International Business by Daniels and Radebaugh Chapter 16

International Business by Daniels and Radebaugh Chapter 16 Marketing 1

Objectives To introduce techniques for assessing market sizes for given countries To describe a range of product policies and the circumstances in which they are appropriate To contrast practices of standardized versus differentiated marketing programs for each country in which sales are made To emphasize how environmental differences complicate the management of marketing worldwide To discuss the major international considerations within the marketing mix: product, pricing, promotion, branding, and distribution 2

Introduction Domestic and international marketing principles are similar • Environmental differences often cause managers to apply these principles differently abroad – managers may interpret foreign information incorrectly Market Size Analysis Total market potential—estimate of the possible sales of a product for all companies, and the estimate of your own company’s market-share potential Present income and population are the major indicators for potential sales of most products § As incomes change, product demand may change § Other factors affect demand – managers cannot project potential demand perfectly 3

Marketing in International Business OPERATIONS EXTERNAL INFLUENCES OBJECTIVES PHYSICAL AND SOCIETAL FACTORS STRATEGY MEANS COMPETITIVE ENVIRONMENT Modes Overlaying Alternatives Functions • MARKETING • Exporting and importing • Global manufacturing • Supply chain management • Accounting • Finance • Human resources 4

Per Capita Televisions and Per Capita Income at PPP 25, 000 Germany Per Capita Income at PPP 20, 000 Ireland 15, 000 Portugal Argentina 10, 000 South Africa 5, 000 Guinea 0 0. 0 Ecuador Philippin Indonesia es Laos Congo 0. 1 0. 2 0. 3 0. 4 0. 5 0. 6 Per Capita Televisions 5

Gap Analysis Method for estimating a company’s potential sales by identifying market segments it is not serving adequately • Sales potential exists when sales are lower than the estimated market potential • Usage gap—less product sold by all competitors than potential – growth potential for all competitors • Distribution gap—sales lost to competitors who distribute where the company does not – company misses geographic or intensity coverage • Product line gap—sales lost to competitors who have product variations the company does not • Competitive gap—remaining unexplained sales lost to competitors who may have a better image or lower prices 6

Gap Analysis Usage gap Competitive gap Potential sales for all competitors A Actual sales for all competitors Product line gap Sales lost to competitors Distribution gap Company’s current sales B 7

Product Policy Product orientation—companies focus on production with little emphasis on marketing • Assumes that customers want lower prices or higher quality • Price most important factor in selling many commodities – marketing boosts sales of some commodities • Passive sales occur when: – advertising spills over – foreign buyers seek unaltered domestic product Sales orientation—company tries to sell same product in domestic and international markets • Assumes that customers are similar globally • Takes active marketing approach • Effective when consumers are similar and product information spillover exists 8

Product Policy (cont. ) Customer orientation—company wants to penetrate markets in a given country • Geographic area taken as a given • Extremes of approach – develop products tailored foreign market – responds to requests from purchasing agents Strategic marketing orientation—combines production, sales, and customer orientation • Companies vary products abroad without deviating very far from their experience • Can retain some economies of standardization • Product designed for global market segment Societal marketing orientation—considers potential environmental, health, social, and work-related problems that may arise • Concerned about product disposal and changes that increase social desirability of product 9

Reasons for Product Alteration Legal reasons—meant to protect customers • Related to health and safety • Laws on packaging to protect the environment • International product standards an issue – both consumer and economic resistance to standardization Cultural reasons—difficult to predict foreign consumers’ reaction to a product • Examination of cultural differences may pinpoint possible problem areas Economic reasons—personal incomes and infrastructures affect product demand • Foreign consumers must have sufficient income – purchase of items in small quantities may necessitate new types of packaging • Poorer infrastructures require more durable products ability to deal with utility outages 10

Alteration Costs Some product alterations are inexpensive, but have important influence on product demand • Must compare alteration costs with the cost of lost sales from no alterations • Compromise strategy between uniformity and diversity – rely on standardization while altering some end characteristics Extent and Mix of the Product Line Narrowing the product line foreign markets • Offer only a few products, perhaps as entry strategy • Based on considerations of sales and costs associated with selling one product as opposed to family of products • Broadening the product line may gain distribution economies 11

Product Life Cycle Considerations Countries differ in either the shape or length of a product’s life cycle • Product facing declining sales in one country may have growing or sustained sales in another Pricing Companies place importance on price, which must: • Be low enough to gain sales • Be high enough to guarantee flow of funds • Assure short-term profits and long-term viability Governmental intervention—every country has laws that affect prices • May set either minimum or maximum prices – price controls may prompt companies to lower product quality • WTO—countries may restrict imports that come in at prices below those charged in the exporting country 12

Pricing (cont. ) Greater market diversity • Variations among countries create natural market segments • Substantial competition in some countries limits discretion in setting prices – near-monopoly markets permit greater discretion • Country-of-origin stereotypes limit pricing • Diversity in buying on credit affects sales Price escalation in exporting • Price usually goes up by more than transport and duty costs • Price escalation in export sales occurs because: – distribution channels are longer – tariffs are passed on to consumers 13

Price Escalation in Exporting If Companies Use Cost-Plus Pricing Importer’s Cost = $1. 90 and Markup = $. 95 Tar iff W all Transport Cost = $. 25 $12. 975805 Tariff = $. 15 Cost of Production = $1. 00 and Markup = $. 50 14

Pricing (cont. ) Currency value and price changes • Pricing in volatile currencies can be troublesome • Pricing decisions must consider – replacement costs – effects of inflation on: » exchange rates of currencies » readjustment of prices to reflect cost increases – basis for taxation of profits • Spillover in buying occurs if similar goods are priced differently in different countries – gray market—handling of goods through unofficial distributors » ruins relations with official distributor » causes competition among company’s plants » complicates spotting counterfeit goods 15

Effect of Taxing and Inflation on Pricing Assume: Cost at beginning is 1, 000 36% inflation 40% tax rate 30% profit goal on replacement cost after taxes IF SOLD AND COLLECTED AS SOON AS INVENTORY IS ACQUIRED Cost 1, 000 Markup 500 Sales price 1, 500 - Cost 1, 000 Taxable income 500 Tax @ 40% 200 Income after taxes 300 IF SOLD AND COLLECTED A YEAR AFTER INVENTORY IS ACQUIRED Replacement cost 1, 360 Markup on replacement 320 Sales price 1, 680 - Original cost 1, 000 Taxable income 680 Tax @ 40% 272 Income after taxes 408 16

Pricing (cont. ) Fixed versus variable pricing—there are country-to-country differences in: • Whether manufacturers set prices • Whether prices are fixed or bargained in stores • Where bargaining occurs • How sale prices can be used Retailers’ strength with suppliers • Dominant retailers with clout can get suppliers to offer them lower prices 17

Promotion Presentation of messages intended to help sell a product or service Push-pull mix • Push—uses direct selling techniques – used when » distribution system is tightly controlled » indirect tax on advertising is high • Pull—relies on mass media – used when: » contact limited between salespeople and customers » product price is high in relation to consumer income 18

Promotion (cont. ) Standardization of advertising programs • Standardized advertising means similar, not identical, messages in different markets • Advantages of standardized advertising include: – some cost savings – better quality of advertising at local level – rapid entry into different countries • Usually implies using a global advertising agency • Translation—usually required when sales intended in a country with a different language – difficult to translate some messages • Legality—countries have different laws – consumer protection – advertising some products may be forbidden • Message needs—economic and cultural factors suggest different advertising appeals 19

Branding Brand—an identifying mark for products or services • Trademark—a legally registered brand • Provides instant recognition, thereby saving promotional costs • Language factors—brand names may carry a different association in another language – pronunciation presents other problems – different alphabets present other problems • Brand acquisitions—frequent method of international expansion • Country-of-origin images—images of products are affected by where they are made • Generic and near-generic names – if a brand name is used for a class of product, the company may lose the trademark » name becomes generic -- available for anyone to use 20

Distribution The course—physical path or legal title—that goods take between production and consumption • Must decide on method of distribution among and within countries • Company may enter a market gradually by limiting geographic coverage Difficulty of standardization—distribution a difficult function to standardize internationally • Numerous factors influence how goods will be distributed in a given country – distribution norms differ Choosing distributors and channels • Internal handling—more likely when: – volume is high – product requires direct dealing with customer – the customer is global – distribution can be a competitive advantage 21

Distribution (cont. ) Choosing distributors and channels (cont. ) • Distributor qualifications—include: – financial capability – connections with customers – fit with a company’s product – status of personnel, facilities, and equipment • Spare parts and repair—important for sales, especially for expensive products • Gaining distribution—distributors choose companies and products to represent – choose products with greatest profit potential – companies—may need to provide incentives » may use successful products as bait for new products » must convince distributors that product and company are viable 22

Distribution (cont. ) Hidden costs in foreign distribution • Infrastructure conditions—roads, warehousing • Number of levels in the distribution system – multitiered wholesalers that sell to each other before product reaches the retailer • Retail inefficiencies—trust levels of owners – preference for counter service vis-à-vis self-service • Operating-hours restrictions – limit efficiencies of large retailers Internet and electronic commerce • Opportunity to promote products worldwide • Hard to differentiate marketing program • Must deliver goods expeditiously • Advertising must comply with laws of each country 23

Growth of the Global On-Line Population 300 Total 250 Rest of World 200 150 United States 100 Europe 50 0 1995 1997 1999 2001* 2003* 2005* * Estimate 24