B825 unit 7 07e by Haider Ali

Marketing in a Complex World

Unit 7

International Marketing

Prepared for the Course Team by Haider Ali with contributions by Tony Stapleton

Masters

CORE COURSE TEAM Haider Ali, Course Team Chair and Author

Claudia Simoes, Author

Jo Woods, Course Manager

Tony Stapleton, Author

Sally Dibb, Author, Course Team Member Keith Honnor, Course Manager (IT) Jeanne Barby, Course Team Assistant Karen Kingsnorth, Programme Manager Judith Margolis, Author, Course Team Member

External assessor Professor Malcolm McDonald, Cranfield University

Vyv Pettler, Course Team Member

Production Team

Terry Oâ&#x20AC;&#x2122;Sullivan, Author

Martin Brazier, Graphic Designer

Gareth Stone, Course Team Member

Helen Coolen, Editor

Andrew Lindridge, Course Team Member

Holly Clements, Media Assistant

External authors

Jenny Edwards, OUBS Quality Improvement Julie Fletcher, LTS Project Manager

Ian Reid, Author

Jenny Gray, Software Developer

Palamadai Krishnan Viswanathan, Author

Dave Richings, Print Buying Co-ordinator

Frederick Thomson, Author

Diane Hopwood, Compositor

Jill Winter, Author

Roy Lawrance, Graphic Artist

Leslie de Chernatony, Author

David Massey, LTS Quality Assurance

Fiona Harris, Author

Katie Meade, Rights Executive

David Mercer, Author

Grant Miller, Project Officer

This publication forms part of an Open University course B825. [The complete list of texts which make up this course can be found at the back (where applicable)]. Details of this and other Open University courses can be obtained from the Student Registration and Enquiry Service, The Open University, PO Box 197, Milton Keynes MK7 6BJ, United Kingdom: tel. +44 (0)870 333 4340, email general-enquiries@open.ac.uk Alternatively, you may visit the Open University website at http://www.open.ac.uk where you can learn more about the wide range of courses and packs offered at all levels by The Open University. To purchase a selection of Open University course materials visit http://www.ouw.co.uk, or contact Open University Worldwide, Michael Young Building, Walton Hall, Milton Keynes MK7 6AA, United Kingdom for a brochure. tel. +44 (0)1908 858785; fax +44 (0)1908 858787; email ouwenq@open.ac.uk The Open University Walton Hall, Milton Keynes MK7 6AA First published 2000. Reprinted 2007. Copyright # 2007, The Open University All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, transmitted or utilised in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without written permission from the publisher or a licence from the Copyright Licensing Agency Ltd. Details of such licences (for reprographic reproduction) may be obtained from the Copyright Licensing Agency Ltd, Saffron House, 6â&#x20AC;&#x201C;10 Kirby Street, London EC1N 8TS; website http://www.cla.co.uk/. Open University course materials may also be made available in electronic formats for use by students of the University. All rights, including copyright and related rights and database rights, in electronic course materials and their contents are owned by or licensed to The Open University, or otherwise used by The Open University as permitted by applicable law. In using electronic course materials and their contents you agree that your use will be solely for the purposes of following an Open University course of study or otherwise as licensed by The Open University or its assigns. Except as permitted above you undertake not to copy, store in any medium (including electronic storage or use in a website), distribute, transmit or retransmit, broadcast, modify or show in public such electronic materials in whole or in part without the prior written consent of The Open University or in accordance with the Copyright, Designs and Patents Act 1988. Edited and designed by The Open University. Typeset in India by Alden Prepress Services, Chennai. Printed and bound in the United Kingdom by the Charlesworth Group, Wakefield. ISBN 978 0 7492 2652 7 1.1

CONTENTS 1 Introduction 1.1

Aims and objectives

2 International trade, globalisation, and corporate

internationalisation

2.1

The economics of international trade

2.2

The process of globalisation

2.3

Patterns of internationalisation

2.4

Implications for strategy

2.5

The marketing environment

2.6

Implications for structure

2.7

Summary

3 Assessing international markets

3.1

Stages of market assessment

3.2

Sources of competitive advantage

3.3

The economic environment

3.4

The demographic environment

3.5

The political environment

3.6

The importance of culture

3.7

The role of geography

3.8

The role of technology

4 Methods of market entry

4.1

Exporting

4.2

Contractual methods

4.3

Investment

4.4

Alliances and partnerships

4.5

Comparing methods of market entry

5 Managing risk in international marketing

5.1

Complexity, volatility and risk

5.2

Managing risk

6 The international marketing mix

6.1

Marketing-mix strategies

6.2

Product

6.3

Marketing logistics

102

6.4

Price and financing

106

6.5

Promotion

109

7 Managing marketing programmes

113

7.1

International business-to-business marketing

113

7.2

International services marketing

115

7.3

The threat to domestic marketing

118

7.4

Summary

127

8 Conclusion

129

References

131

Acknowledgements

137

1 INTRODUCTION

INTRODUCTION

The definition of international marketing is deceptively simple: The exchange of goods and services with actors from more than one country involved. (Johansson and Wiedersheim-Paul, 1995, p. 51)

Despite this definition, international marketing issues are particularly complex â&#x20AC;&#x201C; in keeping with the theme of this course. Not only are international marketing environments different, but they are also volatile. There is a lack of consensus as to whether marketing environments around the world are converging (through globalisation) or diverging (with national cultures becoming more distinct). Indeed it could be argued that both aspects of each type of change can be taking place at the same time. Another source of complexity faced by international marketers is how they should manage the relationship between their operations in different countries. Indeed, this raises issues that go beyond the functional aspects of marketing and that need to be addressed at the strategic level. As an illustration, we can consider the question faced by many marketers: should they standardise their marketing activities (keep them broadly similar across countries), or should they be locally adapted? This question cannot be answered purely at a marketing level, however, as it cannot be separated from decisions regarding centralisation (that is, where in the world they choose to have key decisions made). Decisions to do with centralisation are part of wider corporate strategy and organisational structure considerations (Quelch and Bartlett, 1999). Since the focus of this unit is on international marketing, our main interest relates to functional marketing decisions. However, these have to be discussed in the broader framework of strategy, structure and the environment, because of the impact they have on marketing decision making. This link between strategy, structure and environment is made by Robert Buzzell: A corporationâ&#x20AC;&#x2122;s strategy should adjust to the competitive environment, and a corporationâ&#x20AC;&#x2122;s structure should be consistent with its strategy. (Buzzell, 1992, p. 326)

Figure 1.1 shows the links between strategy, structure, functional strategy and the environment. Notice also that these are bounded within a square, outside which lie the international marketing issues

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facing firms that may not have international marketing operations themselves but are influenced by those of others.

��

Figure 1.1

��

Links between strategy, structure, functional strategy and the

environment

International marketing is an area that you may not have had to deal with in the past. Moreover, you may work for an organisation in which international marketing plays a limited role. This means it may sometimes be difficult to do exercises asking you to draw on your experience. Another feature of the subject matter is that it can become descriptive, and the relevance of some topics to managerial problem solving may not be immediately obvious. In order to overcome this problem, this unit uses mini case studies to provide you with details of actual marketing problems faced by international marketers, for which you are encouraged to provide a solution. The subsequent discussion then shows how concepts and material from international marketing can be useful in helping managers to deal with the problems they face. We hope you will find this approach useful.

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1 INTRODUCTION

1.1

AIMS AND OBJECTIVES

The aims of this unit are: l

to introduce you to the specific challenges facing international marketers;

to encourage you to consider the marketing implications of competing in an international marketplace.

On completing this unit you should be able to: l

understand how the links between the international marketing environment, strategy and functional aspects of marketing influence the international marketing decisions that organisations make;

assess the costs and benefits of internationalisation according to the circumstances facing an organisation;

assess which countries a marketer should enter and for what reason;

identify which methods of market entry would be most appropriate in different situations;

develop marketing strategies that take into account the risks associated with international marketing;

understand how international marketing can affect organisations which do not engage in international marketing.

��

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2 INTERNATIONAL TRADE, GLOBALISATION, AND CORPORATE INTERNATIONALISATION

INTERNATIONAL TRADE, GLOBALISATION, AND CORPORATE INTERNATIONALISATION

The impact of increasing international trade on organisations is ubiquitous. Encouraged by the general trend towards economic liberalisation and facilitated by radical changes in communication technology, the increasing internationalisation of the world economy is evidenced in the massive growth in world trade (Table 2.1). During the period 1950–97, world exports grew by a factor of nearly eighteen, while exports of manufactured goods grew by a factor of thirty-one. It is inevitable, therefore, that internationalisation now affects most aspects of commercial – and increasingly also non-commercial – organisational activity. Table 2.1 of GDP

Exports of goods and services as percentage

European Union USA Japan

1960

1970

1980

1990

1999

19.5

21.8

27.3

28.2

31.9

4.9

5.6

10.1

9.8

11.2

10.7

10.8

13.7

10.7

(Source: European Commission, 1999)

2.1

THE ECONOMICS OF INTERNATIONAL TRADE

Unusually for their profession, economists of all persuasions tend to agree that free trade is better than protectionism. This claim is based on the following three broad arguments. l

Production efficiency – for a multiplicity of reasons, including raw materials, demography, geography and history, some countries are better at producing some items than others. In other words, they have a comparative advantage in the production of some goods. Therefore, they can utilise their production resources more efficiently by concentrating production on those goods for which they have this comparative advantage. They are encouraged to do this if they can trade with other countries whose comparative advantage lies in a different set of goods. This ability to trade enables both countries to produce more efficiently, and the aggregate production across the two countries is then higher than it would be if there was no trade. The theory of comparative

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advantage, first articulated by the economist David Ricardo in the nineteenth century, has been much elaborated since and provides the theoretical underpinning for the desirability of free trade. Competition – another point upon which most economists agree is that competition leads to more efficient allocation and use of resources than lack of competition. By opening up markets and allowing competition across borders, trade challenges the inefficiencies of the monopolies and oligopolies that can exist within protected domestic markets. Thus trade leads to improved productivity, improved customer service and lower prices to consumers. Evidence of this is easily found – we need look no further than the state-controlled factories of Eastern Europe or the publicly owned utility monopolies in Western Europe.

Scale economies – firms that can trade internationally have a larger potential market and therefore the opportunity to exploit economies of scale that would not be available to them within the smaller domestic market. This, of course, does not apply universally; not all industries offer scale economies, and there are diseconomies that can be incurred through operating across national boundaries or beyond a certain size. Nevertheless, it is hard to see how industries such as car or aircraft manufacture, shipbuilding or investment banking, could prosper if restricted to domestic markets.

The success of free trade in combination with geography, demography and technology in creating economic growth is illustrated in Example 2.1. Note the role of luck in this equation.

EXAMPLE 2.1 LOS ANGELES The modern Los Angeles has been shaped by several factors, including the following. l

Luck. LA’s best-known export is films, and the city’s comparative advantage is obvious and huge. Initially, good light and fine weather may have helped; but luck, a hundred years of practice and economies of scale probably mattered more.

Geography. The deep harbours of LA and Long Beach are the busiest in the USA, and the third busiest in the world. They support an estimated 250,000 jobs in southern California.

People. LA’s location has resulted in a rich ethnic mix, creating an intricate pattern of international commerce.

Technology. Products are frequently manufactured in several countries: LA’s location as a port, close to the Mexican border, with excellent infrastructure and a trained workforce, makes it well placed to manage such operations.

(Source: based on The Economist, 1998a)

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The enthusiasm of economists for free trade is not always shared by others. Despite the aggregate benefits that economic liberalisation brings, there are always individual losers as well as winners. In particular, workers in industries that lose their monopoly status, or whose jobs are transferred to lower-wage economies, can be forgiven for seeing free trade as a mixed blessing. The opening of markets is interpreted by the vulnerable members of society as the export of jobs, and political opposition is frequently widespread. A similar split exists between industrialised and non-industrialised countries. The wealthy industrialised nations seek to sell innovative high technology, expensive products and services around the world. By contrast, less-developed countries seek improved terms for their labour-intensive, low-technology products as well as the securing of low-price access to new technology. Responsibility for overcoming this opposition has, for the past fifty years, rested with the World Trade Organization (WTO), which was known until 1995 as the General Agreement on Tariffs and Trade (GATT). While this has been highly successful, the process of negotiation has been a slow one. In the first round, in 1947, only twenty-three countries were involved. The initial task was to reverse the damage to international economic integration done by the Great Depression and the Second World War. This objective was largely achieved by the 1970s, and since then openness to trade has reached unprecedented levels. The WTO now has 132 members, and trade represents nearly 15 per cent of global GDP. The work of the WTO is by no means complete. There is scope for considerable further liberalisation of trade (for example, in agricultural products, textiles, public procurement), and membership needs to be widened, especially to include China and Russia. It is also necessary to monitor the increasingly important regional trading arrangements (European Union, EU; North American FreeTrade Agreement, NAFTA; Association of South East Asian Nations, ASEAN), and to control the use of anti-dumping measures. (Dumping is the practice of selling goods in export markets at prices below the full cost of production.) In the longer term, the WTO can be expected to become involved in labour standards, investment, competition, and the effects of trade on the environment (Wolf, 1998). We can state with a fair level of confidence that the system of (more or less) open borders that has emerged in the Western world over the post-war period, and the subsequent explosion in the level of trade, has underpinned the economic success of Europe and North America. Economic liberalisation is also closely associated with the rapid growth of many Asian nations (and has generally survived the collapse of 1997), and it has begun to make an impact on the transitional economies of China and Eastern Europe. Nevertheless, protection continues to flourish in several areas: the exclusion of foreign suppliers from much of the domestic Japanese OU BUSINESS SCHOOL

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market; the small numbers of Japanese cars sold in France; and the use of anti-dumping legislation to protect domestic industries. Anti-dumping legislation is popular because the world trade rules allow it. Countries cannot raise tariffs without being liable to claims for compensation. But WTO rules allow countries to impose anti-dumping duties on foreign goods that are being sold more cheaply than at home, or below the cost of production, when domestic producers can show that they are being harmed. The main initiators of anti-dumping cases are the EU, the USA and Australia; the main targets are China, South Korea and Taiwan. However, the number of countries involved is increasing, and the range of products is also expanding from steel and textiles to include semiconductors, chemicals and forestry products. The argument in favour of anti-dumping legislation is that it protects local jobs, particularly in low-technology industries that are vulnerable to lower wage costs in other countries. There is, however, plenty of evidence to show that many low-technology businesses can continue to operate profitably with high wage costs, even in the face of international competition. This seems to be due to a combination of lower transport costs (which are relatively more important for low-value products); mechanisation (so reducing the labour input); quicker delivery and more reliable service; and greater responsiveness and innovation (The Economist, 1998b). Anti-dumping protection is therefore akin to other forms of protection, in that it cocoons the inefficient and passes the cost on to the consumer. There will continue to be arguments about the speed and precise nature of future trade liberalisation, and in both rich and poor countries politicians will try to protect disadvantaged industries from more efficient international competition. Nevertheless, the economic benefits of trade are sufficiently strong that the trend towards more open markets is likely to continue well into the twenty-first century. In recent years the discussion about internationalisation has moved on and a new term, â&#x20AC;&#x2DC;globalisationâ&#x20AC;&#x2122;, has become much more widely discussed. Globalisation as discussed in the section below deals with the marketing environment, and we will discuss it in more detail before we consider firm, specific issues of the first steps in international marketing â&#x20AC;&#x201C; in particular the reasons why firms internationalise.

2.2

THE PROCESS OF GLOBALISATION

Globalisation contributes to the complexity of international marketing decision making because, as Anthony Giddens argues in Example 2.2, it can work in contradictory ways. What this means is that even if globalisation is taking place (and we will question this later), its effects are not predictable.

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EXAMPLE 2.2 GLOBALISATION Globalisation is political, technological and cultural, as well as economic. It has been influenced above all by developments in systems of communication. ... It is wrong to think of globalisation as concerning just the big systems, like the world financial order. Globalisation isn’t only about what is ‘out there’, remote and far away from the individual. It is an ‘in here’ phenomenon too, influencing intimate and personal aspects of our lives. The debate about family values, for example, that is going on in many countries might seem far removed from globalising influences. It isn’t. Traditional family systems are becoming transformed, or are under strain, in many parts of the world, particularly as women stake claim to greater equality. ... Globalisation thus is a complex set of processes, not a single one. And these operate in contradictory or oppositional fashion. Most people think of globalisation as simply ‘pulling away’ power or influence from local communities and nations into the global arena. And indeed nations do lose some of the economic power they once had. Yet it also has an opposite effect. Globalisation is the reason for the revival of local cultural identities in different parts of the world. ... Is globalisation a force promoting the general good? The question can’t be answered in a simple way, given the complexity of the phenomenon. Free trade is not an unalloyed benefit. This is especially so as concerns the less-developed countries. Opening up a country, or regions within it, to free trade can undermine a local subsistence economy. An area that becomes dependent upon a few products sold on world markets is very vulnerable to shifts in prices as well as to technological change. (Source: Giddens, 1999)

On the one hand, today we see globalisation driven by changes in technology: l

the increased importance of patenting by firms abroad (research is being undertaken by firms away from their home countries)

increases in both inward and outward research-related FDI (foreign direct investment)

the explosion of international strategic alliances in science and technology

the increasing trade in technology

the global nature of R&D itself.

On the other hand, there may also be limits to the expansion of the internationalisation of R&D because of: l

the complexity and cost of managing geographically dispersed research centres

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impediments to the diffusion of technology

the importance of the proximity between production and research.

You should note that not all the data support the notion of coordinated geographic dispersal (for example, the affiliate in Japan specialises in one aspect of production, while affiliates in other countries specialise in other aspects of production). Multinational corporations invest abroad to complement their domestic research expertise, rather than to exploit foreign strengths or substitute for areas of domestic weakness. Translating the above argument into a marketing context, we can say that globalisation does not necessarily entail the homogenisation of markets, although it may polarise markets on the basis of material and cultural differences (Belk, 1996). While advances in technology have brought countries together, they have also increased awareness of local and regional differences. Three reasons can be given for why products may not be standardised as fast as had been anticipated: l

distribution of purchasing power

cultural differences

second-order effect of new technology.

As a result, there has been increased expectation that services and products will be adapted to meet the needs on a more individual basis. This issue is an important one for marketers because, if standardisation is taking place, it may make sense to compete on a globalised basis. However, if it is not, there is less of an imperative.

Factors encouraging globalisation The world is said to be becoming more global because of the following developments (Dunning, 1998, pp. 47â&#x20AC;&#x201C;8): 1 the emergence of intellectual capital as the key wealth-creating asset â&#x20AC;&#x201C; intellectual capital is inherently more mobile than traditional, factory-based industries 2 globalisation of economic activity made possible by advances in transport and communications 3 the emergence of alliance capitalism â&#x20AC;&#x201C; there is a growing extent to which the main stakeholders need to collaborate. This requires the development of closer, continuing and more clearly delineated intra-firm relationships. As we have already said, the single most important factor that has encouraged globalisation is technology. From the demand side, technological innovations such as television, communications, transport and computing encourage the convergence of consumer preference. From the supply side, the integration of computers with telecommunications and cheaper transport allows firms to integrate production and address customers worldwide as never before.

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Questioning globalisation It is important to recognise that globalisation is not just a late twentieth- or early twenty-first-century phenomenon. In terms of finance, according to some measures, capital flowed more freely across frontiers in the late nineteenth century than it did in the late twentieth (Financial Times, 1999). At that time there were heavy falls in the cost of transport, and this led to a convergence of prices between countries. There were also substantial movements of people across countries and continents – something that is not a feature of present-day globalisation. That earlier period of globalisation also led to improvements in living standards. Indeed, the experience of that earlier burst of globalisation is important, since the gains that were made were subsequently lost owing to a backlash of protectionism. That protectionism arose because cheap grain from the USA affected the incomes of European farmers. Other factors that reversed globalisation were the introduction of tariffs by the US government to finance the Civil War and, finally, as the First World War and then the Depression got under way, countries became even less open (O’Rourke and Williamson, 1999). The lesson here is that marketers cannot assume that present-day trends will continue for ever if groups that lose out create political pressure for protectionism. There is evidence of this counter-movement emerging today. So far, we have seen that present-day globalisation is not unique. Furthermore, its extent may have been exaggerated. For example, at present 70 per cent of the US economy’s wealth creation and jobs neither export nor face import competition (Marketing Week, 2 February 1996). A study of six global companies – Colgate, Kraft, Nestlé, P&G, Quaker and Unilever – found that less than four per cent of their 1,792 brands can be called global. This is based on a definition of global as selling in thirty-four countries, which in turn is less than 20 per cent of the global total. Only six brands (Colgate, Lipton, Lux, Maggi, Nescafé and Palmolive) were sold in all sixty-seven countries studied. In contrast, 65 per cent were marketed in three countries or fewer. Finally, there is a distinction between increases in the extent of global trade and communications and the impact on consumer preferences. The globalisation that has taken place may not necessarily result in homogenisation of markets as ‘cultures transform global meanings into unique local meanings’ (Belk, 1996, cited by Malhotra et al., 1998, p. 476). Cultural heterogeneity therefore provides a barrier to the homogenisation of demand (Kale, 1995, cited by Malhotra et al., 1998, p. 476). However, Example 2.2 shows how global firms can nevertheless profitably respond to cultural heterogeneity.

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EXAMPLE 2.3 SONY AND LOCALISATION An example of a company that exploits local differences in taste is Sony, which is well known as a manufacturer of electrical and electronic hardware such as television sets. Sony identified the need to become involved in making the software for its products. At the same time it wanted to exploit a shift in demand in international markets, where American programming is being edged out of prime-time slots in favour of locally produced programmes. Its strategy is premised on the limitations of globalisation. In contrast to its American rivals, in the late 1990s Sony set up production facilities and TV channels in most large countries in Latin America and Asia, and it is producing (although not marketing) channels in Europe. In 1999 it was projected to make nearly 4,000 hours of foreign-language TV programmes, compared with 1,700 hours of English-language programmes. AXN is an example of the globally branded channels that are one part of this strategy. AXN started in 1997 in Singapore. It was launched in India in 1998 and in late 1999 was rolled out in Latin America. But the scope for launching more branded global channels is limited. Action is one of the few genres that plays well across borders. Most of the others have already been exploited: for example, Time Warner is in global news and children’s programming, with CNN and Cartoon Network; and Viacom is in children’s and music programming, with Nickleodeon and MTV. This is why Sony has gone for local production and local channels. Sony now has 24 channels in 62 countries. As evidence of their success Sony Entertainment Television in India is equal in the ratings with Zee, India’s most popular commercial channel, which used to be a near-monopoly; it beats Rupert Murdoch’s Star TV hollow. (Source: adapted from The Economist, 3 July 1999)

Regionalisation For some firms, regionalisation can be a more effective strategy than globalisation. Facilitating the growth of regionalisation is the development of trading blocs, as clusters of geographically close countries that share abstract and/or material culture in varying degrees (Malhotra et al., 1998, p. 477). Thus firms which pursue regionalisation can gain from the advantages of scale and scope of globalisation, while allowing organisations to exploit existing competencies (Morrison and Roth, 1992, cited by Malhotra et al., 1998, p. 477). There are three main trading blocs: the European Union (EU), the North American Free-Trade Agreement (NAFTA) and the Association of South East Asian Nations (ASEAN). A trading bloc is an 16

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association of countries that reduces intra-regional barriers to trade (in goods and sometimes services), investment, capital and labour (Schott, 1991). From a public policy point of view, there are important issues concerning the motives underlying the formation of trading blocs and the possible economic gains and losses that occur as a result. We shall not deal with these here since they are not directly related to managerial decision making. What is of concern to managers is the commercial impact of the development of a trading bloc. Thus within the EU the removal of multiple trading standards will eventually make possible the design and marketing of truly ‘European’ products. This will allow marketers to develop longer production runs and it will also provide advantages to larger firms as compared with smaller ones. Evidence for the impact of the EU on marketers comes from the effects of the 1992 programme to end specific physical, technical and fiscal barriers. As a consequence there were mergers and acquisitions across borders. Prices were affected because of VAT harmonisation. Distribution policies were affected as physical barriers diminished. As far as ASEAN is concerned, the value of that bloc is the growth that has taken place and is forecast in the region. If growth rates return to the levels of the mid–1990s, ASEAN is likely to become larger than North America by 2011, and Europe by 2016, in terms of GNP (Malhotra et al., 1998, p. 484). Some effects of regionalisation are described in Example 2.4.

EXAMPLE 2.4 REGIONALISATION AND GLOBALISATION Regional trading blocs are based on geographic proximity, while the world is heading for globalisation that transcends geography. Factors driving regionalisation can be caused by greater homogeneity of consumer tastes, for example, on a regional basis than on a global basis. In pop music, local cultures seem to be taking over from the domination of Western music. While US pop groups had 50 per cent of the worldwide music market in 1987, according to current trends they will have just 20 per cent by 2000. The success of stars seems to be at best regional. In China, singer Wei Wei outsold Madonna – until she started singing in English in an attempt to go global. Laura Pausini, a big star in Italy, is successful only in a particular region: Latin America. Michael Learns to Rock are popular in South East Asia, but not in their native Europe.

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Emerging markets Corporations that want to maintain their competitiveness on a global basis must compete in the triad of North America, Western Europe and Japan. The size and maturity of these markets means that global players in all industries need to have a presence in those countries. However, for many product categories the triad markets are saturated and sales growth potential is limited. If a firm seeks growth in both the medium and the long term, it may also need to have a presence in emerging markets such as China, the Middle East and South East Asia. Emerging markets may not be as lucrative as the triad at present, but the key to their importance is their long-term potential. While the membership of the triad is fixed, this is not the case with the other groups of countries. According to Czinkota and Ronkainen (cited in Arnold and Quelch, 1998, p. 8), there is no commonly accepted definition of an emerging market. However, three aspects of a countryâ&#x20AC;&#x2122;s economy underlie the definitions used. 1 The absolute level of economic development. This is measured by the World Bank using average GDP per capita. Emerging markets, or less-developed countries, vary considerably in terms of their per-capita income. In 1995, low-income countries were defined as those having per-capita income of less than $765; they included India and China. In contrast, high-income countries had per-capita income greater than $9,000; they included Hong Kong, Singapore, South Korea and Taiwan. 2 The rate of economic growth. Emerging markets typically have average annual growth rates of GDP of more than five per cent, and in East Asia these rates have been closer to ten per cent since 1990. However, not all emerging markets achieve such growth rates: for example, Russia. 3 The state and stability of the market structure. One measure used to assess these factors is the national investment risk indices compiled by organisations such as The Economist Intelligence Unit. Emerging markets can have attractions for marketers in certain industries. Soft-drink manufacturers, for example, can adapt prices to local economic circumstances and can achieve significant market growth. Coca-Cola has seen its sales double every three years in emerging markets. As a result, it has invested $2 billion in China, India and Indonesia. Overall foreign direct investment in developing countries increased from 18 per cent in 1992 to 33 per cent in 1996. For marketers considering entering emerging markets, the key issue is one of timing. Given enough time, it will be obvious whether individual countries represent profitable opportunities or not. Time is not a costless commodity, however, and firms may lose out by waiting. Table 2.2 identifies some of the advantages and disadvantages of being a first entrant.

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Table 2.2 Advantages

Disadvantages

Reputation. Brands can be established before those of competitors. This can be particularly beneficial for firms that have second-tier brands in their home market

Market infrastructure can be absent. This means that the marketer may have only limited access to customers or it may have to spend money in order to gain access

Low advertising costs help brand development. In emerging markets billboards may be a more effective and cheaper medium than television

Regulatory discipline can be absent or arbitrary. This means that the marketer may not be able to compete as an equal against local vested interests

Benchmarks by which other brands in the product class will be judged can be established

Limited trust in formal institutions (e.g. courts, judiciary). This makes it more difficult and expensive to resolve disputes

Domination of communications and distribution channels can take place

Short-term uncertainty. This can be economic or political

Pent-up demand. In some emerging markets there is a pre-existing market for Western goods. Advertising on satellite television increases this

Maintenance of standards. Quality standards may be more difficult to maintain in countries where there is limited existing training and expertise

Qualified staff can be attracted. These may become more difficult to hire for future entrants

Piracy and counterfeiting. This may mean that the marketer does not make as many sales as expected

Governments look favourably on first movers. This varies country by country. The Chinese government attaches a great deal of importance to marketersâ&#x20AC;&#x2122; demonstration of commitment

Lessons can be learnt from first-mover mistakes, if they are transparent to outsiders

Lessons learnt can be transferred to other emerging markets and even the home market. This is an advantage where they are not transparent to others

An example of lessons being learnt is the experience of fast-food firms entering the market in China. Consumers in China tend to eat in restaurants rather than take food away. This means that firms such as KFC need to open restaurants in China that are much larger than their restaurants in the USA. As a result, the corporation will learn how such restaurants should be managed and then transfer the lessons it has learnt to its operations in other countries. Example 2.5 (overleaf) illustrates one of the potential problems of trading with an emerging economy.

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EXAMPLE 2.5 EMERGING TOO FAST In the late 1970s, Nigeria displayed all the necessary elements for rapid market expansion. The countryâ&#x20AC;&#x2122;s economic growth resulted from a dramatic increase in previously stable oil prices. Nigeria is the most populous country in Africa, with over 100 million people and an abundant supply of crude oil. When oil prices rose and the economy exploded, there were major increases in new construction for government buildings, sports stadia, new highways, office buildings and improved port facilities. Much of the new construction was necessary, but its pace was too rapid for the existing infrastructure. The port of Lagos was not able to handle the increased shipping and incoming cargo vessels stacked up in the entry channels for months, waiting for unloading facilities. (Source: based on Miller, 1998, p. 48)

ACTIVITY 2.1 Identify the major risks of doing business with an emerging market.

COMMENTARY You may have identified the following risks: payment, intellectual property and political. Payment risk is that of the marketer not getting paid for the product or service sold. Intellectual property risk occurs when the marketer is likely to have its products counterfeited in emerging markets. Political risk results from an unstable and unpredictable political environment.

Parker (1999) suggests two ways in which countries can be prioritised. All countries should be considered on at least two key dimensions: latent demand and market accessibility.

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Latent demand depends on the size of the country and the demand ceiling (this is the percentage of the population that is likely to adopt the product in the long run). So markets with high levels of existing penetration will have low growth potential. Ceiling effects are important because they help marketers take into account the fact that some countries have groups that may be excluded from buying their products, for example because they are too poor.

Accessibility in turn depends on demography, economics, culture and political structure. In demographic terms the more concentrated the population of a country, the easier it will be to serve it. Economic factors may counterbalance demographic

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ones, so that high income levels can compensate for countries that have large rural populations. Openness can also be important and can affect the extent to which the country can be served by large foreign companies. In terms of culture, the degree of heterogeneity can be important. The higher the percentage of the total population made up by the largest religious group and the largest language group, the more homogeneous the country will be and the easier it will be to access the market.

2.3

PATTERNS OF INTERNATIONALISATION

Every organisation is unique, and its pattern of activities reflects its own particular amalgam of resources, history, planning, personalities and luck. The process of internationalisation is no different, as illustrated in Example 2.6.

EXAMPLE 2.6 ICI AND ZENECA ICI, a broad-based chemical company operating throughout the world, was one of the largest and most highly regarded companies in post-war Britain. Nevertheless, it suffered years of belowaverage growth and poor profitability. Its early history was complicated and much influenced by political considerations. The outcome was that in the 1950s ICI found itself with a dominant position in the domestic UK market, but a very uneven international presence. It was strong in Australia, India, South Africa, Canada and Malaysia, but had been forced to give up its US presence as part of an anti-trust settlement. It had never established a presence in Continental Europe, as these markets had been ceded to German companies as a result of earlier market-sharing arrangements. In the high-growth markets of the post-war era, ICI tried to correct this inherited imbalance; but it had little tradition of central control or of strategic planning, and different parts of the company adopted different approaches to internationalisation. The ‘heavy’ businesses (chlor-alkalis, petrochemicals) continued to establish manufacturing sites in overseas markets using existing technology, where the local subsidiary was able to make a suitable justification. Thus ICI enlarged its position in its traditional markets, where the local subsidiaries enjoyed considerable autonomy. However, little manufacturing investment in these businesses was made in Continental Europe, in the USA or – until the late 1980s – in the Far East. In contrast, the high-value-added businesses (pharmaceuticals, agrochemicals) pursued strategies of highly centralised control and heavy investment in research. Both thrived, developing a series of successful and profitable products. But the commercialisation

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of these products was constrained by the absence of a strong marketing presence in the major markets of the USA, Continental Europe and the Far East. Major efforts were made to offset these weaknesses by investment in in-country sales subsidiaries. These were supplemented by a marketing joint venture in the USA, followed by a major US acquisition in 1987. However, ICI was falling behind its competitors in these businesses as well. In 1992, ICI eventually decided to demerge into a commoditychemical company (ICI) and an effect-chemical company (Zeneca). Since then ICI has disposed of many of its traditional businesses – including most of the overseas subsidiaries – and is trying to build a new global business based on speciality chemicals. Zeneca, meanwhile, continued to be profitable but found itself seeking partners to ensure its survival in the oligopolistic world of pharmaceuticals. In 1998, it merged with Astra to seek to protect itself as a truly global business.

Nevertheless, it can be helpful to identify the different patterns that emerge from the study of other organisations. In this section we discuss briefly four models of internationalisation that have been propounded on the basis of such studies: product cycle theory; stage theories; internalisation theory; and network theory.

Product cycle theory The concept of the product life cycle – introduction, growth, maturity and decline – is well understood. When applied to the process of internationalisation, the theory assumes that technical innovation and new product development occur initially in the domestic markets of high-income countries. The transmission of product information to other countries, and the availability of the product in those countries, are lagged and uneven. The product cycle theory, as put forward by Vernon (1966), suggests that new products are first produced in and for the domestic market, with some exports. As the product matures, it may be produced abroad. Once the product is standardised, overseas production may become the norm and the product may be imported back into the country of origin. This theory was developed to describe the post-war expansion of US companies into Europe. Patterns of trade today are more complicated, and this theory has only limited relevance to current internationalisation processes.

Stage theories These focus on the level of the firm rather than the product, and they suggest that firms follow an incremental, evolutionary approach to international expansion. They assume that the uncertainty and risk associated with internationalisation lead to

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a stepwise approach to the process. They also build on the concept of psychic distance, which suggests that companies will first move to countries that are psychologically close to their home market (i.e. they will operate first in countries with the same language or a similar culture). There are several variations on this theme, but the model developed by Ohmae (1989) is representative. He sees five stages of internationalisation. 1 Export through agents or distributors. This assumes that control remains in the domestic head office, decisions are centralised, and the focus is on rationalising production and marketing activities. International activity is of peripheral importance to the company. 2 Establishment of an overseas sales subsidiary. The international activity is still controlled from the home office, but there is investment in the export market, which therefore increases in strategic importance. This stage also introduces some responsiveness to local needs and tastes. 3 Establishment of overseas production. This represents a substantial increase in commitment and complexity. Decision making has to be delegated, and there is clear recognition of the need to respond to local market conditions and customer needs. 4 Complete insiderisation. This, according to Ohmae, represents a step change in the attitude of companies to international business. It represents a mental readjustment and requires the company to establish a global mind-set. It will involve a dispersion throughout the organisation of what were previously head-office functions. It requires a major revision of management and decision-making structures. 5 True globalisation. This involves recentralising key functions to ensure consistency and to enable synergies and scale economies to be fully realised. Stage models are attractive because they simplify what can otherwise seem to be a confusing set of events. However, this simplification also means that the stage model is only rarely supported by empirical evidence. Companies follow a diverse set of routes to internationalisation, and the approach is neither necessarily stepwise nor consistent across countries. In particular, the establishment of an overseas production subsidiary is relatively unusual, most companies preferring to export.

Internalisation theory Even though the external provider may enjoy economies of scale and scope, an organisation can benefit from the control and flexibility that in-house production offers. This will be particularly evident if the external market is operating inefficiently, as is often the case in countries with poorly developed market infrastructure or high levels of government intervention. In these circumstances, organisations may vertically integrate their activities. Where activities are internalised across national boundaries, a multinational enterprise is created.

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This approach has been further developed by Dunning (1981), who has provided a conceptual basis for foreign direct investment (FDI). Dunning’s OLI theory argues that three conditions have to be met if a firm is to invest in a host country. 1 Firms must have Ownership of a uniquely competitive asset (which can include technology, intellectual property, and brand name). 2 The host country must offer clear advantages as a Location for production of the firm’s products – there must be a unique set of conditions to make that country attractive. 3 There must be clear advantages to the firm from operating outside its own borders, through the Internalisation of certain activities. If there is no such advantage, the firm will do better to source the product locally.

Network theory This theory is based on the acceptance that internationalisation is the result of strategic decisions made by a firm. These decisions can be thought of as rational or as a pattern of activities. They can also take place in an organisational structure that is either hierarchical or a looser coalition of interests (McKiernan, 1992). The theory argues that internationalisation is influenced by political factors within the organisation, and therefore to understand the decisions it is necessary to recognise the political nature of the process. Several assumptions underlie network theory: l

Organisations are all part of networks (of subsidiaries, suppliers and customers), and it is necessary to understand the behaviour of the networks within which they operate.

Organisations within a network are mutually interdependent.

Decisions will therefore be made to add value to the network.

Networks are not stable and members change.

The strength of an organisation depends on its links within the

network.

Informal exchange and mutual adaptation processes are crucial to the success of a network.

The nature of the network will depend on the products or services involved.

According to this theory, decisions to internationalise are based on the need to maintain, develop or defend a firm’s place in the network. It follows also that company-specific advantage is less important. International decision making then becomes a network issue rather than a headquarters–subsidiary issue. This model emphasises a move towards viewing the acquisition of knowledge as the key to understanding the internationalisation of the firm. These models are helpful in understanding the past, and provide several perspectives on structures and processes that are useful today. The riskiness of international marketing, and the strategic

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and competitive issues that arise from it, are developed in detail later in this unit.

ACTIVITY 2.2 Theories of international development are useful because they provide a framework to enable you to reflect on the way strategies emerge and decisions are taken. Consider an organisation that operates internationally – it could be your own or one with which you are familiar. (a) Describe in outline its history of exporting, and the role that exporting currently plays in its operations. (b) Consider whether, how and why it has established international sales, production or research activities. (c) Can you identify any changes in management and control structures that have arisen from the internationalisation of its business? (d) Which of the models discussed here most closely explains the pattern followed by the organisation? (e) In what ways has its progress differed from the models?

COMMENTARY The answers to this activity will differ in each case. If we consider the history of ICI outlined in Example 2.6, we can see that the route followed was different for different products. For the heavy chemicals the company’s history follows closely the stage theory. It is clear that the concept of psychic distance was very strong: ICI developed powerful operations in the countries of the old empire – India, Australia, South Africa, Canada – but it was relatively backward in the USA, Continental Europe and the Far East. ICI was a polycentric organisation, edging towards regiocentric. In contrast, the high-value products that became part of Zeneca were dominated by strong centralisation and control, with production and – initially – R&D heavily concentrated in the UK. Although investment was made in sales and marketing subsidiaries, there was little attempt to globalise the business. As a consequence Zeneca was forced to make major acquisitions and, ultimately, to merge in order to establish the scale and scope of operations needed to compete in a global business. Zeneca was seeking to become truly global and geocentric, but it lacked the scale – and possibly the culture – to achieve this fully. You will probably find that your organisation also fails to fit completely into any of the model categories. Nevertheless, these models can provide a useful analytical framework.

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2.4

IMPLICATIONS FOR STRATEGY

In the rest of this section we look at the interdependence of functional, strategic and structural issues facing international marketers. We also examine the importance of the environment as it affects the strategy and structure of an organisation. Figure 2.1 gives an overview of this section. It shows that the choice a marketer faces between a multidomestic strategy or a global one depends on the marketing environment and the structure of the organisation. In turn, whether or not the environment is multidomestic or global will depend on customer preferences and the interdependence of competition. The structure of the organisation will depend on whether the organisation chooses to structure by function, area or product.

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Figure 2.1

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Overview of Section 2.4

International marketing strategy cannot be considered separately from a firm’s overall, worldwide strategy. Following this logic, the advantages of standardisation and adaptation will have to be considered in terms of whether or not they support the firm’s overall strategic position. The unique aspects of international strategy that differ from domestic strategy are configuration and coordination (Porter, 1992). Configuration deals with the fact that firms have to decide whereabouts in the world they will perform the activities in their value chain. Firms need to decide whether they should either disperse their activities or concentrate them. The question is: can you concentrate marketing activities and serve the world from one location? Porter suggests that, while firms may sometimes undertake promotions centrally, on most occasions marketing activities must be done where the buyer is located. Coordination deals with the way in which activities in different countries should be related to each other: should each country be relatively autonomous in its decision making, or should countries be tightly coordinated? There are several opportunities for coordinating marketing activities. Coordination can involve using similar methods across countries (for example, the same brand can be used across countries). Another way to coordinate is for

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the marketer to transfer information or knowledge, for example, from one country to another. A third way is for the marketer to integrate activities across countries. As soon as an organisation ventures into other countries, a number of factors need to be addressed, as Activity 2.3 will show.

ACTIVITY 2.3 Imagine that you work for a national charity, operating in a developed country and supporting people suffering from a chronic illness. It raises funds, which it uses to provide information and counselling to those people who are affected by the condition. The charity has identified that there are people in neighbouring countries who could benefit from the expertise and knowledge that it has built up. Before it ventures abroad, what decisions would the charity have to make?

COMMENTARY The charity may need to: (a) work out which countries should be entered; (b) work out how relevant markets should be entered; (c) identify how it should do its marketing activities in other countries. For example, should they be the same as those in the domestic country? (d) work out how the structure of the whole organisation should be altered to take into account the international operations.

We shall leave the detailed discussion of answer (a) until Section 3. Answer (b) â&#x20AC;&#x201C; how to enter the new markets â&#x20AC;&#x201C; is discussed in detail in Section 4, but the principal alternatives are outlined here to familiarise you with the terms. Market-entry methods can be divided into three main groups: exporting, contractual methods and direct investment. Export-based methods do not require the firm to manufacture or deliver services itself in foreign countries; instead intermediaries are used to market and distribute the product in those countries. This form of international marketing does not require a high level of commitment from the organisation in terms of either resources or risk. Contractual-type methods can involve, for example, licensing foreign companies to manufacture and/or sell their products in other countries. Such methods can also be used by service marketers, as when management contracts are sold to foreign companies to manage installations such as airports.

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In contrast to export-based methods, direct investment (also called foreign direct investment or FDI) methods require a firm to invest in the foreign countries in which it does business. Market-entry methods are linked to the two major topics of this section in the following way. At the most simple export level of international marketing, a firm may not face any issues regarding either its strategy or its structure. An example might be where a firm simply reacts to unsolicited export orders. As the level of a firm’s involvement in international marketing increases, the organisation will have to consider the implications for both the strategy it pursues and how it is structured. The questions raised in Activity 2.3 immediately bring up the issue of the different strategic and functional levels at which decisions can be made. We can distinguish between functional strategy, business strategy and corporate strategy as follows. l

Functional strategy refers to how the different functional activities contribute to an overall business strategy. Ellis and Williams (1995) see functional marketing strategy as matching the product or service offer of an organisation to customer needs by appropriately applying the elements of the marketing mix.

At a higher level, the international operation in another country could have its own business strategy for dealing with how a firm chooses to compete in its chosen product markets. Such a strategy can be distinct from the business strategy pursued in other countries.

Finally, the highest level is corporate strategy, which concerns the management of the organisation’s activities as a corporation. This is to gain the maximum benefit from a combination of related or unrelated businesses. For firms that operate in several countries, the relationship between these national operations is set as part of the corporate strategy.

The important point here is that strategy at any one level is constrained by, and influences, strategies at other levels. Of course, in a small organisation where there are no separate business divisions, business and corporate strategy are effectively the same. One of the challenges facing international marketers is how to align their strategies to the different environments in which they compete. In this section we focus on the type of strategy that firms can follow, whether global or multidomestic.

Multidomestic strategy As a result of its exposure to different markets around the world, a firm may realise that there are differences between them that need to be reflected in its corporate and business strategies. It achieves this by formulating a unique strategy for each country in which it does business – unless it does so, it risks losing competitive advantage and market share. It may require changes to the elements of the marketing mix – or adaptation.

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Consequently, a company can see itself as a domestic player in several different markets (Porter, 1986). It will then view each country’s operations as a profit centre that is distinct from its activities in other countries. The structure of such a firm allows it to compare its operations in one country with its performance in other countries. This method of operating is defined as ‘multilocal’ or ‘multidomestic’. You may also have met terms such as ‘multinational’ or ‘multinational corporation’ (MNC). While MNC can simply describe firms with significant overseas operations, Johansson (2000) uses the term to describe organisations that adopt multidomestic marketing and business strategies. With a multidomestic strategy, in-country operations will have a relatively high degree of autonomy. The strategy within a country should be influenced primarily by the competitive situation in that country. The major considerations for marketers in a multidomestic strategy are: l

How should business be conducted in each country?

Which countries should be selected for market entry?

How should know-how be transferred from the home market to the country being entered for the first time?

There are limitations, however, to a multidomestic strategy, arising from a lack of coordination, a failure to achieve global synergies, and uneven performance between countries or regions.

Global strategy In global organisations, competitive strategy is no longer shaped at a country level. Instead, competitive advantage is derived from assets that can be developed anywhere in the world and combined in a globally optimal manner as circumstances demand (Lane, 1998, p. 464). So decisions about the selection and exploitation of global resources are made globally, with the objective of achieving a competitive advantage on a global basis. Such firms try to keep the global characteristics of their operations as similar as possible and adapt them where necessary. Global firms improve coordination among geographically dispersed operations by taking advantage of changes in information technology and increased organisational sophistication. There are many prescriptions for how marketers should manage their global operations. The initial view, promoted by Levitt (1983), was that the basis of a global strategy is the development of a ‘standardised’ product, which is made and sold in the same way throughout the world. The role of marketing within such a global strategy is to provide the information and support needed by designers and engineers to develop universal products. Marketing can also play a more proactive role, by creating the demand amongst customers for more ‘universal’ products. Porter (1992) gives the example of Honda, which developed universal vehicles with minor modifications for national markets, and then demand followed.

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Marketing can also make universality viable by executing segmentation appropriately. The same product can be targeted differently in the different countries in which the marketer makes sales. There are also other ways in which segmentation can be implemented. The standard physical product can be tailored in different markets using support services, for example. International marketers pursuing a global strategy will have an additional challenge to the one faced by multidomestic marketers. Global marketers will also need to assess how activities should be integrated across countries. A global strategy involves the firm’s separating elements of value and then placing each activity in the most efficient location. The global corporation seeks to sell the same products in the same way everywhere. It operates as though the world, or major regions of it, were homogeneous. Marketers can use planning processes that simultaneously cover a range of markets. You may also see the term ‘transnational’ used to describe organisations; we take this to mean the same as global. For example, research and development is done in those countries that offer the best technical expertise; manufacturing is done where costs of production are lowest; and so on. The transnational corporation can exchange its learning experiences around the world. However, Daniels and Daniels (1993) say that the term implies the existence of borders in international business and does not go far enough in emphasising the borderless, holistic or systemic nature of global companies. We therefore prefer to use the term ‘global’.

2.5

THE MARKETING ENVIRONMENT

An important factor influencing the choice of a global or multidomestic strategy is the nature of the marketing environment, of which two factors are particularly important: customer preferences, and the interdependence of competition between countries. Customer preferences are multidomestic where: Local consumers have preferences and functional requirements widely different from one another’s and from those elsewhere ... multidomestic markets reflect underlying religious, cultural and social factors and also climate and the availability (or lack of) various foods and raw materials. ( Johansson, 2000, p. 9)

Competition is multidomestic where competition in each country is independent of competition in other countries. The competitive advantage that a firm develops is country-specific and its transferability is limited (Porter, 1986). The multidomestic nature of some industries can also be due to other factors. For example, because of logistical barriers the cement 30

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industry offers little incentive to build global-scale plants. Branded packaged goods (foods, soaps and cigarettes) benefit from nationally differentiated strategies because of differences in tastes, distribution channels and media. This will benefit firms that are skilled in downstream parts of the value chain and that can tailor their activities to local market differences (Bartlett, 1986). In contrast, customer preferences are global where buyer preferences across countries are similar. This is likely to be because their technology content is greater, and/or their cultural content is less, than for multidomestic markets. From another perspective, interpersonal differences between consumers within a market are greater than the cultural, religious or social differences between national markets. Interdependence between country operations is global where a firm’s competitive position in one country is significantly affected by its position in other countries, or vice versa (Porter, 1986, p. 18). A company’s ability to compete in one country is therefore affected by how well it performs in others. Such influence may arise because of scale or synergy benefits or the sharing of costs and resources: A global industry ... pits one multinational’s entire worldwide system of product and market positions against another’s. Various country subsidiaries are highly interdependent in terms of operations and strategy. ... Country profit targets vary, depending on individual impact on the cost position or effectiveness of the entire worldwide system. ... A company may set prices in one country to have an intended effect in another. ... The company seeks to respond to particular local market needs, while avoiding a compromise of efficiency of the overall global system. (Hout et al., 1982, pp. 64–5)

From this perspective, a global environment will exist where the forces for global integration are strong and those for local responsiveness are weak. Such industries include construction and industrial chemicals, which can be described as being ‘born global’. The advent of the transistor and the subsequent electronics revolution meant that scale economies in product development and in manufacturing became important sources of competitive advantage in industries such as television and hi-fi, which are therefore also structurally global industries (Bartlett, 1986, p. 369). Globalisation has developed in other industries where the structural drivers are less obvious – these are industries which have had ‘globalness thrust upon them’ (Ghoshal, 1999); fast-food companies are an example. Whatever the cause, firms operating in a global market environment face the challenges of coordinating and integrating their activities across multiple country markets. (You should note that a company does not have to be operating in all countries to be classified as global – it is the integration of strategy and operations across countries that is important, rather than the number of countries.)

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Finally, you should be aware that the term ‘globalisation’ has two meanings. From a demand perspective, it refers to the convergence in culture and technology of markets around the world. From the supply perspective, it also refers to the rise of the global corporation. Both usages of the term are a relatively recent phenomenon. The terms ‘internationalisation’ and ‘globalisation’ are similar but have subtle differences. As a process, internationalisation refers to the progressive increase in the scale and nature of a firm’s international activities. This may incorporate the progression from exporting to setting up operations in another country. Although cultural convergence between countries can be referred to as globalisation, in the corporate context globalisation refers to a specific, extreme stage of internationalisation. We examine this argument in more detail later. These terms can be important because they denote specific types of activity and they also embody assumptions that managers have made about the competitive environment they face. The success or failure of their strategies can depend on the validity of those assumptions.

2.6

IMPLICATIONS FOR STRUCTURE

Strategy and structure are inextricably linked: firms may be able to identify what they need to do in international marketing, but how they do it is as important and often more difficult (Quelch and Bartlett, 1999). Implementation of international marketing strategy will depend on the structure of the organisation: structure determines the responsibilities of individuals, how they are motivated and rewarded, and how international operations are to be integrated: Indeed the issue of marketing program standardisation versus customisation cannot be separated from the management process issue of centralisation versus decentralisation. It is conceivable that an enlightened headquarters might decide in favour of customisation. However, there can be an ongoing tension in most multinationals between headquarters and advocacy of standardisation – motivated primarily by cost and control considerations – and the field operations that seem to respond to differences in customer behaviour from one market to another. On the one hand, a weak headquarters will permit an excessive proliferation of country-specific adaptations; after all, if country managers cannot identify differences requiring adaptations, they might as well resign. On the other hand, an excessively controlling headquarters will leave money on the table by not permitting low-cost, yet potentially highly profitable customisation. (Adapted from Quelch and Bartlett, 1999, p. 235)

So, there are two opposing forces influencing international organisational structure. The more centralised an organisation is, the better the possibility of coordination between the operations in different countries and the easier a global strategy becomes.

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In contrast, decentralisation will enable corporate actions to be more responsive to local situations. There is no single, correct organisational structure for any given situation, and most industry sectors include examples of firms that have developed different organisational forms to cope with their marketing environment (see Example 2.7).

EXAMPLE 2.7 A COMPARISON OF GLOBAL AND MULTIDOMESTIC STRATEGIES IN THE SAME INDUSTRY The motor industry illustrates how firms can successfully implement different strategies. l

Toyota has developed a tightly coordinated, centrally controlled operation that emphasises the worldwide export of fairly standardised vehicles from global-scale plants in Japan. Marketing is dispersed, but the approach is quite standardised around the world.

General Motors has dispersed production and R&D in different regions of the world. International markets are handled differently, for example with different brands, such as Opel (in Continental Europe) and Vauxhall (in the UK).

Fiat, in contrast, relies heavily on its dominant position in its home market and on selective internationalisation where it can gain protection from competition.

While both Toyota and GM are in some ways global companies with global strategies, they use different strategies with different patterns of coordination and configuration. At the other extreme, Fiat built its international operations on various governmentsâ&#x20AC;&#x2122; interest in developing national automobile industries. The company grew by negotiating with host governments for protection from more efficient global competitors, in exchange for establishing joint ventures and licensing agreements. (Source: based on Bartlett, 1986, p. 371; Porter, 1992, p. 33)

The structural issues an organisation faces are likely to vary according to the maturity of its international operations. For a firm at the early stages of development of its international marketing, a key question is likely to be: should it separate international marketing from its domestic activities, or should it integrate the two? Separation will mean that specific individuals will have responsibility for the success of the international operation. Moreover, they will be able to assess the possible benefits of international marketing for all the companyâ&#x20AC;&#x2122;s activities. At the same time, however, separation may mean that international marketing does not attract as much senior management attention as other, more lucrative, domestic business. Furthermore, it may not be

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possible for the international division to co-opt the best people from domestic activities. In contrast to the international division approach, a firm can opt for the â&#x20AC;&#x2DC;global company approachâ&#x20AC;&#x2122;. Here international marketing activities are integrated with domestic marketing, rather than separated from it. Functional groups, such as marketing, have a global responsibility and not just a domestic one. In addition, organisations also need to consider the relative importance of three types of knowledge when developing appropriate structures for international marketing: product and technical knowledge, area and country knowledge, and functional expertise. Where firms structure by area, individual divisions take responsibility for specific regions of the world. Given the growth of trade blocs and regional groupings, this basis for structure can offer advantages. Countries within a regional group are likely to share economic, cultural and social similarities. There may also be benefits regarding logistics, since such countries are likely to be geographically close. On the other hand, a regional structure requires the corporation to duplicate staff across regions (in product development, for example), which can lead to inefficiencies. A possible solution is to have regional staff located at corporate headquarters. However, this means that staff are no longer based close to their customers, which was one of the supposed advantages of a regionally based structure. Where a firm adopts a product structure, product groups are given responsibility for promoting their offering around the world. This structure is likely to be suitable when there is greater variation between products (for example, they may be technically specialised and unrelated) than there is in the requirements of the different countries in which the products are sold. It will then be more productive to have the same specialists marketing the products in different countries. This is because it is easier for them to pick up information about different markets than it would be to have country specialists learn about the intricacies of the different products the firm has to sell. This is the key principle underlying the choice of whether a firm organises by country, region or product. Priority will be given to whichever of the three bases is considered to have the greatest variability. We can apply the same principle to structuring by function. This is most likely to happen where there is little difference between the products that a firm sells, or between the markets in which those products are sold. Firms that structure according to function will have their top executives for each function take responsibility for the firmâ&#x20AC;&#x2122;s global operations. Different organisational approaches are illustrated in Examples 2.8 and 2.9.

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EXAMPLE 2.8 A MATRIX SOLUTION In 1990, Bausch and Lomb (B&L) had US domestic divisions and an international division (ID) that made separate marketing and manufacturing decisions. This meant that brands such as Ray-Ban sunglasses could not be managed globally. Pricing differences between markets meant that parallel importing developed in response to price differentials (officially, contact lenses sold in the USA for $6.70 and for $25 in Japan). Other sources of tension arose because the US domestic divisions were perceived to short-change the ID of R&D and marketing resources. The firm also realised that competitors were attacking them globally, but B&L was responding only on a country-by country basis. Moreover, country managers felt that decisions were made too far away and too slowly. The firm felt that a regional structure was needed. ID was replaced by three autonomous, self-contained, regional headquarters: Europe, Middle East and Africa; Asia/Pacific; and Western Hemisphere. To coordinate decision making between the regions and US operations, the company established business management committees (BMCs) and global business networks (GBNs). BMCs managed the worldwide coordination of B&L’s three core product lines: they integrated initiatives and resolved conflicts from a global perspective. The BMCs included the US division presidents and the regional presidents. The five GBNs covered the marketing and operations functions, facilitated communication across functions and identified and coordinated decision making on issues of global importance. Network participants were senior middle managers with specific functional responsibilities, drawn from US divisions and regional headquarters. The impact on the European region was as follows. The marketing manager of a country subsidiary, such as France, would participate in shaping regional marketing strategies and setting new product development priorities in conjunction with European regional headquarters in London. Sales and brand contribution would remain the basis for compensation, while at the country manager level 25 per cent of the annual bonus would be based on pan-European performance to encourage coordination and communication. (Source: based on Quelch and Bartlett, 1999, pp. 585–602)

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EXAMPLE 2.9 AN ECLECTIC STRUCTURE Unilever, the UKâ&#x20AC;&#x201C;Dutch packaged-goods giant, moved from autonomous subsidiaries to a more global structure. The old structure had allowed the national companies to be responsive to local market differences, but they were limited in terms of crossmarket coordination. The company decided that, while their packaged-food business benefited from nationally responsive, country-based structures, their commodity-chemicals business needed a more centralised structure. Greater coordination was also considered important for their detergent business. As far as detergents were concerned, the company felt that research could be done on a global basis, while sales could be devolved to local responsibility. In terms of marketing, local promotion decisions had to be nationally differentiated. However, basic product characteristics, market positioning and other key aspects of product policy would remain the remit of the corporate product group. This is quite different from being either centralised or decentralised, or from having a product- or geographic-based structure. (Source: based on Quelch and Bartlett, 1999, p. 579)

2.7

SUMMARY

So far in this unit we have seen differences in methods of market entry, and also the distinction between multidomestic and global types of international organisation. These differences reflect the degree of international involvement. A firm that uses foreign direct investment is more internationally involved than one that simply exports. Similarly, a global organisation is more internationally involved than a multidomestic one. This element of international involvement has two dimensions: qualitative (how it does business) and quantitative (how much business it does). These measures of the degree to which a firm participates in international marketing are termed internationalisation, and the changes in the level of international participation are referred to as the internationalisation process. For the individual company there is more to the degree of internationalisation than simply the level of sales generated by foreign-country operations. Internationalisation can be thought of as a continuum. At one extreme there is the firm that operates purely on a domestic basis; it considers its home market to be an adequate source of revenue. At the other end of the spectrum there is the global organisation that, hypothetically, is so at home in all the countries in which it operates that it may not even consider any particular country to be its home base. Such an organisation decides where to conduct its operations on the basis of the comparative advantage of each country. 36

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From the marketer’s point of view, the degree of internationalisation is important because: l

It will influence competitiveness against other firms and ultimately profitability.

If managers can understand the factors that affect internationalisation, they can try to influence the process and so their firm’s competitiveness.

Even where they do not have direct power or influence, they can nevertheless position the organisation to either avoid negative effects or take advantage of positive ones.

The way in which a firm structures its international operations will have a direct impact on the way in which it manages its elements of the marketing mix – which we study later in Section 6. To put it another way, whether a firm chooses to operate on a global basis or on a multidomestic basis will have a bearing on how it specifies its products around the world, and how it prices them.

In this section we have addressed the interrelationships between internationalisation, strategy and structure. We now consider how managers can understand and assess the attractiveness and risk of international markets. ��

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3 ASSESSING INTERNATIONAL MARKETS

ASSESSING INTERNATIONAL MARKETS

In Unit 1 we discussed the impact of external change on organisations and the consequent importance of identifying and assessing developments in the global macro-environment. Organisations need to scan the environment to detect change: such information can come from personal sources or from publications. They then need to monitor that change to determine its evolution. This is important because developments may die out or gather momentum â&#x20AC;&#x201C; clearly, the latter will be more important. The direction of future changes needs to be forecast, and the organisation needs to assess those changes in terms of their impact on the organisation and the strategies it seeks to pursue (Fahey and Narayanan, 1994). Strategic planning involves matching markets with products and other corporate resources, across a range of countries. This can be a complex process and some of the planning tools developed for use within single markets may prove to be of limited value.

ACTIVITY 3.1 What problems can you identify with using planning tools in an international marketing context?

COMMENTARY The problem with using domestic planning tools for global strategic planning is that they focus on the product as the unit of analysis, whereas in an international context it is more appropriate to consider market portfolios. There are additional problems with using traditional portfolio models in an international context. Usually such models seek to sort businesses in terms of a few strategic variables and draw heavily on the experience curve. In an international setting, however, this can be inadequate because other factors, such as geographic diversity, can greatly affect a firmâ&#x20AC;&#x2122;s performance.

International marketers have to decide which countries their firm should enter, and in what order. As a result, it is important to be able to assess how attractive any particular country is. This assessment will cover the normal range of factors that determine opportunity and risk, and is similar to the conventional STEEP (social, technological, economic, environmental, political)

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framework. The interrelationship of these factors is illustrated in Figure 3.1. In this section we examine these key factors in detail and consider how they influence the attractiveness of markets.

��

Figure 3.1

3.1

Factors influencing choice of market

STAGES OF MARKET ASSESSMENT

The assessment of countries for market entry should follow a logical screening approach, in which key variables are identified and countries selected according to objective criteria. Various screening models are used, of which the following four-stage approach is typical ( 0Johansson, 2000, pp. 105–6): 1

country identification

preliminary screening

in-depth screening

final selection.

The first stage simply requires the marketer to list the countries that they could possibly enter. Countries that are clearly unsuitable because of size, instability or inaccessibility are eliminated at this stage. The second stage requires countries to be rated according to macro-level indicators, such as political stability, geographic distance and economic development. The costs of entry should also be assessed at this stage – they may include costs of transport and customs duties, for example. The third stage involves gathering data specific to the industry and product markets and, where relevant, to the specific market segments. Here the marketer will want to assess market potential and size, the growth rate of the market and the strengths and weaknesses of competitors. The final selection stage requires the company to assess the costs and returns for each market. Countries similar to those the marketer has already entered may have lower entry costs, less risk and

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quicker returns on investment. Throughout this screening process, it is important to be aware of the organisation’s sources of competitive advantage.

3.2

SOURCES OF COMPETITIVE ADVANTAGE

The screening process focuses on the nature of the country and its market. The attractiveness of a country to a firm also depends on the characteristics of the firm itself – what Dunning (1998) refers to as ‘ownership advantages’. Firms that are successful in their home market are not necessarily equally successful when they go abroad. Moreover, there are firms which are not amongst the most successful at home but can do a better job in overseas markets than their domestic competitors. A firm’s advantages and disadvantages are defined in terms of its strengths and weaknesses relative to the competition in a specific competitive arena. Advantage is always relative and arises from assets and capabilities that are superior to those of competitors. Advantages are also specific to an arena or a context: what is an advantage in one situation may not be an advantage in another. This is because: l

the competitors may be different

the customer’s needs may not be the same

the ways in which business is done may not be the same

competition may be different – there may be international as well as local competitors.

A firm’s competitive advantage can derive from any or all of the functions that are performed in making and selling a product or service. Each function can be a possible source of competitive advantage. At the downstream level, a source for competitive advantage is the interface between the firm and the customer. At the upstream level, the source lies in what the firm has and what it does. There are dynamic advantages in terms of the firm’s ability to learn. In industries where there is rapid technological change, upstream dynamic advantages will matter most. In sectors where technological change is slow, static downstream advantages may be more important. A firm’s sources of competitive advantage may be different in international markets from those in its domestic market for three reasons. 1 Advantages that matter will vary between countries, because competitors, customers and circumstances are different. 2 Just because a firm has a competitive advantage relative to domestic competitors does not mean that the same will apply relative to its international competitors. Similarly, if it is actually inferior to its domestic competitors in competitive terms, that does not mean it will be inferior to its international competitors. OU BUSINESS SCHOOL

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The extent to which domestic superiority or inferiority will carry over into the international market may depend on technological superiority. On the one hand, if the domestic market is technologically superior to the international market, a competitive advantage (or competitive inferiority) in the domestic market will carry over into the international market. On the other hand, if the domestic market is technologically inferior to the international market, neither competitive advantage nor inferiority will carry through into the international market. 3 Finally, there are characteristics specific to the country, the industry and the local community. These characteristics do not enable domestic firms to have any advantages over each other. For example, the country-of-origin (COO) label will confer the same benefits to all companies coming from the same country. However, COO will give firms advantages (or disadvantages) over other international competitors. Other general advantages include superior domestic infrastructure, growth of human capital, rates and diffusion of innovation. These sources of competitive advantage are important because they differ significantly between different nations â&#x20AC;&#x201C; and they can be greater than the differences between companies. It is important, therefore, for firms to understand the extent to which competitive advantage can be transferred from their home market to the international market. A firm will draw on its underlying assets and capabilities, or on the general characteristics of the home country, to establish a competitive advantage for its operations overseas (Hu, 1995, p. 79). But this transfer is not necessarily always in one direction, from the parent company to the foreign subsidiary; transfers may also be from subsidiary to parent or between subsidiaries.

ACTIVITY 3.2 Can you think of any reasons why the competitive advantage enjoyed by your firm in one country may not transfer to another?

COMMENTARY Lack of transferability generally falls into one of two categories. (a) The key ingredient for competitive advantage may not be transferable: for example, locational advantages of a retail firm or access to raw materials. (b) Alternatively, the advantage may be transferable but it confers no benefit on the companyâ&#x20AC;&#x2122;s ability to compete in the foreign market: for example, organisations that are successful because of their very high labour productivity will have less of an advantage in low-labour-cost environments.

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There are three categories of transferable advantage: 1

unique, firm-specific advantages relative to domestic competitors

specific assets at home (resources, capabilities, relationships and corporate characteristics)

general attributes and general access to factors shared by industry.

However strong and transferable its assets, a firm will also need to develop additional or complementary assets if it is to succeed in foreign markets. These are likely to include after-sales service, technical support, distribution and marketing, and they will require investment in personnel, training and facilities. There are many sources of competitive advantage that are generally not transferable, including: l

the workforce

a monopoly market position

possession or control of a distribution network (however, the knowledge of how a distribution system can be developed may be transferable)

market-specific reputation (although reputations based on the country of origin may be transferable)

close relationships with suppliers and customers that may be of no use in another country, unless those firms are also willing to go abroad. (After the Second World War, American service firms benefited from following American manufacturing firms which set up businesses in Europe. Japanese car manufacturers have encouraged parts manufacturers to accompany them so that they can continue with their lean production systems.)

Tacit knowledge, which can include skills, competencies and capabilities, may also not be transferable. Because it is tacit, this knowledge cannot be reduced to codified operating instructions, and it is therefore difficult to communicate and reproduce. Tacit knowledge is important because it helps deal with complexity, and is acquired through experience and trial and error. Demonstration, observation and imitation are more difficult in an international marketing context, limiting the extent to which this type of knowledge can be transferred. Organisational learning, which happens on a collective basis, may be even more difficult to transfer. The transfer of such knowledge is best achieved through the transfer of staff. In the case of collective learning, large numbers may be involved. This inevitably involves high costs and possibly complex cultural problems.

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ACTIVITY 3.3 Consider the work that you do for your organisation. Which parts of it could be taught to someone else in another country? Which parts would be more difficult to teach? How could the organisation overcome these problems?

COMMENTARY We can illustrate this by considering the Open University Business School. When OUBS establishes an operation in a foreign country, its teaching materials are relatively easy to transfer. However, it is also necessary to train local lecturers in its processes. Some of these can be relatively easily taught: for example, the way in which forms relating to specific activities are completed. What is more difficult, however, is the student support that lecturers are required to provide. To transfer these tacit skills, OUBS requires local lecturers to study its courses under the guidance of an experienced UK tutor, and to attend a UK residential school, before working as local tutors.

We now discuss in more detail the factors that influence the choice of market.

3.3

THE ECONOMIC ENVIRONMENT

As we review the main factors that influence the choice of market entry, we shall use two case studies to illustrate key points. Before we look at economic factors in detail, read the information in Example 3.1 about the choices facing an American medical products company contemplating market entry into Latin America, and then do Activity 3.4.

EXAMPLE 3.1 BAXTER INTERNATIONAL Baxter International manufactures intravenous therapeutic solutions and bottles them into vacuum-sealed containers. The company has export offices in the USA, Singapore and the UK and sales offices in twenty-nine other countries. It is considering expanding its business into Latin America, and has the following economic information.

Brazil This is the strongest country economically in Latin America, although the major industries have developed only since the 1970s. The domestic economy stagnated in the late 1980s when the country suffered from severe inflation and could not meet its debt obligations.

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Colombia Colombia is the seventh-largest industrialised economy in Latin America.

Mexico In the 1980s Mexico experienced economic problems because of depressed oil prices. Economic recovery has been bolstered by membership of NAFTA and a free-trade agreement with Chile.

Venezuela The economy boomed in the 1970s when world oil prices reached their highest levels. Much of this wealth was channelled into social programmes, especially healthcare. Venezuela now has one of the highest per-capita income levels in the region. In the 1980s and the 1990s economic conditions deteriorated because of falling oil prices and economic mismanagement. The economic data for 1998 were as follows. Brazil

Mexico

Population (millions) (2000)

173

GDP (US$ billions) (1998) GDP per capita (US$) (1998) Unemployment (%)

Venezuela

Colombia

100

1035

815

195

254

6150

8500

8000

6200

7.5

2.5

(Source: based on Helsen and Chang, 1995)

ACTIVITY 3.4 Based on their respective economic performances, which country would you target for market entry?

COMMENTARY In terms of absolute numbers, the GDP of Brazil is the highest. But according to GDP p.c., Venezuela and Mexico appear to be more attractive markets, since patients may have more to spend. Both criteria show that Colombia is weakest. We look at the interpretation of economic data in the rest of this section.

When firms assess the attractiveness of a country for market entry, one of the key factors will be the likely demand. This will be influenced by the economic well-being of the country. One of the ways in which that can be assessed is the value of final goods and services it produces. This is called Gross Domestic Product (GDP). OU BUSINESS SCHOOL

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Gross National Product (GNP) is GDP plus income earned by citizens abroad, minus income earned by foreign workers from domestic production. However, GDP and GNP figures do not take into account the size of a countryâ&#x20AC;&#x2122;s population. Measures of income are, therefore, probably more useful to marketers, especially for consumer-goods businesses. The commonest measure of income is Gross National Product per person (per capita) â&#x20AC;&#x201C; GNP p.c. One of the key differences between emerging markets and developed markets is that the economic and political situation in developing countries can be more volatile than in developed countries. This is illustrated by the economic information on the four countries in Example 3.1. This can make decisions about investment more difficult, since the past becomes a less useful indicator of the future and there is a greater likelihood that forecasts will be wrong. This fact is familiar to everyone involved in international marketing: emerging markets are exciting in terms of their potential, but they are more volatile and therefore more risky than triad countries. We can explore these differences in more detail by looking at the second case study in Example 3.2.

EXAMPLE 3.2 MARY KAY COSMETICS Mary Kay Cosmetics is an American manufacturer looking to expand its operations in Asia. It is considering the relative advantages and disadvantages of Japan and China, and is therefore faced directly with the contrasts between developed and emerging markets. The economic characteristics of the two markets are as follows. Japan Gross Domestic Product (US$ billions)

4347

963

Gross Domestic Product (US$ billions) (1999 at PPP)

2900

4800

Population growth rate (% per annum)

0.18

0.9

0.3

23,400

3800

18.05

0.34

GDP growth 1999 (estimated) (% per annum) GDP per capita 1999 (US$) Average hourly compensation (US$) Monthly wages (Chinese regions)

Guangzhou wages are double those in Beijing. Urban incomes are double those in rural areas, and are growing three times more quickly.

(Source: based on Laidler and Quelch, 1996, with updated statistics)

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Based on these data, it seems clear that China’s GDP p.c. is far lower than Japan’s. While this is undoubtedly true, the disparity may not be as large as the data suggest. There are several factors that can hide how well an economy like China’s is performing. These include the monetisation of exchange, and purchasing power parity (PPP). l

GDP figures can mask how much individuals have to spend (their disposable income), which is the measure of interest to marketers. This is because GDP figures are inflated by the extent to which exchanges are monetised. In emerging markets many services are provided within families, where no money changes hands, thus depressing measures of GDP relative to those countries (usually developed ones) where a greater proportion of exchanges are monetised.

Income can also be considered in terms of PPP. This measures what the currency of a country would really buy in terms of actual products (in other words, it takes into account price levels). The effect of using this measure is that, because of their generally lower prices, consumers in emerging markets may have more disposable income than is apparent from the national accounts. However, calculating PPPs can be problematic – how do you establish a comparable basket of goods in order to see how much people would have to spend in different countries? The Economist magazine has a solution: it compares the prices of the McDonald’s ‘Big Mac’ in different countries, on the basis that the product is the same the world over. China’s GDP is five times larger if recalculated using PPP.

There is a caveat to using PPP when assessing developing countries, which can be characterised by exchange-rate volatility. So, measures of economic output measured using PPP can fluctuate wildly, not because output has fluctuated but because the exchange rate has. The movement of exchange rates themselves may be caused as much by political fiat as by market forces. Income is, of course, a static measure: it tells us how well a country is doing at present. Marketers will also be interested in rates of income growth, which indicate the longer-term prospects for a country. Income growth should clearly be considered in conjunction with population growth figures. When considering the prosperity of emerging markets, however, the distribution of purchasing power should be borne in mind: although consumers in emerging markets are becoming more affluent, only a very small proportion of the population can aspire to Western levels of consumption. The interpretation of economic data is also complicated by the fact that private consumption as a percentage of GDP (which reflects spending by households and firms) can vary considerably. In the USA this was 68 per cent of GDP in 1997. However, in Singapore it was only 41 per cent of GDP, because of mandatory savings schemes that discourage spending. Thus Singapore’s very high per-capita GDP does not necessarily translate into expenditure by its residents. Furthermore, the high level of GDP per capita in Singapore would indicate a strong demand for cars. However, government policy OU BUSINESS SCHOOL

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restricts the sale of cars, particularly high-specification models, through permits and taxation. This reduces demand for cars and encourages use of the excellent public transportation system. We can see, therefore, that economic data need careful interpretation. First, we must distinguish between the economic status of a country and its residents – the two are not the same. Particularly in the developing world, it is possible to find very poor countries (that is, whose governments are poor) which, nevertheless, have certain affluent population segments. Second, where marketers use national indicators of personal income those may also be misleading, since there can be large differences between the rich and the poor members of a nation. Third, statistics may be out of date or inaccurate because of the existence of a substantial informal economy that falls outside the official statistics. Finally, economic indicators are just that – an idea of the economic status of a country and its residents. Whether they actually correlate with the demand for a specific product or service is another issue. Macroeconomic data may therefore be of limited value in assessing potential demand, especially in emerging markets.

3.4

THE DEMOGRAPHIC ENVIRONMENT

Before we discuss demographics, look at some of the other data available to Mary Kay Cosmetics in Example 3.3.

EXAMPLE 3.3 MARY KAY COSMETICS (CONTINUED) Japan

China

Population 1999 (millions)

126

1261

Estimated population 2020 (millions)

137

1541

Population distribution (estimated 2000): 0–24 years 25–49 years 50+ years

29% 35% 36%

40% 39% 21%

Urban population (estimated)

77%

30%

Population per square mile Penetration of (per 100 people): televisions l radios l telephones l

Advertising expenditure per capita 1992 (US$)

865 69% 95% 48% 220

315 33% 33% 9% 0.86

By combining the economic and demographic data, we can now make some further observations about the markets in Japan and China. For both countries, GDP growth is comfortably higher than annual population growth projections. However, China is growing much more rapidly, suggesting that standards of living should improve

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considerably. From Example 3.2 we can also see that there are large variations in income levels between regions in China, illustrating how important it is to identify segments within the national market in emerging countries. In this case, the greater apparent prosperity of Guangzhou suggests that this region could reasonably be expected to have a higher level of demand for cosmetics than other regions. China clearly has a much larger population than Japan and it is growing more quickly In terms of demography, therefore, China seems to have greater market potential (although attention needs to be paid to who is having the children â&#x20AC;&#x201C; the economically poorest classes may have the highest population growth rates (Muhlbacher et al., 1999)). It is also clear that China has a much younger population than Japan, which is important if the marketer sells a product aimed at people up to the age of 24. China has, and will continue to have, a larger proportion of its population in that age group than Japan. In contrast, it will have relatively fewer people than Japan in the 50+ category. So, if Mary Kay Cosmetics sells to a relatively young market, China appears to be more attractive on that count as well. (Source: based on Laidler and Quelch, 1996, with updated statistics)

Population size and growth rate are clearly going to be important indicators of market potential. However, age distribution is also important because it can indicate the types of product for which there will be demand. In countries with high population growth rates there will be a relatively young population â&#x20AC;&#x201C; most emerging countries are in this category. In contrast, the birth rate in most European countries is so low that populations are static or falling. As this happens, and improvements in healthcare increase the longevity of European populations, projections show an increase in the proportion of elderly people. One of the reasons for the increasing populations of developing countries is that while child mortality is declining, the lifestyles that encourage smaller families are taking longer to emerge. So far we have looked at the absolute numbers of potential customers. For some products, however, it is the spending power of potential customers that is important. In this respect the comparison between China and Japan is stark, with the average Japanese person earning sixty times more than a Chinese person. Even allowing for such factors as the higher cost of living in Japan and the higher level of taxes, there is still no comparison between the two countries in terms of purchasing power. For some products the capabilities of the target population are important. Capabilities can be related to the level of education or literacy. Levels of literacy will determine which type of media can be used and they can also affect the complexity of products that can be sold. Thus the level of education and training may determine the attractiveness of potential markets for some companies. OU BUSINESS SCHOOL

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Marketers will also need to consider how easy it will be to reach potential customers. In this respect the proportion of the population that lives in urban areas is important. In our example, this criterion again favours Japan. Urbanisation statistics need to be treated with care, though, as they may conceal sections of impoverished people as a result of ruralâ&#x20AC;&#x201C;urban migration in cities such as Mexico City and SĂŁo Paulo. We shall now return to the first case study, Baxter International, in Example 3.4.

EXAMPLE 3.4 BAXTER INTERNATIONAL (CONTINUED) Baxter has a 25 per cent market share in the renal therapy market, which is divided into three segments: haemodialysis (HD), continuous ambulatory peritoneal dialysis (CAPD) and kidney transplants. HD is an effective method to remove waste from the blood. However, it is hard on patients and requires four hours of treatment and three treatments per week. Baxter is a strong competitor in the HD market. CAPD was pioneered by Baxter. It is done by the patients themselves and has lifestyle advantages. It provides increased mobility, is less costly than HD and needs less medical infrastructure (in terms of hospital facilities). Baxter dominates the CAPD segment (it has 80 per cent global market share). (Patient satisfaction is also much higher with CAPD.) The demographic data on potential Latin American markets available from desk research were useful in indicating total population size, but of little value in assessing the market for renal therapy. For this, more specific research was needed in order to determine the number of people suffering from renal failure. This required targeted research, which gave the following results. Country

Total dialysis patients

HD patients

PD patients

PD patients (%)

Brazil

12,724

10,450

2274

Colombia

1,000

750

250

Mexico

3,000

700

2300

Venezuela

1,100

500

600

Argentina

4,000

3,920

Cuba

1,000

500

Total

22,824

16,820

6004

On the basis of this further information, Baxter International identified Mexico as the country with the greatest market potential for their products. (Source: based on Helsen and Chang, 1995)

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3.5

THE POLITICAL ENVIRONMENT

All organisations operate within a political, legal and regulatory framework that both protects and constrains their operations. The complexity and pervasiveness of this framework increases when organisations operate across international boundaries, as illustrated in Example 3.5.

EXAMPLE 3.5 POLITICAL AND LEGAL CONSTRAINTS Political ideology: the political viewpoints of existing governments. Relevant legal rules for foreign businesses: rules that apply only to foreign businesses, e.g. tax and labour legislation. International organisation and treaty obligations: military responsibilities, political obligations, copyright, postal and patent obligations. Power or economic bloc grouping: membership of formal or informal military, political or economic bloc. Import/export restrictions: formal legal rules controlling exports and imports, including tariffs, quotas and export duties. International investment restrictions: formal legal and administrative restrictions on investments by foreigners in the country. Profit remission restrictions: formal legal and administrative restrictions on remittance of profits of local operations to foreign countries. Exchange control restrictions: formal legal and administrative controls on the conversion of the local currency to any or all foreign currencies. Membership of and obligations to international financial organisations. (Source: based on Albaum et al., 1989)

The political environment can influence the business climate both positively and negatively: l

It can facilitate international operations when incentives are given to international firms, in order to attract know-how or create employment.

Operating costs may be lower if employment laws and other laws influencing business are more lax than in the domestic market.

Levels of taxation and social charges are likely to be different from those in the home country.

A lax regulatory environment may not protect intellectual property or prevent counterfeiters (for example, in Pakistan most users run unlicensed versions of Microsoft software). OU BUSINESS SCHOOL

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Regulatory regimes may make it hard for foreign companies to gain approval for new products, thus providing protection to local competitors.

In addition to differences in the regulatory regime, emerging markets may also be politically volatile. Economic problems may lead to sudden and arbitrary political changes (in 1998, in response to an economic crisis, Pakistan froze foreign-currency bank accounts), to labour unrest or to civil disturbances. Political risk can be defined as the application of host-government policies that constrain the business opportunities for foreign companies. It represents the likelihood that political forces will cause changes in a country’s business environment that affect profit and other measures of success. Marketers can also face ‘transfer risk’, which is the risk associated with transferring capital and profits from one country to another. Where a firm seeks flexibility in its sources of supply, in order to overcome volatility, it will choose locations where government policy on imports and labour-force versatility is relatively liberal. Countries with supplier networks that function with a high degree of trust will also be favoured. Thus local culture and institutions can be an important factor when choosing locations (see Example 3.6.).

EXAMPLE 3.6 BAXTER INTERNATIONAL AND POLITICAL RISK In most of the Latin American countries under consideration (with the possible exception of Mexico), there is not the level of protection of intellectual property – and in particular of patents – that is offered in the USA. The legal systems are not watertight. Baxter International is vulnerable to patent infringement, which can result in sales lost to counterfeit products and damage to Baxter’s corporate image. The company will therefore have a difficult decision to make: whether the opportunities offered by these large and fast-growing markets are sufficient to run the political risk that they undoubtedly carry. If Baxter chooses to enter one or more of these markets, it can take actions that will reduce the political risk. Legal action can be taken against infringers. The government can be lobbied to strengthen protection of intellectual property. Product innovation is another option, including the development of service options that differentiate Baxter’s products from imitators. This can be expensive, however, and customers may simply prefer counterfeiters’ cheaper products. Alternatively, companies can choose to collaborate with counterfeiters by licensing, subcontracting and even acquisition. Whatever measures are chosen, it is important that Baxter develops an explicit strategy to reduce political risk. (Source: based on Helsen and Chang, 1995)

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Although the most apparent cause for concern is the legal and regulatory framework of the host country, political decisions may also be affected by home-country issues. Firms may be encouraged to expand internationally owing to favourable tax treatment of these activities by their own country. Perhaps even more important than the economic and political issues in assessing international markets are issues of culture. We discuss these in the following section.

3.6

THE IMPORTANCE OF CULTURE

Why should marketers pay attention to culture and the social environment? The simple answer is that these factors can influence sales. This is because they influence how individuals (who can be consumers, customers or suppliers) perceive the world around them. For the international marketer this means that it may be important to consider the cultural appropriateness, not only of communications but also of products (in terms of their specifications), prices, and the way in which the products are distributed. Culture creates complexity for the international marketer, because the cultures of potential customers in other countries are likely to be different from the culture of the home market. Furthermore, the fewer the interactions there have been between the two cultures, the greater the degree of difference is likely to be. Marketing blunders can be made when managers make decisions with unconscious reference to their own cultural values, experiences and knowledge. This is called the self-reference criterion (SRC) (Dalgic and Heijblom, 1996). Note that we have said that it may be important to take culture into account. This is why culture is complex to deal with: sometimes it can be important and in other situations it is not. Individuals do not regard all aspects of their culture as equally important. Indeed, they may happily subscribe to some aspects of another culture, while not accepting others. In Unit 1 Section 4.3 we pointed out that some consumption patterns are more open to innovation than others. One of the objectives of this section is to enable you to identify the different aspects of culture and to distinguish between those that individuals would be unwilling to change and those that may be changed relatively easily. We also identify the different methods that international marketers can use to deal with the cultures of the markets in which they are doing business. We emphasise that the choice of method will vary according to the aspect of culture the marketer seeks to influence.

What is culture? Culture is defined as: ... the sum total of learned beliefs, values, and customs that serve to direct the consumer behavior of members of a particular society. (Schiffman and Kanuk, 1994, p. 409) OU BUSINESS SCHOOL

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The importance of culture can be seen from the last part of the definition: it guides people’s behaviour. It is also important to note that culture is transmitted by an individual’s environment. This definition identifies three elements of culture: beliefs, values and customs. Beliefs are a person’s knowledge or assessment of something. They are important because those assessments will be influenced by an individual’s previous experience and knowledge, and those in turn will depend on their culture. Values are important because they are a guide for culturally appropriate behaviour. Values can differ between different societies and, as a result, those societies can differ in terms of what is considered to be acceptable or unacceptable. As the term implies, values are rated differently by different cultures. Values can be difficult to change, because they may be linked to moral and ethical considerations, that is, what is right or wrong. In this respect they can be closely linked to religious beliefs. So the rise of religious consciousness in various parts of the world can mean that people will link specific behaviours more closely to values and will therefore be less inclined to change those behaviours. National values are important in influencing the marketing activities of international companies. This applies not just from a consumer perspective (which is commonly acknowledged), but also from business-to-business and organisational culture perspectives. The importance of values is illustrated in Example 3.7.

EXAMPLE 3.7 VALUES IN A BUSINESS-TO-BUSINESS CONTEXT The Japanese value gambate – ‘stick-to-it-iveness’ – like few other societies. Regardless of the approach you take to selling in Japan, you will earn the respect and trust of customers, suppliers and competitors alike by hanging on there through good times and bad. (Source: Morgan and Morgan, 1991, p. 158)

Cultural values were also reflected in one of the main motivations driving the international expansion of Japanese MNCs. As growth in their domestic market slowed and became increasingly competitive, these companies needed new sources of growth so they could continue to attract and promote employees. In a system of lifetime employment, growth was the engine that powered organizational vitality and self-renewal. It was this motivation that reinforced the bias toward an export-based strategy managed from the center rather than the decentralized foreign investment approach of the Europeans. (Source: Bartlett, 1986, p. 374)

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Values can be distinguished from beliefs in accordance with the

following criteria (Schiffman and Kanuk, 1994).

Values are relatively few in number.

Values serve as a guide for culturally appropriate behaviour.

Values are enduring or difficult to change.

Values are not tied to specific objects or situations.

Values are widely accepted by the members of society.

Example 3.8 illustrates how differences in values can have an

impact on a firm’s behaviour.

EXAMPLE 3.8 CULTURAL ASPECTS OF CORE COMPETENCE Western firms value the notion of ‘core competencies’, which can make it difficult for them to do business in some Asian countries where everyone else plays by ‘Asian’ rules. In those countries core competencies may not matter as much as being able to do business with people you know. To most Western firms interpersonal relationships are secondary: a company tends first to decide which businesses or projects it is interested in, and then it seeks to cultivate the necessary connections. Asian companies believe that the relationships come first, and that investment opportunities flow from them. Similarly, the importance attached by American firms to moving executives every three or four years is due to the value they attach to being a ‘multicultural multinational’. However, this makes it more difficult for them to do business based on personal rather than institutional relationships. Personal relationships are valued in Asian business cultures. So you have an example of diverging values making business transactions more difficult. (Source: adapted from The Economist, 29 March 1997)

The above should help you to appreciate that the content of your MBA is culturally bound. The very fact that you are being shown the importance of certain tools, concepts and modes of thinking is imbuing you with a set of values; indeed, the very notion of gaining a qualification as a means of personal advancement is a feature of twentieth- / twenty-first-century Western business culture. These values do not have to be subscribed to everywhere else in the world; neither, indeed, can we expect them to apply at all times. Customs derive from beliefs and values and are defined as: Overt modes of behaviour that constitute culturally approved ways of behaving in specific situations. (Schutte and Ciarlante, 1998, p. 7)

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Customs are modes of behaviour that define which behaviours are or are not acceptable in specific situations. The word ‘overt’ is important – it means that customs can be observed. We argue that customs will vary in terms of their significance to an individual. Those customs that are linked to values will be less susceptible to change than customs that are purely cosmetic or superficial. A factor leading to complexity is that culture can operate at different levels, some of which are important but cannot be observed. As Figure 3.2 shows, behavioural practices – which we can observe – are only the tip of the iceberg. Values and beliefs underlie behaviour; and underlying them in turn are basic assumptions. ��

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Figure 3.2

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Three levels of culture (Source: Schutte and Ciarlante, 1998, p. 7)

In the definition of culture given earlier, the phrase ‘members of a particular society’ is also important. Culture exists in a social context; it is shared and transmitted between members of a social group. This is the reason why social and cultural influences on an individual are intertwined. Culture will influence the social environment of an individual and the social environment will be responsible for transmitting culturally appropriate behaviours and values to the individual. So the culture to which you subscribe will depend on the social group to which you belong or – more accurately – the one to which you feel you belong.

How culture influences behaviour How do these aspects of culture influence individuals in a marketing context? We shall deal with the role of culture in three specific areas: meanings, habits and physical realities. We end this discussion by arguing that culture can influence consumers with 56

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differing degrees of intensity and that some aspects of culture can be more susceptible to change by the marketer than others. First, we consider meanings.

Meanings Marketers need to pay attention to the images and words they use in mass communications. Individuals from different cultures will attach different values to time, objects, action, prices and sounds (the impact of language). The meaning that people attach to time reflects the social and religious significance of specific days of the week, months of the year and special days in the year. As well as the obvious holidays, there are also occasions when daily routines and certain activities can be restricted, while others are encouraged. Such events that we may take for granted include, for example, the tradition of giving gifts at Christmas. Such occasions and the meanings they hold for consumers are important for marketers because of the impact they have on buyer behaviour. The value that people attach to time can also vary on a cultural basis and according to how time is spent. In Asian countries, for example, shopping can be a social and leisure activity and the opportunity cost of time is low. Cultures can vary in terms of the meanings that they attach to objects. These include household utensils, food, clothes, and so on. In some cultures utensils used for preparing and serving some foods cannot be used for others. This may be because of religious reasons or the cultural significance of the foods cooked in those utensils. Individuals from different cultures can also attach different meanings to actions, meaning the activities in which people engage. In some cultures certain types of washing or cooking can be part of a wider ritual. One of the reasons for General Millsâ&#x20AC;&#x2122; inability to launch a cake mix into the Japanese market was their failure to recognise that cooking rice for Japanese homemakers carries far more meaning and importance than it does for American households. In certain Asian societies physical work is not socially approved of by some sectors of society, which can be a barrier to marketers of products such as self-assembly furniture. Meanings attached to prices can be particularly important for marketers. You will have come across price being an extrinsic indicator for quality: that is, people use price to determine product quality, particularly when it is difficult to assess that quality from the product itself. Cosmetics are one type of product for which consumers infer quality from price. Avon found that was the case in Japan, where sales actually fell in response to price cuts. Figure 3.3 (overleaf ) shows that the perception that higher prices mean higher quality is found everywhere in the region, although the strength of this perception varies. When does price serve as a proxy for quality? The answer can be as follows. The dependence on price as a proxy for quality is especially strong when two conditions exist. First, consumers believe that differences

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between alternative product offerings exist. Second, consumers have little information or experience with the products concerned. The reliance on price as an indicator of quality is most critical in the case of purchases of products that affect the standing of the individual within the peer group. ... In group-orientated Asia, such thinking is widespread and helps individuals to stay in line with the expectations of society. (Schutte and Ciarlante, 1998, pp. 164–5)

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Customers’ association of higher prices with higher quality (Source: Schutte and Ciarlante, 1998, p. 165)

Figure 3.3

The relevance of meanings to consumer behaviour is shown in Example 3.9.

EXAMPLE 3.9 MEANING ATTRIBUTED TO AN OBJECT – THE CHILLER CABINET In Western countries the chiller cabinet in the supermarket has certain meanings for the consumer. We assume that it contains relatively fresh products, which have not been frozen. We expect such products to be relatively expensive compared with their frozen counterparts and those ‘long-life’ products that are stored on ordinary shelves. These are all the meanings that we attach to

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a piece of metal. Interestingly, a manufacturer (Procter and Gamble) has taken advantage of all these meanings that we attach to chiller cabinets (and other images). Their product ‘Sunny Delight’ is stored with other premium fruit juices in the chiller cabinet; its bottles look like those of premium fruit juices. However, it is not a fresh fruit juice and contains, amongst other ingredients, vegetable oil. Indeed – and here is the most interesting aspect – it does not need to be stored in a chiller cabinet because there are no bacteria in it that could grow in a warmer environment. P&G have not mislabelled the product; they have simply taken advantage of the (somewhat subconscious) meaning we attach to chiller cabinets and their contents. (Source: based on Which? magazine, March 2000, p. 9)

The components of culture also include language and symbols. If members of the same culture share values and beliefs, it must follow that they also need to share the language and symbols with which these are communicated. Furthermore, people or groups who are not a part of that culture or have not been exposed to it may well attach different meanings to those sounds, words and symbols. This set of factors leads to the apocryphal stories of Ronald McDonald not being appreciated in Japan because his painted, white face looks like a death mask. In Japanese culture that image has certain meanings and associations that do not help to promote the product. Similarly, there is the story about the Vauxhall Nova not being appreciated in the Spanish market because ‘no va’ means ‘won’t go’ in Spanish. What should be remembered is that ‘no va’ is a sound that the human voice can make. In the Spanish language that sound has a particular meaning, which it has not acquired in other languages. You should be aware, however, that not all differences in consumer behaviour are explained by cultural factors, even though a similar behavioural trait may be exhibited by people belonging to the same social group. Habits and physical realities are also important in influencing behaviour. Habits simply represent the way in which people are used to doing things. We argue that they can be relatively easily changed over time. Similarly, we also point out that consumers’ actions can be influenced by the physical realities of their environment. Marketers may be able to change consumers’ actions by changing the physical realities of that environment. The reason we made the last two points is this. Not all the variation in behaviour that we see in different countries is due to differences in values, beliefs and attitudes. Where it is not, behaviour may be easier to change. It is therefore important for marketers to identify accurately what underlies observed differences in consumer behaviour.

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Habits Habits are activities that people are used to doing. There may not necessarily be a cultural or social imperative for doing so, but people are used to behaving or acting in a particular manner. Habits may be relatively easy to change, should marketers want to change them, because there are no social, ethical or moral imperatives underpinning them. The importance of habits is illustrated in Example 3.10.

EXAMPLE 3.10 THE IMPORTANCE OF HABITS The need to pay attention to the habits of consumers is exemplified by the experience of Neerlandia, a Dutch milk producer, in some African countries. In order to save costs they changed the packaging from aluminium cans to packs made of aluminium foil. However, the change did not find favour with customers because they had become accustomed to using the cans for boiling water and preparing food, and even for building. (Source: based on Dalgic and Heijblom, 1996, pp. 86–7)

An important area of cultural difference is food: what we eat, when we eat and how we eat are strongly ingrained by habit. This is illustrated in Example 3.11.

EXAMPLE 3.11 FOOD CULTURE IN EUROPE What are the cultural boundaries dividing Europe? Indeed, do such cultural boundaries mirror the borders of countries? One way in which these can be identified is to look at how and what people eat across the continent. Although consumers have a biological need to eat, what is up to individual choice is what we should eat, with what, how it is to be cooked, when it is to be eaten and under what social circumstances. How we make our choices for these variables is governed to some extent by the food culture of the region in which we live. Food cultures can be distinguished from the micro level (the family) to the macro level (countries, regions and classes). ‘Food culture’ can be determined within some countries principally by social class (France and the UK). However in others, such as Germany, food culture varies by region. Within Europe, a border can be drawn between Latin European and Anglo-Saxon and Germanic food cultures. The border is between Germany and France and runs through the southern part of Belgium, northern France and western Switzerland. North of this line people prefer single-dish meals and south of the line people prefer composite meals.

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At the heart of the European continent there is a formation of clusters across nation states, while the nations across the periphery of the continent tend to form individual clusters. This is because the former are more exposed to people from other (non-European) food cultures and that encourages them to try new things. It is clear in the clusters that national boundaries are important, despite the fact that some regionalisation and panEuropeanism is taking place. Some of the clusters of eating habits that can be identified in Europe are as follows. The Germanic area is very health conscious: when these consumers nibble they make sure it is fresh fruit, for example. They also drink relatively large quantities of health drinks such as fruit juice. When it comes to alcohol they prefer white wine and schnapps. Consumers in The Netherlands and Flanders place an emphasis on traditional eating patterns and they have strong attitudes towards what is considered to be good and what is not. Brussels, Wallonia and Luxembourg have a sophisticated food culture and a preference for heavy meals. People have an interest in food; they eat out and attach great importance to the sensory enjoyment of eating. These latter characteristics are also found in France and French-speaking parts of Switzerland. French and Wallonian consumers do not share the Germanic taste for health and dieting. They also do not share the Germanic dislike for convenience foods. When it comes to nibbling they admit to consuming chocolate. Drinking is also different from the Germanic taste; here aperitifs and red wine are preferred. These consumers are willing to indulge themselves, which contrasts with the Germanic guilt about indulgence or the consumption of non-traditional food. The Germanic and Dutch/Flemish regions are united in their preference for traditional foods based on solid meals and dislike for convenience foods and snacks. However, while there is a health concern in Germany, that does not appear to be the case with the Dutch/Flemish region. There are some idiosyncrasies. Greek people are not convenienceorientated when they buy food: however, the burger culture does attract them, as does Coca-Cola. Greece is also one of the countries where there is a clear difference between the preferences of people living in rural areas and those living in cities. This is the case in terms of drinking behaviour; city consumers have a more varied and widespread usage of different alcoholic drinks. Similarly, in the Portuguese cities of Lisbon and Oporto people eat more quickly than they do in rural areas. In Italy there is a northâ&#x20AC;&#x201C;south divide, with people in the north preferring low-calorie food, for example. Internationalisation also appears to be taking place. However, while that may be so in terms of the â&#x20AC;&#x2DC;elementsâ&#x20AC;&#x2122;, i.e. the actual foods that are consumed, it may not actually apply to the meanings that the foods have for consumers. For example, the Danes have adopted cappuccino and see it as an alternative to coffee, to be drunk at any time of the day. In its native Italy, cappuccino is drunk only in the morning.

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Factors promoting the internationalisation of eating habits are the growth of food industries, supermarkets and increasing trade in food. Supermarkets in particular have also contributed to changing the range of consumption possibilities, since they provide consumers with a multiplicity of ways of putting together an eating pattern. These findings are based on research that was done in existing administrative units in individual countries. If predefined regions had not been used, regional food patterns could have been searched for in a more detailed manner. An example of this shortcoming is that in the Loire valley there is a boundary between ‘oil-based’ and ‘butter/cream-based’ French cuisine. Since the Loire valley goes through the French ‘West’ administrative region, this difference between the fat preferences of people within the same region was not picked up in the analysis. (Source: based on Askegaard and Madsen, 1998, pp. 549–68)

Physical realities Consumers may be unable to buy a product, no matter how much they would like to, because, for example, their houses are too small or they do not have the requisite utensils at home. Again, there may be no social, moral or social imperative for this – it is simply a physical constraint. If it can be overcome then the marketer may be able to make sales. General Mills’ early market research into Japanese cake-buying behaviour indicated that cakes were never baked at home, but were bought in from bakeries. General Mills made cake mixes and was attracted to the market because sales of Western-style cakes were increasing. A possible reason why consumers did not make cakes themselves was that most Japanese households did not have ovens. General Mills therefore made a cake mix that could be cooked in rice cookers, which were widely used. The resulting cake was also approved in taste tests (Knight, 1995).

ACTIVITY 3.5 Identify any habits that you and other members of your social group have that are not underpinned by any cultural mores. Alternatively, identify any activities which arise out of the physical constraints of your surroundings. Consider how marketers have sought to overcome any of these in order to make sales to you. Have they been successful and, if so, why?

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COMMENTARY You probably identified many examples of changing habits and physical realities. I and my neighbours all used to buy milk from the local milkman. However, like many other milkmen, he no longer delivers because supermarkets such as the one near my home started supplying relatively cheap milk. We changed our habits because of a financial incentive. In response to similar financial incentives from on-line commercial organisations, we are all changing other aspects of our shopping habits. The availability of digital and cable television is reducing the number of times that we go to the cinema or live sporting events.

Social factors The way consumers behave is also influenced by their social environment and their role within it. The people who comprise an individualâ&#x20AC;&#x2122;s reference group can vary from one country to another, as will the definition of family. The impact of an individualâ&#x20AC;&#x2122;s role and status on their behaviour as consumers will also vary according to the society in which they live. For example, in some societies the notion of status is very important. It matters to the members of a hierarchy that people below their position are deferential to them; while they will offer the same respect to people above themselves. Other societies are more egalitarian: in Western universities, for example, students address lecturers by their first name and lecturers address deans by their first name. In certain societies gender roles are kept within their traditional boundaries, while others have seen a blurring of those boundaries. Advertising must therefore reflect what people consider to be acceptable social roles. Moreover, the way in which genders are portrayed can differ. More traditional societies may prefer a passive look in female models, while more modern audiences may prefer a more aggressive portrayal (Ali and Anselmo, 1998). This has implications for advertisers and the images that they present. Individuals from different cultures can vary in the extent to which they involve others in opinion forming and decision making. Furthermore, culture also influences who they involve in these processes. These differences are illustrated in Example 3.12.

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EXAMPLE 3.12 CHINESE AND AUSTRALIAN SOCIAL TIES COMPARED It has been argued that Australians are individualistic: for example, family, marriage and children are instruments to satisfy individual needs, not those of the wider society. In contrast, the collectivist nature of Chinese society is reflected in the Chinese family and kinship system. Kinship means the continuous and long-lasting family ties that do not have clearly defined boundaries; its effect is that family welfare can be more important than individual welfare. Another cultural difference is the greater respect for authority and a more clearly defined hierarchical relationship in Chinese society. The implications are that opinion leaders, such as older people, political leaders and family elders, for example, will be relatively more influential in Chinese consumer decision making than they would be amongst Australian consumers. Social orientation is also said to be more important to Chinese consumers, with a greater disposition towards social conformity and submission to social expectations. They are also more likely to worry about external opinion. (Source: based on Lowe and Corkindale, 1998)

Social norms are the unwritten rules and regulations that specifically govern the interaction of individuals. Underlying the social norms of a society are its values and customs. Values will determine what types of behaviour are considered to be rude or polite, acceptable or unacceptable, and under what conditions. In some cultures or countries it may not be appropriate for two people to interact, based on the differences in their social classes. Norms may also dictate how and when members of the opposite sex can meet. One of the reasons why individuals will not want to break the norm is that they do not want to be ostracised by other people in their social environment. Clearly, the closeness of individuals within a society will determine the level of ostracism that an individual will face. Social norms can change and can be reconfigured as society changes, as illustrated in Example 3.13.

EXAMPLE 3.13 NORMS IN EDUCATION AND BROADCASTING The Open University runs residential schools, which students attend for weekend or week-long learning. Since the majority of students do not know each other, and they also come from very diverse backgrounds, the University spells out â&#x20AC;&#x2DC;rulesâ&#x20AC;&#x2122; at the beginning of each school. The notions of respecting others, paying attention to equal opportunities and ensuring that no one is

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offended on the basis of their gender, sexuality or race are norms of behaviour that developed in the 1990s. These rules also apply to present-day British broadcasting, where standards of tolerance are fairly widely recognised. However, these standards change over time, as is apparent from archive footage from the 1970s and 1980s, where attitudes to race and gender are displayed that are simply unacceptable today.

High- and low-context cultures Cultural factors are important in a business-to-business marketing context because they also affect how business is undertaken and what people can take for granted. For example, high-context cultures have high levels of interpersonal trust. In such societies it is possible to rely on the trustworthiness of the other person. In contrast, in low-context cultures there is less reliance on interpersonal trust and greater reliance on the rule of law. A high-context culture (Hall, 1976) is one in which people are deeply involved with each other. As a result of intimate relationships between people, a structure of social hierarchy exists. In a high-context culture individual inner feelings are kept under control and information is widely shared through simple messages with deep meaning. As a result, such cultures differentiate to a larger degree between insiders and outsiders. There is also greater commitment to others in a high-context culture, and people in places of authority are personally and truly responsible for the actions of subordinates. Finally, to maintain social harmony, people in high-context cultures may be willing to avoid direct confrontation. In such cultures any confrontation is more subtle and verbal. Within Chinaâ&#x20AC;&#x2122;s business culture, many people still do not consult lawyers. They rely less on written contracts than do Western business people, and more on mutual trust, understanding and the all-important guanxi (connections). Some Western lawyers and their clients, in particular Americans, find it difficult to operate in such an environment â&#x20AC;&#x201C; especially if they (or more likely, their head offices back home) expect everything to be spelt out in a mountain of legal documents (The Economist, 24 June 1995). A low-context culture, in contrast, is one in which people are highly individualised, somewhat alienated and fragmented, and there is relatively little involvement with others (Hall, 1976, p. 39). In low-context cultures there is a solution-orientation approach towards problems. whereas in high-context cultures the approach is non-confrontational.

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Managing cultural and social factors Now that we have looked at the cultural and social influences on consumers, the practical issue is: how can marketers sell into international markets where these can be important considerations? We argue that the answer lies in understanding clearly what it is that marketers want to do and how they try to do it. Central to this argument is the distinction that we have drawn between values, which underpin a culture, and those customs and habits which may lie at the periphery of that culture. It is clearly easier to influence and change the latter than the former. So the first question that marketers need to ask themselves is: what do they want the target consumer in an international market to ‘give up’? Second, Maslow’s hierarchy of needs provides a useful framework for understanding how change can be effected (Maslow, 1943). We can see that the very least that marketers can offer to customers are physiological benefits. The most that they can offer is self actualisation – an individual’s desire to fulfil their potential, so that they can achieve everything they are capable of achieving. So, marketers need to look at two sides of the equation: what do they want customers to give up, and what can they offer in return? Figure 3.4 integrates the two concepts of the different levels at which culture operates and Maslow’s hierarchy.

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Figure 3.4

Applying Maslow’s hierarchy of needs in international marketing

If consumers are to give up habits that they are accustomed to, for example, they may need to be offered some physiological reward 66

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in return. Getting consumers to change an item of confectionery (that has little or no cultural significance) may be relatively easy and will not require any form of compensation. However, giving up other customs may be more difficult and will require more substantial benefits. Nevertheless, such benefits do not have to be physiological: marketers can appeal to self-esteem and social needs. Moreover, marketers do not always have to appeal to all segments of the market. Innovators may be targeted first. For an international marketer, the benefit lies in the fact that these are probably the group of people who are most exposed to international influences and who are most willing to try new things. Furthermore, they may be seen as a reference group by other members of society. This is illustrated by Mark Tully’s comment about the marketing of British culture in India: The festivals of India [in Britain] undoubtedly increased interest in things Indian but they had no radical effect on life in our countries. The exhibitions [of Britain] in India were a hard and effective sell to the Indian élite who dominate Indian life. (Tully, 1992, p. 58)

The following questions are useful as guidelines for assessing how marketers should take into account customers’ values. l l

What broad cultural values are relevant to this product? Are there strong values about work, morality, religion, etc. that relate to this product? Does this product connote values that conflict with these cultural values? Do members of the culture tend to be rigid or flexible in their acceptance of new ideas? How can the conflict be resolved? (Source: Jain, 1990, p. 229)

3.7

THE ROLE OF GEOGRAPHY

Physical geography matters in several ways. Landlocked countries grow more slowly than coastal economies and tropical countries have grown more slowly than those in the temperate zone, even after allowing for other differences. This seems to reflect the cost of poor health and unproductive farming. Moreover, Sachs (1998) argues that producers of natural resources may get trapped into an unsatisfactory specialisation of trade, which can delay the development of the industry necessary for economic growth. He also cites the problem that occurs when the currency of a developing economy is strengthened because of its sales of natural resources, thus making its manufactured products uncompetitive in international markets. This, in turn, reduces long-term growth, because manufacturing offers a country better scope to innovate and improve productivity than does the extraction of natural resources. Obvious examples of this are oil economies such as Venezuela, Nigeria and Iran. OU BUSINESS SCHOOL

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Where there are no major geographic obstacles, economic prospects may be bright. China is an example: it lies almost entirely in the temperate zones, and infectious diseases, while endemic, are not out of control. In contrast, Ethiopia is landlocked, tropical and short of water. Climate can also be a source of competitive advantage: the Central American countries, for example, can export tropical fruits to countries that do not share their climate (Muhlbacher et al., 1999). India demonstrates a range of geographic advantages and disadvantages: in its tropical states, the population is clustered around the great ports of the southern coasts; the northern populations are concentrated in the great Gangetic plain; but the vast populations in Uttar Pradesh and Bihar are hundreds of kilometres from the nearest port (The Economist, 14 June 1997). Buckley and Casson (1998a) argue that, in order to overcome volatility, manufacturers may seek to have the same product made in different locations. This flexibility will require ease of transport and, in turn, that will favour some geographic locations over others. Locations on nodal points of transport networks are inherently more flexible than others, leading to lower transport costs. Singapore (for South East Asia) and Lille (for North West Europe) are examples of transport nodes that have become regional hubs.

3.8

THE ROLE OF TECHNOLOGY

As we manage our way through the information revolution, technology clearly has a major role to play in assessing international markets. At one level, information technology has simplified many of the problems of internationalisation by eroding the traditional obstacles of time and distance â&#x20AC;&#x201C; but this does not mean that technology is equally available or accessible in all countries. This section deals with technological issues that marketers will need to take into account when selling in international markets. The following are key areas that marketers will need to address. 1 Differences in technological development between countries. This applies to situations where the marketer is selling into countries that are either more or less advanced than those in which the marketer has experience. 2 Differences in technical standards. Here two countries may have the same level of technical development, but different standards. The marketer will need to address that issue before sales can be made. 3 Determining the technology portfolio that is appropriate to meet customer needs. Marketers will need to assess the attractiveness of each available technology for product and country markets and compare them with the firmâ&#x20AC;&#x2122;s relative strengths in those technology fields. Technology attractiveness is defined as its potential for customer problem solution and diffusion. Solution potential depends on its potential for development and the risks that may be incurred until the 68

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technology is ready for application. The diffusion potential for technology depends on the extent to which customers accept it. Four global building blocks have been identified by Don Schultz and Philip Kitchen: digitalisation, information technology, intellectual property and communications systems. These are driving changes in the marketplace and therefore in marketing and marketing communication. Schultz and Kitchen argue that these changes are leading to the creation of a global marketplace. We want to add one further building block to this list: infrastructure. That is important because it affects peopleâ&#x20AC;&#x2122;s ability to communicate, to travel and to move goods. The better the infrastructure, the cheaper and faster transportation will be. Technology has an impact on the work of international marketers in three ways. 1 Existing technological standards can act as a barrier to entry, where they are different from those used in the domestic market. Barriers exist when it is expensive to make changes to comply with the standards. One of the reasons that Ericsson (the Swedish telecommunications company) was doubtful about entering the Japanese telecommunications market was because of the different digital standards used in Japan. 2 Technological change can aid entry into international markets, where it reduces the cost of manufacture and makes the product more affordable to a wider range of people. 3 Technological change can make entry into international markets more difficult, where international competitors have developed the technology. BNP Paribas opened the first pan-European Internet retail brokerage in September 1999, in a bid to get an early lead on competitors as the scramble for Europeâ&#x20AC;&#x2122;s growing on-line share-trading audience picked up speed (Reuters, 14 September 1999) and created a barrier to later entrants. The impact of technology on broadcasting is illustrated in Example 3.14.

EXAMPLE 3.14 IMPACT OF GLOBAL MEDIA The effect of technology on such areas as transparency of electronic information, global media and communications has been to increase similarities in consumer tastes across international boundaries. In 1990 private television companies were outlawed in Turkey: this ruling was an impact of the legal/regulatory climate that would have made broadcasting impossible for marketers. However, Star TV was established in Germany and began to transmit to Turkey using satellites. An impact of this development was that advertisers on Star could bypass the restrictions on

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advertising imposed on the state-run TRT television channel. For marketers there were other changes as well. TRT would not negotiate on advertising rates; Star would. (Source: based on Reuters, 14 September 1999; Vardar, 1995)

The rapid rate of technological change means that marketers should recognise that international marketing opportunities exist in a state of flux. Even if a government is not about to change its regulatory structure, will technology have an impact on marketing opportunities? The role of technology as a tool that can transcend national barriers means that even firms which are not operating internationally will be affected by it: for example, the state television company in Turkey described in Example 3.14. The volatility caused by technological change is a major source of the complexity which faces marketing today – and is the subject of this course. This completes our review of the factors affecting the assessment and selection of international markets. In the next section we review the different routes to market entry. ��

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METHODS OF MARKET ENTRY

This section deals with the methods that organisations can use to enter international markets. We start by looking at the characteristics of each method, and then evaluate these methods using specific bases. We adopt the approach that the effectiveness of market entry depends on several factors, and that managers need to be aware of these factors and how they influence decision making. The factors include, for example, the competitive situation facing the organisation, its capabilities, and the compatibility of the entry route with the firm’s objectives. These objectives will include the level of profits the firm seeks, the degree of risk it is willing to take and the level of control it wants to exercise over its operations. Figure 4.1 shows the range of modes of entry and the bases for comparison.

��

Figure 4.1

Modes of market entry

The choice of mode is important (Erramilli and Rao, 1993, p. 19) because it determines: l

the extent to which the firm becomes involved in developing and implementing marketing programmes in the foreign market

the amount of control the firm has over its marketing activities

the degree to which it succeeds in foreign markets.

If a firm chooses the wrong mode of foreign market entry, as well as compromising profits and even its existence in the country in question, it may continue using the same method for entering different countries. The mistake can therefore be perpetuated, as entry methods can become institutionalised and firms may be

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unwilling to change their method of market entry (Driscoll, 1995, p. 15). This is because each mode of entry entails resource commitment and changing from one mode to another can be difficult without a loss of time and money (Root, 1994, cited by Kumar and Subramaniam, 1997). While it may seem as though marketers choose market entry methods on a rational basis, this does not adequately explain how ill-defined and complex decisions are really made. Managers face time and financial constraints that inhibit them from gathering all the necessary information. Next we describe the four main routes of entry in more detail.

4.1

EXPORTING

There are several different ways of exporting. Casual exporting simply involves the firm responding to unsolicited requests for products from foreign customers. Using the services of an export management company relies on an independent company to promote the product and process orders. Such an organisation will assume all the risk of the firm’s foreign market entry. The export management company may take title to the goods: that is, it buys them from the supplier and assumes the risks for marketing them in other countries. An alternative is for the supplier to retain title and use the company as agent. This involves more risk but has greater potential profit for the supplier. Exporting is the simplest method of international marketing. However, there is a difference between export selling and marketing. Export selling is very straightforward: it only requires the marketer to modify the place ‘P’ in the marketing mix. The marketer does nothing different to cater for the needs of overseas customers. In contrast, the marketing-oriented firm does not simply take production that would have been sold in the home country and sell it overseas; instead, it seeks to identify and meet the needs of overseas customers in the same way that it would for domestic customers. Exporting generally means that the firm does not have to take any additional investment risks: for example, it does not have to build any new manufacturing plants or establish overseas offices. One of the reasons why additional investment is not required is because of the use of intermediaries. Since the supplier has delegated some of the work and also the risk taking to a third party, it will necessarily forgo some of the profits associated with the international marketing activity. It will also forgo some of the control regarding the promotion, distribution and pricing of the products overseas. Marketers who export have to consider some of the wider strategic implications of using this method to enter a foreign market. While it may be an attractive way of testing the acceptability of the products that are produced, it may not enable the exporter’s management to learn about the international marketing process. In contrast, it will be the marketing intermediaries who will acquire information about the markets in which the products are being sold. 72

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ACTIVITY 4.1 Why can it be important for an exporter to learn about a foreign market?

COMMENTARY For all parties involved in exporting, from the manufacturer through to the exporting and the importing agents, there is always the risk that one of the parties involved in the transaction will pull out and do business with someone else. The manufacturer may choose another export agent, or the importer may find a manufacturer whose products or terms it prefers. This means that exporting as a means of doing business has inherent business risks. For an exporter using an intermediary that has direct contact with the final customer, there is a risk of information asymmetry. This means that the intermediary will know more about the market than the exporter. This information asymmetry may place the intermediaries in a relatively powerful position. If their relationship ends, the manufacturer will have more to lose than the intermediary.

Therefore, firms involved in exporting need to continuously evaluate their relationship with their export intermediaries, and to consider the alternatives they have available should the relationship end. In many cases, however, exporting is the first step towards a more committed approach to the foreign market, as illustrated in Example 4.1.

EXAMPLE 4.1 USING A LOCAL DISTRIBUTOR Applied Materials Inc. (a semiconductor manufacturer) marketed its products through a direct sales force throughout the USA and Europe. However, in Japan it had had a distributor relationship with Kanematsu Electric, a general trading company that sold a large catalogue of foreign products throughout Japan. Applied had chosen this route into Japan because the Japanese had historically been reluctant to buy equipment from outside their companies and related suppliers. By contracting with a Japanese trading partner, Applied gained access to what would otherwise have been a closed market. However, there were some general problems with using trading companies. l

They may have been insufficiently familiar with the product or technology the international marketer was selling.

The products would be part of a catalogue and would not receive any special attention.

There was limited technical support.

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Tetsuo Iwasaki, a young executive from Kanematsu, together with some colleagues decided to leave the company and form their own â&#x20AC;&#x201C; Nippon IC. They approached Allied about forming a partnership. This led to Allied eventually forming a wholly owned subsidiary. Since the company did its own marketing, it could develop long-term relationships with customers directly â&#x20AC;&#x201C; something that had not been possible with the trading company. (Source: based on Morgan and Morgan, 1991, pp. 165â&#x20AC;&#x201C;6)

4.2

CONTRACTUAL METHODS

Contractual methods are used where the marketer has a source of competitive advantage but cannot use it in international markets. That could be because of any of a variety of constraints, including a lack of resources. The firm therefore enters into a contractual agreement with another organisation, such as a licensing agreement. Contractual methods include the following forms. 1

Franchising. The franchisor sells a recognised brand name and market-support services to the franchisee. Product lines and customer service are standardised and are controlled by the franchisor.

Patent licensing agreements. These are either fixed-fee or on a royalty basis.

Turnkey operations. An entire operation is contracted out. This may include plant construction, personnel training and initial production runs. It is paid with a fixed fee or on a cost-plus basis.

Management contracts. The multinational corporation provides key personnel to operate the foreign enterprise for a fee, until local people acquire the expertise to manage the facilities.

Licensing. This is dealt with in more detail below.

Licensing Under licence agreement, the licensor provides intangible assets such as patents, trade secrets, know-how, trade marks and the company name. Technical services may also be provided to ensure that the assets are used properly. In return the licensee pays a fee, royalty or other type of payment. Licensing can also include the licensor earning additional revenues by selling products or services to the licensee. The forms that licensing can take include, for example, giving permission to clothing manufacturers to use company trade marks, such as Coca-Cola on clothing. Table 4.1 gives details of different types of licensing and the implications for the two parties to the transaction. 74

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Table 4.1

Features of different types of licensing

Characteristic

Licensor

Licensee

Licensee pays for the licence as a percentage of sales

As sales improve, the licensor receives increasing revenues

Reduces risk for the licensee

Licensee uses proprietary assets in an agreed manner

Protects the interests of the licensor

Limits the freedom of the licensee

Licensee is responsible for manufacturing/ marketing

Reduces investment required by licensor. Allows licensor’s products to reach markets/segments that may otherwise be unprofitable

Can make use of licensee’s core competencies

The key benefit of licensing to the international marketer is that it requires very little investment or expenditure. It can also mean that the exporter does not need to spend time doing marketing research into the new market. As the licensee develops knowledge of the product, the licensee will have a greater ability – and incentive – to promote it than would a simple distributor. This means that market entry can be quite fast and the potential returns can be very high. Licensing can also be used to avoid tariffs that could have been levied against an imported product. Against these benefits the marketer will need to offset some possible long-term problems with licensing. 1 The licensor will not be able to ‘learn’ about any activities in which the licensee has engaged. They will not become familiar with the manufacturing and marketing processes involved. This can leave the licensor exposed when it comes to renegotiating contracts: they may find it difficult to find someone else who can do the job as well as the incumbent. 2 The licensee may well have learnt valuable lessons about the licensor’s technology, manufacturing and marketing, so that in practice the contract becomes one of technology transfer, with the concomitant risks of loss of control and creating a new competitor. This is particularly the case where the deal involves the licensee manufacturing and selling certain products under licence. 3 The value of a licence will inevitably decline over time, as the product ages. Licensing, therefore, is likely to be attractive only as a strategy (as opposed to an operational convenience) if the licensor is confident that it will be able to maintain a stream of new products or intellectual property that can be licensed in the future. 4 The return to the licensor is likely to be substantially less than if it had developed and marketed the product itself. Morgan and Morgan (1991) say that by 1982 US firms had received licence OU BUSINESS SCHOOL

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fees of $800 million from Japanese firms. If they had developed their own products and sold them in Japan, that technology would have accounted for $60 billion of sales. They concede that while licensing was an unavoidable price of admission to the market, as time has passed that restriction has weakened. If the product is very successful, the share of the proceeds between the two parties may appear to be inequitable. A case of this is described in Example 4.2.

EXAMPLE 4.2 A SUCCESSFUL LICENSING AGREEMENT? In the 1980s a UK chemical company became dissatisfied with the success rate of its own research and began actively to seek to license in new products. One such product was an experimental chemical from a medium-sized Japanese company. The product had substantial commercial potential, but there were considerable risks associated with its development: there was no certainty that the product would gain regulatory approval, and the patent rights were being contested. Nevertheless, the UK company negotiated a licence agreement based on a royalty of seven per cent of sales value. The company had global rights outside Japan, was responsible for all development and testing expenditure, fought the patent case in court and undertook to buy the active ingredient from the licensor. After six years of development, the product gained regulatory approval and the patent dispute was resolved satisfactorily. Intense marketing efforts around the world led to the product becoming highly successful commercially. Within a few years it had reached annual sales of $150 million at a gross margin of more than 80 per cent. Meanwhile, the licence fee remained at seven per cent. The licensor repeatedly sought to renegotiate this fee but was refused by the licensee, who claimed that it had carried all the expenditure and all the risk. Relationships deteriorated and no other licence agreement was ever made between the two companies.

The following techniques can help to reduce the chances of these problems occurring (Terpstra and Sarathy, 1997).

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Responsibility for licensing should rest with a senior manager. This will ensure that commitments carry as much authority as possible.

Agreements should be drafted to cover as many eventualities as possible. As the two organisations develop an ongoing relationship, its nature may become less legalistic.

There should be equity in the agreement. If it clearly favours one party at the expense of the other, it risks being broken either publicly or surreptitiously.

4 METHODS OF MARKET ENTRY

Some problems are still possible with these solutions. Even if responsibility lies with a senior manager they can, as an individual, leave the firm. It may be difficult to draft agreements to cover eventualities in a comprehensive way, especially where people do not know what those eventualities might be. Such agreements may also foster distrust. Fairness lies in the eye of the beholder and is difficult to assess. One example of how a licensor can protect its interests is the case of the licensing agreements for the movie ‘Jurassic Park’ (see Example 4.3).

EXAMPLE 4.3 LICENSING ‘JURASSIC PARK’ The movie ‘Jurassic Park’ opened in June 1993. Around the world, 690 licences were issued to market 5,000 associated products. These would eventually generate $1 billion in worldwide retail sales. The licence spelt out trademark rights, copyrights and conditions for use of characters, likenesses and logos. It also delineated geographic coverage and level of exclusivity, the duration of rights, procedures for renewal (if any) and performance and payment conditions. Income for the licensor included not only royalties on merchandise sales and advance payments against future royalties, but also technical assistance fees, sales of materials or components to licensees, lump sum payments for transfers of rights or technology, reciprocal licence rights and management fees. (Source: based on Quelch et al., 1995, pp. 547–8)

ACTIVITY 4.2 Imagine that you were negotiating the licence for ‘Jurassic Park’. What responsibilities would you impose on the licensees in exchange for the rights?

COMMENTARY Criteria were set by the licensor to ensure quality of products, compliance with the trade-mark obligations, the honouring of names and likeness restrictions (protecting, for example, live actors’ images, voices and recognisable lines). These restrictions were referred to as ‘publicity rights’ and were not usually negotiable.

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A licenseeâ&#x20AC;&#x2122;s financial commitments to marketing expenditures, the timing of these efforts and the implications of failing to meet them were often negotiated and included in the agreement. A percentage of gross or net sales was negotiated as the basis for most royalty agreements. The percentage varied according to the size of the market, the market share held by the licensee, the type of intellectual property being licensed, the relationship between the licensor and the licensee and the product category involved. Risk sharing in exchange-rate fluctuations was also an important negotiating point in the typical two-year contract between a licensor and an overseas licensee. Finally, a licensing contract usually included insurance and indemnification, as well as arbitration agreements to settle disputes. For a global movie release, the licensor would typically establish intellectual property rights, including trade-mark registration in key countries early on, even before negotiating licence rights.

4.3

INVESTMENT

Investment modes share the characteristic that the marketer owns facilities overseas. Such facilities may require equity investments, which may be through the acquisition of equity in a local company or a merger. In its own right the demonstration of commitment to a market can generate more business, as potential customers realise that the marketer will be around for the long term (see Example 4.4). FDI can be a means of overcoming tariffs and quotas, and there may also be transport and manufacturing cost savings.

EXAMPLE 4.4 BENEFITS OF COMMITMENT Successful foreign companies in Japan have made a direct investment in the market. A direct presence, through a subsidiary and by manufacturing and engineering in Japan, or even an on-site support operation, when you are working through a distributor or joint venture, is the best way to gain and maintain market share. It helps a company to adapt its product or service to rapidly changing consumer needs and to build a lasting operation. (Source: Morgan and Morgan, 1991, p. 155)

Firms that engage in FDI must have a competitive advantage, as they are likely to face a disadvantage compared with indigenous players in terms of cost. In the 1980s British advertising agencies 78

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establishing themselves in the US market had access to the money of the City of London, and they also had more favourable rules comcerning goodwill compared with their US counterparts. Both of these were sources of competitive advantage (West, 1995). Investment may be through either a joint venture or a wholly owned subsidiary. Each of these routes is discussed in more detail below.

Joint venture A joint venture ( JV) is the pooling of assets or knowledge by two or more firms who share joint ownership and control over the results of the pooling (Kumar and Subramaniam, 1997, p. 54). It enables the international marketer to share risk and control with a firm from the host country in which it wants to do business. The two parties to the JV will form a third company, in which they both own shares. This type of venture can benefit from the local knowledge of the local firm together with the know-how and other proprietary assets of the international marketer. The local company may also provide access to resources such as raw materials, labour and connections to the government and other important decision makers. In a study of JVs in Kazakhstan, Charman (1998) found that firms used them – rather than a subsidiary or a representative office – for political reasons. A JV also provided the foreign investor with access to business contacts and distribution channels. Local partners were motivated by the possibility of acquiring new products or technology. Nevertheless, there can be problems associated with JVs, and the perception of fairness will be different (see Table 4.2). These differences in perception often cause JVs to fail. Table 4.2

Perceptions of contributions to JVs Percentage of total Foreign partner’s view

Local partner’s view

Foreign partner contributes more

Local partner contributes more

Partners equal

No response

100

Total

(Source: Charman, 1998, p. 17. Note: The percentages do not add up to 100 but they are as quoted in the original article.)

However, Charman (1998) also observes that JVs with partners from countries that are culturally close to Kazakhstan (for example, OU BUSINESS SCHOOL

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Turkey and Russia) have had a higher degree of stability in their

contracts (less need to rewrite) than JVs formed with companies

from other countries. Overall, a problem has been the lack of a

suitable legal infrastructure; specifically, the issue of ownership has

caused difficulties. The conclusion seems to be that the advantages

of the JV as a low-cost entry strategy may be offset by the time

and money required to forge relationships.

According to Buckley and Casson (1998b, p. 542) the conditions

conducive to international joint ventures are as follows:

possession of complementary assets

opportunities for collusion

barriers to full integration (economic, legal, financial or political).

The termination of a JV does not mean that it has been a

failure – it may simply have achieved its objectives. Furthermore,

changing the structure of a JV may simply be taking advantage of

the flexible nature of the method, rather than indicating a problem.

Most Western multinationals setting up in East Asia have formed some

sort of joint venture or alliance with a local firm – principally as a way

of acquiring local influence and knowledge. In doing so they have

imitated Asia’s home-grown conglomerates, most of which are owned

by ethnic Chinese people. However, whereas the local multinationals

are happily embedded in their networks, Western companies seem

increasingly frustrated with their local partners.

The most common problem cited by Western businesses is that the

local partner has its own agenda. This can be at the expense of

building up brands or expanding market share. Rather, the local

partner wants to extract short-term profits in order to invest in new

and usually completely unrelated ventures. Moreover, many of the

foreigners’ local partners are also working with numerous other

firms, which is now leading to increasing conflicts of interest

(The Economist, 29 March 1997). Reflecting these concerns, an

increasing number of outside investors in China now prefer to set

up majority or wholly owned enterprises. Some 30 per cent of

foreign-funded enterprises in China are now wholly foreign owned.

The same problem – of control – can be found in European JVs, as

illustrated in Example 4.5.

EXAMPLE 4.5 BT AND ITS PARTNERS BT chooses partners on the basis that they share its vision. Partners should also offer access to infrastructure and a customer base and they should have adequate financial resources. BT typically builds up a minority stake of 20 to 50 per cent, using opportunities to increase holdings as they arise. This approach gives it the control over operations it needs.

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One of the factors constraining BT’s approach is that in several foreign markets it is allowed to take only a minority stake. In India, for example, it can hold only 49 per cent. Indeed, it was control over joint ventures that prompted British-based cellphone giant Vodafone AirTouch Plc to launch the world’s biggest hostile takeover bid for its European partner, Mannesmann AG. Specifically, Mannesmann’s agreed takeover of the British group’s domestic arch-rival Orange Plc would have turned Vodafone’s partner in Europe into a competitor with its own expansion ambitions. (Source: based on Reuters, 1 December 1999)

The key issue for firms developing JVs is the choice of the partner. Both firms need to be able to coordinate their activities and appreciate the benefits that the other party is bringing to the business. It may help if both parties have complementary skills and capabilities, as shown in Example 4.6. Furthermore, the goals of each party need to be clearly understood, as well as the responsibilities of the managements that are party to the transaction.

EXAMPLE 4.6 CONTRIBUTING COMPETENCIES The alliance between AXA (a European insurer) and Dantai (a Japanese insurer) is aimed at creating a leading life-insurance company in Japan. The new company will be called Axa Nichidan and Axa will have a 95 per cent stake in it. The company will take advantage of Nippon Dantai’s client base and AXA’s strong credit standing and global expertise in product development, asset management and information technology. (Source: based on Reuters, 29 November 1999)

Wholly owned subsidiaries Foreign direct investment can be used to establish a wholly owned subsidiary, either by acquisition or from scratch. Unlike a joint venture, the international marketer does not have a partner organisation sharing the risks of foreign market entry. Compared with other methods of market entry, investment in wholly owned subsidiaries offers more control and higher potential rewards, but it is more resource-intensive and riskier. When a firm starts a venture abroad from scratch, it is also slower, which is why acquisition is often the preferred route. Acquisition offers the benefit of speed and immediate access to market share (the company being acquired will already have customers and other elements of infrastructure). The investing business will immediately benefit from the goodwill and OU BUSINESS SCHOOL

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relationships (with customers and suppliers) of the company being bought. For a multinational corporation this can be an important advantage, enabling it to establish a presence in a new country relatively quickly. It may prefer to pay the inevitable price premium to acquire experience quickly, rather than having to spend time doing this. However, there are other disadvantages as well as price. The existing products and the ones the international marketer wants to introduce may not be compatible. The existing sales force and distribution channels may need to be re-educated and changed in order to adapt them to the products the international marketer wants to sell. The acquiring firm will have to consider the opinions of other stakeholders of the firm that is being acquired, such as the government, employees and shareholders. They may not look favourably on a foreign firm taking over a national concern, and integration may present problems. Even within the same country, the acquisition of one firm by another can pose problems where there are differences in management style or culture. When the acquisition happens across national boundaries, such problems are likely to be exacerbated. The establishment of a subsidiary presents additional risks for the international marketer, because the level of the investment is likely to be higher than with any other mode of entry. Balancing this will be a very high level of control, since there will be no other organisations whose concerns need to be considered. However, this form of foreign investment can pose problems because of the perceptions of the government and regulators in the foreign country. They may not like the fact that a wholly owned foreign business could be taking market share from indigenous businesses.

4.4

ALLIANCES AND PARTNERSHIPS

According to the OECD, the growth of international collaborations has increased because companies have recognised that new technologies and concepts are increasingly found outside company walls and national borders. These new organisational forms enable firms to respond rapidly to technological change. From 1980 to 1994 the total number of science and technology alliances grew at 10.8 per cent a year, and 65 per cent of the alliances involved two partners from different countries. Alliances are different from joint ventures because they can involve larger partners, they are global in scale and they are strategic in nature. In contrast, joint ventures are more likely to be short-lived and localised in a particular country. Strategic alliances are more than standard customerâ&#x20AC;&#x201C;supplier relationships or venture capital investment, but they fall short of outright acquisition (Terpstra and Simonin, 1993).

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Quelch and Bartlett (1999, p. 466) identify four types of alliance relationship. l

Partnerships for technology change. This has led to the transformation of whole industries. Here partnerships develop because mergers and acquisitions may have not have provided companies with sufficient critical mass to gain global-scale efficiencies.

Partnerships for global competitiveness. This refers to partnerships and alliances between smaller players who are trying to establish some defence against industry giants. It also refers to situations in which small firms ally themselves with larger firms in order to ensure their competitiveness in international markets.

Partnerships for industry convergence. The convergence of previously distinct industries has meant that firms from those industries have had to seek out partners with competencies in fields in which they lack relevant expertise. High-definition television (HDTV) is an example of a technology that has required large investments from a range of technologies, and this has led to the development of several consortia.

Partnerships to create industry standards. The HDTV battle is motivated by the knowledge that the consortium that establishes the dominant format will have a large competitive advantage. In a more fragmented world, multiple formats and standards could coexist.

In addition to these types of alliance, Johansson (2000) identifies three types of non-equity alliance. l

Distribution alliances – one partner agrees to sell in its home market the products of the partner who may not have a distribution infrastructure in that market. This improves capacity load and the product line offered by the first partner, and provides inexpensive and quick market access for the second. Over time, however, the arrangement can be limiting for both parties. The first partner may not be able to develop and market its own products that compete with its partner’s; and the second partner may be unable to learn about the market where it already has a partner doing its distribution. Moreover, the firm may be incapable of launching products that directly compete with its partner’s.

Manufacturing alliances involve a partner manufacturing another’s products.

Research and development alliances ensure that a firm can keep pace with changing technology and that it works to the same technological standards as its competitors. The competitive edge for alliance partners when this happens will come from its marketing and the implementation of the technology.

Despite the advantages of global partnerships, various risks remain. There is the risk of the ‘obsoleting bargain’. Partnerships are usually established on the basis of mutual interdependency; however, if one partner develops the skills previously provided by the other

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partner, then that mutuality is lost and the scope for a breakdown in the partnership increases. Quelch and Bartlett (1999) cite the example of General Foods (GF) in Japan. GF exchanged its technology in instant coffee for a Japanese company’s market access and management capability in a culture where GF had limited experience. As the partnership matured, Ajimoto learned a great deal about GF’s technology, but GF learned little about the Japanese market. While ‘obsoleting bargain’ is a risk, the major organisational cost of partnerships is boundary management. Alliances are formed on the basis of strategic logic: for example, the competitive gains from combining the two firms’ competencies. However, firms often ignore the organisational logic: that is, the way in which the two organisations will actually work. That is where many of the difficulties can arise. To overcome the problems, partners need to select boundary-spanning managers (people who will cross the boundaries of the two organisations). They also need to integrate information systems, realign incentives and rewards and ensure that top management monitors the relationship. Now that we have described the different modes of market entry, we can consider the criteria for comparing them.

4.5

COMPARING METHODS

OF MARKET ENTRY

According to Buckley and Casson (1998b) and Kumar et al. (1993), market entry methods need to be assessed against a range of criteria. l

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Dissemination risk is the extent to which a firm believes that its know-how may be appropriated by contractual partners. This can be the case where a licensing agreement, for example, involves the marketer giving its foreign partner access to proprietary technology or processes. Degree of control has been defined as ‘authority over operational and strategic decision making’. Control allows marketers to ensure that supplies are maintained, together with quality of outputs. Where firms use agents to do international marketing on their behalf, they cede a relatively high level of control to the agent. There is a difference between ownership and control. Ownership gives benefits in addition to control and control can be achieved without necessarily having ownership. For example, McDonald’s has a high degree of control over franchisees even though it does not own them (Hill et al., 1990). Resource commitment is the amount of physical, financial and human resources that have to be committed to the international marketing operation. As firms become more experienced in operating in foreign markets, so they will become more confident in committing resources to those markets. Direct investment methods involve relatively high levels of resource commitment.

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Degree of flexibility is inversely related to the commitment the firm has to changing entry modes. Such flexibility may be necessary in situations where the environment in the host country changes and an alternative approach is required. Firms will prefer to own assets where the gains in terms of greater control are greater than the costs through the internalisation of intermediate product markets.

Integration of multinational enterprises (MNEs) traditionally included both vertical and horizontal integration. However, the weaknesses of integration became obvious as Asian competitors took market share from their US competitors. Vertical integration has advantages when supplies are relatively low cost in a highgrowth situation. In contrast, where decisions may need to be reversed (perhaps because of low growth), vertical integration becomes more costly. In the latter type of situation, a method of production that involves distributing risk, such as franchising or joint venturing, becomes more cost effective. Where firms can be seen as a network of interlocking joint ventures, they can also achieve flexibility in R&D, and reduce their commitment to any one technology (Buckley and Casson, 1998a).

Credibility of image, brand name and relationships may not be transferable from home to overseas markets. Where this is the case, an organisation may have to build credibility abroad from scratch, in the same way that a start-up venture has to develop in its home market.

Potential foreign partners will want to assess a firm’s readiness and capability. For example, if an American company does not have a significant share of the US market, potential foreign partners will question whether it can develop a significant position in the overseas market. If they develop ties with a relatively weak company, will that leave the field open for their competitors to develop ties with partners who may be better placed? If the company venturing abroad does not have significant sales at home, will it have the infrastructure to support an international operation? The characteristics of the three major modes of entry are compared in Table 4.3. Table 4.3

Comparison of the modes of market entry Mode of entry

Criterion

Exporting

Contractual agreement

Investment

Risk

Low

Medium–high

Return

Low

Medium–high

Control

Moderate

Low

Medium–high

Integration

Negligible

Low–medium

(Source: adapted from Kumar and Subramaniam, 1997, p. 67)

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The final point in this section is that the position of an international company in each of its markets is dynamic. While it is important for a firm to adopt the most suitable mode of entry over time, the form and structure of its presence will change, partly for strategic reasons and partly in response to opportunities. An illustration of this dynamism is given in Example 4.7.

EXAMPLE 4.7 FROM EXPORTS TO OWNERSHIP Loctite is a leading international manufacturer of adhesives, sealants and related products. In the late 1950s, Loctite began its international growth with opportunistic export sales to Canada, Australia and the UK. The growth of the international business meant that Loctite had to appoint national distributors who, as principals, bought products from Loctite for resale. All overseas sales were of exported products, until the establishment of manufacturing plants in Ireland and The Netherlands in the late 1960s. International expansion was aided by acquisitions and joint ventures. In the 1970s, Loctite began to acquire equity interests in its distributors. By 1992, the company had a mixture of wholly owned subsidiaries, joint ventures and distributorships. All joint ventures and wholly owned subsidiaries had evolved from Loctite’s relationships with third-party national distributors. Loctite’s penetration of country markets began with a relationship with a distributor, followed by an increasing stake in the business and eventual Loctite ownership. (Source: based on Quelch and Bartlett, 1999, p. 477)

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MANAGING RISK IN INTERNATIONAL MARKETING

This section addresses the issue of risk in international marketing. After studying the section, you should be better able to identify sources of risk in international marketing and to assess the tools available to marketers to assist in managing that risk. The main elements in the process are shown in Figure 5.1.

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Figure 5.1

5.1

��

Sources and consequences of risk

COMPLEXITY, VOLATILITY AND RISK

Marketing decisions are simple when they have been taken before, in similar conditions, and when marketing managers have developed routines (heuristics) for them that can be repeated. Decisions can also be simple where marketers know the differences that exist in foreign markets and the action that will be needed to overcome them. In some new situations, marketers may believe that their existing experience is appropriate. The differences in foreign markets, however, may be such that knowledge of the home market actually becomes a liability, as it leads to a false sense of security. This can mean that marketers fail to look for the information that is necessary to make a correct decision. The result can be blunders which arise when ‘we do not know what we do not know’.

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The fact that managers may not be aware of the cultural and other differences between their home consumers and the new international market creates risks for the business, because there are now increased possibilities for making mistakes. Risk is the result of multiplying two components: l

the probability of something going wrong

the value of what is at stake.

The amount of actual risk in a transaction increases as the probability of something going wrong increases. As the value of what is at stake rises, so too does the level of risk.

Differences in market conditions Managers will be aware that certain features of the marketing environment with which they are familiar in their existing markets are likely to be different in other countries. For example, they will appreciate that tax regimes in other countries are different. Risk arises when, as a result of these differences, the firm has to develop new modes of operation. It may not have the relevant experience, and the newness of the operations can contribute to complexity – the established heuristics are no longer appropriate. In addition, marketing managers may also be faced with making decisions about issues which they do not realise are different from those in their home country. This will increase the riskiness of international operations. We can illustrate these abstract concepts with an example. A marketer of cosmetics might use a direct selling and distribution method in its existing markets. This involves women being recruited to sell the product to other women by visiting prospective customers’ homes and demonstrating the product. The management of such an organisation may take it for granted that women (who are the target salespeople) will be willing to approach other women (total strangers) in order to sell the product. Note here the phrase ‘take it for granted’. This is an important characteristic of domestic marketing. Marketers who have literally grown up in a particular economic, cultural and technological environment do not have to learn about its characteristics: they know them, and they may take such knowledge for granted. The development of a new segment of the cosmetics market within the home country may not raise any issues of risk, since the women in that market subscribe to the same national culture. In an international market, however, risk arises because the company is then dealing with a new group of people, and it may be unaware of their social norms and values. The newness of the situation creates the risk. The marketers may be unable to use the distribution methods and practices with which they are familiar. They will have to develop totally new methods of operation – and that will be where the risk becomes most apparent. This is what actually happened to Avon, the US cosmetics company, which had problems entering the Japanese market

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because housewives were reluctant to try selling the products to virtual strangers. Furthermore, the notion of inviting strangers into the family house was also foreign to them. In such situations new practices need to be established, and these practices need to match the norms and values of the host society. In the case of Japan, Avon assigned saleswomen sales territories that consisted of their own neighbourhood and social group. Shyness was overcome by offering large â&#x20AC;&#x2DC;beauty classâ&#x20AC;&#x2122; meetings. Although cultural differences are a common source of complexity in international markets, economic, political and technological factors can also be drivers of complexity. Because of these environmental differences, organisations may have to find new ways of doing things. Some of these new techniques may be so different from their existing skill-set that new skills have to be acquired to accomplish them.

Volatility So far we have seen that risk can arise when an organisation is dealing with the unfamiliar. In such situations its existing knowledge may either be useless or, worse, a liability. This is why risk is inherently tied to change. Where change is volatile, it can be unpredictable, sudden and large. A volatile business environment further complicates decision making because the unpredictability and suddenness of change mean that the organisation will have only a limited time in which to decide on a response. Buckley and Casson (1998a) identify three factors that have led to an increase in volatility in the international business environment. 1

The diffusion of technology has increased the number of industrialised nations and, in turn, that has increased the number of countries within which political and social disturbances will have an impact on the marketer.

The liberalisation of trade and capital markets means that shock waves will travel more widely and quickly than before.

Shocks can also arise from import competition and new competitive threats in export markets.

As a result of this volatility, managers working for multinationals have to revise their plans on a regular basis. So volatility leads to change and, where there is change, there may be a need for actions that are new and for which there are no heuristics. Volatile environments will be more complex to manage.

5.2

MANAGING RISK

New activities need not be risky, but if they are it must be possible to carry them out using the experience and knowledge that marketers have already gained. This is one of the reasons why marketers often prefer to do business in other countries that are similar to their own. Such similarity can be in terms of culture,

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technology or economic status. Psychic distance is an important factor in determining the direction of internationalisation. German companies when they invest abroad have tended to do so in countries that border Germany: in Austria and Switzerland, where there are a shared language and culture, and in the Czech Republic where there is a long history of trade. Even where countries are psychically close, however, cultural and behavioural difficulties can still arise, as illustrated in Example 5.1.

EXAMPLE 5.1 MIGROS Migros (known as the ‘Big Orange’) is a large retailer in Switzerland and is well known for its own-label branding strategy. In 1995 the company was forced to acknowledge the failure of its expansion into Austria, where it had entered a joint venture with the Konsum and Familia supermarket chains. One of the reasons given for the failure was the introduction of own-label brands that were completely unfamiliar and unacceptable to Austrian shoppers. (Source: based on Marketing Week, 26 August 1999, p. 22)

Obviously, the greater the difference between an activity and the ones with which a marketer is familiar, the greater the degree of complexity the marketer will face. This will require the development of new skills, which will at the very least require time, training and experience. In some cases, however, the gap will be so large that the company seeks to solve them in other ways. Employment of local staff is an obvious route, as is the establishment of joint ventures with local partners. The use of a culturally bilingual intermediary to bridge the gap may also be possible, as illustrated in Example 5.2.

EXAMPLE 5.2 RISK AND PARTNERSHIPS Some multinationals, fearful of being taken advantage of in South East Asia, have formed alliances with blue-chip companies that have a long history of operating in the region, such as Jardine Matheson and the Swire Group. An alternative has been for multinationals to ally themselves with large, overseas-Chinese family firms that operate throughout the region. Wal-Mart, for example, has an alliance with Thailand’s Charoen Pokphand (CP) Group, Mitsubishi with Indonesia’s Lippo Group and Pearson with the veteran Hong Kong television tycoon Sir Run Run Shaw. (Source: based on The Economist, 25 June 1995)

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Another method of managing risk in international marketing is through the management of information. ‘Efficient information processing is crucial to cope with the resultant increase in the complexity of decision-making’ (Buckley and Casson, 1998a, p. 22). Improvements in information processing can be achieved by changing the organisational structure of the multinational enterprise – flatter, less bureaucratic structures allow information to pass more rapidly between people. As well as collecting information, firms that want to manage in a volatile environment must seek to identify change as early as possible. This requires continuous monitoring of the external environment, as was discussed in Unit 1. Change should be recognised as a continuous process, rather than a sequence of oneoff events. So, for example, market entry into one country should be considered in terms of how it affects entry into other countries (Buckley and Casson, 1998b). Risk can be handled through a mixture of experience and learning, or by shifting tasks to others who already have the relevant capabilities. This may save the organisation time but it will cost more, dilute control and defer organisational learning. Risk can also be reduced by the organisation avoiding activities that are subject to differences and change and focusing on those activities where there is more similarity and stability. However, that may put it at a strategic and competitive disadvantage. In the next section we consider the main elements of the international marketing mix. ��

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THE INTERNATIONAL MARKETING MIX

So far in this unit we have looked at the different methods that companies can use to gain entry into foreign markets. Whatever actual method is chosen, the marketing manager will need to consider how to adapt and develop the elements of the marketing mix to take account of differences in the marketing environment. These differences are likely to affect customer and consumer behaviour. Although marketers can try to simplify the complexity by standardising the marketing mix across countries, it will be the wrong way of managing the complexity if it results in the compromising of sales and profits. In this section we address the issue of standardisation versus adaptation when applied to the different elements of the marketing mix, which are shown in Figure 6.1.

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� ��

��

Figure 6.1

Marketing mix strategies

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6.1

MARKETING-MIX STRATEGIES

There are four marketing strategies that international companies can pursue (Keegan, 1995). l

Standardisation involves taking the product or service as it exists in the home country and selling it in other countries without adaptation. The benefits of standardisation are that marketers can achieve economies of scale, message consistency and the ability to attract common cross-cultural market segments, by using globally standardised marketing programmes. Johansson (2000) says that in service organisations it is necessary to distinguish between back-office activities (for example, quality control, booking processes), which can be standardised, and the front-office aspects of service that may have to be adapted to the local culture and the capabilities of local staff. Even if it is not feasible to standardise the product, it may be possible to standardise the marketing process (Krum and Rau, 1992). This involves the standardisation of coordinating processes, whereby information from one market is available to another market, thus facilitating the transfer of learning from one market or operating subsidiary to another.

Adaptation involves changing the product or service to match the requirements in the countries to which the product is being exported. Johansson (2000, p. 369) points out that in many businesses, however, it may be possible to standardise the core product, to achieve economies of scale, but to adapt the final product to meet local needs or tastes. For example, in cars the chassis and engine may be standardised but the bodywork and features customised.

Creation. In some sectors, products or services are developed from scratch in order to meet the needs of a range of international markets. This is hard to do, however, and examples of the successful creation of a universal product are rare. The automobile industry continues to search for the â&#x20AC;&#x2DC;world carâ&#x20AC;&#x2122;, which can be marketed internationally with a minimum of adaptation (Keegan, 1995).

Mixed. It is possible to have a combination of these strategies, especially when they are applied to the elements of the marketing mix. For example, firms may find it cost effective to have a standardised product but a locally adapted communications programme. Adapting communications is likely to be cheaper than adapting products and it offers fewer scale economies. Firms can follow different strategies in different countries. Products will be adapted where it is relatively cheap to do so, where scale economies are not threatened or where market requirements demand it and the profit potential is high.

Cases of mixed adaptation and standardisation are described in Example 6.1 (overleaf ).

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EXAMPLE 6.1 MIXED STRATEGIES l

McDonaldâ&#x20AC;&#x2122;s extends its standard product, communications and pricing policies in Russia, while pursuing a strategy of product adaptation in France and Japan. In Japan rice is added to the menu, while in France wine is also available.

Software houses standardise the technical core of their product, but will adapt it to the major languages.

Ferrero Rocher sells the same chocolates in all markets, and uses the same television advertisement in several countries. However, the language of the voice-over is changed and now an Asian-looking actress appears in the advertisements in Asia.

Pharmaceutical companies will sell the same active ingredient in all countries, but the form in which it is formulated, packaged and applied (tablet, injection, suppository) will vary according to local preference.

Open University courses in Hong Kong are the same as those in the UK. However, the poor quality of housing in Hong Kong makes home study difficult, so it has been necessary to provide study facilities for students.

There is a continuum between standardisation and adaptation, and very few products are completely standard. It is useful to distinguish between localisation and adaptation: localisation avoids giving people reasons for rejecting a product (changing the specification of electrical goods to suit the local voltage); whereas adaptation provides a reason for choosing a product by adapting the product to suit customer tastes or preferences (Johansson, 2000).

ACTIVITY 6.1 Consider the international operations of your organisation, or one with which you are familiar. Which of the above strategies does it pursue, and why?

COMMENTARY The degree of adaptation is likely to be determined by some or all of the following factors (Jain, 1989). (a) Competition. The degree of competition can determine the extent to which a marketer takes on the expense of adaptation. Even where competition is low, adaptation may be necessary as a barrier to entry.

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(b) Market conditions. This refers to cultural, economic and other differences between the markets in which the marketer operates and the new one which is to be entered. (c) Nature of the product. Standardisation is more feasible with industrial goods than it is with consumer goods, and with services more than with products. (d) Market development. The extent to which a marketer customises or standardises may depend on the maturity of a market.

We now look in more detail at the first element of the marketing mix â&#x20AC;&#x201C; the product.

6.2

PRODUCT

We shall start with the technical specifications of what is offered and the choices that marketers have to make about adaptation and standardisation. We then consider the role of branding and the challenge facing marketers over whether they should go for international consistency, or have a multitude of brands in different markets reflecting the historical links that brands have to particular countries.

Technical specifications Products may need to be adapted for local conditions. From the cases in Example 6.2 we can see that firms need to be aware of the impact on reputation should mistakes be made. Furthermore, the issue of specification is important in so far as customer expectations are concerned. Overspecification (where the product can do more than the customer wants or needs) is likely to result in higher prices and, if the customer does not value the additional benefits, a negative impact on sales. Technical specifications need to take into account local social and cultural characteristics. Finally, it is important for marketers to take into account the whole product-service package that customers receive. This means that the services used to support a product also need to be evaluated in terms of their consonance with local culture.

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EXAMPLE 6.2 PROBLEMS WITH PRODUCT SPECIFICATIONS l

A Dutch manufacturer of portable electrocardiograph machines was not as successful as envisaged because the humidity in the Philippines impaired performance. Even when the product was adapted to correct the fault, it took a long time to overcome the initial bad reputation that the firm had established.

The construction technique of a Dutch prefabricated house manufacturer used concrete. When this method was introduced into the Malaysian market it did not work, because consumers had been used to houses being made of wood, which had allowed them to hang decorations. Also, given the cheap labour costs in Malaysia, the cost benefits of prefabricated housing were not as great as in the Dutch market.

A Dutch manufacturer found that its greenhouses were overspecified for the American market. They offered too many benefits for consumers who were used to simpler products that also cost less. Moreover, the users of the new products also needed far more education in their use than was the case with competitor products.

DAF Trucks found that it could not penetrate the Saudi Arabian market for several reasons. First, Saudi buyers were loyal to German manufacturers, especially Mercedes. Second, they were used to their trucks being serviced by small service stations, which were perceived to be flexible and friendly. This was in contrast to the DAF dealer network, which was perceived as being formal and unfriendly. Finally, the construction of Mercedes trucks was more in keeping with the social habits of Saudi drivers, who like to carry friends and family in the front. Four seats allowed for this; the two seats in DAFâ&#x20AC;&#x2122;s trucks did not.

(Source: based on Dalgic and Heijblom, 1996, pp. 4â&#x20AC;&#x201C;5)

Branding International product branding is complex, which is why there are relatively few successful global brands. We shall look at the following issues: l

benefits and problems associated with global branding

national identity (including country-of-origin effects)

managing brand names across borders.

Benefits and issues associated with global branding Quelch (1999) cites the following characteristics of a global brand. l

It is strong in its home market, allowing generation of the cash flow necessary to operate in a global market.

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A global brand exceeds a minimum level of awareness, recognition and sales all over the world.

While the product may vary across markets, for example for cultural reasons, it meets the same widely held human needs.

The positioning of the product is consistent around the world, representing a consistent set of values.

Consumers value the country of origin. Thus the country of origin makes the brand a global one.

A global brand has a product category focus.

The brand name is the same as the corporate name.

The benefits of global branding are that it adds value for customers; it reduces costs for the marketer; it enables cross-border learning; and it provides cultural benefits for the company. Added value means that consumers feel that the global brand adds value to an â&#x20AC;&#x2DC;emotionally involvingâ&#x20AC;&#x2122; product. Costs can be lowered by spreading fixed costs over a large number of markets. (Opportunities for globally marketing communications, such as the Olympic Games, are best taken advantage of by brands that are present in many different countries.) Despite these benefits, Quelch (1999) identifies two pitfalls with building global brands. In his view, marketers can standardise excessively the different elements of the marketing mix in their desire to build a global brand. He argues that this is not necessary, and that marketers should choose which elements should be standardised and how the mix should vary country by country. He also says that headquarters may impose excessive control. There is also the risk that marketers may ignore differences in market development. To counter this, marketers need to consider cross-border differences in terms of category development and brand development. In the beer market, for example, category development can be measured by beer consumption per capita, while brand development can be measured by a brandâ&#x20AC;&#x2122;s market share. In some countries the beer market is underdeveloped, while it is mature in others. In turn, in some markets brewers will have to build visibility and market share; in others, the firm has achieved awareness and needs to enrich brand imagery. In mature markets, where competition is high, the firm will need to reaffirm with customers that they have made the right choice. Finally, in markets where the firm may be losing market share, it will need to reinvigorate the brand. Excessive control by headquarters can lead to specific problems. The firm may tend to be biased towards the domestic market, where headquarters are located. Reverse learning may be reduced, so lessons learnt in other markets are not passed back to headquarters. Differences between consumers in different markets may be glossed over. There may also be a loss of motivation amongst management in other territories. Some aspects of global branding are illustrated in Example 6.3.

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EXAMPLE 6.3 BRAND IMAGE Managers may need to consider market conditions when they decide whether to standardise or customise their global brand image (Roth, 1995). For most firms the strategies used lie somewhere between total customisation and total standardisation. Firms within the same industry can differ in the extent to which they customise or standardise their brand image. Nike, for example, is said to have a standardised fitness and performance image in all the markets that it serves. In contrast, Reebok customises its image on the basis of national and regional differences in consumer tastes and preferences. In the USA the company tries to present lifestyle and athletic images; in Western Europe the emphasis is more on athletics and performance. (Source: based on Roth, 1995)

National identity and country of origin When marketers sell brands across national frontiers they need to be aware that the brand image can be influenced by consumersâ&#x20AC;&#x2122; perceptions of the country of origin (COO) of the brand. There is evidence to show that consumers can use COO as an extrinsic cue for product quality (Bilkey and Ness, 1982; Erickson et al., 1984). This cue is used as a surrogate when other information is in short supply. COO has in many cases been found to be more important in affecting product quality assessments than price and brand information (Janda and Rao, 1997). An example of COO is the â&#x20AC;&#x2DC;Made in Germanyâ&#x20AC;&#x2122; label, which signifies reliability, precision and punctuality. In contrast, products from developing countries are considered to be inferior to those from developed countries. The image of a country can change, however: Japan was originally associated with poor quality, but the current image is of reliability and value for money. Binational products are produced in one country and branded in another. Such products can either inhibit or bolster COO information, depending on whether the potential market perceives the COO information positively or negatively. Consumers have also been shown to have a bias towards products from countries other than their own. This effect can also exist in industrial buying. There is evidence that Asian countries have had to work to overcome market resistance based on COO image (Khanna, 1986). COO is a significant indicator of product quality (Eroglus and Machleit, 1989), but its relative influence varies by product category and individual and product variables.

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ACTIVITY 6.2 Consider the country-of-origin effect within your business. (a) Does your organisation benefit or suffer from it? (b) Does country of origin affect the relative strengths of your competitors in your home or overseas markets? (c) In what ways does country of origin introduce complexity for international marketers?

COMMENTARY Compared with a firm that does only domestic marketing and faces no international competition, international marketers face several additional choices when it comes to COO. The firm that is exporting will need to take into account the nature of COO between the two countries. Firms that operate on a global basis will need to take into account COO effects among the countries in which they do business, and whether changing sources of supply will improve the COO effect. Moreover, firms will also need to take account of the COO effect when competing against foreign firms entering their domestic market: a major retailer of electrical goods in the UK created a Japanese name for its own-brand products, in order to try to obtain a COO benefit. This is an example of how international marketing can affect firms which do not proactively take part in it.

Companies have to decide whether, and how, to use national identity to enhance brand values. On the one hand, global-brand builders aim to construct a unified image for their products and services to emphasise their global stature and universal qualities. On the other hand, they cannot ignore the fact that the values associated with individual countries, of benefit in one market, may be less acceptable in another. An illustration of this is given in Example 6.4.

EXAMPLE 6.4 BRANDING ISSUES FACED BY GERMAN FIRMS The question of brand values and national heritage is becoming an important issue for German companies in international markets. Brands such as Audi or Mercedes have been admired for qualities that are inextricably linked with their German origin â&#x20AC;&#x201C; most notably, functional design and engineering reliability. These companies are therefore faced with the choice of positioning their products and national brands with reference to their national heritage, or of becoming genuine global brands. Success in developing their brands internationally lies in retaining the positive

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values that have historically been associated with their nationality, and transferring these into their uniform, international, corporate brand identity. Audi and Mercedes have therefore accompanied their international expansion with a shift away from referring to their national heritage and towards building a corporate image. They have overcome the national-versus-international dilemma by successfully incorporating those relevant German values into their own universal brand image, so that both brands are universally synonymous with quality and function. (Source: based on Marketing Week, 7 February 1997)

Managing brand names across borders Global companies can gain many advantages if they can develop global brands for their products – even if it causes problems when acquisitions take place and firms have to choose between competing brands. Standardising of brands allows marketers to send a consistent, worldwide message. It also means that they can take greater advantage of growing global media opportunities and gain scale economies in advertising and promotion: they can promote one brand, one pack and one positioning across markets. There is an attraction in having an international brand portfolio, rather than a patchwork of local brands in local markets. Cases of firms that are seeking to develop global brands are described in Example 6.5.

EXAMPLE 6.5 CROSS-COUNTRY BRANDING Spillers, a manufacturer of animal food, plans to use the Winalot name as an umbrella brand across Europe, and is dropping the Spillers name. In its cat-food ranges Felix, which has a strong presence across Continental Europe, will replace the Arthur name, which is strong in the UK and a contender in Germany, but is unheard of elsewhere. The reason for dropping the Spillers name and concentrating on two core names for dog food and cat food is because of competition from own-label products and rival brands, including Pedigree Chum. One of the criteria used to assess whether a particular name should be used is whether or not it can ‘travel’. So although Winalot is not currently used on the Continent, it is felt that it can easily be transferred to other countries. ‘Spillers Prime’, for example, will become ‘Prime from Winalot’. For similar reasons Scott Paper will kill off the Andrex name – but not its trademark puppy – and replace it globally with Scottex. The Scottex name is already in use in the USA, Continental Europe and Asia. Despite the fact that Andrex is the UK’s

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seventh-largest grocery brand, its familiarity is not sufficient to safeguard its future against the move to global brands. Mastercard is in much the same position. In the UK, Access acted as the local brand, but was almost unknown in the rest of the world. Access was a strong brand in a small market, but Mastercard is a global company, so the rationale for replacing Access became overwhelming. With careful management it is possible to gain public acceptance of well-known names. The name of the chocolate bar Marathon was changed to Snickers in 1991. Over a period of months Marathon had Snickers emblazoned across the side of the packaging. Snickers was then moved to the front and Marathon disappeared. This was supported by a television advertising campaign to keep the public informed. The net result was an increase in sales. Philips white goods, which merged with US domestic-appliance manufacturer Whirlpool in 1989, dual-branded its products as Philips Whirlpool until 1992. The Philips name was then dropped. The rationale was that consumers had had enough time to become aware of the Whirlpool brand. According to Whirlpool figures, by 1992 awareness of the brand across Europe had reached 97 per cent of the level previously enjoyed by Philips. In reality, however, there are few global brands. In most business sectors, markets are dominated by local brands which may extend to a few other markets but are far from global. Despite the example of Snickers and Mars, the confectionery market is actually highly fragmented, with local brands important in most countries. Cadbury Schweppesâ&#x20AC;&#x2122; attempts to establish a master brand for its products has achieved only limited success, and they have abandoned their efforts to develop a global soft-drinks brand. (Source: based on Marketing Week, 22 September 1995 and 30 August 1996)

6.3

MARKETING LOGISTICS

Marketing logistics starts with the marketplace and works backwards to the factory. It incorporates both outbound distribution (moving products from the factory to customers) and inbound distribution (moving products and materials from suppliers to the factory). Internationalisation presents companies with greater opportunities, but also greater challenges in the management of their logistics. The international distribution strategy chosen by a firm will depend on the broader international marketing strategy it wants to follow. This broader strategy will determine the extent to which the firm wants to centralise or decentralise its operations, and the extent to which distribution should be standardised or adapted. 102

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An additional source of complexity for international marketers is that they may enter new markets where their competitors already have established relationships with members of the distribution channel. Faced with such a situation, marketers may need to develop alternative distribution channels. This can involve working with other local organisations that may be able to offer access to potential customers.

Supply logistics To what extent can logistics be managed globally? The global importance of logistics is beyond dispute – trade between subsidiaries of the same company accounts for more than half of all the trade among OECD countries. Globalisation has also led to the application of the concept of postponement as a strategic tool. Postponement means that activities that were once done upstream in the supply chain can now be done further downstream, closer to the point of final consumption. In practical terms this means that part-finished products can be shipped from factories to local distributors, who can then add features to a product in order to make it more suitable for local customers. An illustration is given in Example 6.6.

EXAMPLE 6.6 POSTPONEMENT OF THE MANUFACTURE OF TELEVISION SETS Sony’s Welsh factory makes television sets for Europe. The company began production by making different product ranges for different countries, since they had different technical and broadcast requirements. Subsequently the company simplified production by introducing a ‘Eurochassis’, which is used for all European television sets. Specific market adaptations could then be carried out at a late stage of the production process – in-market where that was appropriate. (Source: based on Cooper, 1995)

The extent to which firms can take advantage of such developments in logistics depends on three key factors. 1

Value density is the value of a product in relation to its weight and volume. Where the value is low compared with the weight and volume of a product (i.e. low value density), the logistics system will be more localised. An example is the soft-drinks industry, where bottling is done in-market, frequently on a contract basis. In contrast, products with a high value density, such as diamonds, can be distributed around the world from relatively few points of supply. There are two issues to consider when assessing the logistics reach for a product of any given value density. The first is the OU BUSINESS SCHOOL

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‘standard of customer service’ and the second is the ‘cost of logistics services’. Soft drinks have low value density (so the logistics system is localised); in fact, the bottling plants serve a well-defined local area. The configuration of the bottling plant network is dependent on the logistics reach. This means that if, for example, transport costs change, the logistics reach will change as well and, in turn, that will have an effect on the network of bottling plants. So the production network has to be maintained at a level at which both customer service needs and supply-chain economics are satisfied. 2 Brand or technical superiority can be an important consideration for logistics. Two products in the same industry (with the same level of value density) can have very different logistics strategies, because of differences in their brand superiority. One product can be in a competitive market where price is important. The other product may have a high market share and need to focus less on price-based competition, but does need to deliver high levels of customer service to deter competitors. In order to minimise costs, therefore, the first product will have a centralised logistics strategy; production will be in one place and worldwide distribution will be done from there. Since it is customer service that is more important for the second product, the logistics strategy will need to be more decentralised. A source of complexity here is that the same product may not always merit the same logistics strategy, since the competitive environment may change. 3 The availability of raw material and components needs to be taken into account when determining logistics strategy. Supply logistics may be a determining factor in decisions to enter new markets or establish new production facilities. The same corporation might have different logistics strategies for different products. Firms can be classified in terms of their logistics strategy as follows (Cooper, 1995). 1 Invaders are firms that establish ‘screwdriver’ plants in foreign countries. Such plants are used to assemble the final product, using components shipped in from other countries (usually the international marketer’s home country). Since host governments do not like ‘screwdriver’ plants (they do not promote learning or technology transfer), international companies may move towards local sourcing of inputs over time. 2 Settlers are firms that may previously have been invaders but, over time, they have sourced so much of their inputs from the countries in which they operate that they have taken on the characteristics of an indigenous firm. 3 Cloners are companies that are principally locally based in terms of their resource acquisition. Bottling plants, for example, will source most of their requirements locally, possibly importing the concentrate needed for soft drinks. Such operations are likely to be local and duplicated on a global

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basis. Cloners need to be able to disseminate information about best practice around the world, since plants may be very similar to one another. 4 Barons concentrate their operations and sourcing so as to ensure product or manufacturing quality. An example is Mercedes Benz. However, even companies like this have to consider the costs of setting up and running new plants. One of the reasons why Mercedes has decided to establish overseas plants is the rising cost of manufacturing in Germany. Even barons may need to be flexible when they switch between different logistics systems. 5 Outreachers source components from around the world, but manufacture in just one location. These firms have extensive inbound and outbound logistics considerations. Outreachers need to develop partnerships.

Distribution logistics The choice of distribution channel and partner has to satisfy several criteria. The first criterion is functions, which concerns the responsibilities that a supplier wants to allocate to different members of the distribution channel. An international marketer may want channel members to do activities such as storage, transportation, customer service, and so on. Members will have to be selected on the basis of the functions that they can perform. When identifying specific functions, the marketer will need to consider what is done in the domestic market and then assess what additional functions may need to be performed in foreign markets. These differences in markets might concern government regulations, for example, or customer expectations. Market coverage and control form the second criterion. They are determined by how extensive the intermediaryâ&#x20AC;&#x2122;s sales network is and how much of the target market it can cover. Control is determined by how large the intermediary is compared with its customers. Clearly, an international marketer will prefer to work with an organisation that is relatively powerful compared with other businesses in the distribution channel. The above criteria will influence the structure of the distribution channel. This structure will vary according to the number and types of intermediaries in the channel. The structure will also depend on the number of product lines that are carried and the relationships between different channel members. Channels can vary in length: the longer the channel, the more expensive the product will be to the final customer. This is a major issue in some countries, such as Japan, where traditional distribution structures incur significant costs.

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ACTIVITY 6.3 Do the distribution channels used by your organisation differ by country? If so, why do you think that is?

COMMENTARY You can probably ascribe differences to the three factors identified previously: function, market coverage and control, and structure. You may have noticed that distribution channels tend to be longer in economically less-developed countries. This is because in poorer countries consumers may not have the resources to transport goods over large distances, or to pay for or store large quantities. This means that there is a role for intermediaries to â&#x20AC;&#x2DC;break downâ&#x20AC;&#x2122; products into very small quantities, for example, and to sell as locally as possible.

International distribution management poses the following additional problems, which add costs and create additional risks of mistakes being made. l

The distances travelled by products are likely to be longer.

As products travel they will have to pass customs at different borders.

Products will require storage and warehousing.

Different independent companies may handle products as they are moved around different countries, so increasing the number of transactions.

6.4

PRICE AND FINANCING

As with other elements of the marketing mix, companies have a choice between standardised and adaptive pricing policies. With standardised policies, companies charge the same price in different countries, converted by the relevant exchange rate. The approach is simple, since the marketer does not take into account any information about local market conditions. However, this avoidance of complexity by the marketer can lead to sub-optimal performance if the product is not positioned appropriately for local conditions. It also passes on to the customer the consequences of shifting exchange rates. The other methods of pricing that we look at below introduce complexity, but they are also more market-orientated. In contrast, pricing policies that are adapted to the conditions of each country will be more market-orientated, taking into account local competitive and environmental factors. However, they will also be more complex, and consistent positioning becomes more difficult. This approach also means that if there is too large a price differential between countries, then there is scope for parallel 106

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imports. This happens when customers (distributors or consumers) can buy products cheaply in a foreign country and import them to their own country (where they would have been more expensive). Some cases are described in Example 6.7.

EXAMPLE 6.7 PARALLEL IMPORTS It is cheaper for British car buyers to go to Continental Europe to buy cars. Car prices in the UK are higher than in other countries because a high proportion of sales are in the form of bulk purchases. (Bulk purchasing exists because of the custom in the UK of employers providing cars to management staff as part of their remuneration package. Initially developed to take advantage of a tax loophole, this custom persists even though the tax advantage has disappeared.) Manufacturers traditionally give large discounts to bulk buyers and charge more for retail sales. All manufacturers have taken advantage of this quirk of the local market and have adapted their prices upwards. In another example from the UK, supermarkets have been importing and selling branded cosmetics and clothing far more cheaply than authorised outlets can sell them. Manufacturers have taken a range of measures to block such imports, including action through the courts. Some electrical-goods marketers have tried to reduce the possibility of parallel imports by ensuring that their products will work only in certain geographic regions.

A problem with locally adapted prices is that they can make consistent positioning more difficult. Stella Artois, a Belgian lager, is positioned as a high-priced premium product in the UK, whereas it is cheaper in the Benelux countries and is not regarded as a premium drink. Closely linked to pricing policy in international marketing is the issue of financial risk. Payment risks mean that suppliers may require letters of credit from customers in other countries before goods are dispatched. Product risk means that customers may want to have the goods inspected for quality before they are willing to make payment. Currency risk arises owing to fluctuating exchange rates. If a currency appreciates, other currencies become cheaper, thus making imports cheaper and exports more expensive. This poses problems for exporters: if they do not reduce prices they may find that their products are uncompetitive. When the situation is reversed, an importer whose currency has appreciated will find that imported products are cheaper, thus providing an opportunity to increase profits or expand market share. These examples illustrate how exchange-rate changes introduce an additional layer of complexity for the international marketer. As with the other issues

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raised in this unit, the task for managers is to identify how such complexities can be managed. In this case, a variety of financial instruments can be used in order to hedge against exchange-rate risks. Thus an important supplier for the international marketer is the banker from whom such products can be bought. Table 6.1 compares the different methods of making payments in international marketing and identifies their risk characteristics for the marketer. Table 6.1 Methods of payment in international marketing

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Method

Meaning

Key characteristics

Consignment

Marketer delivers products, but keeps ownership until they have been paid for

Marketer finances customers’ inventory and absorbs credit risk

Open accounts

Full credit offered to customer

Exposure to risk for the marketer is very high and in international marketing is offered only to internal customers or long-term relationships

Payment against documents

Marketer presents documents to own bank as proof that goods have been sent. Marketer’s bank forwards documents to customer’s bank and requests payment. Once it has been received, customer can take ownership of goods

Decreases risk to marketer. Problem remains if payment is not made – what should be done with the goods?

Letter of credit

Customer and marketer exchange products and payment via involvement of their own banks. In an irrevocable letter of credit the marketer’s own bank will make the payment to the marketer, regardless of whether or not it has received payment from the customer’s bank

Irrevocable letters of credit offer marketers very high levels of security (second only to payment in advance). Since the bank can become a party to risk taking, it may refuse to set up letters of credit for countries that are considered bad credit risks

Payment in advance

The customer pays for the product or service before taking title to it

The customer bears all the risks and may be prepared to do so when the supplier has a very powerful position

6 THE INTERNATIONAL MARKETING MIX

6.5

PROMOTION

ACTIVITY 6.4 List possible reasons why the message, the promotion medium and the budget for promotional campaigns may need to vary between different countries.

COMMENTARY Your reasons may have included, for example, that the costs of running promotion campaigns can differ between countries. Furthermore the same media may not be available and, even if they are, there may be restrictions on how they are used. Finally, the message the marketer gives to target customers in the home country may not apply to the foreign market because the marketer may have positioned the product differently, or may simply be using different appeals.

There are several reasons why promotions can vary in terms of effectiveness in different countries. 1 There may be differences in the availability of media. The most obvious reason for this is the difference in economic well-being. Television may be less widely available in developing countries, and the Web is used far more in the developed world. 2 Literacy can also have an impact in terms of how a message is actually presented. Where literacy is a problem, marketers may have to use images more than words, and they are likely to rely more on radio than on text-based advertising. Even where literacy is not a problem, marketers may need to adapt their brand names to suit local languages and local scripts. Waves, a US manufacturer of refrigerators, uses both Roman and Arabic script on its advertising in Pakistan. 3 Advertising costs also vary between countries. This may be a function of the variety of media available to marketers, or may simply reflect the degree of competition. 4 There could also be restrictions on what can be advertised. This is becoming less important with the advent of satellite television and cross-border transmission. Marketers can offset some of these complications by using an advertising agency that has affiliated companies overseas. It may be possible to tap into more creative ideas by using independent agencies in each country, although that can lead to problems of inconsistent brand messages and images. If the markets are insulated from each other, and the audience is unlikely to hear messages being broadcast in other countries, consistency of brand image may not necessarily be a problem.

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Three criteria are considered to be important in managing a global promotional campaign – particularly one that is multilingual: 1

the consistency with which the concept and message are reconstituted in different markets;

the flexibility with which adaptations can be made to local differences;

control to ensure that there is no change in content, style or tone of voice.

The standardisation of advertising has several potential advantages. It is defined as ‘keeping one or more of the components of an advertising campaign – strategy, execution and language – the same when applying the campaign to different countries’ (Backhaus et al., 1999). Advertisers can ensure that there is a consistent brand image by transposing a single, unified message into a number of different languages. Standardisation is possible where there is homogeneity of consumer needs and behaviour across national boundaries. In these circumstances, standardisation can also offer significant cost savings. The choice for the marketer, however, is not between complete localisation and complete standardisation. At any time an advertising campaign will be somewhere along the continuum between these two extremes. Therefore, rather than focus on whether an organisation should localise or standardise, the debate is centred on the degree of each. Two important criteria can be used to assess the optimal degree of standardisation. 1 Efficiency: measured by the number of people a campaign reaches per dollar of expenditure. 2 Effectiveness: the influence on consumer purchasing behaviour as a result of standardisation. This can function in a positive way by reducing consumer confusion and irritation, which is particularly the case where the target market is mobile or where there is media overspill (because of satellite transmissions, for example). It can also have a negative influence, because of a reduced ability to account for specific characteristics of each country in which the campaign is aired. Thus effectiveness depends on consumer reaction and that, in turn, depends on consumer perception. Table 6.2 summarises the standardisation and adaptation issues for the different elements of the promotion mix.

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Table 6.2

Factors affecting standardisation in promotion

Factor limiting standardisation

Product design

Pricing

Distribution

Sales force

Advertising and promotion, branding and packaging

Customer mobility

Dispersion of customers

Access to media Climate

Market characteristics Physical environment

Climate Product-use conditions

Cultural factors

Attitude towards foreign goods

Attitude towards bargaining

Consumer shopping patterns

Attitude towards selling

Language, literacy

Stage of product life cycle in each market

Extent of product differentiation

Elasticity of demand

Availability of outlets

Need for missionary sales effort

Awareness, experience of products

Competition

Quality levels

Local costs

Competitors’ control of outlets

Competitors’ sales force

Competitive expenditure, messages

Availability of outlets

Prevailing margins

Number and variety of outlets available

Number, size and dispersion of outlets

Extent of self-service

Ability to force distribution

Effectiveness of advertising, need for substitutes

Media availability, cost overlaps

Restrictions on product lines

General employment restrictions

Specific restrictions on messages and costs

Industry conditions

Marketing institutions Distributive system

Advertising media and agencies Industry conditions

Product standards

Tariffs and taxes

(Source: adapted from Buzzell, 1992, p. 181)

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MANAGING MARKETING PROGRAMMES

In Section 6 we discussed how the elements of the marketing mix might vary between countries. In the context of international marketing it is important to pay special attention to consumer products, because they can be more culturally bound than is the case for business products. Furthermore, consumer products may require more extensive distribution than business products. When this is done on an international basis it creates additional complexity. Both of the above issues point to the value of working closely with local companies. Alternatively, if the supplier wants to operate independently, it will need to establish local operations that are staffed by local people. Within any country the marketing methods used will depend on the product being sold and the structure of the market, and not all international businesses are involved with consumer goods. In this section we discuss the special characteristics of business-to-business markets and of services markets internationally. Finally, we consider the impact of internationalisation on firms operating within domestic markets.

7.1

INTERNATIONAL BUSINESS足

TO-BUSINESS MARKETING

Compared with consumer marketing, the marketing of industrial products and services is generally simpler: there are fewer customers; distribution channels need not be so extensive; cultural factors may not be so critical; and sales are more likely to be based on technical specifications. These advantages are offset, however, by one other factor: the importance of personal relationships. The fact that there are fewer buyers and larger orders in industrial markets than in consumer markets means that personal relationships are more likely between representatives of buyers and sellers. This poses a problem for international marketers, since they may not have the necessary interpersonal networks with potential customers. Again the possible solutions to this problem are to work with local companies who do have such knowledge, or to hire local salespeople (we addressed this issue when discussing market entry in Section 4). Where industrial products are sold with support services, the international marketer will need to consider how such services are to be offered. Support services are inherently people-based, and such people may need to be able to match

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the needs and practices of the customers with the corporate culture of the supplier. We believe that the ability to understand and manage relationships is critical to success in business-to-business markets. Relationships are discussed in detail in Unit 4, so here we focus on a particular but important aspect of relationship marketing that exists in China and Chinese communities – ‘guanxi’. The relevance of this discussion to this unit is to demonstrate that relationship marketing is a social and cultural construct. By that we mean that what relationship marketing means to an individual, and how it is practised, will depend on their social and cultural background. In the following discussion you will see how guanxi differs from relationship marketing as practised in Europe or America, and how that relates to differences in social and cultural factors. The discussion draws on Buttery and Leung (1998) and Ewing et al. (1999). Chinese people are said to place a high level of importance on personal relationships. Some studies have sought to define, delineate and operationalise the guanxi construct. Guanxi has usually been studied through the lens of the network marketing paradigm. The Asian version of networks is said to be held together by elaborate patterns of interdependence and reciprocity and a dense interconnection of culture and identity. Moreover, such networks also exist in Japan and Korea and in countries where intimacy with people in authority is important. Such trust-based relationships are also a consequence of institutional weakness and corruption. According to Davies et al. (1995), guanxi means personal relationships or connections on which an individual can draw in order to secure resources and advantages. The main features of guanxi are that reciprocation extends over an indefinite time period, and that it can extend beyond the two immediate parties to a transaction (Arias, 1998). Such extension can apply across the social networks of the parties involved. The important considerations about such networks are: l

They are between individuals and not organisations.

Relationships with a senior will extend to the subordinates, but not vice versa.

The social relationships need to exist before the business relationship is established.

A major factor in guanxi relationships is the importance of family. However, the Chinese meaning of the term ‘family’ is different from the Western one. Rather than simply referring to blood ties, it is a more holistic concept and is fluid enough to distinguish between close members and distant members. It can extend to friends of family and their families. ‘Renqing’ is the exchange of favours and ‘mianzi’ describes the giving of face or enhancing someone’s status. The nature of guanxi is that it is not about the single transaction, nor is it about the 114

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immediate return of favour. The offer and return of favours is diffuse and long-term. It is said that guanxi counts for nothing in consumer markets. You have to make good products or offer good services. In fact connections, particularly corrupt ones, will count against you soon – even in China. In Hong Kong, the Bank of East Asia’s chief executive, David Li, draws a clear line between corporate banking, where established relationships do count for something, and retail banking, where the only things that matter are efficiency and service. Confucian values are said to provide some of the basis for guanxi. These values drive three interpersonal norms: l

basic communication patterns

social obligation

relationships amongst different life domains.

According to Confucius, ‘jen’ and ‘lun’ signified the ideal of man in society. Jen means moral excellence in interpersonal relationships and emphasises self-education and analysis. It advocates the importance of knowing others and the relative unimportance of being known. Lun is the proper position of mankind within the social and political hierarchy. Confucian philosophy seeks to create a harmonised society in which everyone stays in their proper position. This means that people who try to do business outside accepted positions and ranks would not be very effective. The notion of giving face refers to the recognition and enhancing of the status and moral reputation of the Chinese negotiator. When someone loses face not only have they lost status, but also they may have lost the confidence and trust of the other person. Giving favours and gifts means giving face. Local people are much more likely than foreigners to have the personal connections known as guanxi, so essential to doing business in the region. They also have the sort of insider’s knowledge that saves them from making crass mistakes. This suggests that to be successful in Chinese markets, foreign firms should localise their operations. The trouble with localisation is that good locals are difficult to recruit; the Hong Kong labour market, for example, is one of the tightest in the world. On China’s mainland the dearth of managerial talent and technical skills that seems to be a common feature of communist and ex-communist countries was exacerbated by the Cultural Revolution, which thinned the ranks of people aged between 35 and 45.

7.2

INTERNATIONAL SERVICES MARKETING

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We begin this discussion by considering the characteristics of services – intangibility, heterogeneity, perishability and inseparability – from an international viewpoint.

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Intangibility. Because services are intangible, they cannot be seen or felt or tasted before purchase. Once they have been delivered the customer may not be left with anything tangible, since services are ‘performed’. This means that the perception of service quality can be subjective. For the international marketer this, in turn, means that perception may vary across markets and cultures. In some Middle Eastern countries, for example, bank staff may be expected to deliver cash personally to important local customers. Banks from outside the region may find that level of service strange.

Heterogeneity. Service quality can vary between members of staff within an organisation, and also the same member of staff can provide service of varying quality over time. International marketers have a dual challenge here: to ensure that quality is consistent enough to meet expectations, but flexible enough to cater for cultural differences.

Perishability. Because services are perishable, they cannot be stored and it can be more difficult to meet peak demand levels. The international marketer may overcome this by using excess capacity in one market to supply another market. Airlines, for example, can re-route telephone enquiries from one country to another. Marketers also need to consider whether cultural, economic and other environmental factors will allow the same methods of managing demand to be applied across countries. For example, the introduction of automated teller machines (ATMs) can be a means of meeting customer demand for banking services in developed economies, but possibly not in less economically developed countries.

Inseparability. Services have to be produced at the same time as they are delivered. This means that the client will be present at the same time that the service is delivered. Indeed, the interaction between the provider and the customer is an important part of the service. For international marketers this raises issues about recruiting staff. Airlines, for example, can try to ensure that they recruit staff from several different countries so that passengers can speak to someone in their own language. On the other hand, Singapore Airlines projects a particular brand image based on its Singaporean cabin crew: the company believes that diversity amongst its staff could dilute the brand image.

Given the increased usage of technology, customers may not actually be aware of the identity of the member of staff providing the service. This actually makes inseparability a possible source of competitive advantage. Marketers may have IT technical support located in low-cost countries. Indeed, as we have seen above, inseparability can be a possible solution to the perishability problem.

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Before discussing the entry methods available to service marketers, we shall look briefly at some environmental differences between service and product businesses. Service companies can face a more hostile attitude from foreign governments, compared with product companies, because it may be perceived that they bring little into a country in terms of investment and technology, while repatriating profits (Bradley, 1995). Such attitudes can take the form of specific restrictions in areas such as work permits. The choice of market entry method for service businesses will depend on the following factors. 1 The nature of the service that they are selling. This refers to the degree of interaction between the service provider and the customer that is necessary for the transaction to take place. Moreover, the nature of that interaction is important. Interaction can be physical (i.e. both need to be physically present) or it may be possible using telecommunications and IT. This gives rise to the â&#x20AC;&#x2DC;mode of presenceâ&#x20AC;&#x2122; range on a continuum that ranges from greater to lesser intimacy. So where a service needs a high level of intimacy, it may be necessary to use direct investment as an entry strategy. Where a low level of intimacy is acceptable, then exporting may be adequate. 2 The way in which the service is delivered. This refers to the degree to which the service is embodied in or delivered through goods. For example, telecommunications services cannot be delivered without there being a significant level of infrastructure. The greater the need for local physical investments to take place in order to provide the service, the more likely it is that direct investment will take place, rather than exporting. 3 Barriers to trading in services can be different from those in products, and they may be higher. Where that is the case, a marketer may embody the service in the product (thereby making it more tangible). For example, marketers may sell service contracts with industrial equipment. 4 If the nature of the service means that capital intensity is low, a service marketer will not incur the same cost as a manufacturer should they decide to use a full control mode, such as direct investment. Since the benefits of full control methods remain the same for services as for products, direct investment may be a more attractive route for services than for manufacturing. Nevertheless, exporting remains an important entry route for services. There are two key differences between service and product exporters (Chadee and Mattsson, 1998). 1 Service exporters are narrower in their export market selection compared with product exporters. This may be because it is less complicated to export tangible products than services. Service firms therefore concentrate on a few strategically important markets. 2 For service firms the channels used for exporting also have an important impact on performance. Specifically, direct channels OU BUSINESS SCHOOL

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of distribution in export markets contribute far more to export performance than manufacturing firms. Example 7.1 shows how two service providers have used an alliance to gain the benefits of international marketing, without some of the attendant risks.

EXAMPLE 7.1 ROYAL BANK OF SCOTLAND AND BANCO SANTANDER In general, the mix of proprietary know-how, availability of key personnel, government regulation and the time needed to build relationships all encourage banks to follow a controlled strategy based on direct investment. However, this will often be moderated by alliance building to accommodate local market needs, building on local contacts and experience and government regulations. An example of such an alliance is that between the Royal Bank of Scotland (RBS) and Banco Santander of Spain. Both are mediumsized banks that needed to develop Europe-wide banking services for their clients as European unification proceeded, and each was concerned about being taken over. Negotiation between the top management of both banks led to the alliance. As a result, Santander introduced a high-interest cheque account after studying RBS’s experience. RBS studied Santander’s branch management practices to improve employee productivity, profitability and service levels. The two banks plan to link treasury departments and they give preferential treatment to each other’s clients. They have also linked their branch networks to create a seamless network. The Interbank On-line System will also join banks from Portugal, the USA, Belgium and Italy. (Source: adapted from Sarathy, 1999, p. 273)

7.3

THE THREAT TO DOMESTIC MARKETING

Throughout this unit we have focused on marketing issues for the international company. In this section we consider the impact of internationalisation on domestic marketing and look at ways of dealing with foreign competitors encroaching on a company’s home market. This perspective on international marketing is extremely important, as all firms have to deal with foreign competitors in their home market. We discuss not only the impact of foreign competitors, but also the competitive strategies that domestic firms can use to fight back. The framework for this discussion is outlined in Figure 7.1, and Example 7.2 shows the impact of foreign competitors in Japan.

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Figure 7.1

Threats to the domestic market

EXAMPLE 7.2 THREATS TO JAPANESE RETAILERS The following list shows just how much of a threat international competitors can be for local marketers. l

Within a year Gap, an American clothing retailer, doubled its number of stores in Japan to 39. Toys ‘R’ Us has become the biggest toy retailer in the country, with 78 shops.

Foreign restaurant chains and coffee shops are widespread.

Boots, a British pharmacy chain, has plans to open four shops in Tokyo in a joint venture with Mitsubishi Corporation (a Japanese trading company).

One of the charges laid by foreign entrants into a market is that domestic competitors are protected by either overt protectionism or more subtle methods designed to protect the home industry. This section does not deal with the possible regulatory and legal options domestic marketers have for restricting the operations of foreign marketers. Instead, the focus here is on the marketing threats that international competitors present to domestic marketers and the OU BUSINESS SCHOOL

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marketing options with which those domestic marketers can retaliate. The section starts by examining the threats to marketers from international competitors and the sources of competitive weakness. Then we deal with sources of strength for domestic marketers when they are competing with foreign entrants.

Threats to domestic marketers and their responses Most domestic markets have always been exposed to some competition. However, this competition is increasing. The main sources of the threat are as follows.

The role of deregulation A structural threat to domestic marketers is the deregulation of markets, which makes it possible for foreign companies to enter markets that were previously protected. For example, 80 per cent of the insurable population in India is not covered, making it a very large potential market. After government deregulation of the market, dozens of global players are developing plans to sell to India’s population of nearly one billion people – Canada Life, Cigna, Metlife, All State, Prudential, Sunlife and Zurich Insurance have already signed preliminary agreements with local partners.

Entrants from other industries It is one thing for foreign entrants to enter a domestic competitor’s market, but there is an additional threat when the foreign entrant collaborates with a local company that has an established brand name in another industry. The foreign company will provide the industry-specific expertise and the local partners will provide a brand name that local customers trust. The local partner can also bring other advantages such as knowledge of culture, contacts within government, and so on. The Indian insurance industry is again an interesting example, since it shows how deregulation can enable local competitors to leverage their own brands in order to offer products in the deregulated industry. Indian conglomerates, financial institutions and even newspapers and mobile-phone operators are entering the insurance industry. The Tata group, the country’s largest business house, has linked with America’s AIG; Kotak Finance is a partner of another US company, Chubb Corp.; and the Hindustan Times is a partner of CGU Life Insurance.

Emasculati on th rough protection Where there has been protection in the past, domestic industries can be left uncompetitive. LIC and GIC, who are currently the largest insurers in India, have efficiency and public-relations problems. LIC takes an average of 87 days to settle a claim. In 1999, GIC’s four subsidiaries failed to process 570,000 car-accident claims: one-fifth of them were more than three years old. As a result, they

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will probably have many customers only too willing to buy products from alternative sources (Asia Week, 10 December 1999). Another example is retailing in Japan, where government protection of small, family businesses has created major inefficiencies. Japan’s complicated and costly wholesale distribution system has survived because small retailers have been unable to cut out the layers of middlemen or to deal directly with the manufacturer. As a result, foreign entrants such as Toys ‘R’ Us have gained a major advantage by bypassing the middlemen.

Overseas sourcing Another threat to domestic marketers is where their domestic customers switch to overseas suppliers. This means that foreign companies do not even have to physically enter a market in order to take business away from local firms. As some British clothing manufacturers are finding out, clothing manufacturing is shifting overseas where it is cheaper (BBC Online, 9 March 1999).

Regionalisation As a geographic region becomes more homogeneous, it represents opportunities for those international players who have the size and financial resources to play on a regional basis. That can present a major threat to smaller local players within the region who cannot exploit these scale economies. American banks, for example, have been able to take advantage of the opportunities created by the emergence of a single currency in Europe. The US giant Citibank – a division of Citigroup – has built a comprehensive retail network across Europe, and plans to offer pan-European accounts in euros. American banks also have the experience of selling certain types of product that their European counterparts do not. Specifically, they have wider experience with ‘securitisation’, where debts such as car loans are turned into share issues (BBC Online, 19 November 1998). The onset of Europe’s single currency will, in particular, expose French banks to far more foreign competition and niche businesses such as franc-denominated bonds will simply disappear. Having discussed the nature of the threat to companies in their domestic market, we now consider how they can respond to these threats.

Bases for domestic response Despite their many competitive weaknesses, domestic companies also have advantages that can be used to fight off international competition.

Technology The Chinese telecommunications market is one of the largest in the world. China buys $15–20 billion worth of telecoms equipment a year, second only to the USA, and is the world’s largest market for pagers and the second largest for mobile telephones. Overall, China OU BUSINESS SCHOOL

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accounts for about one-quarter of the world market for telecoms equipment. Foreign firms entering China had expected the Chinese to buy older equipment, for which they had already written off the cost of R&D. Instead, each province’s telecoms authority wanted more advanced networks than its neighbours. In 1995, local equipment makers had less than ten per cent of the market and supplied mostly cheap, low-capacity gear to rural markets. By the late 1990s, the local firms were taking more than half the market and products in most categories, including cuttingedge technology. Huawei and Datang are already testing versions of an 1800 megahertz GSM switch, which foreign companies have only just begun to sell. A similar focus on technology enabled Chinese PC manufacturers to regain, by 1998, over half the Chinese market from their foreign competitors.

Market knowledge An understanding of the domestic culture and buyer behaviour can work to the advantage of domestic marketers. Foreign competitors will find it difficult to undercut Japanese retailers such as Daiei, Seiyu and Ito-Yokado, despite their lack of investment in their outlets, because supermarkets stock an unusually large amount of fresh food in Japan. This fresh-food business is high-risk and as a result margins are high. Retailers need to have an intimate understanding of how customers’ tastes vary according to store location and time of day. Foreign companies are therefore unlikely to be able to compete simply on the basis of price. The UK provides another example of how preferences within a country can wrong-foot an international player. Freeserve (a domestic firm) was launched as a free Internet service provider (ISP). This meant that it would connect people to the Internet, and they would have to pay only for their call charges. Freeserve planned to make its money from advertising and other services. Before Freeserve’s entry the US firm America Online (AOL) had been selling charged-for services for some years: AOL’s subscribers paid for Internet access as well as for the telephone charge. Freeserve rapidly took market share away from AOL which, given its experience in the USA, had originally felt that the concept would not be successful. Some months later it had to launch its own free ISP in the UK. Even in the high-tech field of Internet access, consumer preference and behaviour can vary between countries. When a foreign firm announces its intention to enter a particular market, it is important for domestic marketers to assess whether the sources of competitive advantage that foreign companies say will be effective can actually be implemented. In food retailing, cultural factors may prevent foreign entrants from being successful. Foreign companies can make mistakes in retailing, as Example 7.3 shows.

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EXAMPLE 7.3 RETAILING IN CHINA When Royal Ahold initially entered the Chinese market, it felt that it would be introducing supermarket retailing concepts to the Chinese people. This confidence was based on Royal Ahold’s successes in Europe and the USA. Royal Ahold entered the market by rebranding Zhonghui’s sixteen Shanghai stores into TOPS supermarkets in 1997. In 1998, it formed another venture with Zhonghui to buy twenty-two more grocery stores from Japan’s bankrupt Yaohan group. But Royal Ahold sales in China were much lower than forecast: consumers thought they would have to pay for the expensive-looking stores. The company’s market research suggested that local consumers would react to TOPS in the same way as American or European shoppers. Middle-class employees in Shanghai were expected to go for convenience over slightly higher prices. While this aspect of the findings was right, the company did not understand that the need for convenience can be fulfilled in several different ways and that these can be culturally bound. Like their Western counterparts, Shanghai’s white-collar workers prefer not to shop or cook. Instead of convenience shopping, they prefer to eat with their parents or at a restaurant. Those who go shopping for food are older people, who are more at home bargaining in local stores and traditional outdoor markets. (Source: based on Tuinstra, 1999)

Imitation Indigenous firms have an advantage over their foreign competitors in that they can either foresee the methods that the foreign entrants intend to use and pre-empt them, or they can copy the foreign entrant once it enters the market. Whether or not the indigenous firm is too late in copying the entrant will depend on the extent to which the foreign entrant has been able to appropriate the benefits of being the first mover. Some cases of competitive imitation are described in Example 7.4.

EXAMPLE 7.4 COMPETITIVE IMITATION l

Chinese supermarket chains such as Hualian and Lianhua reacted quickly when Royal Ahold arrived. They copied the clean, well-lit look, the efficiency of displays and the emphasis on fresh produce. Lianhua planned to increase its number of stores by 50 per cent, to 400, by 1999, whereas Royal Ahold’s business plan called for just 50 supermarkets by 2000.

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B&Q, a British household- and hardware-products retailer, feared the arrival of US DIY giant Home Depot. The British firm responded to the threat by imitating the 100,000 square feet Home Depot format with B&Q Warehouses (Marketing Week, 29 April 1999).

In the 1960s, UK motor manufacturers ran a cartel and all agreed not to advertise on television, so as to keep marketing costs down. Datsun arrived on the scene in 1969 with its Cherry model and broke the house rules by running a huge launch campaign. Car makers had no alternative but to join Datsun on TV and they now spend ÂŁ500 million each year selling two million cars (Marketing Week, 30 August 1996).

In response to foreign competition, some Japanese companies have sought to emulate foreign retailing methods by reducing the number of links in the distribution chain. Since 1991, according to the Ministry of International Trade and Industry, the number of Japanese wholesalers has fallen by 20 per cent.

Lower costs Domestic firms may be able to benefit from having lower costs than their international counterparts. This is particularly the case for domestic marketers in emerging markets. For example, Chinese engineering firms employ young engineers, who work for the promise of stock options. Their engineers work for a substantially lower salary than their Western counterparts.

Playing off foreign competitors Chinese firms have played off Americans against Europeans, and as a result may leap forward in mobile technology. Motorola, under pressure not just in China but across the world, has begun by helping Datang to develop equipment based on its CDMA standard, which competes with GSM. Motorola is gambling that, by trading the technology for orders of CDMA-based equipment, it will promote the standard.

Collaboration and consolidation In order to combat threats from foreign firms, local competitors may choose to collaborate with other international players, to collaborate with other domestic players or to consolidate their own operations. Illustrations of these competitive strategies are given in Example 7.5.

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EXAMPLE 7.5 COLLABORATION AND CONSOLIDATION One example of collaboration with foreign players comes from Germany, where news publishers have increased their international collaboration as a result of the British Pearson Group and Grüner & Jahr joining forces to launch a German-language Financial Times. The Frankfurter Allgemeine Zeitung has improved its editorial and design and announced that it will publish an eight-page English language edition with the International Herald Tribune. In the business press, the von Holtzbrink group, owners of Germany’s leading business daily Handelsblatt, has agreed with Wall Street Journal publishers, Dow Jones, to exchange editorial and commercial resources. Examples of collaboration amongst local competitors come from the banking and retail industries. In order to combat foreign competitors, the indigenous banks in Malaysia have been advised to merge – and quickly! According to Andersen Consulting, foreign banks in Malaysia are already generally more aggressive than local ones in expanding their capabilities in electronic banking, e-commerce and specialised services. In addition, rather than basing their decisions about prospective partners on domestic market considerations alone, the banks should view the entire programme of consolidating the financial services industry as an opportunity to expand their operations internationally (Business Times Malaysia, 24 December 1999). In August 1999 three Japanese banks were in discussions to create the world’s largest financial group. One of the motivations for this was to maintain their competitiveness in the face of deregulation in Japan. This would increase competitive pressure both from international competitors and from local ones (Reuters, 19 August 1999). Wal-Mart’s push into Europe (buying two German retailers and, later, buying British retail chain Asda) has pressured European retailers to combine in order to cut costs and gain other competitive advantages. Wal-Mart presents a real threat and has average margins double those of Continental European food chains. For example, Carrefour and Promodes have merged to help head off attacks from Wal-Mart. Even after the merger, however, the combined French company’s sales will be half those of Wal-Mart. An illustration of consolidation in India is the National Dairy Development Board (NDDB) and its partner, the Gujarat Co-operative Milk Marketing Federation (GCMMF), better known as owner of the Amul brand. This is one of the fastest growing FMCG companies in India, in the same league as Hindustan Lever, Glaxo, Nestlé and Britannia. GCMMF is one of the cooperative unions under the NDDB umbrella. Its fellow cooperatives have their own brands. While these are locally very successful, they do not have

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the resources to take on FMCG multinationals in a brand-building, marketing and distribution war. As a result, GCMMF is seeking to consolidate all its products under one or two brands. In regions where Amul is better known, it will replace regional brands.

Internationalise So this unit comes full circle. We started with the reasons why firms would want to go overseas. We ended with a discussion of how marketers can defend their home markets in the face of foreign competition, and as a result of doing so we have come back to the argument that a possible method that firms can use to defend their home markets is to increase their international presence. This is a classic market-seeking response. Dentsu, the largest Japanese advertising agency, could afford to be patient about international expansion while domestic business was good and margins wide. But the Japanese market shrank and margins came under pressure as competition in Japan from international agency brands increased. This led Dentsu to look with fresh urgency at its international expansion (Marketing Week, 30 September 1999). In another example, Paribas has quit the overcrowded domestic consumer-banking market. This has made it one of the most international of French banks, with 75 per cent of its turnover outside France. The bank can offer its customers niche expertise in international investment banking, asset management and specialised financial services. This section took the perspective of the domestic marketer in discussing how to respond to foreign competitors entering the home market. It ends with the salutary tale of the British carmaking industry and how it lost its home market by not taking overseas markets seriously enough â&#x20AC;&#x201C; see Example 7.6.

EXAMPLE 7.6 DECLINE OF THE UK CAR INDUSTRY Instead of investing in products that could be marketed around the world, the UK car industry adopted a â&#x20AC;&#x2DC;fortress UKâ&#x20AC;&#x2122; policy, focusing on the domestic market and not adequately developing products for the world. They failed to develop the economies of scale and production necessary for the manufacture of cars at a reasonable cost. By the late 1970s British manufacturers, having for so long concentrated on the domestic market, were facing a battle on their own doorstep. Imports accounted for more than half of all car sales, and foreign manufacturers were in predatory mood. However, foreign entrants also represented good news for the industry. Before the arrival of Japanese manufacturers in the UK, the British car-making industry had been declining. However,

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Japanese companies soon recognised that, despite its past labour problems, the British workforce could be as efficient as its competitors. From a public policy point of view, this meant that British workers could still be employed in making cars, although the same could not be said of their management. Investment by Japanese companies brought with it new technology, new design and new management. The arrival of the Japanese also raised the capabilities of Britain’s supply industry. More than half of a car is made by suppliers, so this is a very important criterion for any national industry. As a result the UK car industry is once again relatively prosperous, is growing and is a net exporter. Virtually all of it is now in foreign ownership.

7.4

SUMMARY

We can conclude by observing that internationalisation has a range of effects on domestic competitors. As well as capital and products, international firms will bring a foreign culture with them. This can manifest itself in different ways, from service expectations to management practices. Economics can also play a role. Foreign entrants can benefit from higher levels of economies of scale than may be obtained by local players. Domestic firms will therefore have to respond to new challenges. Furthermore – and this is a key issue – international competitors are likely to have ambitious growth plans, and domestic firms may therefore have little time to respond to the threat. The technology brought by international competitors can also be qualitatively different from what previously existed. Furthermore, in a country that had previously been protected by legislation and regulation, the entry of foreign firms can herald a level of competition that had not previously been seen. It is for these reasons that competition by foreign firms can be qualitatively and quantitatively different from that presented by local firms. The liabilities and weaknesses that overseas firms have are also different from those of indigenous competitors. The strategic marketing response is therefore likely to be different from that used with domestic competitors. The threat from foreign competitors applies to firms in developed and developing countries, but the nature of the threat differs. In developing countries the fear is that Western rivals’ efficiency will put them out of business. In contrast, firms in developed countries worry about the rock-bottom cost of labour on offer in the developing world. This leads to pressures for protectionism but – as we have seen – in the long term that creates its own problems of lack of competitiveness. ��

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8 CONCLUSION

CONCLUSION

This final section summarises the major themes of this unit. l

The importance of international marketing We have seen that it is not just international trade that is

growing, and that it is not simply imports and exports between

countries that are rising. The development of a global

economy â&#x20AC;&#x201C; and particularly the growth in international

communications and entertainment â&#x20AC;&#x201C; means that trade is

actually having an impact on influencing the behaviour and

culture of people in every country.

Yet globalisation is not happening without hindrance, and

neither can we assume that it will continue. We have seen how

firms have actually lost sales when they have sought to

compete on a global basis. We also identified the characteristics

of firms that are more likely to benefit from globalised

operations.

Diversity of international marketing While studying this unit, you will have become aware of the myriad terms that are used to describe international marketing activities and the subtle differences between them. This should encourage you to appreciate that the implementation of international marketing can vary greatly, according to the type of enterprise that does it and the enterpriseâ&#x20AC;&#x2122;s objectives. This unit covered some of the advantages and costs of internationalisation and, indeed, you have seen that one of the costs is the need to take on additional complexity. We have also looked at the operational issues facing international marketers. These issues include factors such as promotion, which they will be familiar with in their own country but which may need to be tackled in a different way when operating abroad. We have also emphasised that international marketing varies greatly according to the objectives of the firm, and that it can range from simple exporting through to managing global operations.

Impact of international marketing The final issue addressed in this unit is the importance of

international competition to firms operating in their domestic

market. We have sought to show the nature of the threat that

such firms face and how they can respond to it. In a more

global economy such threats are likely to become more

pervasive rather than less so.

This unit highlighted some of the major current issues in international marketing and referred to some of the key research

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that has been done. You will have seen how large multinationals make mistakes, demonstrating that, although this material seems conceptually straightforward, there are major difficulties in putting the ideas into operational effect. The final point to make is that this is a dynamic area and it is essential that international marketers continue to watch out for the unexpected – the things that do not already exist in textbooks. ��

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Knight, G.A. (1995) ‘Educator insights: international marketing

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ACKNOWLEDGEMENTS

ACKNOWLEDGEMENTS Grateful acknowledgement is made to the following sources for permission to reproduce material in this unit.

Text Example 2.3: ‘Sony and Localisation’, The Economist, 3 July 1999; Examples 3.1 and 3.4: Helsen, K. and Chang, V. (1995) Baxter International – Renal Division: Market Opportunities in Latin America, University of Chicago. Copyright # 1995 Kristiaan Helsen and Vincent Chang, University of Chicago, IL, USA; Examples 3.2 and 3.3: Based on Laidler, N. and Quelch, J. A. (1996) ‘Mary Kay Cosmetics: Asian market entry’ in Quelch, J. A. et al. (eds.) Cases in marketing Management and Strategy – An Asia-Pacific Perspective, Simon & Schuster; Example 3.5: Albaum, G., Strandskov, J., Duerr, E. and Dowd, L. (1989) International Marketing and Export Management, Addison-Wesley Longman Inc. Example 3.11: Based on Askegaard, S. and Madsen T. K. ‘The local and the global: exploring traits of homogeneity and heterogeneity in European food cultures’, International Business Review, Vol. 7, 1998. Reproduced with permission from Elsevier Science Limited; Page 100: Keegan, W. J. Global Marketing Management, Prentice Hall.

Figures Figures 3.2 and 3.3: Schutte, H. and Ciarlante, D. (1998) Consumer Behaviour in Asia, Copyright # H. Schutte and D. Ciarlante 1998. By permission of Macmillan Press Ltd; Figure 3.4: Maslow, A. (1970) Motivation and Personality, Addison-Wesley Longman Inc.

Tables Table 4.2: Charman, K. (1998) ‘Joint ventures in Kazakstan: views from local and foreign partners’, Business Strategy Review, Volume 9, Issue 3, London Business School; Table 4.3: reprinted from Journal of World Business, Vol. 32, No. 1, 1997, V. Kumar and V. Subramaniam, ‘A contingency framework for the mode of entry decision’, p. 67, Copyright # 1997, with permission from Elsevier Science; Table 6.2: reprinted by permission of the Harvard Business Review. ‘Can you standardize multinational marketing?’, by Robert D. Buzzell (November–December 1968). Copyright # 1968 by the President and Fellows of Harvard College; all rights reserved.

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