structured message) for transmission (at one-fifth of the cost of sending a full-text message). As necessary, the receiving bank puts it in to locally used format for customers/ recipients.
Personal relations are still of great importance, but routine transactions are done online.
Export financing methods/terms of payment

The seven methods discussed in the following sections are listed in order with the highest risk to the exporter, and the lowest risk and cost to the importer, first.
Consignment
Payment is made against clean draft (no documents attached), usually after goods are sold by the importer.
Open account
Payment is made against clean drafts or against statements of balance. Factors may be willing to purchase accounts receivable, with or without recourse. Exhibit 11.1 shows Factoring as an alternative means of financing. Figure 11.1 shows the process in Exporters use of factoring.
Documentary collections
Documents against acceptance (D/A) The documents, which the importer needs to obtain the merchandise, are attached to a draft sent through a bank. The bank will not release the documents until the importer has accepted them (agreed to pay after a certain number of days from sight [time draft], or at a specified date [date draft]). Risks if draft is not issued under a letter of credit: nonacceptance of draft or nonpayment of time draft/date draft when due. Documents against payment (D/P): sight draft The documents that the importer needs to obtain the merchandise are attached to a draft sent through a bank. The bank will not release the documents until the importer has paid.
Letter of credit (L/C), Documentary credit

At the request of the importer, his/her bank establishes a commercial credit, which guarantees payment to the exporter when certain conditions are met (usually presentation of documents for the shipment). The bank actually pays, or agrees to pay, when the exporters draft (demand for payment) is presented, usually with documents attached.
COD (Cash on delivery)

Not frequent except for air shipment.
Cash with order

Advance payment is sometimes demanded by sellers. Table 11.1 shows Key features of export payment methods.
Long-term financing
For major projects, large capital equipment sales, special exports. Both financing and insurance against credit and political risk are often available from government and/or private sources.
Payment/financing procedures
Two general categories: (1) letters of credit, (2) drafts or bills of exchange.
Letter of credit
L/C defined: a written promise, usually issued by a bank on behalf of its client, that it will pay the beneficiary a specified sum of money when the conditions in the letter of credit are met. Adds the banks name and credit to that of the importer. An L/C is only as good as the bank that issues it. Figure 11.2 shows the English language version of an application for an irrevocable letter of credit of the US branch of the large international Dutch bank ABN-AMRO. Figure 11.3 shows How a letter of credit operates. Figure 11.4 shows a Correspondent banks notification of opening of a letter of credit that it does not confirm. (This figure covers four pages in the text.) Figure 11.5 provides an example of an Opening banks letter of credit notification. (This figure covers two pages in the text.)
Types of letters of credit

Revocable and irrevocable: most L/Cs issued are irrevocable. revocable can be revoked any time before payment is made; revocable, therefore, is much less safe for exporter. Confirmed and unconfirmed: Confirmed L/C includes agreement by exporters bank to pay when conditions are met. Gives exporter added assurance. Clean and documentary: Clean will pay against draft (demand for payment) with no documents attached. Documentary has documents (required to obtain merchandise) attached.
Transferable and nontransferable: Transferable allows part or all of proceeds to be assigned by the beneficiary to a third party; nontransferable does not. Assignment of proceeds may be made in some cases. Revolving letters of credit: Used where transactions are more or less continuous.
May limit the amount outstanding at any one time or to be paid in a given time period. Deferred payment credit used where the payments are to be made in installments. Standby letter of credit: an irrevocable L/C issued in connection with something other than the movement of goods. See Figure 11.6 for an example.
Drafts (demands for payment)

(The definition of a draft is given above in Section Introduction.) Drafts may be used under an L/C or by themselves. When used alone (not under an L/C), they may be called bills of exchange. Figure 11.7 shows The process of foreign collections. Figure 11.8 shows an International collection instructions and receipt form. Figure 11.9 shows two examples of Drafts drawn under a letter of credit. One is a sight draft and one is a time draft. The difference is explained in the text. Documents may be delivered against payment (D/P) or against acceptance (D/A). Acceptance: a time draft or bill of exchange that has been accepted (signed to agree that payment will be made at the time specified). Signed by the buyer makes it a trade acceptance. Signed by a banker makes it a bankers acceptance. Bankers acceptances, and some trade acceptances, may be sold at a discount to obtain immediate cash. Acceptances can be used domestically as well as internationally.
Types of draft
Clean or documentary (without or with documents attached). Sight and or usance drafts. Sight drafts are to be paid when first seen by the drawee. Usance drafts are to be paid at some time in the future. Used when the seller/exporter is willing to extend credit to the buyer/importer. A time draft is to be paid after a certain number of days. A date draft is to be paid on a certain date.
Figure 11.10 shows one example each of a sight draft and a time draft.
Drafts may be with or without recourse: without recourse means the bank (or factor) purchases the draft (accounts receivable) from the drawer (seller) without requiring that the drawer repay even if the drawee (buyer) does not pay when due.
Export credit insurance

Available through governmental insurance or private insurers. May cover commercial risks as well as political risk and risk of nonconvertibility of currency. Based on co-sharing of risks, spread of risks, reduction of risk.
Countertrade
Trade agreements in which the seller: agrees to a reciprocal purchase obligation for all or part of the value of sale; or provides some other benefit to the purchaser or a third party.
Appeals to buyers: in countries short of hard currency; who want arrangements to supply components or other services to the seller.
Significant now; likely to become increasingly important. Table 11.2 lists some objectives of sellers and buyers in international countertrade.
Pure barter
Goods or services for goods or services. May involve more than two companies and two countries. Now facilitated by specialized corporate barter companies. Online barter is now operating in the US and can be expected to develop internationally.
Clearing arrangements
An agreement to exchange a number of products and/or services, some not easily sold on the open market, during a given period of time.
Counter purchase
A sale for cash or credit with an agreement by the exporter to, in turn, buy products and/or services from the importer or a third party.
Switch trading
An agreement in which the exporter accepts payment in goods or services that the exporter does not really want, but which can be sold for the exporter to some third party by a specialist called a switch trader.
Buy-back or compensation agreement

The seller takes part of the goods produced by the buyer in payment.
Offsets
The seller assists in or arranges marketing or provides some other benefit to the buyer (such as agreement to buy parts that will be used in products sold to the buyer). Examples of formal and informal arrangements in aircraft (airframe) manufacturing are given in the text.
Concluding comment
Countertrade may be arranged by in-house organizations or by outside specialists. Which form is best depends upon the circumstances.
Summary
Table 11.3 provides an outline of types of payment procedures. Exhibit 11.2 discusses Money transfer and exchange rates for individuals.

11.1 Compare and contrast the seven methods of financing exports that are presented in this chapter. Consignment: Payment made by clean draft drawn on consignee to which no documents are attached. Convenient way for buyer to make payment.
If payment is not made, it is known to the collecting bank. May be dangerous: laws not clear on ownership of merchandise, difficult for seller to monitor merchandise, exchange controls may preclude payment by consignee.
Open account: It is handled by the same procedures and methods as in domestic trade. Account may be liquidated by: remittance from consignee, clean draft drawn on consignee.
Documents against acceptance (D/A): Credit is extended to the buyer on the basis of acceptance of draft. Two types of draft are used: Time draft: payment made in specified number of days after it is presented to consignee. Date draft: payment is made on the date specified on draft.
Sight draft, documents against payment (D/P): Buyer must make payment prior to receiving documents conveying title to the merchandise. Upon instruction from the drawer, buyer may be given a certain limited period in which to make payment; meanwhile, title remains in the name of the collecting agency, usually a bank.
Letter of credit: Buyer establishes commercial credit through local bank and specifies conditions under which payment is made to the named seller. To secure payment the seller presents to the notifying bank the specified, necessary documents covering the shipment. Attached to the documents is a sight, time or date draft. If everything is in order the exporter receives payment.
COD (cash on delivery): Not frequently used in export trade, except in connection with air transport. Sight draft, D/P, is equivalent.
Cash with order: Sometimes demanded by seller due to: potential risks in obtaining payment; foreign exchange requirements. Usually part cash, enough to cover transportation costs to the point of import and back to the point of export.
11.2 Explain how factoring can enable an exporter to use open account when making payment arrangements with buyers. How does this differ from forfaiting? The factor purchases the accounts receivable of the exporter, providing cash to the exporter when shipment has been made. The factor receives his/her money when the importer pays, and, of course, charges a fee for this service. If the factor accepts the accounts receivable with recourse, the factor will get the money back from the exporter if the importer fails to pay. If the factor accepts the accounts receivable without recourse, the factor accepts the risk of nonpayment. Few factors in international trade offer terms without recourse. Forfaiting is the sale to a third party (the forfaiter) by an exporter of a term debt owed to him by an importer. The debt is usually evidenced by a bill of exchange or promissory note. It is usually done without recourse (that is, the exporter does not have to repay the forfaiter if the debt is not paid as due). 11.3 What are the major differences between using letters of credit and bills of exchange (drafts) as procedure for financing exports and receiving payment? When letters of credit are used, payment is guaranteed by the bank that issues it. The issuing bank usually has funds on deposit in a bank in the exporters country. When drafts are used, final payment rests upon the ability of the drawee, usually the buyer, to pay. On a technical level, a bill-of-exchange draft is drawn on the importer, whereas a draft used with a letter of credit is drawn on a bank. Therefore, letters of credit are much more secure and attractive from the sellers point of view. 11.4 An exporter gets the same protection from using a bill of exchange as from using a letter of credit. Discuss. No. With an L/C, a bank guarantees payment when a draft is presented along with the required documents. With a bill of exchange, the exporter depends upon the importers ability and willingness to pay. 11.5 Is there one best type of letter of credit? Explain. The type of letter of credit that is best depends on the situation. In a normal export situation, the seller would prefer an irrevocable confirmed letter of credit. With this type, the letter of credit cannot be canceled. It offers the additional security of an endorsement by the exporters bank that they will pay if the importers bank fails to do so. A clean letter of credit is best if there is no documentation necessary that must be remitted by the buyer. If such documentation is necessary, a documented letter of credit insures that the documents will be sent. An assignable letter of credit is best in a situation where the shipper does not know at the time it is requested who the exporter or supplier will be. It is also useful for smaller exporters who find it difficult to finance purchases from suppliers. Revolving letters of credit are used in situations involving regular and continuous transactions and deferred payment letters of credit are used in situations where payment is to be made in a number of installments on prespecified dates. 11.6 When draft or bill-of-exchange methods are used, is it better to have the terms documents against acceptance or documents against payment? Defend your position. From the sellers point of view, it is better to have the terms documents against payment. With these terms, the documents that evidence title to the merchandise are not transferred to the
buyer until payment is made. This guarantees that payment will be made, and quickly, or the buyer will not receive the goods. From the buyers point of view, it is better to have the term documents against acceptance. With these terms, the documents that evidence title are transferred to the buyer upon acceptance of the draft. This provides credit for the buyer until payment is made. The merchandise is available for the buyers utilization immediately. 11.7 With export credit insurance the exporter can eliminate all risks of nonpayment by foreign buyers. Discuss. Export credit insurance is available in most countries to cover risks of loss (fire, theft, etc.) usually covered in domestic trade, plus political risk and non-convertibility of currency. In some countries, it may even be available to cover commercial risks where the buyer simply fails to pay. This latter coverage is not usually available in domestic trade. It may thus be said that insurance can be obtained to make international trade safer than domestic trade. However, some types of export credit insurance require co-insurance by the insured, or have limits on the total amount paid out. Thus, some risk may remain. 11.8 Compare and contrast the alternative techniques for counter trade. Is there one best form for a seller and one best form for a buyer? Explain. Pure barter: direct exchange of products and/or services between two or more parties; Clearing arrangements: an agreement to exchange a number of products and/or services, some not easily sold on the open market, during a given period of time. Counter purchase: a sale for cash or credit with an agreement by the exporter to, in turn, buy products and/or services from the importer or a third party Switch trading: an agreement in which the exporter accepts in payment goods and/or services the exporter really does not want, but which can be sold for the exporter to some third party by a specialist third party called a switch trader. There is no one best form for a seller or a buyer. It all depends upon the circumstances. A straight barter would be one of the simplest forms, if feasible. 11.9 To what extent are the objectives of sellers and buyers in countertrade transactions in conflict with each other and to what extent are they in harmony with each other? In general, each of the parties would prefer to receive hard currency, rather than an equivalent value of goods and/or services, for its exports. They are also often in conflict over the appropriate valuation of the goods. However, their objectives are in harmony in that they both hope to do better in a countertrade transaction than they could in an open, hard currency market.

11.1
1.
Tainan Glass Manufacturing Company
Why did the Nigerian company arrange for payment from a Hong Kong bank rather than a Nigerian bank?
The Nigerian company arranged for payment from a Hong Kong bank because they did not have Nigerian government authorization to buy the glass at the stated price and/or because they did not have a foreign exchange allocation (for hard currency) from the Nigerian
government. They did have undeclared (and probably illegal from the Nigerian governments standpoint) dollars on deposit in a Hong Kong bank. In a case where the government of a country controls foreign exchange in order to inhibit imports, conserve foreign currency, or maintain an artificially high exchange rate (or all three), foreign currency held abroad becomes more valuable than the official exchange rate indicates. That is because it can be used without home government approval and/or for purposes of which they would not approve. There is, therefore, an incentive for companies in the country with the restrictions to try to acquire foreign exchange abroad. 2. In what ways may the Nigerian company have obtained hard currency?
The Nigerian company may have obtained hard currency by underinvoicing some exports. In this case, they had sold goods for a price higher than they showed on the official invoice, took payment at the invoiced rate through the bank of Nigeria, and took the additional payment in Hong Kong. They may also have acquired the hard currency in Hong Kong by purchasing it from another Nigerian company, which had it there, in which event they would have paid a premium over the official exchange rate.
11.2
1.
Arion Exports
What other financial and payment methods might Arion use in exporting to the Canadian market?
There are numerous alternatives to the letter of credit that Arion might use. However, not all those should be considered by Arion as they do not solve the problem that importers have in having working capital tied up for a long period of time. Cash in advance, for example, would still require that the importers cash be tied up for long periods. Those forms of payment that might be used by Arion are: (a) Consignment (b) Open account. These two methods might be okay for importers who are known to Arion or its agent Peterson or who have shown they are good credit risks. If factoring were available in South Korea, open account could be good for those accounts the factor would accept. Other methods would involve draft financing or the use of a bill of exchange: (a) Sight draft, documents against payment (D/P) (b) Time (date) draft, documents against acceptance (D/A). In the case of the sight draft, D/P, the importer must pay when the draft is presented or he can wait until the merchandise arrives. This is equivalent to cash on delivery and does not tie up the importers working capital for a long period of time. The time or date draft represents a term credit that is provided the importer by Arion. However, once the draft has been accepted, if Arion wants to get payment, the so-called trade acceptance can be offered for sale in the secondary market. It appears that most of the Canadian wholesalers who are buying are relatively small. Thus, there might not be a market for their acceptances. The discounts that Arion would be offered would vary with the company involved.
2.
Which one of these would you suggest be used by Arion? Explain.
Students answers will vary. The alternatives presented most often are the use of some type of draft financing. A reasonable compromise that Arion and its buyers might agree upon is the sight draft, D/P. This reduces the amount of time the importers capital is tied up prior to sale (and reduces the time prior to delivery to zero). 3. Should Mr Lee necessarily drop using the letter of credit procedure? Why or why not?
Some students will argue that none of the alternatives be used and that the letter of credit procedure be retained. A question to raise is why are the buyers having trouble? Could they perhaps borrow the money from their bank to represent the letter of credit deposit? Another argument raised is that Arion change its transport mode to air transport so as to get delivery much quicker. As distribution costs would be higher, the price would have to be increased, but this increase may be less than the costs that the buyer will have to pay in the present system. There are two other possibilities that students might raise that tend to change the main issue. First, as it becomes clearer there is a market for Arion products in Canada, the company might want to set up some type of warehouse system in Canada to handle inventories of, at least, the popular products in the line. Perhaps Peterson Trading should take on this activity. Second, rather than selling to many small wholesalers, Arion should try to find a large wholesaler to act as sole importing distributor. This could mean severing relations with Peterson or perhaps Peterson could change from an agent to a merchant importer.
TEST BANK
1. A draft is: (a) a conditional order. (b) in writing. (c) offering to pay an unspecified sum to a beneficiary. (d) All of the above. (e) None of the above. 2. A letter of credit is: (a) an agreement (or guarantee), usually by a bank. (b) indicating it will pay a certain sum to a beneficiary. (c) when certain conditions are met (documents provided). (d) All of the above. (e) None of the above. 3. Regarding the key features of export payment methods: (a) consignment results in the highest risk to buyer. (b) cash in advance minimizes the risk to the buyer. (c) a letter of credit provides important assurances to the seller. (d) All of the above. (e) None of the above.
4. A documentary time or date draft: (a) requires actual payment in the future. (b) is made into an acceptance by the acceptor writing accepted; payable at ________ and then signing it. (c) becomes a bankers acceptance when it is accepted by a bank. (d) All of the above. (e) None of the above. 5. Drafts: (a) with documents attached are called clean drafts. (b) which do not require payment upon sight offer no more assurance of payment than open account. (c) which have been accepted are never purchased without recourse. (d) All of the above. (e) None of the above. 6. Financing and payment issues should be decided independently of export pricing. (a) True (b) False 7. A draft is also known as a bill of exchange. (a) True (b) False 8. If a revocable better of credit is revoked after payment has been made, the funds will be taken back. (a) True (b) False 9. Under a letter of credit, a documentary draft may be used to demand payment. (a) True (b) False 10. Factors may be willing to purchase the exporters accounts receivable. (a) True (b) False 11. An exporter may request a transferable letter of credit because: (a) he may be a middleman purchasing the goods from someone else. (b) he may be providing only part of the goods.
(c) he may be the buyers/importers agent and not yet know who the actual supplier will be. (d) All of the above. (e) None of the above. 12. A request for a transferable letter of credit may be seen by the buyer as indicating that the exporter is financially weak or only an intermediary. (a) True (b) False

1. (b) 11. (d) 2. (d) 12. (a) 3. (c) 4. (d) 5. (e) 6. (b) 7. (a) 8. (b) 9. (a) 10. (a)
CHAPTER 12
Promotion and Marketing Communication

LECTURE OUTLINE
This chapter covers: Export marketing promotion and communications decisions Alternative methods of promotion Developing promotional programs and strategies Decisions regarding standardization or adaptation Advertising transference Management issues.
Introduction
International/export marketing communication is cross-cultural. Differences within some nations; similarities among some segments across borders. Language is a legal or key issue in some countries. Figure 12.1, Some barriers to export marketing promotion. Legal limits on types or subjects of advertising, or requirements that local companies need in the preparation of materials. (e.g., In Korea, comparing two different products in advertising is illegal.) Regulatory barriers relating to specific market segments (e.g., children) Not all cultures respond to marketing promotion in the same way.
Export marketing promotion and communication decisions

What message, what media, how much to spend. Forms of promotion: personal selling, advertising, sales promotion, and publicity. Advertising is only one component in the communications/promotional mix. Others include public relations, direct mail, business-to-business promotions, telemarketing, sponsoring events, etc.
Other considerations: funds available for promotion, costs, competition, nature and size of markets, etc.
Export marketing promotion as communication

Inform, persuade, develop positive attitudes, and change peoples thinking and behavior. Problems and barriers in verbal and nonverbal communications. Table 12.1 lists some elements in Nonverbal communication.
Symbols
Considerations in use of color, animals, and portrayals of people. Exhibit 12.1 discusses Color, culture and consumption. For example, use of color in B2B advertising has profound effect on advertising success. Exhibit 12.2 discusses some promotional blunders.
Problems in marketing communications: message may not get through, may not be understood, and/or may not induce desired action.
Alternative techniques of promotion

Personal selling
Person-to-person communication between a company representative and a potential buyer. Basic functions: (1) selling; (2) customer relations; (3) information gathering and communicating.
Sales promotion
Sales promotion: all sales activities that supplement and strengthen personal selling and advertising. Foreign catalogs: to create interest, carry personality and reputation of manufacturer abroad, facilitate buying, create desire, and supply all facts. Samples: direct sampling sent by mail or other; use of samples by agents, branches, salespersons, and at fairs. House organ and company-published magazines. Films, slides, and personal computers.
Motion pictures/videos/DVDs can be very effective: Potential buyers may be willing to stop and watch. Material must be carefully developed and produced.
Internet and fax transmittals. Trade fairs and exhibitions: (1) annual fairs; (2) specialized fairs particularly important in Europe; (3) some by invitation only. Trade fairs: facilitate gathering names, demonstrations, prizes, and client promotions, plus other business functions. Another type of fair that attracts retail customers: the annual Christmas Market in Aachen, Germany shown in Figure 12.2. Point-of-purchase materials. Using consumer promotion materials, such as coupons, is another sales promotion method.
Publicity
It is news about a company published free in some outside periodical; often a result of public relations activities of a company. A major component of the public relations activities of a company. Often has a higher level of credibility than companys own advertisements.
Advertising
Potential for international or global advertising, using the same approaches in multiple country markets, is increasing. Exhibit 12.3 discusses advertising to the young and achieving engagement. Exhibit 12.4 discusses The dimensions of the climate for advertising including underlying factors: economic systems, social structures, cultures, religions; laws and political climate: state monopolies in some countries; censorship; restrictions and potential problems.
International media (multination) and foreign (local) media: popular, business, and technical periodical/journals; radio and TV (including cable and satellite). Foreign media: major types exist in virtually all markets; patterns and use vary widely; match objectives with target audience; newspapers, magazines, posters, signs, and car cards; cinema, radio, TV, and direct marketing (mail, telephone/telemarketing).
Figure 12.3 shows advertising on the side of a bus in Australia. Figure 12.4 shows a semi-truck for Pepsi designed to look like its sides are missing. Direct marketing can be a useful part of sales and advertising programs; activities limited by government regulations, particularly with regard to privacy rights of individuals in Europe and elsewhere. Advertising on the Web is growing rapidly, often using a pay by the click system. Online advertising: technically, online advertising takes place when a company places advertising on another companys website; banner advertisements: (a) widely used to deliver content, enable transactions, solicit response, and encourage retention; (b) placed through advertising networks or affiliate networks.
Advertising network: collections of independent websites with arrangements for placements of banner advertisements. Affiliate networks: collections of websites linked to an online retailer; Amazon Bookstore has over 300,000 affiliates. Consumer goods companies are now creating bulletin boards, forums, and chat rooms. Interactive online sites provide both consumers and the company with valuable interactions and information. Exhibit 12.5 shows An innovative use of Internet advertising. Exhibit 12.6 discusses Media objectives that evaluate media in terms of: reach, frequency, continuity, size, and availability.
Each form of export promotion has its relative strengths and weaknesses. Personal selling is often effective, but has high cost per unit of sales. Advertising reaches many buyers at a low cost per contact, but may have high total cost. Sales promotion takes many forms. Sponsorship of events is useful for some larger companies. Click fraud is a growing problem.
Promotional programs and strategy

Promotional programs may be designed for: (1) prototype standardization: basic strategy with only minor local modifications. (2) pattern standardization: designed specifically to accommodate local modification. Set objectives, determine themes, select media, and set budgets. Set forth specifically what is to be accomplished for each country: consider channels, market, product, and costs. Design with buyers preferences/needs in mind. Exhibit 12.7 Globalizing the brand image of Unilevers ice cream business: one companys response to market trends, new consumers, life styles, and individual brand images. Co-promotion useful for some products: Figure 12.5 provides an example of LEGOs copromotion with Kelloggs and McDonalds.
Standardization or adaptation
No consensus on whether standardization or adaptation is best. Situation specific, particularly among product type. Some needs are basic, but culture determines perception of message. Advantages of standardized advertising: present a worldwide coverage, lower costs, and reduce confusion. Basic standardization with adjustments to local markets may be effective. Table 12.2 VALS categories presents one view of similarities in values in lifestyles across countries. Exhibit 12.8 discusses the global approach for advertising Wow, including national adjustments. Exhibit 12.9 discusses international advertising strategies in China. Aspects of international advertising subject to standardization: see the bulleted list on page 584 of the text.
Appeals
Need to consider lifestyles of people and what they want. Advertising must match cultural values of target consumers.
Illustrations and layout

Have more of a universal appeal. But even here, cheese might be shown with beer in one country and wine in another.
Copy
Need for more than accurate translations. Pampers in Thailand: appeal to babys comfort rather than mothers convenience. In addition to back translation, use knowledgeable local people for checking.
Some generalizations
Factors that influence the appropriateness of standardized advertising: type of product, homogeneity of markets, media, advertising agency service, government restrictions and charges, and company organization (see the bulleted list on pages 586 and 587 in text).
Advertising transference
Using a successful campaign in another market: appeals used; encoding and decoding symbols; and silent language. Many models using varying degrees of transference are available (see bulleted list on page 588 in text).
Management issues
Control over planning promotion strategy and selecting media, like all strategy development, is concerned with: centralizationdecentralization; location of relevant knowledge. May combine centralized strategic planning (using foreign and home office inputs) with decentralized planning and execution of advertising and promotional campaigns. Local personnel usually know which media are most effective in their market, costs (including taxes), most effective time and place for advertisements, how to get access to media with limited space or time slots, etc.
SUMMARY
In this chapter we have looked at: Communications and promotion as major activities in export/international marketing promotion
Methods available for export promotion Management issues relating to degree of centralization versus decentralization.

12.1 What is your interpretation of the term climate for advertising? What factors cause the climate for advertising to differ among countries? Select one foreign country and explain how the climate for advertising in that country is important to an exporter. Climate for advertising is the local value system that determines the potential viability and effectiveness of export advertising. It is the result of the socioeconomic and cultural system and evaluates the message as either desirable or undesirable. The reactions of the audience are usually in accordance with this evaluation. In addition, the climate both affects and is affected by the legal/political situation. The factors that cause the climate for advertising are: Economic system Social structure Cultural background Religious climate State monopoly Censorship Restrictions on advertising.
Answers to the last part of this question will vary depending on the country chosen, but should be based on the chapter material. 12.2 From an exporters standpoint, what kinds of objectives should promotional messages be designed to accomplish? The objectives that a promotional message should be designed to accomplish are: Reaching the intended recipient Being understood in the way intended by the sender Inducing the recipient to take the action desired by the sender.
12.3 It can be argued that sometimes export marketing promotion activities appropriate for one foreign market are also appropriate in other foreign markets. Do you agree or disagree? Explain. While it is possible that export marketing promotions which are appropriate for one foreign market may also be appropriate for other foreign markets, it is highly unlikely that this will be so without some modification. Even the two common forms of standardization, prototype and
pattern, involve some modification. In prototype standardization, there may be language translation or idiomatic changes. In pattern standardization, the overall theme is the same, but the details can be changed. 12.4 Which type of media can be most effective: international or foreign? Explain. Whether international or foreign media are most effective depends on who the target audience is and the type of message to be communicated. International media audiences are often relatively influential, either as members or the middle and upper socioeconomic groups or as specialized professionals in a general industry. It is useful in communicating corporate image, messages aimed at audiences not well served by local foreign media, or a uniform message in a number of relevant foreign markets. Foreign media are better suited for more specific messages aimed at more specific audiences. 12.5 Explain why individual sales promotion activities might be more effective in some markets than in others. The effectiveness of sales promotion, defined as all sales activities that supplement and strengthen personal selling and advertising (subsection Sales promotion of the text), differ from market to market. Laws or customs may restrict the use of promotions such as cashbacks, free drawings, lotteries, and in-pack premiums. The use of samples depends upon the law and the ease or difficulty of reaching potential customers. Literacy rates and the availability, coverage, and cost of TV, radio, and newspapers, as well as the percentage of the target customers on the Internet, affect their use. Trade fairs and exhibitions may be more available and/or more useful in some markets than in others. 12.6 In what ways does culture affect export marketing promotion and communications? Culture affects export marketing promotion and communication by influencing many of the factors that must be considered when developing these programs. One of the biggest factors involved is the value system of the society. This serves to help determine how a product, activity or message will be judged and, therefore, if it will be purchased or not. Culture also affects what media will be effective in reaching a particular audience. 12.7 As an export marketer becomes more or less permanent in doing business in multiforeign markets, it almost inevitably faces the issue of standardization versus adaptation of its advertising program. Discuss what you consider to be the best approach for an exporter to use. The best approach for an exporter to follow, when deciding whether to standardize or adapt its advertising program, must be viewed as a cost/benefit evaluation. Standardization results in lower costs in creating the advertising program and consistency in the messages delivered. However, not all markets will respond in the same way to the same message. Adaptation allows for different messages to be delivered to different markets in an attempt to elicit the desired response in each. Therefore, an evaluation must be performed to weigh the benefits and costs of each in an attempt to find the program which will produce the best results. That program will often be a mix of the two approaches and may be different for different markets. Given these factors, students answers can be expected to vary. 12.8 Discuss the main issues involved in deciding whether to centralize or decentralize the planning, developing, implementing, and controlling of export promotion strategy and tactics. The main issues involved are the following.
Objectives of the promotional activity: if the objectives are company-based in nature, rather than local, the control is likely to be centralized. The availability of information on the relevant possible promotion form: if such information is available only at the local level, decisions are likely to be made there. The knowledge and experience of company personnel: control should be located where these factors exist in greater supply. The degree to which promotion, particularly advertising, must be supervised locally to ensure proper performance: the greater this degree, the more decentralized the control should be. 12.9 Go to the library and search out print media (that is, magazine and newspaper) advertising by a company, for one of its products or brands in different countries. Does this company use standardized or individualized advertising? Explain. Students findings will vary. 12.10 What do you see as the future for the Internet as a basic advertising medium and/or as a means for implementing sales promotion in foreign markets? The Internet can be expected to continue to grow in importance as an advertising medium and as a means of implementing sales promotion in foreign markets. Use of the Internet is increasing rapidly, though at widely differing rates, in various countries. The technological capabilities for sending information and pictures are being improved. The extent of use for particular products in particular markets will depend upon the extent of use of Internet services in the particular market and the type of product. 12.11 Go to a European companys website, an Asian/Pacific companys website, and a US or Canadian companys website and evaluate each in terms of its use for marketing communications about the companys product(s). What can you conclude about the promotion strategies of the websites? Students findings will vary, and should be interesting to compare.

12.1 Christa Clothing International
1. Should Christa Clothing International enter Asian markets? If so, in which countries, and in what order? If not, why not? It should. With Christas objectives of continuing international expansion and becoming a truly global company, it cannot afford to ignore the large and rapidly growing Asian market. It will also give it greater insight into what is happening in those markets, and to spot possible new trends that may affect their European and North American operations. Korea seems to be a likely candidate for Christas first entry to an Asian market based on Mr Caminos visit there (as a tourist), his subsequent development of information about the country, and the hiring of Ms Peters who comes with some familiarity and experience with respect to Korea (though she also has lived in Japan as a teenager). If Christa had conducted a more extensive analysis of Asian countries, they might have chosen one of the three markets that have higher GNI per capita (based on purchasing power parity): Hong Kong, Japan, or Singapore. Thailand, with its large population, bustling city of Bangkok, and the large number of tourists, might also have been considered.
2. Assuming Christa decided to enter one or more of the Asian markets, what should be the companys advertising objectives, message strategies, media strategy, and budget? The advertising objectives should be to develop brand awareness and to establish its position as a designer, producer, and marketer of high quality fashions at an affordable price. They should avoid giving the impression that they are mainly copying/modifying designs from other fashion designers. Christa should direct its appeal to the same age groups and lifestyles as in present markets, tapping into the worldwide niche of teenagers and young adults whose lifestyle emphasizes fun, freedom, and individuality. In developing its messages, however, it needs to adjust to the differences in how the target groups in Asian countries view fun, freedom, and individuality. As an example, the friendly kiss they portray in present markets may be misinterpreted in some Asian markets, and be considered offensive in others. On the other hand, the theme of a universal set of young, dynamic, internationally oriented people should play out well. The same types of media shown in Table 12.7 are available in all five of the countries mentioned in the answer to Question 1 (above). The costs and effectiveness of the various types of media will vary from country to country (e.g., advertisements in cinemas are effective in Thailand, but are not widely used in Japan. Given their lack of experience in Korea, Christa needs to work with a Korean advertising agency. The advertising objectives, message strategies, media strategy, and budget that Christa uses in their current markets should be presented to and discussed with the Korean agency and the Korean agencys recommendations, suggestions, etc., carefully evaluated. Christa will need to be open to what the agency has to say to avoid the danger that the Korean company may decide simply to tell Christa what they think Christa wants to hear. (Note to instructors: When KFC first entered Japan many years ago, their Japanese advertising agency recommended that their messages should convey a very different image of the company and product than that was presented in the US. The image in Japan was of high quality, and it was associated with what the Colonel learned when he was a boy. KFCs willingness to listen and understand what was told to them resulted in a very successful advertising campaign in Japan.) The Korean agency can give figures and opinions regarding the cost and effectiveness of the various types of media available. They can also develop budget proposals. Christa must keep in mind that their advertising expenditure will have to be high, relative to potential market size, in order to establish their brand awareness and image. Their experience in current markets appears to indicate that advertising in the mass media is very important in this regard, and needs to be reinforced over time. 3. Can the company standardize its advertising or must it individualize? Can the company transfer advertising from other markets? Defend your answer. Christa cannot standardize its advertising, and it needs to determine which of its themes and images it can transfer from its existing markets. That is, in some aspects it may be able to use prototype standardization but in others it may have to use pattern standardization. As noted in the answer to Question 2 above, Christa needs to work with a Korean advertising agency to determine what should work in the Korean market and what needs to be adjusted or changed completely (see text page 546). At the same time, Christa may want to take some risks in creative approaches to the market.
12.2
Nove Ltd
1. Explain why Nove Ltd can or cannot standardize its advertising in countries A, B, and C? Standardization of advertising is an issue facing all international marketers that do business in two or more foreign countries. As we point out in the text, there are different schools of thought on the standardization versus adaptation issue. These range from a belief that (a) basic human needs, wants, and expectations cross geographical, national and cultural borders and hence, differences between countries are of degree not of type, to (b) a Swede is always a Swede and a Korean is always a Korean, even though human nature is the same everywhere. In the first instance, a standardized advertising program could be utilized whereas in the latter, people would not be satisfied with the same advertising appeals and approaches. There are two versions of standardization prototype and pattern standardization. With prototype, the same advertisement(s) or campaign(s) are used in multiple foreign markets with the difference being language translation and necessary idiomatic changes. Pattern standardization, on the other hand, involves designing the advertising campaign, including its overall theme and specific components, for use in multiple markets but it is developed to provide uniformity in direction, not necessarily in detail. Thus, it would be possible to have individual market adaptation within the context of overall pattern standardization. Since the countries to which Nove exports are not identified, students will not be able to utilize outside sources of information in their analysis. They must rely solely on the results of the consumer investigation that are reported in the case. These data are not sufficient to arrive at a conclusion as to whether standardization is feasible or not. Students probably will find it difficult to state a normative conclusion whether the company should standardize. 2. If advertising can be standardized, what would the advertising program be? In addressing the question of standardization in countries A, B, and C, Nove management must look at the consumer investigation for answers to such questions as: Do consumers perceive the same benefits? Do purchasers buy for the same reasons? Do purchasers buy in the same way? What is the brand loyalty situation? Are the same media used equally effectively?
In short, there needs to be an assessment of the consumer/buyer decision process. The following statements summarize some of the findings from the consumer study: (1) These are major differences among the three countries in shaving habits daily shaving and self-shaving. This would suggest that the role to be played by advertising in the overall marketing mix would vary and that some adaptation would be necessary. (2) Ease of operation, speed, and absence of skin irritation are important advantages of dry shaving. It may be possible to standardize some appeals if they are based on benefits. (3) Purchase of a shaver as a gift is significant in any country. Thus, utilizing appeals to gift givers can be done in all countries. Similarly, most receivers of the gift had expressed a desire for it.
(4) There are some differences in where the shaver is bought. In countries B and C most are purchased in radio shops and electrical appliance stores. In country A, in contrast, barber shops and department shores are the major places of purchase. Any advertising program must incorporate this difference. (5) The Nove brand is not regarded as the best brand in all three countries. Brand loyalty for Otex is greater than it is for Nover. This is further evidence that the needed objectives for advertising to achieve should vary by country. In particular, Nover is most desired in country B and least desired in country A. Indeed, Nove may find it necessary to pursue a marketing strategy to maintain share in countries B and C, while attempting to increase market share in country A. (6) The media preferences are not the same. Countries A and B are similar, but country C differs significantly. Thus, it may not be possible to standardize media and this could affect the creative and strategic aspects of the advertising. These are but some of the findings that students can be expected to incorporate into their analysis. Some students will argue for adaptation stating that the differences are too great for standardization. Other students should argue strongly for pattern standardization only. It would be difficult to defend the feasibility of prototype standardization. Some students may present a compromise standardize some aspects (e.g., appeals) but individualize other aspects such as objectives, media, etc. 3. If advertising cannot be standardized, what advertising programs should be developed in each country? If advertising cannot be standardized, in each country advertising programs should be developed which meet the country differences discussed in Question 2 above.
12.3
Elis Cheesecake Company
1. What factors/actions/characteristics of Elis have made its web initiative so effective? Elis premium quality product, coupled with their promotional activities, provided the base for their successful web initiative. The company has been actively participating in Chicago civic activities for a long time and in providing special cakes for local events and celebrations, national events, and national figures. This has provided publicity through a wide range of publications and television. Tours of its facilities and a slice of cheesecake are available to the public. It established its name internationally through participation in trade shows overseas and in US, and through visits with distributors. It thus has a brand name with widespread recognition. Its website extends its reach by providing up-to-date information about the product, a way for retail customers to order online, and a way for existing and potential distributors/partners to interact with them. 2. Evaluate the companys use of promotion versus traditional advertising in light of the type of business it is in. Would another mix of promotion and advertising more efficiently or effectively meet its objectives? This is a medium-sized company with one basic product, sold in many markets, with much of its product sold to large purchasers or through brokers to their clients. Traditional advertising in print, radio or TV, in order to create a demand pull for the product, would probably be more expensive than the potential additional sales would justify. The Internet offers a way to provide the sort of information that the company would want to give through traditional methods of
advertising, and at a fraction of the cost. Finding ways to increase the effectiveness/visibility of its website, continued participation in trade shows, and continued participation in other promotional/civic activities are probably the most effective way to supplement its promotional activities. 3. Are the apparent objectives of Elis Cheesecake the same as those you would expect to find in a large conglomerate? In addition to the motive for profit, Elis Cheesecake Company was created in order to fulfill the dream of Marc Schulmans father to market a product that would spread his name beyond the restaurant business. That is, it had and still has a personal as well as a business objective. The continuous participation in civic activities and partnerships with educational institutions evidence social as well as promotional objectives. In this, it is like Ben and Jerrys Ice Cream Company (before its acquisition) mentioned in the text. It is difficult for a large corporation, concerned with large numbers of stockholders and managing thousands of employees, to have a major focus on personal and social objectives. An increasing focus on social responsibility has resulted in a number of large companies adding this to their objectives, but generally not in the personal way done by Elis. 4. What appears to be the emphasis on short-term versus long-term objectives? There appears to be a focus on long-term objectives, rather than on short-range profits. The emphases on premium quality, treatment of the workforce, steady improvement of production and marketing efforts, and the continuing development of community-focused programs all are indicative of a long-term focus. 5. What channels should Elis consider in its international expansion? Using a combination of brokers and direct sales to very large customers has worked well for Elis up to this point. With their product line limited to one basic product, cheesecake in many varieties, they have limited potential for using other channels. Teaming up with a producer of another food product who could distribute Elis cheesecake through their network is a possibility though, as noted in the answer to Question 8 below, there would be potential problems of loss of control. 6. How should Elis go about identifying potential new markets? The markets in which it presently operates successfully are those in which there are high per capita incomes or in which there is an adequate market segment of high-income individuals who are interested in high quality foreign products. Western Europe, the mid- and high-income Asian countries, and the Middle Eastern oil producers would appear to offer attractive opportunities. Participation in trade shows or exhibits, as discussed in the answer to Question 7 below, would be a relatively inexpensive way to determine if there is interest in particular markets. 7. How should Elis go about finding potential new distributors or large customers? Potential new distributors or large customers can be found by participating in national or regional trade shows such as those conducted in the Middle East and Europe, or in exhibits abroad sponsored by the US or other governments. These provide an opportunity to give the product additional visibility and attract potential distributors. Sponsorship or presence in an international event would also increase visibility, though the costs of being associated with an event like the Olympics would probably be prohibitively high.
8. Should Elis consider other methods of market entry such as joint ventures or establishing production facilities abroad? Given the objectives of the company, discussed above, licensing, overseas production facilities, or joint ventures abroad do not seem appropriate. There would almost certainly be dilution of management effort and focus as well as potential loss of control. The company would also lose appeal of its Chicago cheesecake image. Its niche market is tied in to the way it currently operates, and possible cost savings or increased market size do not appear to be justified. 9. Will the present web page be adequate for the next several years? Why or why not? The present web page will not be adequate for the next several years. The evolution of advertising, customer support, and interactivity on the Internet is proceeding very rapidly. A company which has a top-rated web page today, as Elis does, will find their efforts outdated in the near future without continual improvements. Elis web page was in its fifth generation in only six years from inception. 10. Should Elis consider expanding its product line? If so, what additional products might it consider? What would be the advantages and disadvantages of doing so? If Elis were to expand its product line, other types of cakes that would be of premium quality and could be frozen for distribution would seem the most likely extension. The same marketing/distribution channels could be used. The Elis name (without the cheesecake portion) should give the products some advantage. The overall potential advantage would be additional sales and potentially additional profits. The disadvantages would be the costs in dilution of management focus and attention, and in additional investment and risk.
TEST BANK
1. Regarding international/export marketing communication: (a) such communication is cross-cultural communication. (b) advertising within a nation may be cross-cultural. (c) certain aspects of markets in different nations may be culturally similar. (d) All of the above. (e) None of the above. 2. Symbols used in marketing include: (a) animals. (b) lifestyles portrayed. (c) color. (d) All of the above. (e) Answers (a) and (b) only are correct.
3. The exhibit on Promotion blunders are no joke presented examples, where: (a) blunders which occurred resulted in all companies permanency losing out in the markets. (b) in some cases the companies felt there was no blunder. (c) blunders were all concerned legal issues. (d) All of the above. (e) None of the above. 4. Trade fairs and exhibitions: (a) include broad, general type, well-established annual affairs and specialized types. (b) are common in the US but not in Europe. (c) trade fairs are really of value only to well-established firms. (d) All of the above. (e) None of the above. 5. Concerning advertising standardization or adaptation: (a) prototype standardization uses identical advertisements everywhere. (b) pattern standardization means a pattern in which themes and components for advertisements for each market are created from scratch. (c) there is still controversy over standardization of advertising. (d) All of the above. (e) None of the above. 6. There are some nations where the governments prohibit the use of a foreign language in promotion activities. (a) True (b) False 7. It is the personal aspect of marketing that can least readily be duplicated by competition. (a) True (b) False 8. Publicity is any form of nonpaid significant news or editorial comments about a company, its practices, its personnel, or its products appearing in the media. (a) True (b) False 9. Back translation is enough to ensure that advertising messages will be suitable. (a) True (b) False
10. The experience of Grey Advertising, Inc. in the Wow campaign for Playtex showed that, for advertising that product, no adjustments were required in other countries. (a) True (b) False 11. Online advertising is generally viewed as occurring when an advertiser places advertising content on another website. (a) True (b) False 12. In recent years, some brand-based online communities have been effective in improving communications from and among customers as well as improving communications to customers. (a) True (b) False 13. The EU has achieved uniformity in specifying the types of sales promotion activities that are legal. (a) True (b) False 14. Advertising aimed at children has come under increasing scrutiny and legal restrictions. (a) True (b) False

1. (d) 11. (a) 2. (d) 12. (a) 3. (b) 13. (b) 4. (a) 14. (a) 5. (c) 6. (a) 7. (a) 8. (a) 9. (b) 10. (b)
CHAPTER 13
Handling Export Orders and Supply Chain Management

LECTURE OUTLINE
This chapter discusses: Handling the export order: detailed requirements of critical importance Logistics/supply chain management: increasingly important; potentially a source of competitive advantage Basic structure of international physical distribution: modes of transportation, facilitating organizations, documents required
Introduction
Figure 13.1 outlines the overall export procedure. Exhibit 13.1 briefly describes methods commonly used in international communications. Two disparate current trends: Advances in systems and equipment making physical distribution faster and cheaper. Increased security concerns raising some costs and potentially causing delays.
Handling the export order

The inquiry and response
Respond politely and in business-like form to all inquires.
The order
May be received directly from the prospective importer, or from a branch or representative overseas. There is no standard form. Exporter normally sends confirmation of receipt right away. Pro forma invoice may be used by exporter to indicate proposed or agree-upon terms (example shown in Figure 13.2).
Acceptance of an order without modification constitutes a contract. Buyer confirmation and acceptance of a proposed modification constitutes a contract. Order based on contract negotiated by an overseas branch or a representative is referred to in international trade as an indent order. Performance of contract Difficult to enforce, but each party is honorbound to do so. Contract should include an arbitration clause.
Export licenses
Exporter should not enter into a contract until the exporter is sure that goods or services can be exported.
Financing/payment and other terms of sale

Trade term agreed upon indicates when and where legal title passes. Need to specify responsibility for logistical arrangements and payments.
Physical distribution
Processes, procedures, and documents required in export shipments are relatively more complex because of the following three factors: Passage of goods across national boundaries. Shipment by ocean-going vessels or air in some cases. Time, distance, and need to ensure payment.
Importance to management
Price is influenced by physical distribution. Potential sources of profit through reduced costs and/or increased sales: improved communications, lower transportation costs, more efficient warehousing. Good service can increase sales volume: speed, reliability, degree of immediate availability, arrival in good condition. National governments requirements affect inventories, transportation, (example of TaiwanChina trade). Exhibit 13.2, which includes Figure 13.3, provides an example of the use of improved technology (an EDI system) to improve service and lower costs.
Decision areas
Quantities and packing, transportation, warehousing, materials handling, carrying inventory, order processing and documentation. Potential problems in documentation: complexity, culture (language, currency, laws), changing requirements, costs of preparation, high costs of errors.
Logistics and the systems concept

Logistics is now often called supply chain management. Developments leading to new advances in logistics: Recognition that proper supply chain design and management can provide competitive advantage. Improvements in management systems: JIT, MRP, ERP. Improvements in communications. Improvements in physical facilities. Software to support improvements.
Exhibit 13.3 provides examples of improvements in logistics that have given specific companies competitive advantages. Modern logistics/supply chain management takes a systems view of the management of relations, decisions, and activities among production, storage and distribution so as to minimize total final cost. MRP and ERP systems originally designed to work backwards from expected final output requirements to determine input requirements The Japanese just-in-time approach discussed under Systems and innovations supporting modern logistics below.
The cost approach

The total-cost approach includes: Direct physical distribution costs: transportation, etc. Hidden or distribution-related costs: loss of sales, etc.
Marginal or incremental cost approach includes only those costs, which occur on additional orders/goods sold (assumes fixed costs are all covered by original volume). Break-even or least-cost model to show volume at which change from one method to another is desirable.
Goals (not all consistent): minimize costs, maximize service, maximize competitive advantage, maximize profits. Figure 13.4 shows Total-cost analysis for multiple distribution alternatives. Lines I, II, III, and IV represent combinations of successively higher fixed costs coupled with successively lower variable costs. The darkest line indicates the lowest combined cost for each expected volume range.
Systems and innovations supporting modern logistics

Present systems highly dependent upon broadband communications and computer software programs. Types of manufacturing systems: Traditional production planning dependent upon on having inventories at every stage. Toyotas just-in-time system, assumptions and approaches: 1. inventories are costly and parts should arrive just in time for installation; 2. design flexibility to allow production of more than one type or model of an item on a production line; 3. assure quality at each stage by giving worker responsibility for and control over production; 4. develop supporting relationships with suppliers. Radio frequency identification (RFID) systems used for tracking and control.
Structure of international physical distribution

Modes of transportation
Ocean, air, rail, truck, inland waters, pipeline. Ocean: low cost but slow; hidden costs of time, damage, etc. Small shipments by courier or parcel post to avoid minimum bill of lading charges. May use combinations: air-sea, land-sea, etc. Figure 13.5 shows A container vessel that is not fully loaded (partial loading indicated by how high it is riding in the water). Exhibit 13.4 discusses The major ports of the world, and the differences between Hong Kong and Singapore. Figure 13.6 lists The top ten ports in the world in the year 2000.
Facilitating organizations and services

Foreign (export) freight forwarders provide a very wide range of services for exporters, including production planning, tracking, electronic reporting (see page 623 for other services). Nonvessel operating common carriers (NVOCC) (ocean transportation intermediary): combines shipment for containerization; issues bills of lading. Distriparks lease space to supplier/exporter/shipper for assembling/processing/holding products. Districenters offer complete logistics systems for contracting out of distribution and transportation. Warehousing: public warehouses: customs bonded warehouses (duty free storage and processing). Free areas are treated as if outside of country's customs area. Types: free trade zone, free port, free perimeter. Provide: duty free storage and manufacturing (until sent out of zone). Exhibit 13.5 shows How companies can benefit from a free trade zone. Transportation insurance Marine insurance: always used on ocean shipments; can cover risks from sellers factory to foreign buyer. General average claims: liability for damage to another party's goods to save the vessel (see Exhibit 13.6, Marine insurance coverage). Insurance usually purchased to cover 110% of C&F value. Export packing: cost of packing and shipping versus cost of losses; there is also increasing concern, and increasing legal requirements, regarding recyclability.
Documents required
Customs and practices differ from country to country, and sometimes within countries. Changes in regulations may have substantial effects on distribution costs. Bill of lading; export license and export declaration; commercial invoice; consular invoice/special customs invoice/factura; packing list; certificates of origin and special certificates. Table 13.1 lists Common export documents. Figure 13.7 shows Main lines of communication in trade. Figure 13.8 shows a Consular invoice for the Republic of Haiti. Figure 13.9 shows a Certificate of origin from the United States.
Ocean transportation and bills of lading (B/L)

Purposes: receipt for goods, contract of carriage, evidence of title. Types of bills of lading (Exhibit 13.7): Signed (legal status) and unsigned (for many other purposes). Straight (nonnegotiable) and to order (legal holder can take delivery). Received for shipment and on-board. Clean (no damage or missing containers noted) and foul. Special types (accommodation B/L). Forwarders and NVOCC B/L. Ocean/combined transport bill of lading (uniform through export bill of lading (see Figure 13.10).
In selecting the route and getting goods to port, consider: (1) time required; (2) costs. Freight rates and space reservations: conferences, independents, and tramp vessels. Container shipments. Dock receipts. Figures 13.11a and 13.11b show A modern container facility, Auckland, New Zealand and A container vessel being loaded in Melbourne, Australia.
Air shipments and air waybills

Total cost considerations may lead to selection of air freight. An Air waybill, shown in Figure 13.12, is a simpler form than an ocean B/L: Does not carry title (not negotiable; like straight ocean bill). Limits the way financing procedures work under draft financing and L/Cs. Declared value for carriage purposes serves three purposes: transportation rates based on value; limit of liability for losses; and basis of valuation charge and insurance premiums.
Omission of any management function or any specific document is potentially very expensive. Management needs to keep up with changes.

13.1 What are the main issues that are of concern to the exporter regarding inquiries and orders? The main issue involved with an inquiry is that every one should be handled seriously with the expectation that it may lead to a profitable sale. It should be in polite, business-like letter format and include any information necessary to open negotiations. Orders may come directly from the prospective importer or from a branch or representative overseas. There is no standard order form, but all should contain the essential facts concerning the desired merchandise and how it is to be shipped. A confirmation of receipt is then sent by the exporter to the importer. Once both parties agree to all the details, a contract is created. A pro forma invoice showing the terms of the sale may also be used by the exporter to create a contract. Performance of an export contract is often hard to enforce. Litigation is very expensive. Therefore, if no monetary obligations or damages have been created, both parties are likely to disregard a contract if disputes arise. Honor is relied upon to enforce performance. Arbitration is the usual method of settling disputes which must be addressed. 13.2 Why might the cheapest form of transportation not be the most economical? There are many opportunities during the exporting process for things to go wrong, which may jeopardize safe and timely arrival of the goods. Some of these, such as damage to the goods or late arrival, involve the transportation of the goods. The cheapest form of transportation may increase the risk of such problems and therefore be less economical in the long run. Higher costs of insurance and money tied up in goods being transported are also factors. 13.3 Discuss the various ways in which a company might minimize its export marketing costs by paying proper attention to physical distribution matters. There are two types of physical distribution costs. The first are direct costs. These include transportation, warehousing, carrying inventory, packing, packaging, insurance, and so on. Export marketing costs may be minimized by seeking the most economical sources for each of these. The second type of physical distribution cost is hidden or distribution-related costs. These include lost sales, distributor/customer dissatisfactions, cost of time in transit, inventory loses, foreign warehousing, and losses from not being fully insured. By using as criteria the total of indirect and direct costs, the total physical distribution costs may be minimized.
13.4 Explain the meaning of the total-cost concept, and illustrate how break-even analysis might be used to solve an export physical distribution analysis problem. The the total-cost concept is based on the fact that the various aspects of physical distribution are inter-related. In order to optimize the 'costprofit relationship of the various alternatives the total cost of all distribution activities must be considered, not the costs of the individual activities. Break-even analysis is designed to show which of any of two or more alternative systems gives the lowest total cost for any given or expected volume of service (or production). It involves calculating the sum of fixed costs plus variable costs for each of the alternative systems. The fixed cost of any alternative is shown where the total cost line intersects the Y axis, and the variable costs are shown by the slope of the total cost line. As an example, Figure 13.4 on page 617 of the text shows four different distribution systems that could be used in a particular (hypothetical) case. Alternative I has the lowest fixed costs while Alternative IV has the highest fixed costs. But Alternative I has higher variable costs than Alternative IV. Thus the total cost lines for the two alternatives have different beginning points on the Y axis of the graph, and different slopes. The breakeven point for any pair of alternatives is where their respective total cost lines cross (about 4000 units in this case). Below that point, Alternative I has lower total costs and above that point, Alternative IV has lower total costs. Thus, with this data, a company can determine which system is preferable (if the total cost lines are correct and the expected volume can be forecast with adequate accuracy). For any given company, the costs may be hard to determine with accuracy, and volume may be hard to predict and to change over time. But this type of analysis often gives a useful model for determining what alternative may be most cost-effective. 13.5 Why does an exporter often need the services of a foreign freight forwarder? The foreign freight forwarder is often needed because of the difficulty of arranging and documenting export shipment. The foreign freight forwarder has a detailed knowledge of the required procedures, and contacts with the organizations involved, and can therefore assist the exporter in effectively and efficiently completing documentation and transportation arrangements. A wide variety of other services also may be provided, from arranging information to providing useful business contacts at home and abroad. The complexity of the exporting requirements makes it uneconomical for most exporters to develop the required expertise themselves. The foreign freight forwarder handles so many transactions for so many exporters that she/he can do so more accurately and at lower cost per shipment than the individual exporter. 13.6 A typical export shipment requires many documents. Identify those that are generally required for all shipments and those that may be required only for specific shipments. Documents generally required for all shipments include: Bill of lading: carries title to the shipment and authorizes acceptance of delivery. Commercial invoice: describes the merchandise, particulars of the shipment, and terms of the agreement. Packing list: lists the contents of the cases or containers.
Documents required for some shipments include: Export license: used by some countries to regulate their trading relationships. Export declaration: used by most countries to collect statistical data on exports.
Consular invoice/special Customs invoice/factura: ensures that fair market value is listed on the invoice. Certificate of origin: certifies the place of origin of the merchandise. Special certificates: certify purity and absence of disease, and are issued to cover food products, plants, seeds, and live animals.
13.7 Why is the bill of lading an important document in an export transaction? The ocean bill of lading is an important document because: (1) it is the contract of carriage between the shipper and the transportation company; (2) it is a receipt for the goods issued by the steamship company; and (3) it is evidence of title to the merchandise. 13.8 Distinguish between the alternative types of free areas that are potentially available for use by an exporter and/or importer. Is any one type better than the others? Explain. The alternative types of free areas that are potentially available for use by an importer and/or exporter are: (1) The free trade zone, an enclosed area without resident population into which foreign goods can be brought without formal customs entry. Duty is deferred on the goods until they are brought into the host country, and then charged only on the amount and under the classification they have at the time of entry. If the goods are sent to another country without entering the host country, duty is not charged on the goods by the host country. (2) The free port (or free perimeter) encompasses a port, an entire city, or some other specific area isolated from the rest of the country for customs purposes. Duty is treated in the same manner as in a free trade zone. (3) An export processing zone is an area in which foreign manufacturers receive favored treatment on imports, in industrial regulations applied, etc., when the final products are to be exported. In the typical free zone, goods can be stored, repacked, transformed/manufactured into final products, and in some cases displayed before being reexported or sold into the host economy. Which type is better depends upon the companys purpose (reexport or eventual sale in some form in the host country), the nationality of the company (domestic or foreign to the host country), and the location of the zone relative to where the company wants to carry out the particular functions. 13.9 How has the rapidly changing technology of the late 1990s and the early 2000s affected the physical distribution of products from one country to another? Improved communications, particularly through the Internet and World Wide Web, has enabled greater interaction and real-time information exchanges between suppliers, shipping companies, and users of products. Tracking of shipments has become much easier. Overall supply chain management has been facilitated by both software and hardware. Advances have been made in the physical handling of air, ocean, and surface shipments. Together, these factors have enabled suppliers to provide more rapid response to user needs, and made it feasible to carry smaller inventories. Internet technology has made it easier for smaller exporters and potential exporters to find potential importers, and to determine the most cost-effective means of transportation.
13.10 How have security concerns affected physical distribution? Security concerns have both raised costs and caused delays in moving goods. Additional inspections in the countries of export and additional inspections in countries of import have required the hiring of additional personnel and the development and purchase of additional detection and tracking equipment, thereby raising costs. The more thorough inspections required, and the lack of adequate personnel and equipment capacity has resulted in delays at some ports. In the long run, the accelerated development of more advanced tracking and monitoring systems and equipment can be expected to result in improvements in distribution management. This should provide some savings to at least partially offset the additional costs of inspections and delays.

13.1
1.
Jaguar Electronics, Inc.
Calculate the costs if the Airflow is assembled in Country 1 and if it is assembled in Country 2. Note that Country 1 has a free trade zone and Country 2 does not. Note also that calculations should be done for total sales to the two countries rather than on a per-unit basis since the costs will differ depending upon destinations as well as assembly points.
Students can use the cost calculation model shown in the case. 2. Is Jaguar Electronics likely to be able to compete overseas with a new product that it feels will not be competitive in its home market? Why or why not?
Jaguar Electronics president, Mr. Smith, believes that his company cannot compete in its home market because it does not have the resources, apparently the budget for product promotion and distribution system, required to compete with the major suppliers of the final product (the OEMs to whom Jaguar supplies the components). The relatively small size of the overseas markets have not yet attracted the major OEMs, so Jaguar might be able to enter those markets and become the established brand before the larger companies try to enter. It is possible that Jaguar could successfully enter the market if it were to develop an appropriate marketing plan and commit the resources required to carry out the plan. However, the company has no experience in marketing its products to consumers and thus would need to build up this capability. See the answer given to questions 3 and 4 below. 3. Should Winklepleck bring up the questions that are bothering him. If so, when?
If Winklepleck does not bring up the questions that are bothering him, the company may undertake a project that could be very costly to them. On the other hand, if he brings them up in a meeting attended by the president and others, he may embarrass/irritate/infuriate the president. He probably should request an individual meeting with the president (if his position in the company allows him to do this) or write a memo to the president about things to consider before making a final decision on the proposed project. The meeting or letter should be done as soon as possible, and certainly in advance of another meeting by managers on the proposal. Key questions that occurred to Winklepleck included: (1) can they compete in an overseas market when they feel they cannot compete at home (discussed in the answer to Question 2 above); (2) how would Jaguar control quality if assembly were done overseas; (3) was the
company prepared to expend the time and effort to begin marketing internationally; and (4) how realistic were the projections for overseas sales and how long would it take to reach them. There is actually a more basic problem, as discussed in the answer to Question 4 below. 4. What do you recommend?
The basic problem in Jaguar Electronics (Mr. Smiths) approach is that they are looking at the proposed expansion into Latin America as a manufacturing problem when it is really a marketing problem. This is understandable since all of their experience is in manufacturing and industrial sales (selling to other companies). The company should separate the two problems. The company should first decide if it is willing to commit the resources necessary to develop a marketing plan, including distribution channels, promotion, etc., for the target Latin American countries. To do this, they then need to determine the approaches they could use, and determine what type(s) of entry is(are) appropriate given Jaguars acceptable levels of costs and risks. Given the lack of required expertise within the company, they need to hire (one or more) people with international marketing experience and/or use a marketing firm to develop alternatives and associated costs. Exporting from their US base would be much less costly and risky than trying to establish a foreign assembly operation. They could export from their South Carolina base using one of the export entry modes discussed in Chapter 7 of the text, such as an independent organization in the US or a foreign-based distributor or agent/representative. The decision of where to assemble the product is also important, but it is premature to try to decide the location of the assembly operation until there is a clear plan for marketing the output. If they cannot manufacture the product in the US at a cost that enables them to export it to Latin America, it would be difficult to justify the costs and risks associated with foreign manufacturing in order to make the project feasible. A possible alternative, of course, would be to enter a licensing or joint venture agreement with an existing Latin American manufacturer to produce, and possibly market, the product.
13.2
1.
Megabox, Inc.
Evaluate the alternative physical distribution systems available for Megabox to use in its exporting activities to Zumburu.
The first step in evaluating the alternative physical distribution systems is to determine the cost for each (or to determine the cost of enough of the alternatives that we can make judgments about all of the relative costs). Since we have both weights and measurements for the four products, we should first determine whether we will be paying on a weight or measurement basis. In calculating payments by weight or measurement tons at shipping company options, one short ton (2000 lbs) is equivalent to 40 cubic feet (with a similar equivalency in metric units). The product with the highest weight to volume ratio is the VCR, 7 kg to 3 cubic feet per unit. One kilogram is very nearly equal to 2.2 pounds, so 7kg is approximately 15.4lbs. One VCR thus weighs 15.4 lbs/2000 lbs/ton = 0.0077 tons (by weight), and 3 cuft/40 cuft/ton = 0.075 measurement tons. The shipping company will thus charge for the VCRs on a measurement ton basis, and since the other three products have higher ratios of volume to weight, they also will be charged by measurement tons. In other words, for our cost calculations, the weights of the units become irrelevant.
We can make some shipping cost calculations for the VCRs as follows: SENDING VCRs BY AIR, 1000 UNITS IN 3000 CUBIC FEET OF SPACE: FOB factory cost: Unit cost of shipping (Table 5 excluding line 6): 3 x $10.10 = Consular fee: $300 x 1% = Insurance: (300 + 3.67 + 30.30)(110%)(1%) = Documentation: $220 / 1000 units = Customs: 40% x (300 + 3.67 + 30.30) = Total cost (to Megabox) per unit delivered to pick-up point: Note that Megabox is only charging the Zumburu customer: $300.00 30.30 3.00 3.67 .22 133.59 $470.78 $432.00
Based on a US price of $300 per unit, Megabox is in effect giving the Zumburu customer a discount of 12.6%. SENDING VCRs BY OCEAN CL, 40 FOOT CONTAINERS, USABLE VOLUME OF 1800 CUBIC FEET, WILL CARRY 600 UNITS: FOB factory cost: Unit cost of shipping (Table 5 excluding line 6): 3 x $4.50 = Consular fee: $300 x 1% = Insurance: (300 + 4.90 + 13.50)(110%)(1.4%) = Documentation: $220 / 600 units = Wharfage: 2% x (300 + 4.90 + 13.50) = Customs: 40% x (300 + 4.90 + 13.50 + 6.37) = Total cost (to Megabox) per unit delivered to pick-up point: Note that Megabox is only charging (432 2%) = $300.00 13.50 3.00 4.90 .27 6.37 129.91 $457.95 $423.36
Based on a US FOB price of $300, the company in effect is giving the Zumburu company an 11.5 % discount (as a minimum). It should be noted that the costs above do not take into account that, using ocean freight, it is sometimes necessary for the company to send goods by the higher LCL rates. Thus, costs will be higher unless we switch to nonconference ship operators who will charge 15% less. The $2.03 savings in freight per unit would be offset to a small amount by the higher per-unit documentation charge. Similar calculations could be made for each of the products for each of the methods of shipment. It can be noted, however, that for each of the other three products shipping costs will be relatively higher because they each have a higher volume to value ratio. Additionally, they
will show a higher percentage discount in the sales price to the Zumburu customer because there is a smaller percentage differences between the FOB and CIF prices. (The difference between FOB and CIF prices for the VCRs is approximately 44%, while it is less than 38% for the TVs.) Thus, it appears that Megabox should review their pricing structure to determine if it really is profitable to continue to sell to Zumbubu at the present prices. Even though it appears not to be profitable on a total cost basis, it may be profitable if only the marginal cost of producing the additional units is used as a starting basis. The marginal savings in using the nonconference carriers might be worthwhile, particularly if using the smaller containers would avoid the necessity of sending some of the cargo in LCL. It might also be possible to effect some savings by less handling of goods, though data on this is not available in the case. The volume of expected shipments over the coming year, after taking into account Mr. Perezs discounting of sales forecasts, is still sufficient to justify a 12-month air carrier contract. If there is some danger of imposition of exchange controls and/or import controls by the Zumburu government, Mr. Perez might be stuck with unusable space. But, on the other hand, he would not have the problem of so much inventory tied up en route by ship. Given the costs involved, chartered air cargo flights do not seem to be economical, except in an emergency. Mr. Perez also is interested in taking into account the cost of money tied up in inventory in this whole process. The difference between air and sea transit time is estimated at 25 to 34 days. The cost of carrying inventory is estimated at 28% per year, or less than 2% per month before compounding, and the cost of capital tied up is nearer 1% per month. The quicker shipment by air for the VCRs would thus save about $3 per unit. Whether overseas sales tie up money longer than domestic sales depends upon the average time from shipment to the plant to receipt of payment in both cases. 2. Which system should Perez select? Why?
As can be seen from the calculations and considerations given in the answer to Question 1 above, there is no single best answer to this question. If it is really profitable to continue to sell to the customer in Zumbubu, and the case does not provide enough information for us to answer that, shipping most of the goods by nonconference carriers with some supplementary air shipments as required would seem to present the most economical and least risk solution.
13.3
1.
Primex Marketing, Inc.
Do the methods used to locate, contact, and work with prospective customers appear to be appropriate? What other actions might be undertaken?
Primexs attendance at trade shows and their use of the World Wide Web are both appropriate, and are supported by printed materials, public relations and promotional activities. Advertising in some trade publications in the travel and leisure, medical and rehabilitation, and materialshandling industries might be useful if carefully targeted, though expenses may not be justified. 2. What are the advantages and disadvantages in Primexs requirement for having payment in advance, and for having a bank handle incoming payments?
The advantage is that they do not have to bear the cost of carrying accounts receivable, nor worry about bad debts. The disadvantage is that they may lose some potential customers (for
example, the systems and rules of government agencies, some nonprofit organizations, and even some companies preclude payment in advance). The bank also charges a fee for this service. 3. What are the advantages and disadvantages of contracting out services such as payroll (including handling of required taxes) and Web page updating?
The advantage of contracting out these services is they will be carried out by companies or qualified individuals that are specialists in the area. This should reduce errors, save time, and avoid diverting management attention away from primary business activities. The disadvantage is the cost, though for a small company the cost of maintaining in-house expertise in these areas, and the costs of possible errors, is probably much greater than the costs of contracting out. 4. What are the advantages and disadvantages of having others make international shipping arrangements?
As discussed in the textbook, arrangements for handling international shipping are complex and time consuming. For most small- and medium-sized companies, and even some large ones, it is less expensive to pay the fees charged by specialists in the field than to develop and maintain in-house capabilities in this area. 5. What problems can the companies expect to face as they grow in size and expand product lines?
The typical problem faced by a company as it grows and expands product lines is that the functional areas requiring attention become so diverse that the entrepreneur is no longer able to handle them all. This, then, requires the location and hiring of individuals who can handle the managerial functions in some of the areas, leaving the president free to concentrate on the areas he/she feels are most critical. Many executives find it difficult to delegate responsibilities and decision making.
13.4
1.
EFI Logistics
Do EFIs marketing strategies appear to be appropriate?
Their marketing strategy is basically to hold on to existing customers and to acquire new customers through referrals from present customers and from transportation companies. Given the way in which they and their competitors are judged, the lack of incentives for satisfied customers to switch customs house brokers/foreign freight forwarders, and the difficulty of identifying potential new customers, EFIs marketing strategies appear to be appropriate. 2. Do the organizations structure and stated objectives appear to be appropriate given the existing and potential customer base?
The stated objectives and structure do appear to be appropriate. The provision for direct communication between individual customers and their EFI service providers provides clear responsibility and promotes rapid responses to inquiries and requests. Potential customers can choose to contact the company owners or the specialists in their areas.
3.
What would be the advantages and disadvantages of attempting to expand into other geographical areas or into providing similar services for other lines of business?
The assumed advantages of either type of expansion would be growth and increased profits. A decision regarding whether to expand would involve the personal evaluations of the owners of EFI regarding their possible desire for expansion against the potential costs discussed below. (They do not need to worry about stockholders; only about external threats to their present business.) An attempt to expand into other geographical areas using a sort of Greenfield approach would be costly and might divert management attention from the present focus on top quality service. It would also likely be difficult since, in spite of improved communications, farmers probably want to use a company located near to them. It might be possible to acquire a company in another area, and then use EFIs technological capabilities to improve service (and hopefully increase EFIs profits by operating more efficiently). This would still involve up-front costs, probably require a substantial investment in training at the new location, might involve personnel problems at the new location, and certainly would divert management attention from their current operations. Attempting to add other product lines would require investment in time and money in learning the details of a new business area, developing appropriate contacts, and attracting and training competent/knowledgeable new employees.
TEST BANK
1. In handling an order form from an importer: (a) sending of a confirmation of receipt creates a contract. (b) acceptance of an order without modification creates a contract. (c) proposed modifications to the order by the exporter/manufacturer creates a contract. (d) All of the above. (e) None of the above. 2. Physical distribution is of great concern to export marketing managers because: (a) it strongly influences the price of the product to the user. (b) it is an area where technology and automation have had a great impact on costs. (c) it can have a positive impact on sales through the service provided. (d) All of the above. (e) None of the above. 3. Logistics and the systems concept: (a) concern the management of relationships, decisions, and activities among production, storage and distribution. (b) concern only direct distribution costs. (c) use a total-cost approach concerned only with minimizing marketing costs. (d) All of the above. (e) None of the above.
4. An ocean bill of lading: (a) is a contract of carriage between shipper and transportation company. (b) is evidence of receipt for the goods by the transportation company. (c) is evidence of title (and is negotiable in a to order B/L). (d) All of the above. (e) None of the above. 5. An air waybill: (a) requires more complex procedures than an ocean bill of lading. (b) carries title to the goods (is negotiable). (c) makes financing by drafts and L/C's particularly simple. (d) All of the above. (e) None of the above. 6. A pro forma invoice may be used by the exporter to indicate the terms that have been agreed upon or are proposed. (a) True (b) False 7. Export licenses are no longer required in the US and the EU. (a) True (b) False 8. Within the EU, almost all border stations have been closed and all countries will eventually use the same single document covering cross-border shipments. (a) True (b) False 9. A clean bill of lading is one on which no notations of damage or missing goods are noted. (a) True (b) False 10. By law, independent carriers and members of shipping conferences must offer the identical rates for a given product carried over a given route. (a) True (b) False 11. Districenters offer complete logistics systems for contracting out of distribution and transportation. (a) True (b) False
12. The need for a fast and easily monitored supply chain has been reduced because more companies are now willing to carry large inventories in order to avoid running out of stock. (a) True (b) False 13. What was formerly called logistics is now sometimes called or viewed as supply chain management. (a) True (b) False 14. In the year 2000 the two largest ports in the world, measured in millions of TEU (twentyfoot container equivalent units) were in Europe. (a) True (b) False 15. Internet technology has made it easier for exporters of smaller shipments to compare and select the lease cost carrier and shipping option. (a) True (b) False 16. All improvements in logistics systems either sacrifice responsiveness to lower costs or result in higher costs to improve responsiveness. (a) True (b) False 17. The just-in-time inventory system relies on large inventories to avoid the danger of running out of inputs at any point in the system. (a) True (b) False 18. The just-in-time inventory system can be used in a production system that is designed so that more than one product or more than one version of a product can be made on one production line. (a) True (b) False 19. The just-in-time inventory system has made it possible to give individual workers responsibility for assuring quality at every stage in an assembly line without giving them any actual control over the production line. (a) True (b) False
20. The just-in-time inventory system was originally developed by Toyota but is now used in some form by companies in many countries. (a) True (b) False 21. Radio frequency identification (RFID) systems: (a) are similar to bar codes in that they require visual scanning. (b) have become an inexpensive alternative to using bar codes. (c) are being used by some retailers. (d) All of the above. (e) None of the above.

1. (b) 9. (a) 17. (b) 2. (d) 10. (b) 18. (a) 3. (a) 11. (a) 19. (b) 4. (d) 12. (b) 20. (a) 5. (e) 13. (a) 21. (c) 6. (a) 14. (b) 7. (b) 15. (a) 8. (a) 16. (b)
CHAPTER 14
Organization of International Marketing Activities

LECTURE OUTLINE Introduction
The way in which an organization is structured helps determine: how effectively and efficiency it exploits opportunities; its capacity for responding to problems and challenges. Organization structure is affected by: environmental conditions; goals underlying corporate strategy; and diversity of operations.
The Internet and Web technologies make it possible for companies with widespread operations to: quickly and easily determine the status of business operations. attain better coordination, cooperation, and control of functional, product and geographical divisions.
Main considerations of being organized internationally

No one way is best. As threats and opportunities change, structures may need to be changed. Issues: definition of organizational units; centralization versus decentralization; assignment of reporting and control system.
Definition of organizational subunits

Fundamental competencies needed for decision making: functional, product, and geographical. Internal and external variables are contingency factors: help determine appropriate structures. Differences across national and cultural lines greatly increase complexity. Structure must follow strategies decided upon.
Need to: identify key dimensions around which to organize; define organizational subunits; and create linkages through communication, coordination, and management and control.
Centralization versus decentralization

Factors influencing centralization versus decentralization: management philosophy and style. Centralization: efficiency, consistency, and avoidance of duplication. Decentralization: local responsiveness and adaptation. Challenge of rapid technological change may best be met by centralized R&D. Table 14.1 shows A business area-based framework to analyze centralization vs decentralization for three types of businesses.
Communication and control systems

To meet: legal requirements (variations in Europe discussed); need for information; and motivational needs.
Communication and control issues arise when reorganization takes place (HP reorganization discussed).
Organizational structures
Can organize by function, product grouping, market or customer groupings, geography, or mixed (matrix) approaches.
Functional export department (built-in or separate export unit)

Usual initial form for export marketing. Allows the building up of international expertise.
International division structure (Figure 14.1)

Provides single, coordinated management of international business across product lines and countries. Problem: lack of built-in key product/technology competencies.
International organization structure based on product (Figure 14.2)

Used by companies with several dissimilar product lines. Meets special requirements of products and supporting technologies. Most appropriate where standardized marketing mix is more important than individualization for local needs. Problems: duplication of staff and activities; lack of international coordination between product lines. Product line coordinators may ease problems. Example of Procter & Gamble changing from geographical to product structure.
International structure based on geographic area or customer groupings (Figure 14.3)

Area presidents have responsibility for profit and performance. Useful for companies with wide geographical spread and relatively narrow product lines: food, beverage, automobile, and pharmaceutical industries. Emphasizes the importance of regional characteristics. Within regions, product managers have internal staff support. Problems: difficulty in spreading of new products, duplication of staff, coordination of planning, and coordination of R&D.
International mixed structures; the matrix organization (Figure 14.4)

Exhibit 14.1 discusses Marketing organizations: consequences of the European Union movement to the internal market Individual markets are now more accessible, but not more identical. Search is now for similarities rather than differences across boundaries, and for pan-European market segments.
Implies: more authority and responsibility for regional headquarters; country offices will become more sales and service facilities; increasing need for executives with multiple functional and multiple cultural experiences. Mixed structures combine two or more competencies on a worldwide basis: geographic knowledge, product knowledge, functional competence, or the knowledge of customer or industry. Staff members have two or more bosses; work as members of more than one competency group. Advantages: emphasizes more than one competency (e.g., provide market and product knowledge). Disadvantages: unclear decision-making structure; slower decision making; and built-in tendency for conflict.
Figure 14.4 shows an International mixed structure type of organization.

14.1 What kinds of variables influence how line operations should be subdivided into organizational units? Organization is influenced by: (1) Internal variables such as strategy, goals, key functions, diversity, and size and (2) external variables such as environment and the industry, including rate of technological change, competition, customs, etc. Issues include: definition of organizational units; centralization versus decentralization; and assignment of reporting and control system. 14.2 Define the concept of centralization and discuss the conditions favoring the centralization of a companys international operations. The concept of centralizationdecentralization applies to the amount of decision making delegated to local management. Centralized organizations reserve greater amounts of decision making for the central/home office while decentralized organizations delegate more. Centralization with attendant concentration of R&D and standardization tends to support more rapid major technological change and more efficient production. It is beneficial when products are highly standardized in design, usage, buying behavior, and distribution outlets. Decentralization provides the potential for greater responsiveness to local needs. 14.3 Discuss the advantages and disadvantages of a centralized organizational structure. Advantages: uniformity in policies; efficiency in R&D; and efficiency in production through economies of scale. Disadvantages: lack of flexibility and responsiveness to local requirements.
14.4 Explain why a company in the early stage of internationalization often uses a functional export department. The functional export market department allows the company to build up an in-house expertise in export selling and marketing with a relatively small investment. It provides a focus and center of interest for export marketing while being easy to manage. 14.5 Why do companies choose an international organization structure based on product lines? Explain. An international organization structure based on product lines is used where there are dissimilar product lines or business areas which require different production and marketing approaches. Such a structure allows each division to concentrate on one product line and realize economies of scale in production and distribution of that product line. 14.6 Give examples of product types or lines where a company must expect to choose a geographic area division of international structure. The geographic area structure might be used for automobiles (various students will have various product types or lines). Such a structure is useful where regions are fairly self-contained and possess their own functional infrastructure in marketing planning and research. It enables each subunit to respond easily to regional environmental and market demands. 14.7 The matrix structure is the best way to organize an international company operating in turbulent and diverse environments. Discuss. The matrix structure may be appropriate where there at least two different dimensions of organizational needs that must be met (for example, two or more major product lines and two or more major markets, with some product lines sold in two or more markets and some markets handling more than one product line; see Figure 14.4). The advantage of the matrix organization is that more than one of the major dimensions (geographical knowledge, product knowledge, functional competence, and/or customers) can be emphasized. This advantage must be balanced against the problems of the unclear decision-marking structure, possible slowness of decision making, and potential for conflict. No one structure is best for all organizations, even in a turbulent and diverse environment. 14.8 Is there a best way for a company to bring together its international operations to structure an integrated global enterprise? Explain. There is no single best way for a company to bring together its international operations to structure an integrated global enterprise. The type(s) of products, the breadth of the product line, the variations in products and marketing required by different geographical areas, and the number of internal and external needs that must be met by the organizational structure interact to determine which structure appears to be the most appropriate for a particular organization at a given time. A heterarchichal structure, with headquarters for various functions located in different countries, may be more appropriate than the traditional hierarchical approach for some large global enterprises. 14.9 Is it wise for a company to drastically change its international organization at a time when the world economy is in a downturn? Explain. Arguments can be made both for and against such an action. Factors indicating that it may not be a good idea to do so include the following: (1) it may confuse customers used to their former contacts and ways of doing things; (2) it may create additional concern and discouragement among employees already worried about the downturn; and (3) the problems in lowered
earnings and possible loss of jobs caused by the downturn may be attributed in part (or whole) to the organizational changes. On the other hand, organizational changes may be necessary in the event of sharp downturns rapid growth, marketplace changes, or changes in communications technology (which permit new approaches and/or shift the locus of information availability).

14.1 Hewlett-Packard
1. Was HP wise in attempting to make many major changes simultaneously?
The company was not able to successfully make many major changes simultaneously. For any major reorganization to be effective, all decision makers must clearly understand what is expected of them, what communication and decision making will be required of them, how they will need to interact with others, and how they will be evaluated. In the year 2000 HP reorganization, there appeared to be a lack of adequate planning, inadequate information regarding the reorganization, and confusion with a resulting lack of adequate communication, coordination and control under the new organization structure. 2. What problems does it appear developed under the year 2000 reorganization?
An excessive number of levels in the organization structure resulted in large corporate customers finding it difficult to know whom to work with at HP, inconsistencies in price quotations, and confusion and reduced motivation in the sales operations. 3. What is your evaluation of Mr. Hurds approach to reorganization in first speaking to both customers and salespeople?
His approach was very appropriate for the situation. Talking to the major customers gave him an understanding of their problems with HP, and what they wanted from HP. Talking to the HP salespeople gave him an understanding of the problems with the HP sales organization structure and decision making. This provided the basic information he needed to develop a more responsive and efficient structure with business units being given both responsibility for and control over sales. 4. Does the new structure, insofar as it is outlined, appear to be appropriate?
It does, both from the standpoint of the approach taken and from the results achieved in sales and profit growth.
14.2
1.
Unilever A
Evaluate the organization structure used by Unilever in Asia.
The organization structure used by Unilever in Asia is in a state of change, complex, and lagging somewhat behind the changes the organization has made in its structure in the more developed/larger markets in Europe and the United States. It is in a state of change as the formerly very independent Chief Executives of the 12 Asian countries have faced: the establishment of a regional management group under the direction of a Board Member in London; subsequent increasing attention, visits, and advice from Coordinations (product management groups, recently including the Foods Executive), Board Members, and Special
Committees; much greater travel and interaction by managers/liaison personnel between countries; and a new emphasis on stimulating multicountry approaches. It is complex because relationships exist along geographical/country lines, product lines, and (to some extent) functional lines. It lags behind the rest of the organization of the leading areas of the company because it has no operational headquarters in Asia, and some Coordinations have not been made directly responsible for Asia as they have for Europe and the US 2. How should Unilever organize for optimum results?
Student viewpoints will differ. One possible alternative is the following. Unilever should continue to move further toward thinking globally and acting locally. With increasing competition and a general movement of large multinationals to a more global approach, Unilever needs to find the best possible balance between the independence and power of the country managers and the specialized product and functional managers. At present, this would appear to mean giving greater responsibility/authority to the Coordinations. 3. Explain why a matrix organization approach either would work or would not work for Unilever in Asia.
While Unilever may (or may not) still view itself as a modified line and staff organization, it has already moved to assume key characteristics of a matrix organization in its international operations. The Asian country Chief Executives and their managers are increasingly responsible along cross-national product lines as well as for geographical areas (and functionally as well). Whether or not they formalize the matrix structure will depend upon the perspective of the Board Members, and how they believe such formalization would affect costs, responsiveness, and motivation. 4. Should Unilever have restructured its organization like Proctor & Gamble did in the late 1990s? Why or why not?
The material in the case indicates that Unilever has a higher degree of adaptation of products to local needs than the type of organization structure to which Proctor & Gamble moved in the late 1990s (section 14.3.3 in the text). The Proctor & Gamble structure appears to be clearer, probably less expensive, and conforms to the desires of its largest chain-store customers. Unilevers structure caters more to the specific tastes of individual countries, at a relatively high cost. The changes introduced also seem to be consuming a lot of effort, some of it without clear benefits. Students may have varying opinions as to whether or not a Proctor & Gamble approach would be best for Unilever. Unilevers move toward a more global approach to marketing ice cream was discussed in an earlier chapter. Note: from Some additional comments on Unilevers subsequent actions and performance. Unilever has now reorganized into two global divisions, designed to provide appropriate focus to both regional and global levels. Rationalizing of manufacturing and the supply chain, including a major reduction in the number of brands, is resulting in large cost savings.
14.3
1.
Unilever B
What factors might account for the increase in the percentage of turnover contributed by the AsiaAfrica region from 2003 to 2006?
The factors that could be expected to account for the increase in the AsiaAfrica region from 2003 to 2006 are (a) the very rapid economic growth and expanding market for consumer goods in China and India (that greatly exceeded the growth rates in Europe and the Americas); (b) growth rates in some other Asian nations and the Middle East that were also greater than those in Europe and the Americas; and (c) additional marketing efforts in Asia that it can be expected would have been made by Unilever in response to the companys recognition of rapid growth in these countries. 2. Does the present organizational structure seem to be appropriate for meeting Unilevers objectives?
The material presented in the case is not sufficient to answer this question with certainty. However, the overall growth in sales of 6.7% achieved over the two-year period (as measured in Euros) appears to be satisfactory for a company in this mature industry. The 35.8% growth in profits is very high and indicates improved organizational effectiveness and productivity, which changes in the organizational structure would have supported. The growth rates would be substantially greater if measured in US dollars.
TEST BANK
1. The fundamental competencies that international marketing managers need at the time of and place for decision making are: (a) function. (b) product. (c) geographical. (d) All of the above. (e) None of the above. 2. In the issue of centralization versus decentralization of international operations: (a) decisions depend to a great extent on the companys management philosophy and style. (b) centralization tends to allow greater responsiveness and adaptation. (c) decentralization tends to provide greater efficiency and consistency. (d) All of the above. (e) None of the above. 3. International structures based on geographic area groupings: (a) typically do not provide internal staff support, within regions, for product managers. (b) typically have area presidents responsible for profit and performance. (c) avoid problems of duplication of staff. (d) All of the above. (e) Only answers (a) and (b) are correct.
4. Matrix organizations: (a) are designed to encourage decision makers to focus on only one key basic competency. (b) provide a clear decision-making structure. (c) have a built-in tendency for conflict. (d) All of the above. (e) Only answers (a) and (c) are correct. 5. The implications of the EU to the internal market include: (a) new emphasis on differences across national boundaries. (b) a move toward a pan-European lifestyle segmentation. (c) less need for senior executives with multiple function and multiple cultural experiences. (d) All of the above. (e) None of the above. 6. The internal and external variables that influence decisions on organizational structure are also known as contingency factors. (a) True (b) False 7. Variations in control systems may be required by law in some countries. (a) True (b) False 8. Functional export departments (built-in or separate export units) are seldom used by companies with little experience selling internationally. (a) True (b) False 9. International organization structures based on product result in problems of duplication of staff and activities. (a) True (b) False 10. Communications and control questions and/or problems arise when reorganization takes place. (a) True (b) False 11. Hewlett-Packards year 2000 reorganization follows almost identical reorganizations in a number of other very large companies. (a) True (b) False
12. The year 2000 reorganization of Hewlett-Packards by Mr. Hurd damaged the companys sales organization. (a) True (b) False 13. The Internet has enabled companies with widespread operations to: (a) more quickly and easily determine the status of many aspects of business operations. (b) attain better coordination and control of functional divisions. (c) attain better coordination and control of product and geographical divisions. (d) All of the above. (e) None of the above. 14. The EU movement reducing physical, technical, and fiscal barriers in the internal EU market can be expected to: (a) make the individual national markets identical. (b) replace pan-European lifestyle segmentation with geographical segmentation. (c) result in the shifting of some power from regional management to country management. (d) All of the above. (e) None of the above.

1. (d) 9. (a) 2. (a) 10. (a) 3. (b) 11. (b) 4. (c) 12. (b) 5. (b) 13. (d) 6. (a) 14. (e) 7. (a) 8. (b)

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Instructors Manual

International Marketing and Export Management

Gerald Albaum Edwin Duerr

For further instructor material please visit:

Pearson Education Limited 2008

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International Marketing and Exporting

Reasons for the rapid growth in international business

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Turbulence in the international marketplace

Responding to increasing opportunities and threats

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Being effective: the nature and practice of international marketing

A definition and unique requirements

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Internationalization and the global marketer

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International marketing management

The relationship of exporting and importing

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Some similarities and differences

Export marketing planning and strategy

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The Internet, the World Wide Web, and e-business

The World Wide Web (Web)

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The impact of technology

Entrepreneurial approaches to international marketing

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The virtual company

The growth of non-traditional exports

Exporting business models

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Purpose and approach of the book

ANSWERS TO QUESTIONS FOR DISCUSSION

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ANSWERS TO CASE QUESTIONS

Export of art goods from Hungary

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Murphy Company Limited

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What are the key characteristics of Fords approach to internationalization/ globalization?

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What marketing model should Dell use in India?

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ANSWERS TO TEST BANK QUESTIONS

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Bases of International Marketing

Potential benefits from export marketing

The effects of imports

The effect of exports

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Increasing productivity and efficiency